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

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

12 CFR Part 43 

[Docket No. OCC–2011–0002] 

RIN 1557–AD40 

FEDERAL RESERVE SYSTEM 

12 CFR Part 244 

[Docket No. 2011–1411] 

RIN 7100–AD–70 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 373 

RIN 3064–AD74 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1234 

RIN 2590–AA43 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 246 

[Release No. 34–64148; File No. S7–14–11] 

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 proposing rules 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. Section 

15G generally requires the securitizer of 

asset-backed securities to retain not less 

than five 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 

June 10, 2011. 

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. 

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, under the ‘‘More 

Search Options’’ tab click next to the 

‘‘Advanced Docket Search’’ option 

where indicated, select ‘‘Comptroller of 

the Currency’’ from the agency dropdown menu, then click ‘‘Submit.’’ In the 

‘‘Docket ID’’ column, select ‘‘OCC–2011– 

0002’’ to submit or view public 

comments and to view supporting and 

related materials for this proposed rule. 

The ‘‘How to Use This Site’’ link on the 

Regulations.gov home page provides 

information on using Regulations.gov, 

including instructions for submitting or 

viewing public comments, viewing 

other supporting and related materials, 

and viewing the docket after the close 

of the comment period. 

• E-mail: 

regs.comments@occ.treas.gov. 

• Mail: Office of the Comptroller of 

the Currency, 250 E Street, SW., Mail 

Stop 2–3, Washington, DC 20219. 

• Fax: (202) 874–5274. 

• Hand Delivery/Courier: 250 E 

Street, SW., Mail Stop 2–3, Washington, 

DC 20219. 

Instructions: You must include ‘‘OCC’’ 

as the agency name and ‘‘Docket 

Number OCC–2011–0002’’ 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 

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, under 

the ‘‘More Search Options’’ tab click 

next to the ‘‘Advanced Document 

Search’’ option where indicated, select 

‘‘Comptroller of the Currency’’ from the 

agency drop-down menu, then click 

‘‘Submit.’’ In the ‘‘Docket ID’’ column, 

select ‘‘OCC–2011–0002’’ to view public 

comments for this rulemaking action. 

• Viewing Comments Personally: You 

may personally inspect and photocopy 

comments at the OCC, 250 E 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) 874–4700. 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. 

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 Jennifer J. Johnson, 

Secretary, Board of Governors of the 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24091 

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 a.m. and 

5 p.m. on weekdays. 

Federal Deposit Insurance 

Corporation: You may submit 

comments, identified by RIN number, 

by any of the following methods: 

• Agency Web Site: http://

www.FDIC.gov/regulations/laws/

federal/notices.html. Follow 

instructions for submitting comments 

on the Agency Web Site. 

• E-mail: Comments@FDIC.gov. 

Include the RIN number on 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: Comments may be 

hand delivered to the guard station at 

the rear of the 550 17th Street Building 

(located on F Street) on business days 

between 7 a.m. and 5 p.m. 

Instructions: All comments received 

must include the agency name and RIN 

for this rulemaking and will be posted 

without change to http://www.fdic.gov/ 

regulations/laws/federal/propose.html, 

including any personal information 

provided. 

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 rulecomments@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. 

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 Web site 

(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 a.m. and 3 p.m. 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 e-mail 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 

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, 

Fourth Floor, 1700 G Street, NW., 

Washington, DC 20552. 

• Hand Delivery/Courier: The hand 

delivery address is: Alfred M. Pollard, 

General Counsel, Attention: Comments/ 

RIN 2590–AA43, Federal Housing 

Finance Agency, Fourth Floor, 1700 G 

Street, NW., Washington, DC 20552. A 

hand-delivered package should be 

logged at the Guard Desk, First Floor, on 

business days between 9 a.m. and 5 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 

government-business days between the 

hours of 10 a.m. and 3 p.m. To make an 

appointment to inspect comments 

please call the Office of General Counsel 

at (202) 414–6924. 

Department of Housing and Urban 

Development: Interested persons are 

invited to submit comments regarding 

this rule to the Regulations Division, 

Office of General Counsel, Department 

of Housing and Urban Development, 

451 7th Street, SW., Room 10276, 

Washington, DC 20410–0500. 

Communications must refer to the 

following docket number [FR–5504–P– 

01] and title of this rule. 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. 

• 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 http:// 

www.regulations.gov. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24092 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

1Public Law 111–203, 124 Stat. 1376 (2010). 

2 15 U.S.C. 78o–11. 

3See 15 U.S.C. 78o–11(b), (c)(1)(A) and 

(c)(1)(B)(ii). 

FOR FURTHER INFORMATION CONTACT: 

OCC: Chris Downey, Risk Specialist, 

Financial Markets Group, (202) 874– 

4660; Kevin Russell, Director, Retail 

Credit Risk, (202) 874–5170; Darrin 

Benhart, Director, Commercial Credit 

Risk, (202) 874–5670; or Jamey Basham, 

Assistant Director, or Carl Kaminski, 

Senior Attorney, Legislative and 

Regulatory Activities Division, (202) 

874–5090, Office of the Comptroller of 

the Currency, 250 E Street, SW., 

Washington, DC 20219. 

Board: Benjamin W. McDonough, 

Counsel, (202) 452–2036; April C. 

Snyder, Counsel, (202) 452–3099; 

Sebastian R. Astrada, Attorney, (202) 

452–3594; or Flora H. Ahn, Attorney, 

(202) 452–2317, Legal Division; Thomas 

R. Boemio, Manager, (202) 452–2982; 

Donald N. Gabbai, Senior Supervisory 

Financial Analyst, (202) 452–3358; or 

Sviatlana A. Phelan, Financial Analyst, 

(202) 912–4306, Division of Banking 

Supervision and Regulation; Andreas 

Lehnert, Deputy Director, Office of 

Financial Stability Policy and Research, 

(202) 452–3325; or Brent Lattin, 

Counsel, (202) 452–3367, Division of 

Consumer and Community Affairs, 

Board of Governors of the Federal 

Reserve System, 20th and C Streets, 

NW., Washington, DC 20551. 

FDIC: Beverlea S. Gardner, Special 

Assistant to the Chairman, (202) 898– 

3640; Mark L. Handzlik, Counsel, (202) 

898–3990; Phillip E. Sloan, Counsel, 

(703) 562–6137; or Petrina R. Dawson, 

Counsel, (703) 562–2688, Federal 

Deposit Insurance Corporation, 550 17th 

Street, NW., Washington, DC 20429. 

Commission: Jay Knight, AttorneyAdvisor in the Office of Rulemaking, or 

Katherine Hsu, Chief of the Office of 

Structured Finance, Division of 

Corporation Finance, at (202) 551–3753, 

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) 414– 

3746; Austin Kelly, Associate Director 

for Housing Finance Research, 

Austin.Kelly@fhfa.gov, (202) 343–1336; 

Phillip Millman, Principal Capital 

Markets Specialist, 

Phillip.Millman@fhfa.gov, (202) 343– 

1507; or Thomas E. Joseph, Senior 

Attorney Advisor, 

Thomas.Joseph@fhfa.gov, (202) 414– 

3095; Federal Housing Finance Agency, 

Third Floor, 1700 G Street, NW., 

Washington, DC 20552. The telephone 

number for the Telecommunications 

Device for the Hearing Impaired is (800) 

877–8339. 

HUD: Robert C. Ryan, Deputy 

Assistant Secretary for Risk 

Management and Regulatory Affairs, 

Office of Housing, Department of 

Housing and Urban Development, 451 

7th Street, SW., Room 9106, 

Washington, DC 20410; telephone 

number 202–402–5216 (this is not a tollfree number). Persons with hearing or 

speech impairments may access this 

number through TTY by calling the tollfree Federal Information Relay Service 

at 800–877–8339. 

SUPPLEMENTARY INFORMATION:

Table of Contents 

I. Introduction 

II. General Definitions and Scope 

A. Asset-Backed Securities, Securitization 

Transaction and ABS Interests 

B. Securitizer, Sponsor, and Depositor 

C. Originator 

III. General Risk Retention Requirement 

A. Minimum 5 Percent Risk Retention 

Required 

B. Permissible Forms of Risk Retention 

1. Vertical Risk Retention 

2. Horizontal Risk Retention 

3. L-Shaped Risk Retention 

4. Revolving Asset Master Trusts (Seller’s 

Interest) 

5. Representative Sample 

6. Asset-Backed Commercial Paper 

Conduits 

7. Commercial Mortgage-Backed Securities 

8. Treatment of Government-Sponsored 

Enterprises 

9. Premium Capture Cash Reserve Account 

C. Allocation to the Originator 

D. Hedging, Transfer, and Financing 

Restrictions 

IV. Qualified Residential Mortgages 

A. Overall Approach to Defining Qualified 

Residential Mortgages 

B. Exemption for QRMs 

C. Eligibility Criteria 

1. Eligible Loans, First Lien, No 

Subordinate Liens, Original Maturity and 

Written Application Requirements 

2. Borrower Credit History 

3. Payment Terms 

4. Loan-to-Value Ratio 

5. Down Payment 

6. Qualifying Appraisal 

7. Ability To Repay 

8. Points and Fees 

9. Assumability Prohibition 

D. Repurchase of Loans Subsequently 

Determined To Be Non-Qualified After 

Closing 

E. Request for Comment on Possible 

Alternative Approach 

V. Reduced Risk Retention Requirements for 

ABS Backed by Qualifying Commercial 

Real Estate, Commercial, or Automobile 

Loans 

A. Asset Classes 

B. ABS Collateralized Exclusively by 

Qualifying CRE Loans, Commercial 

Loans, or Automobile Loans 

C. Qualifying Commercial Loans 

1. Ability To Repay 

2. Risk Management and Monitoring 

Requirements 

D. Qualifying CRE Loans 

1. Ability To Repay 

2. Loan-to-Value Requirement 

3. Valuation of the Collateral 

4. Risk Management and Monitoring 

Requirements 

E. Qualifying Automobile Loans 

1. Ability to Repay 

2. Loan Terms 

3. Reviewing Credit History 

4. Loan-to-Value 

F. Buy-Back Requirements for ABS 

Issuances Collateralized by Qualifying 

Commercial, CRE or Automobile Loans 

VI. General Exemptions 

A. Exemption for Federally Insured or 

Guaranteed Residential, Multifamily and 

Health Care Mortgage Assets 

B. Other Exemptions 

C. Exemption for Certain Resecuritization 

Transactions 

D. Additional Exemptions 

E. Safe Harbor for Certain Foreign-Related 

Transactions 

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. Executive Order 12866 Determination 

E. OCC Unfunded Mandates Reform Act of 

1995 Determination 

F. Commission: Small Business Regulatory 

Enforcement Fairness Act 

G. FHFA: Considerations of Differences 

Between the Federal Home Loan Banks 

and the Enterprises 

I. Introduction 

The Agencies are requesting comment 

on proposed rules (proposal or proposed 

rules) to implement the requirements of 

section 941(b) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (the Act, or Dodd-Frank Act),1

which is codified as new section 15G of 

the Securities Exchange Act of 1934 (the 

Exchange Act).2 Section 15G of the 

Exchange Act, as added by section 

941(b) of the Dodd-Frank 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 regulations that (i) require a 

securitizer to retain not less than five 

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.3


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24093 

4See 15 U.S.C. 78o–11(c)(1)(C)(iii), (4)(A) and (B). 

5See id. at sec. 78o–11(c)(1)(B)(ii) and (2). 

6 Data are through September 2010. All data from 

Asset Backed Alert except: CMBS data from 

Commercial Mortgage Alert, CLO data from 

Securities Industry and Financial Markets 

Association. The tables do not include any data on 

securities issued or guaranteed by the Federal 

National Mortgage Association or the Federal Home 

Loan Mortgage Corporation. 

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.4 In addition, section 15G 

states that the Agencies must permit a 

securitizer to retain less than five 

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.5

As shown in tables A, B, C, and D 

below, the securitization markets are an 

important source of credit to U.S. 

households and businesses and state 

and local governments.6

BILLING CODE 4810–33–P 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24094 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 


srobinson on DSKHWCL6B1PROD with PROPOSALSEP29AP11.000</GPH> 
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24095 

7Securitization 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 shortterm bank deposits. Securitization also allows the 

structuring of securities with differing maturity and 

credit risk profiles that may appeal to a broad range 

of investors from a single pool of assets. 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. See generally 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). 

8See Board Report at 8–9. 9See S. Rep. No. 111–176, at 128 (2010). 

BILLING CODE 4810–33–C 

TABLE D—TOTAL U.S. ASSET AND MORTGAGE BACKED SECURITIZATIONS ISSUED PER YEAR

[Dollars in millions] 

2002 2003 2004 2005 2006 2007 2008 2009 2010 Total 2002 

3Q2010 

Auto .......................... 95,484 86,350 72,881 103,717 82,000 66,773 35,469 53,944 43,104 639,724 

CLO .......................... 30,388 22,584 32,192 69,441 171,906 138,827 27,489 2,033 .............. 494,860 

CMBS ....................... 89,900 107,354 136,986 245,883 305,714 319,863 33,583 38,750 27,297 1,305,329 

Credit Cards ............. 73,004 67,385 51,188 62,916 72,518 94,470 61,628 46,581 6,149 535,839 

Equipment ................ 7,062 9,022 6,288 9,030 8,404 6,066 3,014 7,240 5,010 61,137 

Floorplan .................. 3,000 6,315 11,848 12,670 12,173 6,925 1,000 4,959 8,619 67,510 

Other ........................ 135,384 196,769 330,161 444,137 516,175 165,515 19,872 10,652 24,936 1,843,601 

RMBS ....................... 287,916 396,288 503,911 724,115 723,257 641,808 28,612 48,082 39,830 3,393,819 

Student Loan ............ 25,367 40,067 45,759 62,212 65,745 5,812,212 28,199 20,839 13,899 360,210 

Total .................. 747,506 932,134 1,191,216 1,734,122 1,957,891 1,498,370 238,868 233,079 168,843 ..................

Note: 2010 Data are through the month of September. 

When properly structured, 

securitization provides economic 

benefits that lower the cost of credit to 

households and businesses.7 However, 

when incentives are not properly 

aligned and there is a lack of discipline 

in the origination process, securitization 

can result in harm to investors, 

consumers, financial institutions, and 

the financial system. During the 

financial crisis, securitization displayed 

significant vulnerabilities to 

informational and incentive problems 

among various parties involved in the 

process.8

For example, as noted in the 

legislative history of section 15G, under 

the ‘‘originate to distribute’’ model, loans 

were made expressly to be sold into 

securitization pools, with lenders often 

not expecting to bear the credit risk of 

borrower default.9 In addition, 

participants in the securitization chain 

may be able to affect the value of the 

ABS in opaque ways, both before and 

after the sale of the securities, 

particularly if those assets are 

resecuritized into complex instruments 


srobinson on DSKHWCL6B1PROD with PROPOSALSEP29AP11.001</GPH> 
24096 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

10See id. 

11See id. 

12See id. at 129. 

13See 15 U.S.C. 78o–11(c)(1)(B)(ii), (e)(1)–(2). 

14See, e.g., sections 932, 935, 936, 938, and 943 

of the Dodd-Frank Act. 

15See section 945 of the Dodd-Frank Act. 

16See section 943 of the Dodd-Frank Act. 

17Both 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.’’) 

18 ‘‘Excess spread’’ is the difference between the 

gross yield on the pool of securitized assets less the 

cost of financing those assets (weighted average 

coupon paid on the investor certificates), chargeoffs, servicing costs, and any other trust expenses 

(such as insurance premiums, if any). 

19A front-end debt-to-income 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-toincome ratio measures how much of a borrower’s 

gross (pretax) monthly income would go toward 

monthly mortgage and nonmortgage debt service 

obligations. 

such as collateralized debt obligations 

(CDOs) and CDOs-squared.10 Moreover, 

some lenders using an ‘‘originate-todistribute’’ 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 quality of 

those assets.11

The risk retention requirements added 

by section 15G are intended 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. As indicated in the 

legislative history of section 15G, ‘‘When 

securitizers retain a material amount of 

risk, they have ‘skin in the game,’ 

aligning their economic interest with 

those of investors in asset-backed 

securities.’’ 12 By requiring that the 

securitizer retain a portion of the credit 

risk of the assets being securitized, 

section 15G provides securitizers an 

incentive to monitor and ensure the 

quality of the assets underlying a 

securitization transaction, and thereby 

helps align the interests of the 

securitizer with the interests of 

investors. Additionally, in 

circumstances where the assets 

collateralizing the ABS meet 

underwriting and other standards that 

should ensure the assets pose low credit 

risk, the statute provides or permits an 

exemption.13

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 DoddFrank Act intended to improve the 

securitization markets. These include, 

among others, provisions that 

strengthen the regulation and 

supervision of nationally recognized 

statistical rating agencies (NRSROs) and 

improve the transparency of credit 

ratings; 14 provide for issuers of 

registered ABS offerings to perform a 

review of the assets underlying the ABS 

and disclose the nature of the review; 15

and require issuers of ABS to disclose 

the history of the repurchase requests 

they received and repurchases they 

made related to their outstanding 

ABS.16

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 securitizers may have retained 

exposure to the credit risk of the assets 

they securitize.17 As described in detail 

below, the proposed rules provide 

several options securitizers may choose 

from in meeting the risk retention 

requirements of section 15G, including, 

but not limited to, retention of a five 

percent ‘‘vertical’’ slice of each class of 

interests issued in the securitization or 

retention of a five percent ‘‘horizontal’’ 

first-loss interest in the securitization, as 

well as other risk retention options that 

take into account the manners in which 

risk retention often has occurred in 

credit card receivable and automobile 

loan and lease securitizations and in 

connection with the issuance of assetbacked commercial paper. The proposed 

rules also include a special ‘‘premium 

capture’’ mechanism designed to 

prevent a securitizer from structuring an 

ABS transaction in a manner that would 

allow the securitizer to effectively 

negate or reduce its retained economic 

exposure to the securitized assets by 

immediately monetizing the excess 

spread created by the securitization 

transaction.18 In designing these options 

and the proposed rules in general, 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 that are 

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 QRMs on 

the housing and housing finance 

markets. 

As discussed in greater detail in Part 

V of this Supplementary Information, 

the proposed rules would generally 

prohibit QRMs from having product 

features that contributed significantly to 

the high levels of delinquencies and 

foreclosures since 2007—such as terms 

permitting negative amortization, 

interest-only payments, or significant 

interest rate increases—and also would 

establish underwriting standards 

designed to ensure that QRMs are of 

very high credit quality consistent with 

their exemption from risk retention 

requirements. These underwriting 

standards include, among other things, 

maximum front-end and back-end debtto-income ratios of 28 percent and 36 

percent, respectively; 19 a maximum 

loan-to-value (LTV) ratio of 80 percent 

in the case of a purchase transaction 

(with a lesser combined LTV permitted 

for refinance transactions); a 20 percent 

down payment requirement in the case 

of a purchase transaction; and credit 

history restrictions. 

The proposed rules also would not 

require a securitizer to retain any 

portion of the credit risk associated with 

a securitization transaction if the ABS 

issued are exclusively collateralized by 

commercial loans, commercial 

mortgages, or automobile loans that 

meet underwriting standards included 

in the proposed rules for the individual 

asset class. As for QRMs, these 

underwriting standards are designed to 

be robust and ensure that the loans 

backing the ABS are of very low credit 

risk. In this Supplementary Information, 

the Agencies refer to these assets 

(including QRMs) as ‘‘qualified assets.’’ 

The Agencies recognize that many 

prudently underwritten residential and 

mortgage loans, commercial loans, and 

automobile loans may not satisfy all the 

underwriting and other criteria in the 

proposed rules for qualified assets. 

Securitizers of ABS backed by such 

prudently underwritten loans would, as 

a general matter, be required to retain 

credit risk under the rule. However, as 

noted above, the Agencies have sought 

to structure the proposed risk retention 

requirements in a flexible manner that 

would allow the securitization markets 

for non-qualified assets to function in a 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24097 

20See id. at sec. 78o–11(b)(2), (e)(4)(A) and (B). 

21See id. at sec. 78o–11(b)(1). 

22See, e.g. id. at sec. 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). 

23See id. at sec. 78o-11(b)(2)(B). Therefore, 

pursuant to section 15G, only the Federal banking 

agencies are proposing the underwriting definitions 

in §l.16 (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 underwriting standards in §§l.18(b)(1)–(6), 

l.19(b)(1)–(9), and l.20(b)(1)–(8) of the proposed 

rules. At the final rule stage, FHFA proposes to 

adopt only those provisions of the common rules 

that address the types of asset securitization 

transactions in which its regulated entities could be 

authorized to engage under existing law. The 

remaining provisions, such as those addressing 

underwriting standards for non-residential 

commercial loans and auto loans, would be 

designated as [reserved], and the provisions 

adopted would be numbered and otherwise 

designated so as to correspond to the equivalent 

provisions appearing in the regulations of the other 

Agencies. 

24See id. at 78o–11(h). 25Specifically, 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); 17 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. HUD’s codification 

in 24 CFR part 267 indicates that the proposed rules 

include exceptions and exemptions in Subpart D of 

each of these rules for certain transactions involving 

programs and entities under the jurisdiction of 

HUD. 

26The joint proposed rules being adopted by the 

Agencies would apply to all sponsors that fall 

within the scope of 15G, including state and federal 

savings associations and savings and loan holding 

companies. These entities are currently regulated 

and supervised by the Office of Thrift Supervision 

(OTS), which is not among the Federal banking 

agencies with rulemaking authority under section 

15G. Authority of the OTS under the Home Owners’ 

Loan Act (12 U.S.C. 1461 et seq.) with respect to 

such entities will transfer from the OTS to the 

Board, FDIC, and OCC on the transfer date provided 

in section 311 of the Dodd-Frank Act. This transfer 

will take place well before the effective date of the 

Federal banking agencies’ final rules under section 

15G. Accordingly, the final rules issued by the 

appropriate Federal banking agency would include 

the relevant set of these entities in the agency’s 

Purpose, Authority, and Scope section (§l.1). 

27These items would not include staff comment 

letters and informal written guidance provided to 

specific institutions or matters raised in a report of 

examination or inspection of a supervised 

institution, which are not intended to be relied on 

by the public generally. 

28See 15 U.S.C. 78o–11(c)(1)(G)(i) and (e)(1); 

proposed rules at §l.22. 

29See section 941(a) of the Dodd-Frank Act. 

30See 15 U.S.C. § 78c(a)(77). The term also (i) 

includes any other security that the Commission, by 

rule, determines to be an asset-backed security for 

purposes of section 15G of the Exchange Act; and 

(ii) does not include a security that is issued by a 

finance subsidiary and held by the parent company 

of the finance subsidiary or a company that is 

controlled by such parent company provided that 

none of the securities issued by the finance 

subsidiary are held by an entity that is not 

controlled by the parent company. 

31See proposed rules at §l.2 (definition of 

‘‘asset-backed security’’). 

manner that both facilitates the flow of 

credit to consumers and businesses on 

economically viable terms and is 

consistent with the protection of 

investors. 

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 QRMbacked ABS.20 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,21 and also are the agencies 

authorized to adopt rules in several 

specific areas under section 15G.22 In 

addition, the Federal banking agencies 

are responsible for establishing, by rule, 

the underwriting standards for nonQRM residential mortgages, commercial 

mortgages, commercial loans and 

automobile loans that would qualify 

ABS backed by these types of loans for 

a less than five percent risk retention 

requirement.23 Accordingly, when used 

in this proposal, the term ‘‘Agencies’’ 

shall be deemed to refer to the 

appropriate Agencies that have 

rulewriting authority with respect to the 

asset class, securitization transaction, or 

other matter discussed. The Secretary of 

the Treasury, as Chairperson of the 

Financial Stability Oversight Council, 

coordinated the development of these 

joint proposed rules in accordance with 

the requirements of section 15G.24

For ease of reference, the proposed 

rules of the Agencies are referenced 

using a common designation of §l.1 to 

§ l.23 (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.25 Section l.1 of each 

Agency’s proposed rules identifies the 

entities or transactions that would be 

subject to such Agency’s rules.26

In light of the joint nature of the 

Agencies’ rulewriting authority under 

section 15G, the appropriate Agencies 

will jointly approve any written 

interpretations, written responses to 

requests for no-action letters and legal 

opinions, or other written interpretive 

guidance concerning the scope or terms 

of section 15G and the final rules issued 

thereunder that are intended to be relied 

on by the public generally.27 Similarly, 

the appropriate Agencies will jointly 

approve any exemptions, exceptions, or 

adjustments to the final rules.28 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, exceptions, or 

adjustments. The Agencies expect to 

coordinate with each other to facilitate 

the processing, review and action on 

requests for such written interpretations 

or guidance, or additional exemptions, 

exceptions or adjustments. 

II. General Definitions and Scope 

Section l.2 of the proposed rules 

defines terms used throughout the 

proposed rules. Certain of these 

definitions are discussed in this part of 

the Supplementary Information. Other 

terms are discussed together with the 

section of the proposed rules where they 

are used. For example, certain 

definitions that relate solely to the 

exemptions for securitizations based on 

QRMs and certain qualifying 

commercial, commercial real estate, and 

automobile loans, are contained in, and 

are discussed in the context of, those 

sections (see subpart C of the proposed 

rules). 

A. Asset-Backed Securities, 

Securitization Transaction and ABS 

Interests 

The proposed risk retention rules 

would apply to securitizers in 

securitizations that involve the issuance 

of ‘‘asset-backed securities’’ as defined in 

section 3(a)(77) of the Exchange Act, 

which also was added to the Exchange 

Act by section 941 of the Dodd-Frank 

Act.29 Section 3(a)(77) of the Exchange 

Act generally defines an ‘‘asset-backed 

security’’ to mean ‘‘a fixed-income or 

other security collateralized by any type 

of self-liquidating financial asset 

(including a loan, lease, mortgage, or 

other secured or unsecured receivable) 

that allows the holder of the security to 

receive payments that depend primarily 

on cash flow from the asset.’’ 30 The 

proposed rules incorporate by reference 

this definition of asset-backed security 

from the Exchange Act.31 Consistent 

with this definition, the proposed rules 

also define the term ‘‘asset’’ to mean a 

self-liquidating financial asset, 

including loans, leases, or other 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24098 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

32See proposed rules at §l.2 (definition of 

‘‘asset’’). Because the term ‘‘asset-backed security’’ 

for purposes of section 15G includes only those 

securities that are collateralized by self-liquidating 

financial assets, ‘‘synthetic’’ securitizations are not 

within the scope of the proposed rules. 

33See proposed rules at §l.2. Assets or other 

property collateralize an issuance of ABS interests 

if the assets or property serves as collateral for such 

issuance. Assets or other property serve as collateral 

for an ABS issuance if they provide the cash flow 

for the ABS interests issued by the issuing entity 

(regardless of the legal structure of the issuance), 

and may include security interests in assets or other 

property of the issuing entity, fractional undivided 

property interests in the assets or other property of 

the issuing entity, or any other property interest in 

such assets or other property. The term collateral 

includes leases that may convert to cash proceeds 

from the disposition of the physical property 

underlying the assets. The cash flow from an asset 

includes any proceeds of a foreclosure on, or sale 

of, the asset. See proposed rules at §l.2 (definition 

of ‘‘collateral’’ for an ABS transaction). 

34See, e.g., 15 U.S.C. 78o–11(c)(1)(G) (authorizing 

exemptions from the risk retention requirements 

certain transactions that are typically exempt from 

Securities Act registration); 15 U.S.C. 78o– 

11(e)(3)(B)(providing for certain exemptions for 

certain assets, or securitizations based on assets, 

which are insured or guaranteed by the United 

States). 

35 17 CFR 229.1100 through 17 CFR 229.1123. 

36See 15 U.S.C. 78b. 

37An ‘‘issuing entity’’ is defined to mean, with 

respect to a securitization transaction, the trust or 

other entity created at the direction of the sponsor 

that owns or holds the pool of assets to be 

securitized, and in whose name the ABS are issued. 

See proposed rules at §l.2. 

38See proposed rules at §l.2. In securitization 

transactions where ABS interests are issued and 

some or all of the cash proceeds of the transaction 

are retained by the issuing entity to purchase, 

during a limited time period after the closing of the 

securitization, self-liquidating financial assets to 

support the securitization, the terms ‘‘asset,’’ 

‘‘collateral,’’ and ‘‘securitized assets’’ should be 

construed to include such cash proceeds as well as 

the assets purchased with such proceeds and any 

assets transferred to the issuing entity on the 

closing date. Accordingly, the terms ‘‘asset-backed 

security’’ and ‘‘ABS interest’’ should also be 

construed to include securities and other interests 

backed by such proceeds. Such securitization 

transactions are commonly referred to as including 

a ‘‘pre-funding account.’’ 

39See 15 U.S.C. 78o–11(a)(3). 

40See 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.’’) 

41See proposed rules at § __.2. Consistent with 

the Commission’s definition of sponsor, the 

Agencies interpret the term ‘‘issuer’’ as used in 

section 15G(a)(3)(B) to refer to the issuing entity 

that issues the ABS. 

42For example, in the context of collateralized 

loan obligations (CLOs), the CLO manager generally 

acts as the sponsor by selecting the commercial 

loans to be purchased by an agent bank for 

inclusion in the CLO collateral pool, and then 

manages the securitized assets once deposited in 

the CLO structure. 

43See proposed rules at §l.3(a). Because the 

term sponsor is used throughout the proposed rules, 

the term is separately defined in §l.2 of the 

proposed rules. The definition of ‘‘sponsor’’ in §l.2 

is identical to the sponsor part of the proposed 

rules’ definition of a ‘‘securitizer.’’ 

receivables.32 The proposal defines the 

term ‘‘securitized asset’’ to mean an asset 

that is transferred, sold, or conveyed to 

an issuing entity and that collateralizes 

the ABS interests issued by the issuing 

entity.33

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. For example, section 15G 

provides authority for exempting from 

the risk retention requirements certain 

securities that are exempt from 

registration under the Securities Act.34

In addition, the statutory definition of 

asset-backed security is broader than the 

definition of asset-backed security in the 

Commission’s Regulation AB,35 which 

governs the disclosure requirements for 

ABS offerings that are registered under 

the Securities Act.36 The definition of 

asset-backed security for purposes of 

section 15G also includes securities that 

are typically sold in transactions that 

are exempt from registration under the 

Securities Act, such as CDOs, as well as 

securities issued or guaranteed by a 

government sponsored entity (GSE), 

such as the Federal National Mortgage 

Association (Fannie Mae) and the 

Federal Home Loan Mortgage 

Corporation (Freddie Mac). In light of 

the foregoing, the proposed risk 

retention requirements would apply to 

securitizers of ABS offerings whether or 

not the offering is registered with the 

Commission under the Securities Act. 

As discussed further below, the 

proposed rules generally apply the risk 

retention requirements to the securitizer 

in each ‘‘securitization transaction,’’ 

which is defined as a transaction 

involving the offer and sale of ABS by 

an issuing entity.37 Applying the risk 

retention requirements to the securitizer 

of each issuance of ABS ensures that the 

requirements apply in the aggregate to 

all ABS issued by an issuing entity, 

including an issuing entity—such as a 

master trust—that issues ABS 

periodically. 

The proposed rules use the term ‘‘ABS 

interest’’ to 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, 

the payments on which are primarily 

dependent on the cash flows on the 

collateral held by the issuing entity. The 

term, however, does not include 

common or preferred stock, limited 

liability interests, partnership interests, 

trust certificates, or similar interests in 

an issuing entity that are issued 

primarily to evidence ownership of the 

issuing entity, and the payments, if any, 

on which are not primarily dependent 

on the cash flows of the collateral held 

by the issuing entity.38

B. Securitizer, Sponsor, and Depositor 

Section 15G generally provides for the 

Agencies to apply the risk retention 

requirements of the statute to a 

‘‘securitizer’’ of ABS. Section 15G(a)(3) 

in turn provides that the term 

‘‘securitizer’’ with respect to an issuance 

of ABS includes both ‘‘(A) an issuer of 

an asset-backed security; or (B) a person 

who organizes and initiates an assetbacked securities transaction by selling 

or transferring assets, either directly or 

indirectly, including through an 

affiliate, to the issuer.’’39

The Agencies note that the second 

prong of this definition (i.e., the person 

who organizes and initiates the ABS 

transaction by selling or transferring 

assets, either directly or indirectly, 

including through an affiliate, to the 

issuer) is substantially identical to the 

definition of a ‘‘sponsor’’ of a 

securitization transaction in the 

Commission’s Regulation AB governing 

disclosures for ABS offerings registered 

under the Securities Act.40 In light of 

this, the proposed rules provide that a 

‘‘sponsor’’ of an ABS transaction is a 

‘‘securitizer’’ for the purposes of section 

15G, and define the term ‘‘sponsor’’ in a 

manner consistent with the definition of 

that term in the Commission’s 

Regulation AB.41

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 rules. The Agencies believe 

that proposing to apply the risk 

retention requirement to 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.42 In circumstances where 

two or more entities each meet the 

definition of sponsor for a single 

securitization transaction, the proposed 

rules would require that one of the 

sponsors retain a portion of the credit 

risk of the underlying assets in 

accordance with the requirements of 

this proposal.43 Each sponsor in the 

transaction, however, would remain 

responsible for ensuring that at least one 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24099 

44Section 2(a)(4) of Securities Act (15 U.S.C. 

77b(a)(4)) defines the term ‘‘issuer’’ in part to 

include every person who issues or proposes to 

issue any security, except that with respect to 

certificates of deposit, voting-trust certificates, or 

collateral trust certificates, or with respect to 

certificates of interest or shares in an 

unincorporated investment trust not having a board 

of directors (or persons performing similar 

functions), the term issuer means the person or 

persons performing the acts and assuming the 

duties of depositor or manager pursuant to the 

provisions of the trust or other agreement or 

instrument under which the securities are issued. 

45See Exchange Act sec. 3(a)(8) (15 U.S.C. 

78c(a)(8) (defining ‘‘issuer’’ under the Exchange 

Act). 

46See, e.g., Securities Act Rule 191 (17 CFR 

230.191) and Exchange Act Rule 3b–19 (17 CFR 

240.3b-19). 

47For asset-backed securities transactions where 

there is not an intermediate transfer of the assets 

from the sponsor to the issuing entity, the term 

depositor refers to the sponsor. For asset-backed 

securities transactions where the person 

transferring or selling the pool assets is itself a trust 

(such as in an issuance trust structure), the 

depositor of the issuing entity is the depositor of 

that trust. See proposed rules at §l.2. Securities 

Act Rule 191 and Exchange Act Rule 3b–19 also 

note that the person acting as the depositor in its 

capacity as depositor to the issuing entity is a 

different ‘‘issuer’’ from that person in respect of its 

own securities in order to make clear—for 

example—that any applicable exemptions from 

Securities Act registration that person may have 

with respect to its own securities are not applicable 

to the asset-backed securities. That distinction does 

not appear relevant here. 48See 15 U.S.C. 78o–11(a)(3). 

49For example, in auto lease securitizations, the 

auto leases and car titles are originated in the name 

of a separate trust to avoid the administrative 

expenses of retitling the physical property 

underlying the leases. The separate trust will issue 

to the issuing entity for the asset-backed security a 

collateral certificate, often called a ‘‘special unit of 

beneficial interest’’ (SUBI). The issuing entity will 

then issue the asset-backed securities backed by the 

SUBI certificate. 

50See proposed rules at §l.3 through §l.11. 

We note that the proposed rules, in some instances, 

permit a sponsor to allow another person to retain 

the required amount of credit risk (e.g., originators, 

Continued 

sponsor complied with the 

requirements. 

As noted above, the definition of 

‘‘securitizer’’ in section 15G(a)(3)(A) 

includes the ‘‘issuer of an asset-backed 

security.’’ The term ‘‘issuer’’ when used 

in the federal securities laws may have 

different meanings depending on the 

context in which it is used. For 

example, for several purposes under the 

federal securities laws, including the 

Securities Act 44 and the Exchange 

Act 45 and the rules promulgated under 

these Acts,46 the term ‘‘issuer’’ when 

used with respect to an ABS transaction 

is defined to mean the entity—the 

depositor—that deposits the assets that 

collateralize the ABS with the issuing 

entity. The Agencies interpret the 

reference in section 15G(a)(3)(A) to an 

‘‘issuer of an asset-backed security’’ as 

referring to the ‘‘depositor’’ of the ABS, 

consistent with how that term has been 

defined and used under the federal 

securities laws in connection with 

ABS.47 As noted above, the proposed 

rules generally would apply the risk 

retention requirements of section 15G to 

a sponsor of a securitization transaction 

(and not the depositor for the 

securitization transaction). 

C. Originator 

As permitted by section 15G, §l.13 

of the proposed rules permit a sponsor 

to allocate its risk retention obligations 

to the originator(s) of the securitized 

assets in certain circumstances and 

subject to certain conditions. The 

proposed rules define the term 

originator in the same manner as section 

15G, that is, as a person who, through 

the extension of credit or otherwise, 

creates a financial asset that 

collateralizes an asset-backed security, 

and sells the asset directly or indirectly 

to a securitizer (i.e., a sponsor or 

depositor). 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—is an ‘‘originator’’ of the loan 

or receivable for purposes of section 

15G.48

Request for Comment 

1. Do the proposed rules 

appropriately implement the terms 

‘‘securitizer’’ and ‘‘originator’’ as used in 

section 15G and consistent with its 

purpose? 

2. Are there other terms, beyond those 

defined in § l.2 of the proposed rules, 

that the Agencies should define? 

3(a). As a general matter, is it 

appropriate to impose the risk retention 

requirements on the sponsor of an ABS 

transaction, rather than the depositor for 

the transaction? 3(b). If not, why? 

4(a). With respect to the terms 

defined, would you define any of the 

terms differently? 4(b). If so, which ones 

would you define differently, and how 

would you define them? For example, 

credit risk is defined to mean, among 

other things, the risk of loss that could 

result from failure of the issuing entity 

to make required payments or from 

bankruptcy of the issuing entity. 

5. Is it appropriate for the definition 

of credit risk to include risk of nonpayment by the issuing entity unrelated 

to the assets, such as risk that the 

issuing entity is not bankruptcy remote? 

6. Are all of the definitions in §l.2 

of the proposed rules necessary? For 

instance, is a definition of ‘‘asset’’ 

necessary? 

7(a). As proposed, where two or more 

entities each meet the definition of 

sponsor for a single securitization 

transaction, the proposed rules would 

require that one of the sponsors retain 

a portion of the credit risk of the 

underlying assets in accordance with 

the requirements of the rules. Is this the 

best approach to take when there are 

multiple sponsors in a single 

securitization transaction? 7(b). If not, 

what is a better approach and why? For 

example, should all sponsors be 

required to retain credit risk in some 

proportional amount, should the 

sponsor selling the greatest number of 

assets or with a particular attribute be 

required to retain the risk, or should the 

proposed rules only allow a sponsor 

that has transferred a minimum 

percentage (e.g., 10 percent, 20 percent, 

or 50 percent) of the total assets into the 

trust to retain the risk? 

8(a). Should the proposed rules allow 

for allocation of risk to a sponsor 

(among multiple sponsors in a single 

transaction) similar to the proposed 

rules’ parameters for allocation of risk 

among multiple originators? 8(b). Why 

or why not? 

9. A securitization transaction is 

proposed to be defined as a transaction 

involving the offer and sale of assetbacked securities by an issuing entity. In 

a single securitization transaction, there 

may be intermediate steps; however, the 

proposed rules would only require the 

sponsor to retain risk for the 

securitization transaction as a whole.49

Should the rules provide additional 

guidance for when a transaction with 

intermediate steps constitutes one or 

more securitization transactions that 

each should be subject to the rules’ risk 

retention requirements? 

III. General Risk Retention 

Requirement 

A. Minimum 5 Percent Risk Retention 

Required 

Section 15G of the Exchange Act 

generally requires that the Agencies 

jointly prescribe regulations that require 

a securitizer to retain not less than five 

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 proposed rules generally would 

require that a sponsor retain an 

economic interest equal to at least five 

percent of the aggregate credit risk of the 

assets collateralizing an issuance of ABS 

(the ‘‘base’’ risk retention requirement).50


srobinson on DSKHWCL6B1PROD with PROPOSALS
24100 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

third-party purchasers in commercial mortgagebacked securities transactions, and originatorsellers in asset-backed 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, we note that 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. 

51See 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. 

52Section 15G(c)(1)(E) allows the Federal banking 

agencies and the Commission to determine that 

with respect to CMBS, a form of retention that 

satisfies the requirements includes retention of a 

first-loss position by a third-party purchaser that 

meets certain criteria. See 15 U.S.C. 78o–11(c)(1)(E). 

53The determination whether a legal entity 

established to issue ABS must be included in the 

consolidated financial statements of the sponsor or 

another participant in the securitization chain is 

primarily addressed by the following generally 

accepted accounting principles issued by the 

Financial Accounting Standards Board (FASB): 

Accounting Standards Codification Topic 860, 

Transfers and Servicing (ASC 860, commonly called 

FAS 166); and FASB Accounting Standards 

Codification Topic 810, Consolidation (ASC 810, 

commonly called FAS 167). ASC 860 addresses 

whether securitizations and other transfers of 

financial assets are treated as sales or financings. 

ASC 810 addresses whether legal entities often used 

in securitization and other structured finance 

transactions should be included in the consolidated 

financial statements of any one of the parties 

involved in the transaction. Together, this guidance 

determines the extent to which an originator, 

sponsor, or another company is required to 

maintain securitized assets and corresponding 

liabilities on their balance sheets. 

This exposure should provide a sponsor 

with an incentive to monitor and 

control the quality of the assets being 

securitized and help align the interests 

of the sponsor with those of investors in 

the ABS. As discussed in Part III.D of 

this Supplementary Information, the 

sponsor also would be prohibited from 

hedging or otherwise transferring this 

retained interest. 

As required by section 15G, the 

proposed risk retention requirements 

would apply to all ABS 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 federally supervised financial 

institution. Thus, for example, it would 

apply to securitization transactions by 

any nonbank entity that is not an 

insured depository institution (such as 

an independent mortgage firm), as well 

as by Fannie Mae and Freddie Mac. 

The Agencies note that the five 

percent risk retention requirement 

established by the proposed rules would 

be a regulatory minimum. The sponsor, 

originator, or other party to a 

securitization may retain, or be required 

to retain, additional exposure to the 

credit risk of assets that the sponsor, 

originator, or other party helps 

securitize beyond that required by the 

proposed rules, either on its own 

initiative or in response to the demands 

of private market participants. 

Moreover, the proposed rules would 

require that a sponsor, in certain 

circumstances, fund a premium capture 

cash reserve account in connection with 

a securitization transaction (see Part 

III.B.9 of this Supplementary 

Information). Any amount a sponsor 

might be required to place in a premium 

capture cash reserve account would be 

in addition to the five percent ‘‘base’’ 

risk retention requirement of the 

proposed rules. 

Request for Comment 

10. The Agencies request comment on 

whether the minimum five percent risk 

retention requirement established by the 

proposed rules for non-exempt ABS 

transactions is appropriate, or whether a 

higher risk retention requirement 

should be established for all nonexempt ABS transactions or for any 

particular classes or types of nonexempt ABS. 

11. If a higher minimum requirement 

should be established, what minimum 

should be established and what factors 

should the Agencies take into account 

in determining that higher minimum? 

For example, should the amount of 

credit risk be based on expected losses, 

or a market-based test based on the 

interest rate spread relative to a 

benchmark index? 

12(a). Would the minimum five 

percent risk retention requirement, as 

proposed to be implemented, have a 

significant adverse effect on liquidity or 

pricing in the securitization markets for 

certain types of assets (such as, for 

example, prudently underwritten 

residential mortgage loans that do not 

satisfy all of the requirements to be a 

QRM)? 12(b). If so, what markets would 

be adversely affected and how? What 

adjustments to the proposed rules (e.g., 

the minimum risk retention amount, the 

manner in which credit exposure is 

measured for purposes of applying the 

risk retention requirement, or the form 

of risk retention) could be made to the 

proposed rules to address these 

concerns in a manner consistent with 

the purposes of section 15G? Please 

provide details and supporting data. 

B. Permissible Forms of Risk Retention 

As recognized in recent studies and 

reports on securitization and risk 

retention that have examined historical 

market practices, there are several ways 

in which a sponsor or other entity may 

have retained exposure to the credit risk 

of securitized assets.51 These include 

(i) a ‘‘vertical’’ slice of the ABS interests, 

whereby the sponsor or other entity 

retains a specified pro rata piece of 

every class of interests issued in the 

transaction; (ii) a ‘‘horizontal’’ first-loss 

position, whereby the sponsor or other 

entity retains a subordinate interest in 

the issuing entity that bears losses on 

the assets before any other classes of 

interests; (iii) a ‘‘seller’s interest’’ in 

securitizations structured using a master 

trust collateralized by revolving assets 

whereby the sponsor or other entity 

holds a separate interest that is pari 

passu with the investors’ interest in the 

pool of receivables (unless and until the 

occurrence of an early amortization 

event); or (iv) a representative sample, 

whereby the sponsor retains a 

representative sample of the assets to be 

securitized that exposes the sponsor to 

credit risk that is equivalent to that of 

the securitized assets. These examples 

are not exclusive. 

The various forms of risk retention 

have developed, in part, due to the 

diversity of assets that are securitized 

and the structures commonly used in 

securitizing different types of assets. For 

example, due to the revolving nature of 

credit card accounts and the fact that 

multiple series of ABS collateralized by 

credit card receivables typically are 

issued using a single master trust 

structure, sponsors of ABS transactions 

collateralized by credit card receivables 

often have maintained exposure to the 

credit risk of the underlying loans 

through use of a seller’s interest. On the 

other hand, sponsors of ABS backed by 

automobile loans where the originator of 

the loan is often a finance company 

affiliated with the sponsor will often 

retain a portion of the loans that would 

ordinarily be securitized, thus providing 

the sponsor some continuing exposure 

to the credit risk of those loans. In 

connection with the securitization of 

commercial mortgage-backed securities 

(‘‘CMBS’’), a form of horizontal risk 

retention often has been employed, with 

the horizontal first-loss position being 

initially held by a third-party purchaser 

that specifically negotiates for the 

purchase of the first-loss position and 

conducts its own credit analysis of each 

commercial loan backing the CMBS.52

Sponsors across a wide range of asset 

classes may initially hold a horizontal 

piece of the securitization (such as a 

residual interest). Different forms of risk 

retention also may have different 

accounting implications for a sponsor or 

other entity.53 Historically, whether or 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24101 

54See 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.’’). 

55The Agencies note that a variation of the 

vertical, horizontal, seller’s interest and 

representative sample options described below are 

forms of eligible risk retention in the proposed 

European Union capital requirement directive 

relating to securitizations. See ‘‘Call for Technical 

Advice on the Effectiveness of a Minimum 

Retention Requirement for Securitizations,’’ 

Committee of European Bank Supervisors (October 

30, 2009) (CEBS proposal). 

56See proposed rules at §l.4. 

57As noted previously, the proposed definition of 

ABS interests does not include common or 

preferred stock, limited liability interests, 

partnership interests, trust certificates or similar 

interests that are issued primarily to evidence 

ownership of the issuing entity and the payments, 

if any, on which are not primarily dependent on the 

cash flows of the assets of the issuing entity. See 

proposed rules at §l.2 (definition of ‘‘ABS 

interests’’). 

how a sponsor retained exposure to the 

credit risk of the assets it securitized 

was determined by a variety of factors 

including the rating requirements of the 

NRSROs, investor preferences or 

demands, accounting considerations, 

and whether there was a market for the 

type of interest that might ordinarily be 

retained (at least initially by the 

sponsor). 

Section 15G expressly provides the 

Agencies the authority to determine the 

permissible forms through which the 

required amount of risk retention must 

be held.54 Consistent with this 

flexibility, Subpart B of the proposed 

rules would provide sponsors with 

multiple options to satisfy the risk 

retention requirements of section 15G. 

The options in the proposed rules are 

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. However, importantly, each 

of the permitted forms of risk retention 

included in the proposed rules is 

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 

five percent of the credit risk of the 

securitized assets. Thus, the forms of 

risk retention would help to ensure that 

the purposes of section 15G are fulfilled. 

In addition, as discussed further in Part 

III.D of this Supplementary Information 

below, the proposed rules would 

prohibit a sponsor from transferring, 

selling or hedging the risk that the 

sponsor is required to retain, thereby 

preventing sponsors from circumventing 

the requirements of the rules by selling 

or transferring the risk after the 

securitization transaction has been 

completed. The proposed rules also 

include disclosure requirements that are 

an integral part of and specifically 

tailored to each of the permissible forms 

of risk retention. The disclosure 

requirements are integral to the 

proposed rules because they would 

provide investors with material 

information concerning the sponsor’s 

retained interests in a securitization 

transaction, such as the amount and 

form of interest retained by sponsors, 

and the assumptions used in 

determining the aggregate value of ABS 

to be issued (which generally affects the 

amount of risk required to be retained). 

Further, the disclosures are also integral 

to the rule because they would provide 

investors and the Agencies with an 

efficient mechanism to monitor 

compliance with the risk retention 

requirements of the proposed rules.55

Request for Comment 

13. Is the proposed menu of options 

approach to risk retention, which would 

allow a sponsor to choose the form of 

risk retention (subject to all applicable 

terms and conditions), appropriate? 

14(a). Should the Agencies mandate 

that sponsors use a particular form of 

risk retention (e.g., a vertical slice or a 

horizontal slice) for all or specific types 

of asset classes or specific types of 

transactions? 14(b). If so, which forms 

should be required for with which asset 

classes and why? 

15. Does the proposed menu approach 

achieve the objectives of the statute to 

provide securitizers an incentive to 

monitor and control the underwriting 

quality of securitized assets and help 

align incentives among originators, 

sponsors, and investors? 

16. Is each of the proposed forms of 

risk retention appropriate? In particular, 

the Agencies seek comment on the 

potential effectiveness of the proposed 

forms of risk retention in achieving the 

purposes of section 15G, their potential 

effect on securitization markets, and any 

operational or other problems these 

forms may present. 

17. Are there any kinds of 

securitizations for which a particular 

form of risk retention is not appropriate? 

18. How effective would each of the 

proposed risk retention options be in 

creating incentives to monitor and 

control the quality of assets that are 

securitized and in aligning the interests 

among the parties in a securitization 

transaction? 

19(a). Are there other forms of risk 

retention that the Agencies should 

permit? 19(b). If so, please provide a 

detailed description of the form(s), how 

such form(s) could be implemented, and 

whether such form(s) would be 

appropriate for all, or just certain, 

classes of assets. 

20. Should the proposed rules require 

disclosure as to why the sponsor chose 

a particular risk retention option? 

21(a). Are there ways that sponsors 

could avoid the risk retention 

requirements in an effort to reduce or 

eliminate their risk retention 

requirements? 21(b). If so, how should 

we modify the proposed rules to address 

this potential? 

22. Are the methodologies proposed 

for calculating the required five percent 

exposure under each of the options 

appropriate? 

23(a). Are there other ways that the 

minimum five percent requirement 

should be calculated? 23(b). Would such 

calculation methods be difficult to 

enforce? 23(c). If so, how can we 

address those difficulties? 23(d). Are 

there other alternatives? 

1. Vertical Risk Retention 

As proposed, a sponsor may satisfy its 

risk retention requirements with respect 

to a securitization transaction by 

retaining at least five percent of each 

class of ABS interests issued as part of 

the securitization transaction.56 A 

sponsor using this approach must retain 

at least five percent 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 interestonly class, and a residual interest—a 

sponsor using this approach with 

respect to the transaction would have to 

retain at least five percent of each such 

class or interest.57 The proposed rules 

do not specify a method of measuring 

the amount of each class, because the 

amount retained, regardless of method 

of measurement, should equal at least 

five percent of the par value (if any), fair 

value, and number of shares or units of 

each class. 

Under the vertical risk retention 

option, by holding a five percent 

vertical slice in an ABS issuance, a 

sponsor is exposed to five percent of the 

credit risk that each class of investors 

has to the underlying collateral. This 

provides the sponsor an interest in the 

entire structure of the securitization 

transaction. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24102 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

58For similar reasons, disclosure of such 

assumptions and methodologies would be required 

under the other risk retention options where the 

amount of the sponsor’s required amount of risk 

retention is based on the amount of interests issued 

by the issuing entity or the amount of the collateral 

underlying such interests. Depending on the 

circumstances, a sponsor may have an incentive to 

inflate the value of the underlying collateral and the 

ABS supported by such collateral (for example, to 

increase the proceeds from the securitization 

transaction) or to underestimate the value of such 

collateral and ABS (for example, to reduce the 

sponsor’s risk retention requirement). The material 

assumptions relating to estimated cash flows likely 

would include those relating to the estimated 

default rate, prepayment rate, the time between 

default and recoveries on the underlying assets, as 

well as interest rate projections for assets with 

variable interest rates. 

59See proposed rules at §l.4. 

60As discussed in Part III.B.9 of this 

Supplemental Information, if a sponsor is required 

to establish and fund a premium capture cash 

reserve account in connection with a securitization 

transaction, such account would first bear losses on 

the securitized assets (even before an eligible 

horizontal residual interest) until the account was 

depleted. 

61See proposed rules at §l.2 (definition of 

‘‘eligible horizontal residual interest’’). 

62Thus, an eligible horizontal residual interest 

with a par value of five percent of the aggregate par 

value of all ABS interests could, subject to its most 

subordinate place in the payments waterfall, (i) 

initially be entitled to receive up to five percent of 

scheduled principal payments received on the 

securitized assets, and (ii) if losses reduced the par 

value of the interest to three percent, receive no 

more than three percent of scheduled principal 

payments received on the securitized assets. 

Under the proposed rules, a sponsor 

that elects to retain risk through the 

vertical slice option would be required 

to provide, or cause to be provided, to 

potential investors a reasonable time 

prior to the sale of the asset-backed 

securities in the securitization 

transaction and, upon request, to the 

Commission and to its appropriate 

Federal banking agency (if any), the 

amount (expressed as a percentage and 

a dollar amount) of each class of ABS 

interests in the issuing entity that the 

sponsor will retain (or did retain) at 

closing as well as the amount 

(expressed, again, as a percentage and 

dollar amount) that the sponsor is 

required to retain under the proposed 

rules. This disclosure would allow 

investors to know what risk the sponsor 

will actually retain in the transaction 

and compare this amount to the risk that 

the sponsor is required to retain under 

the proposed rules. In addition, the 

proposed rules would require a sponsor 

to disclose, or cause to be disclosed, the 

material assumptions and 

methodologies it used to determine the 

aggregate dollar amount of ABS interests 

issued by the issuing entity in the 

securitization transaction, including 

those pertaining to any estimated cash 

flows and the discount rate used. 

Disclosure of these assumptions and 

methodologies should help investors 

and the Agencies monitor the sponsor’s 

compliance with its risk retention 

requirements because the five percent 

risk retention requirement is based on 

the aggregate amount of each class of 

ABS interests issued as part of the 

transaction.58

Request for Comment 

24. Are the disclosures proposed 

sufficient to provide investors with all 

material information concerning the 

sponsor’s retained interest in a 

securitization transaction, as well as to 

enable investors and the Agencies to 

monitor the sponsor’s compliance with 

the rule? 

25(a). Should additional disclosures 

be required? 25(b). If so, what should be 

required and why? 

26. Are there any additional factors, 

such as cost considerations, that the 

Agencies should consider in 

formulating an appropriate vertical risk 

retention option? 

2. Horizontal Risk Retention 

As proposed, the second risk 

retention option permits a sponsor to 

satisfy its risk retention obligations by 

retaining an ‘‘eligible horizontal residual 

interest’’ in the issuing entity in an 

amount that is equal to at least five 

percent of the par value of all ABS 

interests in the issuing entity that are 

issued as part of the securitization 

transaction.59 As discussed below, the 

eligible horizontal residual interest 

would expose the sponsor to a five 

percent first-loss exposure to the credit 

risk of the entire pool of securitized 

assets. 

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,60 and could not 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. Specifically, 

an interest qualifies as an ‘‘eligible 

horizontal residual interest’’ under the 

proposed rules only if it is an ABS 

interest that is allocated all losses on the 

securitized assets until the par value of 

the class is reduced to zero and has the 

most subordinated claim to payments of 

both principal and interest by the 

issuing entity.61

Moreover, until all other ABS 

interests in the issuing entity are paid in 

full, the eligible horizontal residual 

interest generally cannot receive any 

payments of principal made on a 

securitized asset. However, the interest 

may receive its proportionate share of 

scheduled payments of principal 

received on the securitized assets in 

accordance with the relevant transaction 

documents. For example, so long as any 

other ABS interests are outstanding, a 

sponsor, through its ownership of the 

eligible horizontal residual interest, 

would be prohibited from receiving any 

prepayments of principal made on the 

underlying assets because these are, by 

definition, unscheduled payments. This 

sponsor also would be prohibited from 

receiving principal payments made on 

the underlying assets derived from 

proceeds from the sale of, or foreclosure 

on, an underlying asset. The prohibition 

of unscheduled payments to the eligible 

horizontal residual interest is designed 

to ensure that unscheduled payments 

would not accelerate the payoff of the 

eligible horizontal residual interest 

before other ABS interests. Such 

acceleration would reduce the capacity 

of the eligible horizontal residual 

interest to absorb losses on the 

securitized assets as well as the duration 

of the sponsor’s interest in the 

securitized assets. The proposed rules 

would, however, permit the eligible 

horizontal residual interest to receive its 

pro rata share of scheduled principal 

payments on the underlying assets.62

Similar to the vertical slice risk 

retention option, under the proposed 

rules, a sponsor using the horizontal 

risk retention option would be required 

to provide, or cause to be provided, to 

potential investors a reasonable period 

of 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): the 

amount (expressed as a percentage and 

dollar amount) of the eligible horizontal 

residual interest that will be retained (or 

was retained) by the sponsor at closing, 

and the amount (expressed as a 

percentage and dollar amount) 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, such as when such interest is 

allocated losses or may receive 

payments; and the material assumptions 

and methodologies used in determining 

the aggregate dollar amount of ABS 

interests issued by the issuing entity in 

the securitization transaction, including 

those pertaining to any estimated cash 

flows and the discount rate used. 

In lieu of holding an eligible 

horizontal residual interest, the 

proposed rules would allow a sponsor 

to cause to be established and funded, 

in cash, a reserve account at closing 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24103 

63See proposed rules at §l.4(b). 

64See proposed rules at §l.4(b)(3)(i). 

65Under the proposed rules, amounts in a 

horizontal cash reserve account may only be 

invested in (i) United States Treasury securities 

with remaining maturities of 1 year or less; and (ii) 

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 rules at §l.4(b)(2). 

66As under the horizontal risk retention option 

itself, a sponsor would have the option of 

establishing and funding, in cash, a horizontal cash 

reserve account at the closing of the securitization 

transaction in this amount rather than holding an 

eligible horizontal residual interest. See proposed 

rules at §l.4(b). Any such horizontal cash reserve 

account would be subject to the same restrictions 

and limitations as under the horizontal risk 

retention option. 

(horizontal cash reserve account) in an 

amount equal to at least five percent of 

the par value of all the ABS interests 

issued as part of the transaction (i.e., the 

same dollar amount as would be 

required if the sponsor held an eligible 

horizontal residual interest).63 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. The proposed rules include 

several important restrictions and 

limitations on such a horizontal cash 

reserve account. These limitations and 

restrictions are intended to ensure that 

a sponsor that establishes a horizontal 

cash reserve account would be exposed 

to the same amount and type of first-loss 

credit risk on the underlying assets as 

would be the case if the sponsor held an 

eligible horizontal residual interest. 

Specifically, the proposed rules 

would provide that, until all ABS 

interests in the issuing entity are paid in 

full or the issuing entity is dissolved, 

the horizontal cash reserve account 

must be used to satisfy payments on 

ABS interests on any payment date 

when the issuing entity has insufficient 

funds from any source (including any 

premium capture cash reserve account 

established under §l.12 of the 

proposed rules) to satisfy an amount 

due on any ABS interest.64 Thus, the 

amounts in the account would bear first 

loss on the securitized assets in the 

same way as an eligible horizontal 

residual interest. In addition, until all 

ABS interests in the issuing entity are 

paid in full or the issuing entity is 

dissolved, the proposed rules would 

prohibit any other amounts from being 

withdrawn or distributed from the 

account, with only two exceptions. The 

first exception would allow amounts in 

the account to be released to the sponsor 

(or any other person) due to receipt by 

the issuing entity of scheduled 

payments of principal on the securitized 

assets, provided that the issuing entity 

distributes such payments of principal 

in accordance with the transaction 

documents and the amount released 

from the horizontal cash reserve account 

on any date does not exceed the product 

of: (i) The amount of scheduled 

payments of principal on the securitized 

assets received by the issuing entity and 

for which the release is being made; and 

(ii) the ratio of the current balance in the 

horizontal cash reserve account to the 

aggregate remaining principal balance of 

all ABS interests in the issuing entity. 

This limitation is intended to ensure 

that, like an eligible horizontal residual 

interest, a horizontal cash reserve 

account would not be depleted by 

unscheduled payments of principal on 

the underlying assets. The second 

exception would be that the sponsor 

would be permitted to receive interest 

payments (but not principal payments) 

received by the horizontal cash reserve 

account on its permitted investments.65

A sponsor electing to establish and 

fund a horizontal cash reserve account 

would be required to provide 

disclosures similar to those 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 

27. Do the conditions and limitations 

in the proposed rules effectively limit 

the ability of the sponsor to structure 

away its risk exposure? 

28(a). Is the restriction on certain 

payments to the sponsor with respect to 

the eligible horizontal residual interest 

appropriate and sufficient? 28(b). Why 

or why not? 

29(a). Is the proposed approach to 

measuring the size of horizontal risk 

retention (five percent of the par value 

of all ABS interests in the issuing entity 

that are issued as part of the 

securitization transaction) appropriate? 

29(b). Would a different measurement 

be better? Please provide details and 

data supporting any alternative 

measurements. 

30. Are the disclosures proposed 

sufficient to provide investors with all 

material information concerning the 

sponsor’s retained interest in a 

securitization transaction, as well as 

enable investors and the Agencies to 

monitor whether the sponsor has 

complied with the rule? 

31(a). Should additional disclosures 

be required? 31(b). If so, what should be 

required and why? 

32. Are there any additional factors, 

such as accounting or cost 

considerations that the Agencies should 

consider with respect to horizontal risk 

retention? 

33. Should a sponsor be prohibited 

from utilizing the horizontal risk 

retention option if the sponsor (or an 

affiliate) acts as servicer for the 

securitized assets? 

34. Are the terms and conditions of 

the horizontal cash reserve account 

appropriate? 

35. Do the terms and conditions 

ensure that such an account will expose 

the sponsor to the same type and 

amount of credit risk and have the same 

incentive effects as an eligible 

horizontal residual interest? 

36(a). Should the eligible horizontal 

residual interest be required to be 

structured as a ‘‘Z bond’’ such that it 

pays no interest while principal is being 

paid down on more senior interests? 

36(b). Why or why not? 

3. L-Shaped Risk Retention 

The next risk retention option in the 

proposed rules would allow a sponsor, 

subject to certain conditions, to use an 

equal combination of vertical risk 

retention and horizontal risk retention 

as a means of retaining the required five 

percent exposure to the credit risk of the 

securitized assets. This form of risk 

retention is referred to as an ‘‘L-Shaped’’ 

form of risk retention because it 

combines both vertical and horizontal 

forms. Specifically, §l.6 of the 

proposed rules would allow a sponsor 

to meet its risk retention obligations 

under the rules by retaining: 

(i) 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 

(ii) 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).66

The amount of the horizontal 

component is calibrated to avoid double 

counting that portion of an eligible 

horizontal residual interest that the 

sponsor is required to hold as part of the 

vertical component. This calibration 

also ensures that the combined amount 

of the vertical component and the 

horizontal component would be five 

percent of the aggregate transaction. For 

example, in a securitization transaction 

structured with three classes of 

interests: A certificated senior class 

whose par value is equal to $950, an 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24104 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

67This example is provided for simple 

illustration only. 

68 In a master trust securitization, assets (e.g., 

credit card receivables or dealer floorplan 

financings) may be added to the pool in connection 

with future issuances of the securities backed by the 

pool. 

69See proposed rules at §l.7. 

uncertificated subordinated class of $24 

and an uncertificated eligible horizontal 

residual interest whose par value is 

equal to $26, a sponsor would be 

required to retain $23.75 of the senior 

class ($950*2.5%), $0.60 of the 

subordinated class ($24*2.5%) and 

$25.65 of the eligible horizontal residual 

interest (($26*2.5%) + ($1000 ¥ ($23.75 

+ $0.60 + $0.65))*2.564%) for a total of 

$50 in risk retention requirements. 

Because the required size of the 

sponsor’s retained eligible horizontal 

residual interest ($25.65) is less than the 

amount of the eligible horizontal 

residual interest, retention of the entire 

horizontal residual interest by the 

sponsor complies with the minimum 

L-shape retention requirements for the 

securitization.67

The proposal would require that a 

sponsor hold 50 percent of its required 

risk retention amount in the form of a 

vertical component and 50 percent in 

the form of a horizontal component in 

order to help ensure that each 

component is large enough to affect the 

sponsor’s incentives and to help align 

the incentives of the sponsor and 

investors. In addition, requiring that 

each component represent 50 percent of 

the total minimum risk retention 

requirement should assist investors and 

the Agencies with monitoring 

compliance with the proposed rules. 

Because a sponsor using the L-shape 

risk retention option would retain both 

a vertical and a horizontal component, 

the proposed rules would require that 

the sponsor provide the disclosures 

required under the vertical risk 

retention option, as well as those 

required under the horizontal risk 

retention option. 

Request for Comment 

37. Are the disclosures proposed 

sufficient to provide investors with all 

material information concerning the 

sponsor’s retained interest in a 

securitization transaction, as well as 

enable investors and the Agencies to 

monitor whether the sponsor has 

complied with the rule? 

38(a). Should additional disclosures 

be required? 38(b). If so, what should be 

required and why? 

39. Are there any additional factors, 

such as cost considerations, that the 

Agencies should consider with respect 

to L-shape risk retention? 

40(a). Should the Agencies permit or 

require that a higher proportion of the 

risk retention held by a sponsor under 

this option be composed of a vertical 

component or a horizontal component? 

40(b). What implications might such 

changes have on the effectiveness of the 

option in helping achieving the 

purposes of section 15G? 

4. Revolving Asset Master Trusts 

(Seller’s Interest) 

Securitizations backed by revolving 

lines of credit, such as credit card 

accounts or dealer floorplan loans, often 

are structured using a revolving master 

trust, which allows the trust to issue 

more than one series of ABS backed by 

a single pool of the revolving assets.68

In these types of transactions, the 

sponsor typically holds an interest 

known as a ‘‘seller’s interest.’’ This 

interest is pari passu with the investors’ 

interest in the receivables backing the 

ABS interests of the issuing entity until 

the occurrence of an early amortization 

event. A seller’s interest is a direct, 

shared interest with all of the investors 

in the performance of the underlying 

assets and, thus, exposes the sponsor to 

the credit risk of the pool or receivables. 

In light of and to accommodate those 

types of securitizations, the proposed 

rules would allow a sponsor of a 

revolving asset master trust that is 

collateralized by loans or other 

extensions of credit that arise under 

revolving accounts to meet its base risk 

retention requirement by retaining a 

seller’s interest in an amount not less 

than five percent of the unpaid 

principal balance of all the assets held 

by the issuing entity.69 The proposed 

rules define a ‘‘revolving asset master 

trust’’ as an issuing entity that (i) is a 

master trust; and (ii) is established to 

issue more than one series of ABS, all 

of which are collateralized by a single 

pool of revolving securitized assets that 

are expected to change in composition 

over time. The proposed rules also 

define a ‘‘seller’s interest’’ 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 

definitions of a seller’s interest and a 

revolving asset master trust are intended 

to be consistent with market practices 

and, with respect to seller’s interest, 

designed to 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. 

Under the proposed rules, a sponsor 

using the seller’s interest option would 

be required to provide, or cause to be 

provided, in writing 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 amount 

(expressed as a percentage and dollar 

amount) of the seller’s interest that the 

sponsor will retain (or has retained) in 

the transaction at closing and the 

amount (expressed as a percentage and 

dollar amount) that the sponsor is 

required to retain pursuant to §l.7 of 

the rule; a description of the material 

terms of the seller’s interest; and the 

material assumptions and methodology 

used in determining the aggregate dollar 

amount of ABS interests issued by the 

issuing entity in the securitization 

transaction, including those pertaining 

to any estimated cash flows and the 

discount rate used. 

Request for Comment 

41(a). Should a sponsor of a revolving 

asset master trust be permitted to satisfy 

its base risk retention requirement by 

retaining the seller’s interest, as 

proposed? 41(b). Why or why not? 

42(a). Are there additional or different 

conditions that should be placed on this 

option? 42(b). If so, please explain in 

detail what other conditions would be 

appropriate. 

43. Are there alternative methods of 

structuring risk retention for revolving 

asset master trust securitization 

transactions that should be permitted? 

Provide detailed descriptions and data 

or other support for any alternatives. 

44. Are the proposed disclosures 

sufficient to provide investors with all 

material information concerning the 

sponsor’s retained interest in a 

securitization transaction, as well as 

enable investors and the Agencies to 

monitor whether the sponsor has 

complied with the rule? 

45(a). Should additional disclosures 

be required? 45(b). If so, what should be 

required and why? 

46. Should a seller’s interest form of 

risk retention be applied to any other 

types of securitization transactions? If 

so, explain in detail and provide data or 

other support for application to other 

types of securitization transactions. 

5. Representative Sample 

The next proposed risk retention 

option permits a sponsor of a 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24105 

70See proposed rules at §l.8. 

71Stated otherwise, the unpaid principal balance 

of the assets comprising the representative sample 

must be no less than 5/95ths (5.264 percent) of the 

aggregate unpaid principal balance of all the assets 

that ultimately are securitized in the securitization 

transaction. The proposed rules use this approach 

to defining the minimum size of a representative 

sample. See proposed rules at §l.8(b)(1)(i). 

72 Depending on the type of assets involved in the 

securitization, the material characteristics other 

than the unpaid principal balance of the assets 

might include, for example, the geographical 

location of the property securing the loan, the debtto-income ratio(s) of the borrower (DTI ratio), and 

the interest rate payable on the loan. Characteristics 

such as the DTI ratio and the interest rate payable 

on the loan would be considered quantitative 

characteristics, and characteristics such as the 

geographic location of the property securing the 

loan would be considered categorical 

characteristics. Assuming the factors above are 

material, a sponsor using the representative sample 

option would be required to test the mean of the 

DTI ratio of loans in the representative sample 

against the mean of the DTI ratio of all assets in the 

designated pool (including the ones selected for the 

random sample). In addition, the sponsor would be 

required to test the proportion of the number of 

assets from one geographic location in the 

representative sample to the total number of assets 

in the representative sample against the proportion 

of the number of assets from the same geographic 

location in the designated pool to the total number 

of assets in the designated pool. 73See proposed rules at §l.8(d)(2)(i)–(v). 

securitization transaction to meet its 

risk retention requirements by retaining 

a randomly selected representative 

sample of assets that is equivalent, in all 

material respects, to the assets that are 

transferred to the issuing entity and 

securitized, subject to certain 

conditions.70 This method of risk 

retention has been used in connection 

with securitizations involving 

automobile loans where the underlying 

loans are not originated purely for 

distribution, but are securitized by the 

sponsor as part of a broader funding 

strategy. By retaining a randomly 

selected representative sample of assets, 

the sponsor retains exposure to 

substantially the same type of credit risk 

as investors in the ABS. Therefore, this 

structure provides a sponsor incentives 

to monitor and control the quality of the 

underwriting of the securitized assets 

and helps align the sponsor’s incentives 

with those of investors in the ABS. 

Consistent with other risk retention 

options, a sponsor using the 

representative sample approach would 

be required to retain at least five percent 

of the credit risk of the assets the 

sponsor identifies for securitization. 

Therefore, the unpaid principal balance 

of all the assets in the representative 

sample would be required to equal at 

least five percent of the aggregate 

unpaid principal balance of all the 

assets in the pool of assets initially 

identified for securitization (including 

those that end up in the representative 

sample). For example, if the assets that 

are identified for securitization have an 

aggregate unpaid principal balance of 

$100 million, the aggregate unpaid 

principal balance of the assets in the 

representative sample would be 

required to equal at least $5 million.71

To ensure that a sponsor that retains 

a representative sample remains 

exposed to substantially the same 

aggregate credit risks as investors in the 

ABS, the proposal would require the 

sponsor to construct a representative 

sample according to a specific process. 

As an initial step, the sponsor would 

need to designate a pool of at least 1,000 

separate assets for securitization (the 

‘‘designated pool’’). The representative 

sample would be required to be drawn 

exclusively from the designated pool. 

Also, the designated pool would be 

prohibited from containing any assets 

other than those that are either 

securitized or selected for the 

representative sample. In the second 

step, the sponsor must use a random 

selection process to identify those loans 

from within the designated pool that 

will be included in the representative 

sample. This random selection process 

may not take account of any 

characteristic of the assets other than 

their unpaid principal balance. 

After the sponsor randomly selects a 

representative sample from the 

designated pool, it would be required to 

assess that sample to ensure that, for 

each material characteristic of the 

assets, including the average unpaid 

principal balance, in the designated 

pool the mean of any quantitative 

characteristic, and the proportion of any 

characteristic that is categorical in 

nature, of the sample of assets randomly 

selected from the designated pool is 

within a 95 percent two-tailed 

confidence interval of the mean or 

proportion, respectively, of the same 

characteristic of all the assets in the 

designated pool.72

Without these statistical tests, a 

sample could be biased towards, for 

example, assets with a larger dollar 

value or assets with a lower expected 

risk of default. In summary, this process 

is designed to ensure that the assets 

randomly selected from the designated 

pool are, in fact, representative of the 

securitized pool. If this process does not 

produce a sample with equivalent 

material characteristics (as measured by 

the required two-tailed confidence 

level), the sponsor must repeat it as 

necessary in order to achieve an 

equivalent result or rely on another 

permissible option for retaining credit 

risk. The proposal permits this reselection and testing process. 

The proposal contains a variety of 

safeguards to ensure that the sponsor 

has constructed the representative 

sample in conformance with the 

requirements described above. For 

example, the sponsor would be required 

to have in place, and adhere to, policies 

and procedures for (i) identifying and 

documenting the material 

characteristics of the assets in the 

designated pool; (ii) selecting assets 

randomly from the designated pool for 

inclusion in the representative sample; 

(iii) testing the randomly selected 

sample of assets in the designated pool; 

(iv) maintaining, until all ABS interests 

are paid in full, documentation that 

clearly identifies the assets included in 

the representative sample; and (v) 

prohibiting, until all ABS interests are 

paid in full, assets in the representative 

sample from being included in the 

designated pool of any other 

securitization transaction. 

In addition, prior to the sale of the 

asset-backed securities as part of the 

securitization transaction, the sponsor 

would be required to obtain an agreed 

upon procedures report from an 

independent, public accounting firm. At 

a minimum, the independent, public 

accounting firm must report on whether 

the sponsor has the policies and 

procedures mentioned above.73 Once an 

acceptable agreed upon procedures 

report has been obtained, the sponsor 

may rely on such report for subsequent 

securitizations. However, if the 

sponsor’s policies and procedures 

change in any material respect, a new 

agreed upon procedures report would be 

required. Under the proposal, the 

independent public accounting firm 

providing the agreed upon procedures 

report must report on the following 

minimum items: 

(i) Policies and procedures that 

require the sponsor to identify and 

document the material characteristics of 

assets included in a designated pool of 

assets that meets the requirements of the 

proposal; 

(ii) Policies and procedures that 

require the sponsor to select assets 

randomly in accordance with the 

proposal; 

(iii) Policies and procedures that 

require the sponsor to test the 

randomly-selected sample of assets in 

accordance with the proposal of this 

section; 

(iv) Policies and procedures that 

require the sponsor to maintain, until all 

ABS interests are paid in full, 

documentation that identifies the assets 

in the representative sample established 

in accordance with the proposal; and 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24106 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

74See proposed rules at §l.8(f). 

75See, e.g., disclosure of pool characteristics 

required in registered transactions in the 

Commission’s Regulation AB, Item 1111(b). 

(v) Policies and procedures that 

require the sponsor to prohibit, until all 

ABS interests are paid in full, assets in 

the representative sample from being 

included in the designated pool of any 

other securitization transaction. 

Because the performance of the assets 

included in the representative sample 

could differ from the performance of the 

securitized assets if the two sets of 

assets were serviced under different 

standards or procedures, the proposal 

provides that, until such time as all ABS 

interests in the issuing entity have been 

fully paid or the issuing entity has been 

dissolved, servicing of the assets 

included in the representative sample 

must be conducted by the same entity 

and under the same contractual 

standards as the servicing of the 

securitized assets. In addition, the 

individuals responsible for servicing the 

assets comprising the representative 

sample or the securitized assets must 

not be able to determine whether an 

asset is held by the sponsor or held by 

the issuing entity. 

A sponsor would also be required to 

comply with the hedging, transfer and 

sale restrictions in section l.14 with 

respect to the assets in the 

representative sample. Additionally, the 

sponsor would be prohibited from 

removing any assets from the 

representative sample and, until all ABS 

interests are repaid, causing or 

permitting the assets in the 

representative sample to be included in 

any other designated pool or 

representative sample established in 

connection with any other securitization 

transaction.74

To help ensure that potential 

investors and the Agencies can monitor 

and assess the sponsor’s compliance 

with these requirements, the proposal 

would require the sponsor to provide, or 

cause to be provided, the following 

disclosures to potential investors a 

reasonable period of time prior to the 

sale of asset-backed securities as part of 

the securitization transaction and to 

provide, or cause to be provided, the 

same information, upon request, to the 

Commission and its appropriate Federal 

banking agency (if any): 

(i) The amount (expressed as a 

percentage of the designated pool and 

dollar amount) of assets included in the 

representative sample to be retained by 

the sponsor; 

(ii) The amount (expressed as a 

percentage of the designated pool and 

dollar amount) of assets required to be 

included in the representative sample 

and retained by the sponsor; 

(iii) A description of the material 

characteristics of the designated pool 

and the representative sample, 

including, but not limited to, the 

average unpaid principal balance of the 

assets in the designated pool and the 

representative sample, the means of the 

quantitative characteristics and 

proportions of characteristics that are 

categorical in nature with respect to 

each of the material characteristics of 

the assets in the designated pool and the 

representative sample, of appropriate 

introductory and explanatory 

information to introduce the 

characteristics, the methodology used in 

determining or calculating the 

characteristics, and any terms or 

abbreviations used; 75

(iv) A description of the policies and 

procedures that the sponsor used for 

ensuring that the process for identifying 

the representative sample complies with 

the proposal and that the representative 

sample has equivalent material 

characteristics to those of the pool of 

securitized assets; 

(v) Confirmation that an agreed upon 

procedures report was obtained as 

required by the proposal; and 

(vi) The material assumptions and 

methodology used in determining the 

aggregate dollar amount of ABS interests 

issued by the issuing entity in the 

securitization transaction, including 

those pertaining to any estimated cash 

flows and the discount rate used. 

Further, after the sale of the ABS, the 

sponsor would be required to provide, 

or cause to be provided, to investors at 

the end of each distribution period (as 

specified in the governing transaction 

documents) a comparison of the 

performance of the pool of securitized 

assets for the related distribution period 

with the performance of the assets in the 

representative sample for the related 

distribution period. A sponsor selecting 

the representative sample option also 

would be required to provide investors 

disclosure concerning the assets in the 

representative sample in the same form, 

level, and manner as it provides, 

pursuant to rule or otherwise, 

concerning the securitized assets. 

Therefore, if loan-level disclosure 

concerning the securitized assets was 

required, by rule or otherwise, to be 

provided to investors, the same level of 

disclosure would also be required 

concerning the representative sample. 

Request for Comment 

47. Should we include the 

representative sample alternative as a 

risk retention option? 

48. Are the mechanisms that we have 

proposed adequate to ensure monitoring 

of the randomization process if such an 

alternative were permitted? 

49. Is the requirement that the 

designated pool contain at least 1000 

assets appropriate, or should a greater 

number of assets be required or a lesser 

number be permitted? 

50. Are there material characteristics 

other than the average unpaid principal 

balance of all the assets that should be 

identified in the rule for purposes of the 

equivalent risk determination and 

disclosure requirements? 

51. Are there any better ways to 

ensure an adequate randomization 

process and the equivalence of the 

representative sample to the pool of 

securitized assets? For example, would 

it be appropriate and sufficient if the 

sponsor were required to use a third 

party to conduct the random selection 

with no subsequent testing to determine 

if the sample constructed has material 

characteristics equivalent to those of the 

securitized assets? 

52(a). Alternatively, would it be 

adequate if the sponsor was required to 

provide a third-party opinion that the 

selection process was random and that 

retained exposures are equivalent (i.e., 

share a similar risk profile) to the 

securitized exposures? 52(b). Would this 

opinion resemble a credit rating, thereby 

raising concerns about undue reliance 

on credit ratings? 52(c). If this approach 

were adopted, should the Agencies 

impose any standards of performance to 

be followed by such a third party, or 

that such third party have certain 

characteristics? 

53. If the Agencies adopt a 

representative sample option, should 

the same disclosures be required 

regarding the securitized assets subject 

to risk retention that are required for the 

assets in the pool at the time of 

securitization and on an ongoing basis? 

54. Should the retained exposures, as 

proposed, be subject to the same 

servicing standards as the securitized 

exposures? 

55. Are the disclosures proposed 

sufficient to provide investors with all 

material information concerning the 

sponsor’s retained interest in a 

securitization transaction, as well as 

enable investors and the Agencies to 

monitor whether the sponsor has 

complied with the rule? 

56(a). Should additional disclosures 

be required? 56(b). If so, what should be 

required and why? 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24107 

76See proposed rules at §l.9. 

77Structured 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 support. 

78See proposed rules at §l.2 (definition of 

‘‘eligible ABCP conduit’’). 

79Under the proposal, an originator-seller would 

mean an entity that creates assets through one or 

more extensions of credit and sells those 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 proposal defines 

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 proposed rules at §l.2 (definitions 

of ‘‘originator-seller’’ and ‘‘intermediate SPV’’). 

80The proposal 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. See http://www.bis.org/ 

bcbs/index.htm for more information about the 

Basel Capital Accord. 

57(a). Is the condition that a sponsor 

obtain an agreed upon procedures report 

from an independent, public accounting 

firm appropriate? 57(b). If not, is there 

another mechanism that should be 

included in the option that helps ensure 

that the sponsor has constructed the 

representative sample in conformance 

with the requirements of the rule? 

58(a). Is the requirement that the 

sponsor determine equivalency with a 

95 percent two-tailed confidence 

appropriate? 58(b). If not, what 

measurement of equivalency do you 

recommend and why? 

6. Asset-Backed Commercial Paper 

Conduits 

The next risk retention option under 

the proposed rules is an option 

specifically designed for structures 

involving asset-backed commercial 

paper (ABCP) that is supported by 

receivables originated by one or more 

originators and that is issued by a 

conduit that meets certain conditions.76

This option is designed to take account 

of the special structures through which 

this type of ABCP typically is issued, as 

well as the manner in which exposure 

to the credit risk of the underlying 

assets typically is retained by 

participants in the securitization chain 

for this type of ABCP. 

ABCP is a type of liability that is 

typically issued by a special purpose 

vehicle (or 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 

assets collateralizing the ABCP may 

consist of a wide range of assets 

including auto loans, commercial loans, 

trade receivables, credit card 

receivables, student loans, and other 

securities. 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. 

As proposed, this risk retention 

option in § __.9 of the proposed rules 

would be available only for short-term 

ABCP collateralized by receivables or 

loans and supported by a liquidity 

facility that provides 100 percent 

liquidity coverage from a regulated 

institution. This risk retention option 

would not be available to entities or 

ABCP programs that operate as 

securities or arbitrage programs.77 ABCP 

conduits that purchase loans or 

receivables from one originator or 

multiple originators are commonly 

referred to as single-seller ABCP 

programs and multi-seller ABCP 

programs, respectively. In each of these 

programs, the sponsor of the ABCP 

conduit approves the originators whose 

loans or receivables will collateralize 

the ABCP issued by the conduit. An 

‘‘originator-seller’’ will sell the eligible 

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 

interest that is purchased by the ABCP 

conduit and a residual interest that 

absorbs first losses on the receivables 

and is retained by the originator-seller. 

The residual interest retained by the 

originator-seller typically is sized so 

that it is 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 interests purchased from 

the intermediate SPVs (which itself is 

supported by the subordination 

provided by the residual interest 

retained by the originator-seller). The 

sponsor of these types of ABCP conduit, 

which is usually a bank or other 

regulated financial institution, also 

typically provides (or arranges for 

another regulated financial institution to 

provide) 100 percent liquidity coverage 

on the ABCP issued by the conduit. This 

liquidity support typically requires the 

support provider to provide funding to, 

or purchase assets from, the ABCP 

conduit in the event that the conduit 

lacks the funds necessary to repay 

maturing ABCP issued by the conduit. 

The proposal includes several 

conditions designed to ensure that this 

option is available only to the type of 

single-seller or multi-seller ABCP 

conduits described above. For example, 

this option is available only with 

respect to ABCP issued by an ‘‘eligible 

ABCP conduit,’’ as defined by the 

proposal. The proposal defines an 

eligible ABCP conduit as an issuing 

entity that issues ABCP and that meets 

each of the following criteria.78 First, 

the issuing entity must be bankruptcy 

remote or otherwise isolated for 

insolvency purposes from the sponsor 

and any intermediate SPV. Second, the 

ABS issued by an intermediate SPV to 

the issuing entity must be collateralized 

solely by assets originated by a single 

originator-seller.79 Third, all the 

interests issued by an intermediate SPV 

must be transferred to one or more 

ABCP conduits or retained by the 

originator-seller. Fourth, 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) to 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.80

Under the proposed risk retention 

option applicable to ABCP conduit 

structures, the sponsor of an eligible 

ABCP conduit would be permitted to 

satisfy its base risk retention obligations 

under the rule 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 under the horizontal 

risk retention option as if the originatorseller was the sponsor of the 

intermediate SPV. Specifically, the 

proposal provides that a sponsor of an 

ABCP securitization transaction would 

satisfy its base risk retention 

requirement with respect to the issuance 

of ABCP by an eligible ABCP conduit if 

each originator-seller retains an eligible 

horizontal residual interest in each 

intermediate SPV established by or on 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24108 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

81As noted above, this would be the minimum 

amount of credit risk that must be retained as part 

of a securitization transaction. 

82The sponsor of an ABCP conduit satisfies the 

definition of ‘‘sponsor’’ under the proposed rules. If 

the conduit does not satisfy the conditions for an 

‘‘eligible ABCP conduit,’’ the sponsor must retain 

credit risk in accordance with another risk retention 

option included in the proposal (unless an 

exemption for the transaction exists). 

83See 15 U.S.C. 78o–11(1)(c)(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). 

84 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 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. 

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 must equal at least 

five percent of the par value of all 

interests issued by the intermediate 

SPV. Accordingly, each originator-seller 

would be required to retain credit 

exposure to the receivables sold by that 

originator-seller to support issuance of 

the ABCP. 

The eligible horizontal residual 

interest retained by the originator-seller 

would be subject to the same terms and 

conditions as apply under the 

horizontal risk retention option. Thus, 

for example, if an originator-seller 

transfers $100 of receivables to an 

intermediate SPV, which then issues 

senior interests and an eligible 

horizontal residual interest with an 

aggregate par value of $100, the 

originator-seller must retain an eligible 

horizontal residual interest with a par 

value of $5 or more.81 Importantly, the 

originator-seller also would be 

prohibited from selling, transferring, 

and hedging the eligible horizontal 

residual interest that it is required to 

retain. This option is designed to 

accommodate the special structure and 

features of these types of ABCP 

programs. 

Although the proposal would allow 

the originator-sellers (rather than the 

sponsor) to retain the required eligible 

horizontal residual interest, the 

proposal also imposes certain 

obligations directly on the sponsor in 

recognition of the key role the sponsor 

plays in organizing and operating an 

eligible ABCP conduit. Most 

importantly, the proposal provides that 

the sponsor of an eligible ABCP conduit 

that issues ABCP in reliance on this 

option would be responsible for 

compliance with the requirements of 

this risk retention option. The proposal 

also would require that the sponsor 

maintain policies and procedures to 

monitor the originator-sellers’ 

compliance with the requirements of the 

proposal. In the event that the sponsor 

determines that an originator-seller no 

longer complies with the requirements 

of the rule (for example, because the 

originator-seller has sold the interest it 

was required to retain), the sponsor 

would be required to promptly notify, or 

cause to be notified, the investors in the 

securitization transaction of such 

noncompliance. 

In addition, consistent with market 

practice, the proposal would require 

that the sponsor: 

(i) Establish the eligible ABCP 

conduit; 

(ii) Approve the originator-sellers 

permitted to sell or transfer assets, 

indirectly through an intermediate SPV, 

to the ABCP conduit; 

(iii) Establish criteria governing the 

assets the originator-sellers are 

permitted to sell or transfer to an 

intermediate SPV; 

(iv) Approve all interests in an 

intermediate SPV to be purchased by 

the eligible ABCP conduit; 

(v) Administer the ABCP conduit by 

monitoring the interests acquired by the 

conduit and the assets collateralizing 

those interests, arranging for debt 

placement, compiling monthly reports, 

and ensuring compliance with the 

conduit documents and with the 

conduit’s credit and investment policy; 

and 

(vi) Maintain, and adhere to, policies 

and procedures for ensuring that the 

requirements of the rule have been 

met.82

The sponsor also would have 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 will retain (or 

has retained) an interest in the 

securitization transaction pursuant to 

§ l.9 of the proposed rules (including 

a description of the form, amount, and 

nature of such interest), and of each 

regulated liquidity provider that 

provides liquidity support 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.83 In developing the proposed 

risk retention option for eligible ABCP 

conduits, the Agencies have considered 

the factors set forth in section 15G(d)(2) 

of the Exchange Act.84 The terms of the 

proposed option for eligible ABCP 

conduits include conditions designed to 

ensure that the interests in the 

intermediate SPVs sold to an eligible 

ABCP conduit have low credit risk, and 

to ensure that originator-sellers have 

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 the retained eligible 

horizontal residual interest to a third 

party as would apply to sponsors under 

the rule. 

Request for Comment 

59. Is the proposed risk retention 

option for eligible ABCP conduits 

appropriate? 

60(a). Have the Agencies 

appropriately defined the terms (such as 

an eligible ABCP conduit, intermediate 

SPV and originator-seller) that govern 

use of this option? 60(b). Is the foregoing 

description of ABCP structures 

accurate? 60(c) Are there additional 

ABCP structures that are not easily 

adaptable to the risk retention options 

proposed? 60(d). If so, should the 

proposed ABCP option be revised to 

include these structures and if so, how? 

61. Should the proposed option for 

securitizations structured using ABCP 

conduits require financial disclosure 

regarding the liquidity provider? 

62(a). Also, should other entities be 

permitted to be liquidity providers for 

purposes of the rule? For example, 

should the rule permit an insurance 

company to be an eligible liquidity 

provider if the company is in the 

business of providing credit protection 

(such as a bond insurer or re-insurer) 

and is subject to supervision by a State 

insurance regulator or is a foreign 

insurance company subject to 

comparable regulation to that imposed 

by U.S. insurance companies? 

62(b). Why or why not? 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24109 

85 15 U.S.C. 78o–11(c)(1)(E)(iv). 

86See, e.g., Board Report. 

87We note that under the proposal there is no 

requirement that the tranche or tranches purchased 

by the third-party purchaser be assigned any 

particular credit rating. 

88The TALF was a special lending facility 

established by the Federal Reserve and the Treasury 

Department in response to the financial crisis to 

assist the financial markets in accommodating the 

credit needs of consumers and businesses of all 

sizes by facilitating the issuance of ABS 

collateralized by a variety of consumer and business 

loans. The TALF also was intended to improve the 

market conditions for ABS more generally. 

Additional information concerning the TALF is 

available on the public Web sites of the Board (see 

http://www.federalreserve.gov/monetarypolicy/bst_

lendingother.htm ) and the Federal Reserve Bank of 

New York (see http://www.newyorkfed.org/markets/ 

talf.html). 

89See proposed rules at §l.10(a). ‘‘Commercial 

real estate loan’’ is defined in §l.16 of the 

proposed rules to mean a loan secured by a 

property with five or more single family units, or 

by nonfarm nonresidential real property, the 

primary source (fifty (50) percent or more) of 

repayment for which is expected to be derived from 

the proceeds of the sale, refinancing, or permanent 

financing of the property; or rental income 

associated with the property other than rental 

income derived from any affiliate of the borrower. 

A commercial real estate loan does not include a 

land development and construction loan (including 

1- to 4-family residential or commercial 

construction loans); any other land loan; a loan to 

a real estate investment trust (REIT); or an 

unsecured loan to a developer. 

63. In addition, the Agencies seek 

confirmation that the terms of this 

option effectively prevent structures 

such as SIVs and ABCP programs that 

operate as arbitrage programs from using 

this option. 

64. Should the rule, as proposed, 

allow the liquidity provider to be a 

depository institution holding company 

or a subsidiary of a depository 

institution instead of just the depository 

institution? 

65. Are the disclosures proposed 

sufficient to provide investors with all 

material information concerning the 

originator-seller that will retain an 

interest in the securitization transaction 

and of each regulated liquidity provider 

that provides liquidity support to the 

eligible ABCP conduit, as well as enable 

investors and the Agencies to monitor 

whether the sponsor has complied with 

the rule? 

66(a). Should additional disclosures 

be required? 66(b). If so, what should be 

required and why? 66(c). For example, 

should a sponsor be required to disclose 

the material assumptions and 

methodology used in determining the 

aggregate dollar amount of interests 

issued by each intermediate SPV? 66(d). 

Would such a disclosure be beneficial to 

investors? 66(e). In light of the broad 

range of asset classes that underlie 

ABCP conduits, would such a 

disclosure pose any operational or other 

challenges for sponsors of ABCP 

conduits? 

67(a). Should we, as proposed, require 

that the ABCP be for a term of 270 days 

or less? 67(b). Should we allow for a 

longer term, such as up to one year? 

7. Commercial Mortgage-Backed 

Securities 

Section 15G(c)(1)(E) of the Exchange 

Act provides that, with respect to 

securitizations involving commercial 

mortgages, 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[.]’’ 85 In light of this 

provision, the Agencies are proposing 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 

acquires an eligible horizontal residual 

interest in the issuing entity in the same 

form, amount, and manner as the 

sponsor would have been required to 

retain under the horizontal risk 

retention option and certain additional 

conditions are met. 

The allocation of a first-loss position 

to a third-party purchaser has been 

common practice in CMBS transactions 

for a number of years.86 The third-party 

purchaser has been commonly referred 

to in the CMBS marketplace as a ‘‘Bpiece buyer’’ 87 because the CMBS 

tranche or tranches purchased by this 

investor were either unrated by the 

credit rating agencies or assigned a 

below-investment grade credit rating. 

Typically a B-piece buyer purchases at 

a discount to face value the most 

subordinate tranche in the cash flow 

waterfall of the CMBS transaction. In 

order to manage its risk, the B-piece 

buyer often is involved early in the 

securitization process and has 

significant influence over the selection 

of pool assets. For example, the B-piece 

buyer often performs ‘‘due diligence’’ on 

the pool assets, which often means a 

review of the loans in the pool at the 

property and loan level. As a result of 

this review, a B-piece buyer may request 

that specific loans be removed from the 

pool prior to securitization. 

Additionally, a B-piece buyer is often 

designated as the ‘‘controlling class’’ 

under the terms of the pooling and 

servicing agreement governing the 

CMBS transaction, and in accordance 

with its rights as the controlling class, 

a B-piece buyer often names itself, or an 

affiliated company, as the ‘‘special 

servicer’’ in the transaction. Such 

servicer typically is the servicer 

authorized to service loans in default or 

having other non-payment issues. The 

control of special servicing rights by the 

B-piece buyer has the potential to create 

conflicts of interest with the senior 

certificate holders to the securitization. 

For example, the control of special 

servicing rights would allow the B-piece 

buyer to directly or indirectly manage 

any loan modifications. While some 

CMBS transactions required an 

‘‘operating advisor’’ to oversee the 

servicing activities of the special 

servicer, in many instances this 

operating advisor works on behalf of the 

controlling class (i.e., the B-piece buyer 

unless and until losses reduced its 

junior tranche to zero). To help better 

address the potential conflict created by 

special servicer arrangements involving 

B-piece buyers, newly issued CMBS for 

which investors received financing 

through the Term-Asset Backed 

Securities Lending Facility (‘‘TALF’’) 

were required to have an independent 

operating advisor that acted on behalf of 

the investors as a collective whole, had 

consultative rights over major decisions 

of the special servicer, and had the 

ability to recommend replacement of the 

special servicer.88 These operating 

advisor requirements also were coupled 

with enhanced disclosures to investors 

regarding major decisions by the B-piece 

buyer and special servicer. Aspects of 

these TALF requirements have been 

incorporated into recent CMBS 

transactions undertaken after the closing 

of the TALF to new financings. 

In light of the specific provisions of 

Section 15G(c)(1)(E) and the historical 

market practice of third-party 

purchasers acquiring first-loss positions 

in CMBS transactions, the Agencies’ 

proposal would allow a sponsor to meet 

its risk retention requirements under the 

rule if a third-party purchaser retains 

the necessary exposure to the credit risk 

of the underlying assets provided six 

conditions are met. These conditions are 

designed to help ensure that the form, 

amount, and manner of the third-party 

purchaser’s risk retention are consistent 

with the purposes of section 15G of the 

Exchange Act. This option would be 

available only for securitization 

transactions where commercial real 

estate loans constitute at least 95 

percent of the unpaid principal balance 

of the assets being securitized.89

The first condition requires that the 

third-party purchaser retain an eligible 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24110 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

90See proposed rules at §l.10. 

91See proposed rules at §l.10. 

92This requirement is consistent with section 

15G(b)(1)(E)(ii) of the Exchange Act, which 

provides that the Agencies may consider whether 

a third-party purchaser of CMBS ‘‘holds adequate 

financial resources to back losses.’’ 

93See proposed rules at §l.10(a)(4)(i). The 

proposal also includes a de minimis exception to 

the general prohibition on affiliation with other 

parties to the securitization transaction. Under this 

de minimis exception, the third-party purchaser 

would be permitted to be affiliated with one or 

more originators of the securitized assets so long as 

the assets contributed by such originator(s) 

collectively comprise less than 10 percent of the 

assets in the pool (as measured by dollar volume). 

See proposed rules at §l.10(a)(4)(ii). 

94See proposed rules at §l.10(a)(4)(B)–(E). 

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 (proposed §l.5).90

Accordingly, the interest acquired by 

the third-party purchaser must be the 

most junior interest in the issuing 

entity, and must be subject to the same 

limits on payments as would apply if 

the eligible horizontal residual interest 

were held by the sponsor pursuant to 

the horizontal risk retention option. 

The second condition would require 

that the third-party purchaser pay 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.91 This 

would prohibit the third-party 

purchaser or an affiliate of the thirdparty purchase from obtaining financing 

from any such person as well as from 

any affiliate of any such person. These 

requirements should help ensure that 

the third-party purchaser has sufficient 

financial resources to fund the 

acquisition of the first-loss subordinated 

interest and absorb losses on the 

underlying assets to which it would be 

exposed through this interest.92

The third condition relates to the 

third-party purchaser’s review of the 

assets collateralizing the ABS. This 

proposed condition would require that 

the third-party purchaser perform a 

review of the credit risk of each asset in 

the pool prior to the sale of the assetbacked securities. This review must 

include, at a minimum, a review of the 

underwriting standards, collateral, and 

expected cash flows of each commercial 

loan in the pool. 

The fourth condition is intended to 

address the potential conflicts of 

interest that can arise when a thirdparty purchaser serves as the 

‘‘controlling class’’ of a CMBS 

transaction. This condition would 

prohibit a third-party purchaser from 

(i) being affiliated with any other party 

to the securitization transaction (other 

than investors); or (ii) 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 be subject to an exception, 

however, if the underlying 

securitization transaction documents 

provide for the appointment of an 

independent operating advisor 

(Operating Advisor) with certain powers 

and responsibilities.93 Under the 

proposal, an ‘‘Operating Advisor’’ would 

be defined as a party that (i) is not 

affiliated with any other party to the 

securitization, (ii) does not directly or 

indirectly have any financial interest in 

the securitization other than in fees 

from its role as Operating Advisor, and 

(iii) is required to act in the best interest 

of, and for the benefit of, investors as a 

collective whole. 

The Agencies believe that the 

introduction of an independent 

Operating Advisor would minimize the 

ability of third-party purchasers to 

manipulate cash flows through special 

servicing. In approving loans for 

inclusion in the securitization, the 

third-party purchaser will be mindful of 

the limits on its ability to offset the 

consequences of poor underwriting 

through servicing tactics if a loan 

becomes troubled, thereby providing 

stronger incentive for the third-party 

purchaser to be diligent in assessing 

credit quality of the pool assets at the 

time of securitization. For these types of 

securitization transactions, the thirdparty purchaser’s review of each loan 

can serve as an effective check on the 

underwriting quality and credit risk of 

the underlying loans and the reliability 

of key information utilized. 

Further, in order for a third-party 

purchaser to have servicing rights in 

connection with the securitization 

transaction, the securitization 

transaction documents must require that 

the Operating Advisor have certain 

powers and responsibilities in order to 

ensure that the Operating Advisor can 

effectively fulfill its advisory role in the 

transaction.94 For example, as proposed, 

the transaction documents must require 

that, if the third-party purchaser or an 

affiliate acts as servicer, the servicer 

consult with the Operating Advisor in 

connection with, and prior to, any major 

decision in connection with the 

servicing of the securitized assets. Major 

decisions would include, without 

limitation, any material modification of, 

or waiver with respect to, any provision 

of a loan agreement, any foreclosure 

upon or comparable conversion of the 

ownership of a property, and any 

acquisition of a property. 

The securitization transaction 

documents must also provide that the 

Operating Advisor is responsible for 

reviewing the actions of any servicer 

that is, or is, affiliated with the thirdparty purchaser and for issuing a report 

to investors and the issuing entity, on a 

periodic basis, concerning whether the 

Operating Advisor believes, in its sole 

discretion exercised in good faith, the 

servicer is in compliance with any 

standards required of the servicer as 

provided in the applicable transaction 

documents, and if not, the standard(s) 

with which the servicer is out of 

compliance. In addition, the 

securitization transaction documents 

must also provide that the Operating 

Advisor has the authority to recommend 

that a servicer that is, or is affiliated 

with, the third-party purchaser be 

replaced by a successor servicer if the 

Operating Advisor determines, in its 

sole discretion exercised in good faith, 

that the servicer has failed to comply 

with any standard required of the 

servicer as provided in the applicable 

transaction documents and that such 

replacement would be in the best 

interest of the investors as a collective 

whole. The relevant transaction 

documents must provide that, if such a 

recommendation is made, the servicer 

that is, or affiliated with, the third-party 

purchaser must be replaced unless a 

majority of each class of certificate 

holders eligible to vote on the matter 

votes to retain the servicer. 

Consistent with other disclosure 

requirements under the proposed rules, 

the fifth proposed condition requires 

that the sponsor provide, or cause to be 

provided, potential purchasers certain 

information concerning the third-party 

purchaser and other information 

concerning the transaction. Specifically, 

the proposal would require that a 

sponsor disclose to potential investors a 

reasonable time before the sale of assetbacked securities and, upon request, to 

the Commission and its appropriate 

Federal banking agency (if any) the 

name and form of organization of the 

third-party purchaser, a description of 

the third-party purchaser’s experience 

in investing in CMBS, and any other 

information regarding the third-party 

purchaser or the third-party purchaser’s 

retention of the eligible horizontal 

residual interest that is material to 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24111 

95See, e.g., comment letter to the Commission 

from CRE Finance Council dated January 19, 2011, 

available at http://www.sec.gov/comments/df-titleix/asset-backed-securities/assetbackedsecurities37.pdf. 

96 12 U.S.C. 4617. 

97See 12 U.S.C. 1451, et seq. (Freddie Mac); 12 

U.S.C. 1716, et seq. (Fannie Mae). 

investors in light of the circumstances of 

the particular securitization transaction. 

Additionally, a sponsor would be 

required to disclose 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 ABS 

interests in the issuing entity and as a 

dollar amount); the purchase price paid 

for such interest; the material terms of 

such interest; and the amount of the 

interest that the sponsor would have 

been required to retain if the sponsor 

had retained an interest in the 

transaction pursuant to the horizontal 

menu option. The material assumptions 

and methodology used in determining 

the aggregate amount of ABS interests of 

the issuing entity, including any 

estimated cash flows and the discount 

rate used, also must be included in the 

disclosure. The proposed rules would 

require that the sponsor provide, or 

cause to be provided, to potential 

investors the representations and 

warranties concerning the securitized 

assets, the schedule of any securitized 

assets that are determined not to comply 

with such representations and 

warranties, and what factors were used 

to make the determination that a 

securitized asset should be included in 

the pool notwithstanding that it did not 

comply with such representations and 

warranties, such as compensating 

factors or a determination that the 

exceptions(s) were not material. 

Finally, the sixth condition would 

require that any third-party purchaser 

acquiring an eligible horizontal residual 

interest under this option comply with 

the hedging, transfer and other 

restrictions applicable to such interest 

under the proposed rules if the thirdparty purchaser was a sponsor who had 

acquired the interest under the 

horizontal risk retention option. 

Although the third-party purchaser 

may retain the credit risk required 

under §l.3 of the proposed rules, the 

proposal provides that the sponsor 

remains responsible for compliance 

with the requirements described above. 

Therefore, consistent with the menu 

option available to eligible ABCP 

conduits, the proposal would require 

that the sponsor maintain and adhere to 

policies and procedures to monitor the 

third-party purchaser’s compliance with 

these requirements. In the event that the 

sponsor determines that the third-party 

purchaser no longer complies with the 

requirements of the rule (for example, 

because the third-party purchaser has 

sold the interest it was required to 

retain), the sponsor must promptly 

notify the investors in the securitization 

transaction of such noncompliance. 

Request for Comment 

68(a). Should the rules allow a thirdparty purchaser to retain the required 

amount of risk in a CMBS transaction as 

described above? 

68(b). Why or why not? 

69(a). Should a third-party purchaser 

option be available to other asset classes 

besides CMBS? Would expanding this 

option to other asset classes fulfill the 

purposes of section 15G? 69(b). If so, 

would any adjustments or requirements 

be necessary? 

70. Should the use of this option be 

conditioned, as proposed, on a 

requirement that the third-party 

purchaser separately examine the assets 

in the pool and/or not sell or hedge the 

interest it is required to retain? 

71(a). Should the use of this option be 

conditioned, as proposed, on the 

requirement that the sponsor disclose 

the actual purchase price paid by the 

third-party purchaser for the eligible 

horizontal residual interest? 71(b). Why 

or why not? 

72. Is any disclosure concerning the 

financial resources of the third-party 

purchaser 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? 

73(a). Should the rule 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 

securitization transaction? 73(b). Should 

the specific types of information about 

a third-party purchaser be in addition to 

any other information regarding the 

third-party purchaser that is material to 

investors in light of the circumstances of 

the particular securitization transaction? 

74. Are the conditions relating to 

servicing, including those related to an 

Operating Advisor, appropriate or 

should they be modified or 

supplemented? 

75(a). Should the Agencies require 

any other disclosure relating to 

representations and warranties 

concerning the assets for CMBS? 

76(a). We are aware of at least one 

industry group developing model 

representations and warranties for 

CMBS.95 Should the rule 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? 76(b). 

Would this provide more information 

regarding the adequacy of the 

representation and warranties being 

provided? 76(c). Would this be a costly 

requirement? 76(d). Could investors 

easily create their own blacklines if 

needed? 

77. Are the disclosures proposed 

sufficient to provide investors with all 

material information concerning the 

third-party purchaser’s retained interest 

in the securitization transaction, as well 

as to enable investors and the Agencies 

to monitor whether the sponsor has 

complied with the rule? 

78(a). Should additional disclosures 

be required? 78(b). If so, what should be 

required and why? 

8. Treatment of Government-Sponsored 

Enterprises 

Section l.11 of the proposed rules 

would govern the credit risk retention 

requirements for the Federal National 

Mortgage Association (Fannie Mae) and 

the Federal Home Loan Mortgage 

Corporation (Freddie Mac) (jointly, the 

‘‘Enterprises’’) while operating under the 

conservatorship or receivership of 

FHFA, as well as for any limited-life 

regulated entity succeeding to the 

charter of either Fannie Mae or Freddie 

Mac pursuant to section 1367 of the 

Federal Housing Enterprises Financial 

Safety and Soundness Act of 1992 

(Safety and Soundness Act).96 The 

primary business of the Enterprises 

under their respective charter acts is to 

pool conventional mortgage loans and to 

issue securities backed by these 

mortgages that are fully guaranteed as to 

the timely payment of principal and 

interest by the issuing Enterprise.97

Because of these activities, Fannie Mae 

or Freddie Mac (or a successor limitedlife regulated entity) would be the 

sponsor of the asset-backed securities 

that it issues for purposes of section 

15G. 

In considering how to address in the 

proposal the risk retention requirements 

of section 15G with respect to the 

mortgage-backed securities issued, and 

fully guaranteed as to timely payment of 

principal and interest, by the 

Enterprises or a successor limited-life 

regulated entity, the Agencies 

considered several factors. Because 

Fannie Mae and Freddie Mac fully 

guarantee the timely payment of 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24112 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

98The charters of Fannie Mae and Freddie Mac 

also place limitations on the types of mortgages that 

the Enterprises may guarantee and securitize. 

99See 12 U.S.C. 4617(b)(2)(D). 

100See 12 U.S.C. 4617(i). The affairs of a limitedlife regulated entity must be wound up not later 

than two years after its establishment, subject to the 

potential for a maximum of three one-year 

extensions at the discretion of the Director of FHFA. 

101Under the PSPAs, the rate rises to 12 percent 

per annum if the dividends are not paid in cash. 

102The PSPAs also provide for the retained 

portfolios of each Enterprise to be reduced over 

time. 

103Typically, insurers would pay the first losses 

on a pool of loans, up to one or two percent of the 

aggregate unpaid principal balance of the pool. 

principal and interest on the mortgagebacked securities they issue, the 

Enterprises are exposed to the entire 

credit risk of the mortgages that 

collateralize those securities.98

Both Fannie Mae and Freddie Mac 

have been operating under the 

conservatorship of FHFA since 

September 6, 2008. As conservator, 

FHFA has assumed all powers formerly 

held by each Enterprise’s officers, 

directors, and shareholders. In addition, 

FHFA, as conservator, is authorized to 

take such actions as may be necessary 

to restore each Enterprise to a sound 

and solvent condition and that are 

appropriate to preserve and conserve 

the assets and property of each 

Enterprise.99 The primary goals of the 

conservatorships are to help restore 

confidence in the Enterprises, enhance 

their capacity to fulfill their mission, 

mitigate the systemic risk that 

contributed directly to instability in 

financial markets, and maintain the 

Enterprises’ secondary mortgage market 

role until their future is determined 

through legislation. To these ends, 

FHFA’s conservatorship of the 

Enterprises is directed toward 

minimizing losses, limiting risk 

exposure, and ensuring that the 

Enterprises price their services to 

adequately address their costs and risk. 

Any limited-life regulated entity 

established by FHFA to succeed to the 

charter of an Enterprise also would 

operate under the direction and control 

of FHFA, acting as receiver of the 

related Enterprise.100

Concurrently with being placed in 

conservatorship under section 1367 of 

the Safety and Soundness Act, each 

Enterprise entered into a Senior 

Preferred Stock Purchase Agreement 

(PSPA) with the United States 

Department of the Treasury (Treasury). 

Under each PSPA, Treasury purchased 

senior preferred stock of each 

Enterprise. In addition, if FHFA 

determines that the Enterprise’s 

liabilities have exceeded its assets under 

generally accepted accounting 

principles (GAAP), Treasury will 

contribute cash capital to that Enterprise 

in an amount equal to the difference 

between its liabilities and assets. In 

exchange for this cash contribution, the 

liquidation preference of the senior 

preferred stock purchased from each 

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, and dividends on the 

aggregate liquidation preference of the 

senior preferred stock purchased by 

Treasury are payable at a rate of 10 

percent per annum.101 Under each 

PSPA, 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, 2012.102 Accordingly, the 

PSPAs provide support to the relevant 

Enterprise should the Enterprise have a 

net worth deficit as a result of the 

Enterprise’s guaranty of timely payment 

on the asset-backed securities it issues. 

By their terms, the PSPA with an 

Enterprise may not be assigned or 

transferred, or inure to the benefit of, 

any limited-life regulated entity 

established with respect to the 

Enterprise without the prior written 

consent of Treasury. 

In light of the foregoing, §l.11 of the 

proposed rules provides that the 

guaranty provided by an Enterprise 

while operating under the 

conservatorship or receivership of 

FHFA with capital support from the 

United States will satisfy the risk 

retention requirements of the Enterprise 

under section 15G of the Exchange Act 

with respect to the mortgage-backed 

securities issued by the Enterprise. 

Similarly, an equivalent guaranty 

provided by a limited-life regulated 

entity that has succeeded to the charter 

of an Enterprise, and that is operating 

under the direction and control of FHFA 

under section 1367(i) of the Safety and 

Soundness Act, will satisfy the risk 

retention requirements, provided that 

the entity is operating with capital 

support from the United States. If either 

Enterprise or a successor limited-life 

regulated entity were to begin to operate 

other than as provided in the proposed 

rules, that Enterprise or entity would no 

longer be able to avail itself of the credit 

risk retention option set forth in §l.11. 

For similar reasons, the proposed 

rules provide that the premium capture 

cash reserve account requirements in 

§ l.12, as well as the hedging and 

financing prohibitions in §l.14(b), (c), 

and (d), of the proposed rules shall not 

apply to an Enterprise while operating 

under the conservatorship or 

receivership of FHFA with capital 

support from the United States, or to a 

limited-life regulated entity that has 

succeeded to the charter of an 

Enterprise and that is operating under 

the direction and control of FHFA with 

capital support from the United States. 

In the past, the Enterprises have 

sometimes acquired pool insurance to 

cover a percentage of losses on the 

mortgage loans comprising the pool.103

Because §l.11 requires each 

Enterprise, while in conservatorship or 

receivership, to hold 100 percent of the 

credit risk on MBS that it issues, the 

prohibition on hedging 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. Because the 

exception would continue only so long 

as the relevant Enterprise operates 

under the control of FHFA and with 

capital support from the United States, 

the proposed exception from these 

restrictions should be consistent with 

the maintenance of quality underwriting 

standards, in the public interest, and 

consistent with the protection of 

investors. 

A sponsor utilizing this section shall 

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 has met the 

credit risk retention requirement of this 

part. 

The Agencies recognize both the need 

for, and importance of, reform of the 

Enterprises. In recent months, the 

Administration and Congress have been 

considering a variety of proposals to 

reform the housing finance system and 

the Enterprises. The Agencies expect to 

revisit and, if appropriate modify §l.11 

of the proposed rules after the future of 

the Enterprises and of the statutory and 

regulatory framework for the Enterprises 

becomes clearer. 

Request for Comment 

79. Is our proposal regarding the 

treatment of the Enterprises 

appropriate? 

80. Would applying the hedging 

prohibition to all of the credit risk that 

the Enterprises are required to retain 

when using §l.11 to satisfy the risk 

retention requirements be an unduly 

burdensome result for the Enterprises? 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24113 

104See proposed rules at §l.12. 

81(a). Instead of the broad exception 

from the hedging prohibition for the 

Enterprises, when satisfying the risk 

retention requirements pursuant to 

§ l.11, should the rules prohibit an 

Enterprise from hedging five percent of 

the total credit risk in any securitization 

transaction where the Enterprise acts as 

a sponsor (thus ensuring the Enterprise 

retains at least that amount of exposure 

to the credit risk of the assets)? 81(b). 

Would this be consistent with statutory 

intent? 81(c). Would that be feasible for 

the Enterprises to monitor? 

9. Premium Capture Cash Reserve 

Account 

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 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. 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 

aggressive underwriting. 

In order to achieve the goals of risk 

retention, the Agencies propose to 

adjust the required amount of risk 

retention to account for any excess 

spread that is monetized at the closing 

of a securitization transaction. 

Otherwise, a sponsor could effectively 

negate or reduce the economic exposure 

it is required to retain under the 

proposed rules. Furthermore, 

prohibiting sponsors from receiving 

compensation in advance for excess 

spread income expected to be generated 

by securitized assets over time should 

better align the interests of sponsors and 

investors and promote more robust 

monitoring by the sponsor of the credit 

risk of securitized assets, thereby 

encouraging the use of sound 

underwriting in connection with 

securitized loans. It also should promote 

simpler and more coherent 

securitization structures as sponsors 

would receive excess spread over time 

and would not be able to reduce the 

economic exposure they are required to 

retain. 

Accordingly, as proposed, if a sponsor 

structures a securitization to monetize 

excess spread on the underlying 

assets—which is typically effected 

through the sale of interest-only 

tranches or premium bonds—the 

proposed rule would ‘‘capture’’ the 

premium or purchase price received on 

the sale of the tranches that monetize 

the excess spread and require that the 

sponsor place such amounts into a 

separate ‘‘premium capture cash reserve 

account.’’ 104 The amount placed into 

the premium capture cash reserve 

account would be separate from and in 

addition to the sponsor’s base risk 

retention requirement under the 

proposal’s menu of options, and would 

be used to cover losses on the 

underlying assets before such losses 

were allocated to any other interest or 

account. As a likely consequence to this 

proposed requirements, the Agencies 

expect that few, if any, securitizations 

would be structured to monetize excess 

spread at closing and, thus, require the 

establishment of a premium capture 

cash reserve account, which should 

provide the benefits described above. 

Specifically, the proposal would 

require that a sponsor retaining credit 

risk under the vertical, horizontal, Lshaped, or revolving asset master trust 

options of the proposed rules establish 

and fund (in cash) at closing a premium 

capture cash reserve account in an 

amount equal to the difference (if a 

positive amount) between (i) the gross 

proceeds received by the issuing entity 

from the sale of ABS interests in the 

issuing entity to persons other than the 

sponsor (net of closing costs paid by a 

sponsor or the issuing entity to 

unaffiliated parties); and (ii) 95 percent 

of the par value of all ABS interests in 

the issuing entity issued as part of the 

transaction. The 95 percent of par value 

amount is designed to take into account 

the five percent interest that the sponsor 

is required to retain in the issuing entity 

under each of these options. 

If the sponsor will retain (or caused to 

be retained) credit risk under the 

representative sample, ABCP, or CMBS 

third-party purchaser options of the 

proposed rules, the sponsor would have 

to fund in cash at closing a premium 

capture cash reserve account in an 

amount equal to the difference (if a 

positive amount) between (i) the gross 

proceeds received by the issuing entity 

from the sale of ABS interests to persons 

other than the sponsor (net of the 

closing costs described above), and (ii) 

100 percent of the par value of the ABS 

interests in the issuing entity issued as 

part of the transaction. In these cases, 

the proposal uses 100 percent (rather 

than 95 percent) of the par value of the 

ABS interests issued because the 

relevant menu options do not require 

that the sponsor itself retain any of the 

ABS interests issued in the transaction 

and, accordingly, potentially all of such 

interests could be sold to third parties. 

Under the proposed rules, a premium 

capture cash reserve account would 

have to be established and funded 

whenever a positive amount resulted 

from the relevant calculation described 

in the preceding paragraphs. These 

calculations are designed to capture the 

amount of excess spread that a sponsor 

may seek to immediately monetize at 

closing such as through the issuance of 

an interest-only tranche (which may 

have a nominal value assigned to it, but 

does not have a par value) or premium 

bonds that are sold for amounts in 

excess of their par value. On the other 

hand, the proposal would not require a 

sponsor to establish and fund a 

premium capture cash reserve account if 

the sponsor does not structure the 

securitization to immediately monetize 

excess spread, thus resulting in no 

‘‘premium’’ that would be captured by 

the calculations described above. 

Accordingly, existing types of 

securitization structures that do not 

monetize excess spread at closing would 

not trigger establishment of a premium 

capture reserve account. Going forward, 

sponsors would have the ability to 

structure their securitization 

transactions in a manner that does not 

monetize excess spread at closing and 

would not require the establishment of 

such a premium capture cash reserve 

account. 

The proposed rules include a number 

of conditions and limitations on a 

premium capture cash reserve account. 

Specifically, the proposed rules would 

require that the premium capture cash 

reserve account be held by the trustee, 

or person performing functions similar 

to a trustee, in the name and for the 

benefit of the issuing entity. In addition, 

until all ABS interests in the issuing 

entity (including junior or residual 

interests) are paid in full or the issuing 

entity is dissolved, amounts in the 

account would be required to be 

released to satisfy payments on ABS 

interests in the issuing entity (in order 

of the securitization transaction’s 

priority of payments) on any payment 

date where the issuing entity has 

insufficient funds to make such 

payments. The proposal specifies that, 

the determination of whether 

insufficient funds are available must be 

made prior to the allocation of any 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24114 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

105Until needed to cover losses, amounts in a 

premium capture cash reserve account may be 

invested in U.S. Treasury securities with remaining 

maturities of 1 year or less and in fully-insured 

deposits at one or more insured depository 

institutions. Interest received on such investments 

could be released from the account to any person 

(including the sponsor), but the principal amount 

invested must remain in the account and available 

to absorb losses. 

106To avoid double counting, the calculation 

would not include any interest-only tranche 

required to be retained by a sponsor using the 

vertical or L-shaped options to meet its risk 

retention requirement. Also, because an eligible 

horizontal residual interest, by definition, must 

have the most subordinated claim to payments of 

both principal and interest, a sponsor selecting this 

option of risk retention would be required to 

include the value of any excess spread tranche 

retained by the sponsor in its calculation of gross 

proceeds received by the issuing entity. 

107As 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). Because this definition refers only to the 

person that ‘‘creates’’ a loan or other receivable, only 

the original creditor of a loan or receivable—and 

not a subsequent purchaser or transferee—would be 

deemed to be the ‘‘originator’’ for purposes of the 

proposed rules. See 15 U.S.C. 78o–11(c)(1)(G)(iv); 

(d). 

losses to (i) any eligible horizontal 

residual interest held under the 

horizontal, L-shaped, ABCP, or CMBS 

third-party purchaser risk retention 

options; or (ii) the class of ABS interests 

in the issuing entity that is allocated 

losses before other classes if no eligible 

horizontal residual interest in the 

issuing entity is held under such 

options (or if the contractual terms of 

the securitization transaction do not 

provide for the allocation of losses by 

class, the class of ABS interests that has 

the most subordinate claim to payment 

of principal or interest by the issuing 

entity). Thus, amounts in a premium 

capture reserve account would be used 

to cover losses on the underlying assets 

first before any other interest in or 

account of the issuing entity, including 

an eligible horizontal residual interest 

or a horizontal cash reserve account.105

In order to prevent a sponsor from 

circumventing the premium capture 

requirements of the proposal by taking 

back at closing, and then reselling, 

additional ABS interests (thereby 

reducing the gross proceeds received at 

closing from the sale of interests to third 

parties), the proposal includes a special 

anti-evasion provision. Under this 

provision, the retaining sponsor would 

need to add to the ‘‘gross proceeds’’ 

amount that is used to calculate the 

amount (if any) that must be placed in 

the premium capture cash reserve 

account an amount equal to the par 

value of any ABS interest (or the fair 

value of the ABS interest if it does not 

have a par value) in the issuing entity 

that is directly or indirectly transferred 

to the sponsor in connection with the 

closing of the securitization transaction 

and that (i) the sponsor does not intend 

to hold to maturity; or (ii) represents a 

contractual right to receive some or all 

of the interest, and no more than a 

minimal amount of principal payments 

received by the issuing entity, and that 

has a priority of payment of interest (or 

principal, if any) senior to the most 

subordinated class of interests in the 

issuing entity. The condition in (i) 

above is designed to capture proceeds 

from those interests that the sponsor 

retains at closing, but expects to sell to 

third parties after closing. ABS interests 

retained and expected to be held to 

maturity by the sponsor increase the 

sponsor’s exposure to the credit risk of 

the underlying assets, thus mitigating 

the concerns of a sponsor trying to 

evade the risk retention requirements. 

A sponsor could, however, seek to 

achieve the same economic benefits that 

could be achieved from the sale of an 

interest-only tranche by retaining an 

interest-only tranche at or near the top 

of the waterfall that diverts to the 

sponsor excess spread on the underlying 

assets before other interests are paid. 

For this reason, the proposal requires 

that the value of any interest-only 

tranche that the sponsor retains at 

closing be included in the calculation of 

the premium capture reserve account 

(regardless of whether the sponsor 

intends to hold it to maturity) if such 

tranche has priority of payment senior 

to the most subordinated class of 

interests in the issuing entity.106

Sponsors required to fund a premium 

capture cash reserve account under the 

proposed rules would be required to 

provide potential investors before the 

sale of asset-backed securities as part of 

the securitization transaction and, upon 

request, the Commission and its 

appropriate Federal banking agency (if 

any) disclosures describing the dollar 

amount the sponsor was required to 

place in the account and the actual 

amount the sponsor will deposit (or has 

deposited) in the account at closing. The 

sponsor would also be required to 

disclose the material assumptions and 

methodology used in (i) determining the 

fair value of any ABS interest in the 

issuing entity that does not have a par 

value (and that was used in calculating 

the amount required for the premium 

capture cash reserve account) and is 

subject to the anti-evasion provisions 

described above; and (ii) the aggregate 

amount of ABS interests in the issuing 

entity, including those pertaining to any 

estimated cash flows and the discount 

rate used. 

Request for Comment 

82. Do you believe the premium 

capture cash reserve account will be an 

effective mechanism at capturing the 

monetization of excess spread, 

promoting sponsor monitoring of credit 

quality, and promoting the sound 

underwriting of securitized assets? 

83. The Agencies seek input on 

alternative methods for removing 

incentives to monetize excess spread 

and whether the proposed premium 

capture reserve account would have any 

adverse effects on securitizations that 

are inconsistent with the purposes of 

section 15G. For example, is the method 

of calculating the premium capture cash 

reserve account appropriate or are there 

alternative methodologies that would 

better achieve the purpose of the 

account? 

84. Should amounts from the 

premium capture reserve account be 

used only for amounts due to the seniormost class of ABS interests? 

85(a). Alternatively, are the 

conditions imposed on the premium 

capture cash reserve account more than 

what is needed to achieve the objectives 

of the account? 85(b). If so, how? 

C. Allocation to the Originator 

As a general matter, the proposed 

rules would provide that the sponsor of 

a securitization transaction is solely 

responsible for complying with the risk 

retention requirements established 

under section 15G of the Exchange Act. 

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 

originator(s) of securitized assets.107

Accordingly, subject to conditions and 

restrictions discussed below, §l.13 of 

the proposed rules permits a sponsor to 

reduce its required risk retention 

obligations in a securitization 

transaction by the portion of risk 

retention obligations assumed by the 

originator(s) 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24115 

108 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. 

and businesses to credit on reasonable 

terms, which may not include the 

transfer of credit risk to a third party.108

The Agencies are proposing a 

framework that would permit a sponsor 

of a securitization to allocate a portion 

of its risk retention obligation to an 

originator that contributes a significant 

amount of assets to the underlying asset 

pool. The Agencies have endeavored to 

create appropriate incentives for both 

the securitization sponsor and the 

originator(s) to maintain and monitor 

appropriate underwriting standards, 

respectively, without creating undue 

complexity, which potentially could 

mislead investors and confound 

supervisory efforts to monitor 

compliance. Importantly, the proposal 

does not mandate allocation to an 

originator. Therefore, it does 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 do so. Mandatory allocation of risk 

retention to the originator of the 

securitized assets also could pose 

significant operational and compliance 

problems, as a loan may be sold or 

transferred several times between 

origination and securitization and, 

accordingly, an originator may not know 

when a loan it has originated is 

included in a securitization transaction. 

The proposed rules would permit a 

securitization sponsor that satisfies its 

base risk retention obligation either 

under the vertical risk retention option 

as set forth in § l.4 or under the 

horizontal risk retention option through 

the acquisition of an eligible horizontal 

interest as set forth in §l.5, to allocate 

a portion of its risk retention obligation 

under such option 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 is 

allocated credit risk in accordance with 

the proposal must be at least 20 percent, 

but could not exceed the percentage of 

the securitized assets it originated. The 

originator would also have 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 that would apply to the 

sponsor. Thus, for example, if the 

sponsor satisfies its risk retention 

requirements by acquiring an eligible 

horizontal residual interest under the 

horizontal risk retention option, an 

originator allocated risk under §l.13 of 

the proposal would have to acquire a 

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 be reduced by the 

amount allocated to the originator. 

The Agencies believe this approach is 

a relatively straightforward way to allow 

both the sponsor and the originator to 

retain credit risk in securitized assets, 

on a basis that should reduce the 

potential for confusion by investors in 

asset-backed securities. 

By limiting this option to originators 

that have originated at least 20 percent 

of the asset pool, the Agencies have 

sought 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 be seeking to acquire 

a speculative investment. These 

requirements should also reduce the 

proposal’s potential complexity and 

facilitate investor and regulatory 

monitoring. 

Request for Comment 

86(a). Should the proposed rules 

permit allocation to originators where 

the sponsor is using other menu 

options, such as the L-shaped risk 

retention option in §l.6 of the 

proposed rules, and if so, under what 

specific conditions and requirements? 

86(b). In what cases is it likely that this 

alternative approach actually would be 

used? 86(c). What are the specific 

benefits of an alternative approach, and 

do they outweigh concerns regarding 

complexity? 

87. Should the rule permit allocation 

to originators if the sponsor elects the 

horizontal cash reserve account option 

in proposed §l.5(b)? 

88(a). Should the proposed rules 

permit allocation of risk to originators 

that have originated less than 20 percent 

of the asset pool? 88(b). Alternately, is 

the minimum 20 percent threshold 

sufficient to ensure that an originator 

allocated risk has an incentive to 

monitor the quality of the entire 

collateral pool? 

89(a). Are there alternative 

mechanisms for allocating risk to an 

originator that should be permitted by 

the Agencies? For example, should the 

rules permit or require that an originator 

that is allocated risk retention by a 

sponsor retain exposure only to the 

assets that the originator itself 

originates? 89(b). If so, how might such 

an allocation mechanism feasibly be 

structured, incorporated into the rule, 

and monitored by investors and 

supervisors? 

90. Should the rules permit sponsors 

to allocate risk to a third party, and if 

so, how to ensure that incentives 

between the sponsor and investors are 

aligned in a manner that promotes 

quality underwriting standards? 

91. Are the proposed disclosures 

sufficient to provide investors with all 

material information concerning the 

originator’s retained interest in a 

securitization transaction, as well as to 

enable investors to monitor the 

originator(s) and the Agencies to assess 

the sponsor’s compliance with the rule? 

92(a). Should additional disclosures 

be required? 92(b). If so, what should be 

required and why? 

93(a). As proposed, the retaining 

sponsor is responsible for compliance 

with the rule and must maintain and 

adhere to policies and procedures 

reasonably designed to monitor 

compliance by each originator retaining 

credit risk, including the anti-hedging 

restrictions. 93(b). What are the 

practical implications if the originator 

fails to comply? 

94(a). To help ensure that the 

originator has sufficient incentive to 

retain its interest in accordance with the 

rule, should the rule require that a 

sponsor obtain a contractual 

commitment from the originator to 

retain the interest in accordance with 

the rule? 94(b). If so, how should the 

Agencies implement this requirement? 

95. Are there other methods that 

could be implemented to help ensure 

that a sponsor satisfies its obligations 

under the rule? 

D. Hedging, Transfer and Financing 

Restrictions 

Section 15G(a)(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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24116 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

109 15 U.S.C. 78o–11(a)(1)(A). 

110See proposed rules at § __.2 (definition of 

‘‘consolidated affiliate’’). 

111For example, the proposal would not prohibit 

an issuing entity (and indirectly its investors) from 

being the beneficiary of loan-level private mortgage 

insurance (PMI) taken out by borrowers in 

connection with the underlying assets that are 

securitized. 

with respect to an asset.’’ 109 Consistent 

with this statutory directive, the 

proposed rules would prohibit a 

sponsor from transferring any interest or 

assets that it is 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). The rule 

permits a transfer to one or more 

consolidated affiliates because the 

required risk exposure would remain 

within the consolidated organization 

and, thus, would not reduce the 

organization’s financial exposure to the 

credit risk of the securitized assets. 

The proposal also would prohibit a 

sponsor or any consolidated affiliate 

from hedging the credit risk the sponsor 

is required to retain under the rule. The 

proposal extends the hedging 

prohibition to a sponsor’s consolidated 

affiliates because the rule would allow 

a sponsor to transfer the risk it is 

required to retain to a consolidated 

affiliate. Moreover, even absent such a 

transfer, if a consolidated affiliate was 

permitted to hedge the risks required to 

be retained by a sponsor, the net effect 

of the hedge on the organization 

controlling the sponsor would offset the 

credit risk required to be retained and 

defeat the purposes of section 15G. 

The proposal prohibits a sponsor and 

its consolidated affiliates 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, assets, or 

securitized assets 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, assets, or 

securitized assets, or one or more of the 

particular securitized assets that 

collateralize the asset-backed securities. 

The statutory hedging prohibition is 

focused on the credit risk associated 

with the interest or assets that a sponsor 

is required to retain, which itself is 

dependent on the credit risk of the 

particular securitized assets that 

underlie the ABS interests. Therefore, 

hedge positions that are not materially 

related to the credit risk of the particular 

ABS interests or exposures required to 

be retained by the sponsor or its affiliate 

would not be prohibited under the 

proposal. 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 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). 

The proposal also addresses other 

hedges based on indices that may 

include one or more tranches from a 

sponsor’s asset-backed securities 

transactions, as well as tranches of 

asset-backed securities transactions of 

other sponsors. The proposal provides 

that 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: (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 

represented no more than 10 percent of 

the dollar-weighted average 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 

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. These restrictions 

are designed to prevent a sponsor (or a 

consolidated affiliate) from evading the 

hedging restrictions through the 

purchase of instruments that are based 

on an index that is composed, to a 

significant degree, of asset-backed 

securities from securitization 

transactions in which a sponsor is 

required to retain risk under the 

proposed rules. 

The proposal would also prohibit a 

sponsor and a consolidated affiliate 

from pledging as collateral for any 

obligation (including a loan, repurchase 

agreement, or other financing 

transaction) any interest or asset that the 

sponsor is required to retain unless the 

obligation is with full recourse to the 

sponsor or consolidated affiliate. 

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 

consolidated 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. 

The proposed rules would specify 

that the issuing entity in a securitization 

would not be deemed a consolidated 

affiliate of the sponsor for the 

securitization even if its financial 

statements are consolidated with those 

of the sponsor under applicable 

accounting standards.110 This provision 

is designed to ensure that an issuing 

entity may continue to engage in 

hedging activities itself because such 

activities would be for the benefit of all 

investors in the asset-backed 

securities.111 However, if an issuing 

entity were to obtain credit protection or 

hedge the exposure on the particular 

interests or assets that the sponsor is 

required to retain under the proposal, 

such credit protection or hedge could 

negate or limit the sponsor’s credit 

exposure to the securitized assets. 

Accordingly, under the proposal, any 

credit protection by or hedging 

protection obtained by an issuing entity 

may not cover any ABS interest or asset 

that the sponsor is required to retain 

under the rule. For example, if the 

sponsor uses the vertical approach to 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24117 

112See 15 U.S.C. 78o–11(c)(1)(C)(iii). 

113See id. at sec. 78o–11(e)(4). 

114See id. at sec. 78o–11(e)(4)(C). As adopted, the 

text of section 15G(e)(4)(C) cross-references 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.’’). 

115The SCF is conducted every three years by the 

Board, in cooperation with the Treasury, to provide 

detailed information on the finances of U.S. 

families. The SCF collects information on the 

balance sheet, pension, income, and other 

demographic characteristics of U.S. families. To 

ensure the representativeness of the study, 

respondents are selected randomly using a 

scientific sampling methodology that allows a 

relatively small number of families to represent all 

types of families in the nation. Additional 

information on the SCF is available at http://

www.federalreserve.gov/pubs/oss/oss2/

method.html. 

116Additional information concerning the 

Enterprise data used by the Agencies in developing 

the proposed QRM standards is provided in 

Appendix A in the proposed common rule. 

risk retention, an issuing entity may 

purchase (or benefit from) a credit 

insurance wrap that covers up to 95 

percent of the tranches, but not the five 

percent of such tranches required to be 

retained by the sponsor. 

Request for Comment 

96(a). Under the proposal, a sponsor 

would not be permitted to sell or 

otherwise transfer any interest or assets 

that the sponsor is required to retain to 

any person other than an entity that is 

and remains a consolidated affiliated. Is 

the permitted transfer to consolidated 

affiliates appropriate? 

96(b). Why or why not? 

97. Is the proposed hedging 

prohibition appropriately structured? 

98(a). Would the proposal 

inadvertently capture any kinds of 

hedging that should be permissible? 

98(b). If so, please provide specific 

recommendations on how we can 

appropriately tailor the requirements. 

99. Does the proposed approach 

appropriately implement the statutory 

requirement to prohibit direct and 

indirect hedging? 

100(a). Does the proposal permit 

hedging that is inconsistent with risk 

retention and should be prohibited? 

100(b). If so, please provide specific 

recommendations on how we can more 

appropriately tailor the requirements. 

101. Are the proposed provisions 

concerning the pledging of retained 

assets appropriate? Should the rule 

instead prohibit the pledging of retained 

assets even where the financial 

transaction is recourse to the sponsor or 

consolidated affiliate? 

102(a). Under the proposal, a sponsor 

(or a consolidated affiliate) would be 

prohibited from transferring the retained 

interest or assets until the retained 

interest or assets were fully repaid or 

extinguished. Is this appropriate, or 

should a sponsor be permitted to freely 

transfer or hedge its retained exposure 

after a specified period of time? 102(b). 

If so, should a period of time be 

established for different types of 

securitizations? 

103. Are the proposal’s requirements 

pertaining to index hedging 

appropriate? 

104. Are the 10 percent and 20 

percent thresholds discussed above 

consistent with market practice and the 

underlying goals of the statutory risk 

retention requirements? 

105. Should credit protection and 

hedging by the issuing entity of any 

portion of the credit risk on the 

securitized assets be permitted or, 

because such credit protection and 

hedges could limit the incentive of 

investors to conduct due diligence on 

the securitized assets, should all credit 

protection and hedging by the issuing 

entity (other than interest rate and 

currency risk) be prohibited? 

IV. Qualified Residential Mortgages 

Section 15G provides that the risk 

retention requirements shall not apply 

to an issuance of ABS if all of the assets 

that collateralize the ABS are QRMs.112

Section 15G also directs all of the 

Agencies to define jointly what 

constitutes a QRM, taking into 

consideration underwriting and product 

features that historical loan performance 

data indicate result in a lower risk of 

default.113 Moreover, section 15G 

requires 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, and regulations 

adopted thereunder.114

A. Overall Approach to Defining 

Qualifying Residential Mortgages 

In considering how to define a QRM 

for purposes of the proposed rules, the 

Agencies were guided by several factors 

and principles. The sponsor of an ABS 

that is collateralized solely by QRMs is 

completely exempt from the risk 

retention requirement with respect to 

such securitization. Accordingly, under 

the statute, a sponsor will not be 

required to retain any portion of the 

credit risk associated with the 

securitization of residential mortgages 

that meet the requirements to be a QRM. 

This requirement suggests that the 

underwriting standards and product 

features for QRMs should help ensure 

that such residential mortgages are of 

very high credit quality. 

In considering how to determine if a 

mortgage is of sufficient credit quality, 

the Agencies also examined data from 

several sources. For example, the 

Agencies reviewed data on mortgage 

performance supplied by the Applied 

Analytics division (formerly McDash 

Analytics) of Lender Processing Services 

(LPS). To minimize performance 

differences arising from unobservable 

changes across products, and to focus 

on loan performance through stressful 

environments, for the most part, the 

Agencies considered data for prime 

fixed-rate loans originated from 2005 to 

2008. This dataset included 

underwriting and performance 

information on approximately 8.9 

million mortgages. 

As is typical among data provided by 

mortgage servicers, the LPS data do not 

include detailed information on 

borrower income and on other debts the 

borrower may have in addition to the 

mortgage. For this reason, the Agencies 

also examined data from the 1992 to 

2007 waves of the triennial Survey of 

Consumer Finances (SCF).115 Because 

families’ financial conditions will 

change following the origination of a 

mortgage, the analysis of SCF data 

focused on respondents who had 

purchased their homes either in the 

survey year or the previous year. This 

data set included information on 

approximately 1,500 families. The 

Agencies also examined a combined 

data set of loans purchased or 

securitized by the Enterprises from 1997 

to 2009. This data set consisted of more 

than 75 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 2010.116

Based on these and other data, the 

underwriting and product features 

established by the Agencies for QRMs 

include standards related to the 

borrower’s ability and willingness to 

repay the mortgage (as measured by the 

borrower’s debt-to-income (DTI) ratio); 

the borrower’s credit history; the 

borrower’s down payment amount and 

sources; the loan-to-value (LTV) ratio for 

the loan; the form of valuation used in 

underwriting the loan; the type of 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24118 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

117For the importance of loan-to-value ratio at 

origination, see Quigley, J. and R. Van Order. 

‘‘Explicit tests of contingent claims models of 

mortgage default,’’ Journal of Real Estate Finance 

and Economics, 11, 99–117 (1995) and the 

extensive literature that has followed, including 

Foote, C., K. Gerardi and P. Willen, ‘‘Negative equity 

and foreclosures: Theory and evidence,’’ Federal 

Reserve Bank of Boston Public Policy Discussion 

Papers Number 08–3. (2008) http://www.bos.frb.org/ 

economic/ppdp/2008/ppdp0803.pdf; for the 

importance of credit history, see Barakova, I., R. 

Bostic, P. Calem, and S. Wachter, ‘‘Does credit 

quality matter for homeownership?’’ Journal of 

Housing Economics, 12, 318–336 (2003); for several 

other underwriting criteria see Foote, C., K. Gerardi 

and P. Willen, ‘‘Negative equity and foreclosures: 

theory and evidence,’’ Federal Reserve Bank of 

Boston Public Policy Discussion Papers Number 

08–3 (2008). http://www.bos.frb.org/economic/

ppdp/2008/ppdp0803.pdf, Mayer, C., K. Pence and 

S. M. Sherlund ‘‘The rise in mortgage defaults: facts 

and myths,’’ Manuscript, Federal Reserve Board, 

Washington, DC. (2008), and S. Sherlund, ‘‘The 

past, present, and future of subprime mortgages,’’ 

Finance and Economics Discussion Series No. 

2008–63, Federal Reserve Board, Washington, DC 

(2008). http://www.federalreserve.gov/pubs/feds/

2008/200863/200863abs.html. 118See 15 U.S.C. 78o–11(e)(4)(C). 

119See Section 129C(b)(3)(B)(i) of TILA. 

120Under section 15G(e)(4)(C), future changes to 

the QM definition do not, in and of themselves, 

alter the QRM definition. The QRM definition will 

not change until the Agencies have determined, 

through joint rulemaking, that the QRM definition 

should be altered. 

121The function of the QM standard is to provide 

lenders with a presumption of compliance with the 

requirement in section 129C(a) of TILA to assess a 

borrower’s ability to repay a residential mortgage 

loan. The purposes of these provisions are to ensure 

that consumers are offered and receive residential 

mortgage loans on terms that reasonably reflect 

mortgage involved; and the owneroccupancy status of the property 

securing the mortgage. A substantial 

body of evidence, both in academic 

literature and developed for this 

rulemaking, supports the view that 

loans that meet the minimum standards 

established by the Agencies have low 

credit risk even in stressful economic 

environments that combine high 

unemployment with sharp drops in 

house prices.117

Any set of fixed underwriting rules 

likely will 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. 

The Agencies recognize that many 

prudently underwritten residential 

mortgage loans will not meet the 

proposed definition of a QRM. Sponsors 

of ABS backed by these mortgages will 

be required to retain some of the credit 

risk of these mortgage loans in 

accordance with the proposed 

regulation (unless another exemption is 

available). However, as discussed 

further in Part III.B of this 

Supplementary Information, the 

Agencies have sought to provide 

sponsors with several options for 

complying with the risk retention 

requirements of section 15G so as to 

reduce the potential for these 

requirements to disrupt securitization 

markets, including those for non-QRM 

residential mortgages, or materially 

affect the flow or pricing of credit to 

borrowers and businesses. Moreover, 

the amount of non-QRM residential 

mortgages should be sufficiently large, 

and include enough prudently 

underwritten loans, so that ABS backed 

by non-QRM residential mortgages may 

be routinely issued and purchased by a 

wide variety of investors. As a result, 

the market for such securities should be 

relatively liquid, all else being equal. 

Indeed, the broader the definition of a 

QRM, the less liquid the market 

ordinarily would be for residential 

mortgages falling outside the QRM 

definition. 

The Agencies also have sought to 

make the standards applicable to QRMs 

transparent to, and verifiable by, 

originators, securitizers, investors and 

supervisors. As discussed further below, 

whether a residential mortgage meets 

the definition of a QRM can and will be 

determined at or prior to the time of 

origination of the mortgage loan. For 

example, the DTI ratio and the LTV ratio 

are measured at or prior to the closing 

of the mortgage transaction. The 

Agencies believe that this approach 

should assist originators of all sizes in 

determining whether residential 

mortgages will qualify for the QRM 

exemption, and assist ABS issuers and 

investors in assessing whether a pool of 

mortgages will meet the requirements of 

the QRM exemption. In addition, the 

approach taken by the proposal would 

allow individual QRM loans to be 

modified after securitization without the 

loan ceasing to be a QRM in order to 

avoid creating a disincentive to engage 

in appropriate loan modifications. 

In developing the proposed criteria 

for a QRM, the Agencies also considered 

how best to address the interaction 

between the definitions and standards 

for QRM and QM, as mandated by the 

Dodd-Frank Act.118 The Board currently 

has sole rulemaking authority for the 

QM standards, which authority will 

transfer to the Consumer Financial 

Protection Bureau (the CFPB) on the 

designated transfer date, which is set as 

July 21, 2011 (transfer date). In addition, 

while Section 15G’s risk retention 

requirements are to be prescribed by the 

Agencies no later than 270 days after 

enactment of the Dodd-Frank Act (April 

17, 2011), the Dodd-Frank Act provides 

that the rules implementing the QM 

standards must be prescribed before the 

end of the 18-month period beginning 

on the transfer date. 

In light of these provisions, the 

Agencies propose to incorporate the 

statutory QM standards, in addition to 

other requirements, into the QRM 

requirements and apply those standards 

strictly in setting the QRM requirements 

in order to ensure that, consistent with 

Congress’ directive, the definition of a 

QRM be no broader than a QM. The 

Agencies have proposed this approach 

to minimize any potential for conflicts 

between the QRM standards in the 

proposed rules and the QM standards 

that ultimately will be proposed or 

adopted under TILA, as well as to 

provide the public a reasonable 

opportunity to comment on the 

proposed QRM standards, including 

those that are bounded by the statutory 

QM standards. The proposed approach 

also helps reinforce the goal of ensuring 

that QRMs are of very high credit 

quality. 

As noted above, rulemaking authority 

for the QM standards is vested initially 

in the Board and, after the transfer date, 

the CFPB. TILA provides the QM 

rulewriting agency with the authority to 

establish key aspects of the QM 

definition (e.g., any qualifying ratios of 

the borrower’s total debt to monthly 

income) and to revise, add to, or 

subtract from the criteria for a 

residential mortgage loan to qualify as a 

QM.119 Accordingly, the Agencies 

expect to monitor the rules adopted 

under TILA to define a QM and will 

review those rules to determine whether 

changes to the definition of QRM are 

necessary or appropriate to ensure that 

the definition of a QRM is ‘‘no broader’’ 

than the definition of a QM as defined 

in section 129C(b)(2) of TILA and to 

appropriately implement the risk 

retention requirement of section 15G.120

In light of the different purposes and 

effects of the QRM and the QM 

standards,121 as well as the different 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24119 

their ability to repay the loans and that are 

understandable and not unfair, deceptive, or 

abusive. See section 129B(a)(2) of TILA. 

122See 15 U.S.C. 78o–11(e)(4)(B)(iv). 

123See National Association of Realtors, 

‘‘Financing the Home Purchase: The Real Estate 

Professional’s Guide 1993,’’ Chicago: National 

Association of Realtors, at 20 and 117. 

124See HUD Handbook, available at http://

www.fhaoutreach.gov/FHAHandbook/prod/

contents.asp?address=4155-1. 

agencies responsible for implementing 

these standards, the proposed standards 

for QRMs should not be interpreted in 

any way as reflecting or suggesting the 

way in which the QM standards under 

TILA may be defined either in proposed 

or final form. 

As required by section 15G, the 

Agencies also considered information 

regarding the credit risk mitigation 

effects of mortgage guarantee insurance 

or other credit enhancements obtained 

at the time of origination.122 If such 

guarantees are backed by sufficient 

capital, they likely lower the credit risk 

faced by lenders or purchasers of 

securities because they typically pay out 

when borrowers default. Such 

guarantees have historically been 

required for loans with higher LTV 

ratios, where borrowers have relatively 

thin equity cushions.123 Mortgage 

insurance companies charge a riskbased premium for this insurance, as 

well as impose additional underwriting 

restrictions. The Agencies considered a 

variety of information and reports 

relative to such guarantees and other 

credit enhancements. While this 

insurance protects creditors from losses 

when borrowers default, the Agencies 

have not identified studies or historical 

loan performance data adequately 

demonstrating that mortgages with such 

credit enhancements are less likely to 

default than other mortgages, after 

adequately controlling for loan 

underwriting or other factors known to 

influence credit performance, especially 

considering the important role of LTV 

ratios in predicting default. Therefore, 

the Agencies are not proposing to 

include any criteria regarding mortgage 

guarantee insurance or other types of 

insurance or credit enhancements at this 

time. The Agencies note that mortgage 

guarantee insurance is a form of credit 

enhancement accepted by the 

Enterprises for mortgages with higher 

LTV ratios that allows such mortgages to 

be securitized through mortgage-backed 

securities guaranteed by the Enterprises. 

For the reasons explained in Part III.B.8 

of this Supplemental Information, under 

§ __.11 of the proposed rules, the 

guarantee provided by an Enterprise 

while operating under the 

conservatorship or receivership of 

FHFA with capital support from the 

United States would satisfy the risk 

retention requirements of the Enterprise 

with respect to the mortgage-backed 

securities issued by the Enterprise. 

A number of the proposed standards 

developed for the QRM exemption (e.g., 

the DTI ratios and acceptable sources of 

borrower funds) are dependent upon 

certain definitions, calculations and 

verification requirements that are 

critical to the robustness of the QRM 

standards. The Agencies believe that it 

is important to provide clarity on what 

these definitions, calculations, and 

verification requirements include for 

purposes of the QRM standards. The 

Agencies considered how best to 

achieve this goal in a manner that is 

transparent, uniform, and familiar to the 

mortgage industry. After carefully 

considering a variety of options, the 

Agencies propose to incorporate and use 

certain definitions and key terms 

established by HUD and required to be 

used by lenders originating residential 

mortgages that are insured by the 

Federal Housing Administration (FHA). 

Specifically, the proposed rules 

incorporate the definitions and 

standards currently set out in the HUD 

Handbook 4155.1 (New Version), 

Mortgage Credit Analysis for Mortgage 

Insurance, as in effect on December 31, 

2010 (HUD Handbook) 124 for 

determining and verifying borrower 

funds and the borrower’s monthly 

housing debt, total monthly debt and 

monthly gross income. This proposed 

approach provides a transparent, 

uniform and well-known basis for 

lenders to determine whether a 

residential mortgage loan qualifies as a 

QRM, without requiring the Agencies to 

establish and maintain—and lenders to 

comply with—new requirements. 

In order to facilitate the use of these 

standards for QRM purposes, the 

Agencies propose to include in the 

Additional QRM Standards Appendix of 

the proposed rules all of the standards 

in the HUD Handbook that are used for 

QRM purposes. The only modifications 

made to the relevant standards in the 

HUD Handbook would be those 

necessary to remove those portions 

unique to the FHA underwriting process 

(e.g., TOTAL Scorecard instructions). 

The proposed rules and the Additional 

QRM Standards Appendix would not 

affect or change any of the standards in 

the HUD Handbook as they apply to 

FHA-insured mortgages. Moreover, HUD 

continues to have sole authority to 

modify the HUD Handbook. Any such 

amendments would not affect the 

Additional QRM Standards Appendix of 

the proposed rules unless separately 

adopted by the Agencies under section 

15G. 

Request for Comment 

106. Is the overall approach taken by 

the Agencies in defining a QRM 

appropriate? 

107. What impact might the proposed 

rules have on the market for 

securitizations backed by QRM and nonQRM residential mortgage loans? 

108. What impact, if any, might the 

proposed QRM standards have on 

pricing, terms, and availability of nonQRM residential mortgages, including to 

low and moderate income borrowers? 

109(a). The Agencies seek general 

comment on the overall approach of 

using certain longstanding HUD 

standards for certain definitions and 

standards within the QRM exemption 

and whether the Agencies should adopt 

a different approach. 109(b). Are there 

any other existing, transparent, and 

widely recognized standards that the 

Agencies should use for ensuring that 

lenders follow consistent and sound 

processes in determining whether a 

residential mortgage loan meets the 

qualifications for a QRM? 

110. The Agencies seek comment on 

all aspects of the proposed definition of 

a QRM, including the specific terms and 

conditions discussed in the following 

section. 

111(a). The Agencies seek comment 

on whether mortgage guarantee 

insurance or other types of insurance or 

credit enhancements obtained at the 

time of origination would or would not 

reduce the risk of default of a residential 

mortgage that meets the proposed QRM 

criteria but for a higher adjusted LTV 

ratio. Commenters are requested to 

provide historical loan performance 

data or studies and other factual support 

for their views if possible, particularly 

if they control for loan underwriting or 

other factors known to influence credit 

performance. 111(b). If the information 

indicates that such products would 

reduce the risk of default, should the 

LTV ratio limits be increased to account 

for the insurance or credit 

enhancement? 111(c). If so, by how 

much? 

112(a). If the proposed QRM criteria 

were adjusted for the inclusion of 

mortgage guarantee insurance or other 

types of insurance or credit 

enhancements, what financial eligibility 

standards should be incorporated for 

mortgage insurance or financial product 

providers and how might those 

standards be monitored and enforced? 

112(b). What disclosure regarding the 

entity would be appropriate? 

113. Are there additional ways that 

the Agencies could clarify the standards 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24120 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

125See proposed rules at §l.15(a) (definition of 

‘‘currently performing’’ for QRM purposes). 

126See proposed rules at §l.2 (definition of 

‘‘depositor’’). 

127For these purposes, the Agencies interpret the 

term ‘‘issuer’’ as used in section 15G(e)(6) to refer 

to the depositor for the transaction. 

128Closed-end credit and the related terms 

consumer credit and open-end credit are defined in 

a manner consistent with the definition of such 

terms under the Board’s Regulation Z, which 

implements TILA. 

129See Hui Shan, ‘‘Reversing the Trend: The 

Recent Expansion of the Reverse Mortgage Market 

Finance and Economics Discussion Series,’’ Board 

of Governors of the Federal Reserve System, 2009– 

42 (2009), available at http://www.federalreserve.

gov/pubs/feds/2009/200942/200942pap.pdf . 

130See 15 U.S.C. 78o–11(e)(3)(B). 

131See proposed rules at §l.15(a) (definition of 

‘‘one-to-four family property’’). 

132See Kristopher Gerardi, Andreas Lehnert, 

Shane Sherlund, and Paul S. Willen, ‘‘Making Sense 

of the Subprime Crisis,’’ Brookings Papers on 

Economic Activity (Fall 2008), at 86, Table 3. 

133See proposed rules at §l.15(d)(9). 

134As discussed further below, the proposed 

rules would require that the borrower be currently 

performing on all of the borrower’s debt 

obligations—including any current first mortgage, 

home equity loan or line of credit—for any new 

mortgage to qualify as a QRM. 

applicable to QRMs to reduce the 

potential for uncertainty as to whether 

a residential mortgage loan qualifies as 

a QRM at origination? 

B. Exemption for QRMs 

Consistent with section 15G, 

§ l.15(b) of the proposed rules provides 

that a sponsor is exempt from the risk 

retention requirements of the proposed 

rules with respect to any securitization 

transaction if all of the securitized assets 

that collateralize the ABS are QRMs, 

and none of the securitized assets that 

collateralize the ABS are other ABS. 

These conditions implement the 

requirements in 15 U.S.C. 78o– 

11(c)(1)(C)(iii) and (e)(5). 

Section l.15(b) of the proposed rules 

includes two additional requirements 

for a securitization transaction to qualify 

for the QRM exemption. First, the 

proposal would require that, at the 

closing of the securitization transaction, 

each QRM collateralizing the ABS is 

currently performing (i.e., the borrower 

is not 30 days or more past due, in 

whole or in part, on the mortgage).125

Because QRMs are completely exempt 

from the risk retention requirements, the 

proposed rules would not permit a 

residential mortgage loan that satisfied 

the conditions to be a QRM upon 

origination to be included in an ABS 

transaction exempt under §l.15(c) of 

the proposed rules if the loan was not 

currently performing at the time of 

closing of the securitization transaction. 

Second, the depositor 126 for the ABS 

must certify that it evaluated the 

effectiveness of its internal supervisory 

controls for ensuring that all of the 

assets that collateralize the ABS are 

QRMs and that it has determined that its 

internal supervisory controls are 

effective. This evaluation must 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 must 

provide, or cause to be provided, a copy 

of this certification to potential 

investors a reasonable period of time 

prior to the sale of ABS and, upon 

request, to the Commission and its 

appropriate Federal banking agency, if 

any. These evaluation and certification 

conditions implement the requirements 

in 15 U.S.C. 78o–11(e)(6).127

C. Eligibility Criteria 

1. Eligible Loans, First Lien, No 

Subordinate Liens, Original Maturity 

and Written Application Requirements 

The proposed definition limits a QRM 

to a closed-end first-lien mortgage to 

purchase or refinance a one-to-four 

family property, at least one unit of 

which is the principal dwelling of a 

borrower.128 Under the proposal, 

construction loans, ‘‘bridge’’ loans with 

a term of twelve months or less, loans 

to purchase time-share properties, and 

reverse mortgages could not be QRMs. 

Construction loans, bridge loans and 

other loans designed to offer temporary 

financing have typically not been 

securitized in the past, and their 

underwriting is notably more complex 

than that of standard mortgage loans. 

Thus, expanding the definition of QRMs 

to include such loans would be complex 

and seem to offer few, if any, benefits. 

Any loan relating to a time share also 

may not be a QRM, as these types of 

loans are excluded from the definition 

of a ‘‘residential mortgage loan’’ that may 

be a QM under section 103(cc)(5) of 

TILA. 

Even before the financial crisis, the 

overwhelming majority of reverse 

mortgages were insured by the FHA.129

Reverse mortgages insured by the FHA 

are separately exempted from the risk 

retention requirements of section 

15G.130 In addition, reverse mortgages 

may be QMs only to the extent that they 

meet certain standards to be determined 

by regulation by the Board or CFPB 

under section 129C(b)(2)(A)(ix) of TILA. 

Because the extent to which reverse 

mortgages may be considered a QM 

under TILA is not yet known, the 

Agencies have excluded reverse 

mortgages from potential QRM status. 

Under the proposal, a QRM must be 

secured by a first-lien, perfected in 

accordance with applicable law, on the 

one-to-four family property to be 

purchased or refinanced. In addition, 

consistent with the QM requirement 

under section 129C(b)(2) of TILA, the 

maturity date of a QRM, at the closing 

of the mortgage transaction, must not 

exceed 30 years. A one-to-four family 

property is defined to mean real 

property that is (i) held in fee simple, or 

on leasehold under a lease for not less 

than 99 years which is renewable, or 

under a lease having a period that is at 

least 10 years longer than the mortgage, 

and (ii) improved by a residential 

structure that contains one to four 

units.131 A one-to-four family property 

may include an individual 

condominium or cooperative unit, as 

well as a manufactured home that is 

constructed in conformance with the 

National Manufactured Home 

Construction and Safety Standards and 

erected on, or otherwise affixed to, a 

foundation in accordance with 

requirements established by the FHA. 

If the mortgage transaction is to 

purchase a one-to-four family property, 

no other recorded or perfected liens on 

the one-to-four family property can, to 

the creditor’s knowledge, exist at the 

time of the closing of the mortgage 

transaction. Thus, the proposed rules 

prohibit the use of a junior lien in 

conjunction with a QRM to purchase a 

home. Data indicate that, controlling for 

other factors, including combined LTV 

ratio, the use of junior liens at 

origination to decrease down 

payments—so-called ‘‘piggyback’’ 

mortgages—significantly increased the 

risk of default.132 The proposal would 

not prohibit the existence of junior liens 

in connection with the refinancing of an 

existing loan secured by an owneroccupied one-to-four family property, 

provided that the combined LTV ratio at 

closing of the mortgage transaction does 

not exceed certain thresholds 

established by the proposed rules.133

The Agencies have not proposed to 

prohibit the existence of a junior lien in 

connection with a refinancing 

transaction (subject to certain combined 

LTV limits) because the Agencies 

recognize that some borrowers may have 

existing home equity loans or lines of 

credit and are currently performing on 

all of their mortgage obligations.134 A 

prohibition on junior liens in 

connection with a refinancing 

transaction would force such 

performing borrowers to terminate their 

existing home equity loans or lines of 

credit and obtain a new home equity 

loan or line of credit shortly thereafter, 

with additional transaction costs 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24121 

135See proposed rules at §l.15(d)(9). 

136See, e.g., Avery, Robert B., Raphael Bostic, 

Paul S. Calem, and Glenn B. Canner, ‘‘Credit Risk, 

Credit Scoring, and the Performance of Home 

Mortgages,’’ Federal Reserve Bulletin 82(7) 621–48 

(1996); Pennington-Cross, Anthony, ‘‘Credit History 

and the Performance of Prime and Nonprime 

Mortgages,’’ Journal of Real Estate Finance and 

Economics 27(3) 279–301 (2003); Calem, Paul and 

Susan Wachter, ‘‘Community Reinvestment and 

Credit Risk: Evidence from an Affordable-HomeLoan Program,’’ Real Estate Economics 27(1) 105– 

134 (1999). 

137See Appendix A in the proposed common 

rule. 

138See Report to the Congress on Credit Scoring 

and Its Effects on the Availability and Affordability 

of Credit, Board of Governors of the Federal Reserve 

System (August 2007), available at http://

www.federalreserve.gov/boarddocs/rptcongress/

creditscore/creditscore.pdf. 

(including a loan origination fee). To 

help ensure that the borrower continues 

to have the ability and incentive to 

repay a QRM that is originated as part 

of a refinancing transaction, the 

proposal includes certain combined 

LTV limits on refinancing transactions 

and DTI limits both of which assume 

that any home equity loan or line of 

credit is fully drawn. 

The proposed rules also would 

require that the borrower complete and 

submit to the creditor a written 

application for the mortgage transaction. 

The application, as supplemented or 

amended prior to closing of the 

mortgage transaction, must include an 

acknowledgement by the borrower that 

the information provided in the 

application is true and correct as of the 

date executed by the borrower, and that 

any intentional or negligent 

misrepresentation of the information 

provided in the application may result 

in civil liability and/or criminal 

penalties under 18 U.S.C. 1001.135 This 

standard is consistent with the written 

acknowledgement in the Uniform 

Residential Loan Application (Form 

1003) used by the Enterprises. 

Request for Comment 

114(a). The Agencies request 

comment on each of these conditions for 

QRM eligibility. In addition, should a 

loan be disqualified from being a QRM 

if the creditor has ‘‘reason to know’’ of 

another recorded or perfected lien on 

the property in a purchase transaction? 

114(b). If so, what would constitute a 

‘‘reason to know’’ by the creditor? 

2. Borrower Credit History 

The Agencies’ own analysis, as well 

as work published in academic 

journals,136 indicates that borrower 

credit history is among the most 

important predictors of default. In many 

datasets, credit history is proxied using 

a credit score, often the FICO score 

determined under the credit scoring 

model devised by Fair Isaac 

Corporation. Among the residential 

mortgage loans in the LPS dataset 

described above, 13 percent of all loans 

defaulted (defined as ever having 

missed three or more consecutive 

payments or ever being in foreclosure). 

However, 24.5 percent of residential 

mortgage loans taken out by borrowers 

with a FICO score of 690 or below 

defaulted, compared to a default rate of 

7.7 percent among residential mortgage 

loans taken out by borrowers with a 

FICO score greater than 690. Even 

among the higher-FICO group, 

differences remained: borrowers with 

FICO scores of 691 to 740 had a default 

rate of 11.4 percent, while borrowers 

with FICO scores above 740 had a 

default rate of 4 percent. Thus, in these 

data, mortgage borrowers with a FICO 

score of 690 or below were more than 

six times as likely to default as 

borrowers with FICO scores of above 

740. 

A similar pattern emerges from the 

SCF data described above. Although the 

SCF data do not record the borrower’s 

credit score, they do report several 

important contributors to low credit 

scores. The most important predictor of 

whether a household in the SCF data set 

was delinquent on its mortgage payment 

was whether it currently was behind on 

any non-mortgage debt. The secondmost important variable was whether 

the household had filed for bankruptcy 

within the past five years. Households 

that were current on their non-mortgage 

obligations and had not filed for 

bankruptcy within the previous five 

years had a mortgage delinquency rate 

of 0.2 percent, compared to a 

delinquency rate of 17.9 percent for 

other households. 

Data on residential mortgages 

purchased or securitized by the 

Enterprises also show the importance of 

borrower credit scores as a predictor of 

default. From 1997 through 2002, loans 

that are estimated to meet the proposed 

QRM requirements (except for credit 

history) had cumulative rates of serious 

delinquency ranging from 31 to 44 basis 

points if the borrower’s credit score was 

above 690, but ranged from 267 to 356 

basis points for borrowers with credit 

scores of 690 or lower. The data show 

that, in the peak years of the housing 

bubble (from 2005 to 2007), rates of 

serious delinquency for loans that were 

estimated to meet the proposed QRM 

standards with credit scores above 690 

ranged from 186 to 272 basis points, 

while similar loans to borrowers with 

lower credit scores ranged from 833 to 

1,103 basis points.137

In developing the proposal, the 

Agencies carefully considered how to 

incorporate a borrower’s credit history 

into the standards for a QRM. The 

Agencies are aware that credit scores are 

used often by originators in the loan 

underwriting process. However, the 

Agencies do not propose to use a credit 

score threshold as part of the QRM 

definition because such a standard 

would require reliance on credit scoring 

models developed and maintained by 

privately owned entities and such 

models may change materially at the 

discretion of such entities. There also 

may be inconsistencies across the 

various credit scoring models used by 

consumer reporting agencies, as well as 

among different scoring models used by 

a single provider. Consequently, in 

order to ensure that creditors could 

continue to choose among different 

credit score providers, the Agencies 

would have to determine a cutoff score 

under multiple scoring models and 

periodically revise the regulation in 

response to new scoring models that 

might arise. 

Instead, the proposed rules define a 

set of so-called ‘‘derogatory factors’’ 

relating to a borrower that would 

disqualify a mortgage for such borrower 

from qualifying as a QRM. The Agencies 

considered how these derogatory factors 

related to the credit scores observed in 

the data. A 2007 report to Congress by 

the Board found that, among all persons 

with a FICO score, 42 percent had 

scores below 700, 18 percent had scores 

between 700 and 749, and 40 percent 

had scores of 750 or above.138 Thus, the 

median FICO score is somewhere 

between 700 and 749. The analysis of 

the LPS data found that borrowers with 

prime fixed-rate mortgages with FICO 

scores below 700 were substantially 

more likely than the average of such 

borrowers to default. The Board’s report 

to Congress also found that any major 

derogatory factor, including being 

substantially late on any debt payment 

(not just a mortgage), as well as 

bankruptcy or foreclosure, would push 

a borrower’s credit score down 

substantially. Thus, the relatively 

stringent set of credit history derogatory 

factors set forth in § l.15(d)(5) of the 

proposed rules is designed to be a 

reasonable proxy for the credit score 

thresholds associated with low 

delinquency rates in the data. 

Specifically, under the proposal, a 

mortgage loan could qualify as a QRM 

only if the borrower was not currently 

30 or more days past due, in whole or 

in part, on any debt obligation, and the 

borrower had not been 60 or more days 

past due, in whole or in part, on any 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24122 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

139The proposal defines a ‘‘consumer reporting 

agency that compiles and maintains files on a 

nationwide basis’’ by reference to the definition of 

that term in the Fair Credit Reporting Act (15 U.S.C. 

1681a(p)). See the proposed rules at §l.15(a)(7). 

140See 12 CFR 226 Supplement I, comment 

32(d)(1)(i)–1 and 12 CFR 226.18(s)(5)(i). 

141Section 129C(b)(2)(A)(ii) of TILA defines a 

balloon payment for QM purposes as a scheduled 

payment that is more than twice as large as the 

average of earlier scheduled payments. 

142As described more fully below, an originator 

also would be required to calculate the borrower’s 

front-end and back-end DTI ratios based on the 

maximum interest rate permitted during the first 

five years of the mortgage transaction. 

Consequently, originators of adjustable-rate 

mortgages would have to determine that a borrower 

had acceptable DTI ratios even if rates rose as 

rapidly as possible under the terms of the mortgage 

(subject to the annual and lifetime caps described 

above). 

143 15 U.S.C. 78o–11(e)(4)(B)(v). 

144TILA’s prepayment penalty restriction scheme 

is quite complex. Specifically, section 129C(c)(1)(B) 

of TILA prohibits prepayment penalties for any 

residential mortgage loan with an adjustable rate, or 

for those loans where the annual percentage rate 

exceeds certain thresholds over the average prime 

offer rate for a comparable transaction, based on the 

loan’s amount and lien status. In addition, where 

permitted, prepayment penalties may not exceed 

three percent of the outstanding balance of the loan 

debt obligation within the preceding 24 

months. Further, a borrower must not 

have, within the preceding 36 months, 

been a debtor in a bankruptcy 

proceeding, had property repossessed or 

foreclosed upon, engaged in a short sale 

or deed-in-lieu of foreclosure, or been 

subject to a Federal or State judgment 

for collection of any unpaid debt. 

The proposal would require that the 

originator verify and document, within 

90 days prior to the closing of the 

mortgage transaction, that the borrower 

satisfied these credit history 

requirements. The Agencies are 

proposing a safe harbor that would 

allow an originator to satisfy the 

documentation and verification 

requirements regarding a borrower’s 

credit history by obtaining, no more 

than 90 days before the closing of the 

mortgage, credit reports from at least 

two consumer reporting agencies that 

compile and maintain files on 

consumers on a nationwide basis.139

Such credit reports must demonstrate 

that the borrower satisfies the credit 

history requirements for a QRM and the 

originator must maintain paper or 

electronic copies of such credit reports 

in the loan file for the mortgage 

transaction. This safe harbor would not 

be available if the creditor later obtained 

an additional credit report before 

closing of the mortgage which indicated 

that the borrower did not meet the 

proposed rules’ credit history 

requirements. 

Request for Comment 

115. Are the proposed credit history 

standards useful and appropriate 

indicators of the likelihood that a 

borrower might default on a new 

residential mortgage loan? 

116. Are there additional or different 

standards that should be used in 

considering how a borrower’s credit 

history may affect the likelihood that 

the borrower would default on a new 

mortgage? 

117(a). Should the Agencies include 

minimum credit score thresholds as an 

additional or alternative QRM standard? 

117(b). If so, how might the rules 

incorporate privately developed credit 

scoring models in a manner that (i) 

ensures that borrowers, originators, and 

investors have adequate notice, and an 

opportunity to comment on, changes to 

scoring methodologies that may affect a 

borrower’s eligibility for a QRM, (ii) 

maintains a level competitive playing 

field for providers and developers of 

credit scores, and (iii) ensures that any 

credit scoring methodology used for 

QRM purposes is and remains 

predictive of a borrower’s default risk? 

118. The Agencies request comment 

on the appropriateness of the safe 

harbor that would allow an originator to 

satisfy the documentation and 

verification requirements regarding a 

borrower’s credit history by obtaining 

credit reports from at least two 

consumer reporting agencies that 

compile and maintain files on 

consumers on a nationwide basis. 

3. Payment Terms 

Section l.15(d)(6) of the proposed 

rules addresses the payment terms of a 

QRM, based on the terms of the 

mortgage transaction at closing. 

Consistent with the requirements for a 

QM under section 129C(b)(2)(A)(i) of 

TILA, the proposed rules would 

prohibit QRMs from having, among 

other features, payment terms that allow 

interest-only payments or negative 

amortization. Under the proposed rules, 

regularly scheduled principal and 

interest payments on the mortgage 

transaction may not result in an increase 

of the unpaid principal balance of the 

mortgage and may not allow the 

borrower to defer payment of interest or 

repayment of principal. 

In addition, consistent with the 

requirements for a QM under section 

129C(b)(2)(A)(ii) of TILA, the proposed 

rules would prohibit the terms of a QRM 

from permitting any ‘‘balloon payment,’’ 

defined for these purposes as a 

scheduled payment of principal and 

interest that is more than twice as large 

as any earlier scheduled payment of 

principal and interest. This definition of 

a balloon payment is consistent with the 

current definition of that term under the 

Board’s Regulation Z,140 and somewhat 

more restrictive than the definition of a 

balloon payment in section 

129C(b)(2)(A)(ii) of TILA and applicable 

to a QM.141

Under the proposed rules, both fixedrate and adjustable-rate mortgages may 

qualify as a QRM. However, the 

Agencies are proposing to limit the 

amount by which interest rates may 

increase on adjustable-rate loans that are 

QRMs to reduce the risk of default on 

QRMs by limiting the potential for 

consumers to face a ‘‘payment shock’’ in 

the event that their monthly mortgage 

payments were to rise rapidly due to 

expiration of ‘‘teaser rate’’ periods in the 

early years of a mortgage loan or other 

interest rate increases. Section 

15G(e)(4)(B)(iii) provides that one of the 

underwriting and product features the 

Agencies may take into consideration in 

defining a QRM are those that mitigate 

‘‘the potential for payment shock on 

adjustable rate mortgages through 

product features and underwriting 

standards.’’ Under §l.15(d)(6)(iii) of 

the proposed rules, in order for a 

mortgage that allows the annual rate of 

interest to increase after the closing of 

the mortgage transaction to be a QRM, 

the terms of the mortgage must provide 

that any such increase may not exceed: 

(a) Two percent (200 basis points) in 

any twelve month period and (b) six 

percent (600 basis points) over the life 

of the mortgage transaction.142

Section l.15(d)(6)(iv) of the proposed 

rules also would prohibit a QRM from 

containing any prepayment penalty. The 

term ‘‘prepayment penalty’’ would be 

defined as a penalty imposed solely 

because the mortgage obligation is 

prepaid in full or in part. For purposes 

of this definition, a prepayment penalty 

would not include, for example, fees 

imposed for preparing and providing 

documents in connection with 

prepayment, such as a loan payoff 

statement, a reconveyance, or other 

document releasing the creditor’s 

security interest in the one-to-four 

family property securing the loan. 

When defining a QRM, section 15G 

directs the Agencies to take into 

consideration underwriting and product 

features that historical loan performance 

data indicate result in a lower risk of 

default, such as a prohibition or 

restriction on the use of prepayment 

penalties.143 In addition, under section 

129C(c)(1)(B) of TILA, prepayment 

penalties are prohibited or subject to 

significant limitations for certain loans 

even if those loans otherwise meet the 

QM definition under section 129C(b)(2) 

of TILA.144


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24123 

in the first year, two percent in the second year, and 

one percent in the third year. Creditors who offer 

a consumer a loan with a prepayment penalty must 

also offer the consumer a loan without a 

prepayment penalty. Under section 

129C(b)(2)(A)(vii) of TILA, the total ‘‘points and 

fees’’ for a QM may not exceed three percent of the 

total loan amount, and under section 103(aa)(4) of 

TILA, the definition of ‘‘points and fees’’ now 

includes the maximum prepayment penalties and 

fees which may be charged or collected under the 

terms of the credit transaction. TILA also limits 

prepayment penalties in section 103(aa)(1)(A)(iii), 

which defines a ‘‘high-cost’’ mortgage loan as any 

mortgage (regardless of its cost or other terms) in 

which the creditor may charge prepayment fees or 

penalties more than 36 months after the closing of 

the transaction, or in which the fees or penalties 

exceed, in the aggregate, more than two (2) percent 

of the amount prepaid. And under section 129(c) of 

TILA, as amended by the Dodd-Frank Act, high-cost 

mortgage loans may not contain prepayment 

penalties. 

145While many creditworthy homebuyers seeking 

to purchase a home will likely not have the 20 

percent down payment required for a QRM, sound 

underwriting of these loans may well require the 

prudent use of judgment about the borrower’s 

ability to repay the loan and other risk mitigants 

that are likely to change over time and vary from 

borrower to borrower. Such judgments are difficult 

to incorporate accurately and effectively into a rule 

without introducing substantial complexity and 

cost. 

146See Appendix A in the proposed common 

rule. 

147See proposed rules at §l.15(a) for the 

proposed definition of a ‘‘rate and term refinancing’’ 

and a ‘‘cash-out refinancing.’’ 

Request for Comment 

119(a). The Agencies request 

comment on all aspects of the proposed 

rules’ limits on the payment terms of a 

QRM. In addition, the Agencies request 

comment on the following matters. 

119(b). Should additional or different 

payment terms be established for 

QRMs? Commenters requesting 

additional or different limits are 

encouraged to provide data indicating 

that such additional or different terms 

would result in a lower risk of default. 

119(c). Would different interest rate 

caps, such as a one percent (100 basis 

points) increase in any twelve month 

period, be more appropriate than the 

caps set forth in the proposal? 119(d). 

Recognizing the very damaging effects 

that prepayment penalties had on some 

borrowers during the recent housing 

market distress, the proposed rules do 

not permit any loans with prepayment 

penalties to qualify as a QRM. Often, the 

borrower that suffered because of the 

existence of such penalties were those 

with large, unaffordable payment shocks 

as low initial rates expired or those 

whose credit standing improved after 

origination of the loan, but who were 

not able to benefit from such 

improvements by refinancing into a 

potentially lower rate loan. Given the 

tight credit and product standards 

proposed for QRMs, such conditions are 

less likely to be relevant to QRM 

borrowers, and some QRM borrowers 

might reasonably benefit from an 

opportunity to obtain a mortgage with 

modest prepayment penalties in the 

early years of the loan in exchange for 

lower interest rate. Should the Agencies 

permit prepayment penalties in QRM 

loans (to the extent otherwise possible 

within the limits established for QMs)? 

119(e). If so, what, if any, limitations 

should apply to such penalties? 

4. Loan-to-Value Ratio 

Borrowers with substantial equity in 

their properties—that is, a low LTV 

ratio—should in principle default 

infrequently. If faced with financial 

hardship, such borrowers typically can 

sell their homes or otherwise tap their 

accumulated home equity. To ensure 

that QRMs have low default risk 

consistent with their complete 

exemption from risk retention 

requirements, the Agencies are 

proposing that the QRM definition 

require a sizable equity contribution. 

The figure below shows the default 

rate among loans in the LPS dataset 

considered by the Agencies (and 

described above) with the data further 

restricted to those loans with fully 

documented income in order to better 

match the proposed underwriting 

characteristics of QRMs. These loans are 

divided by their purpose: To purchase 

a home, to refinance an existing loan 

without increasing its principal balance 

(a so-called ‘‘rate and term’’ refinancing), 

or to refinance an existing loan and 

increase the principal balance (a socalled ‘‘cash out’’ refinancing). Different 

types of mortgage transactions (i.e., 

purchase, rate and term refinancing, and 

cash-out refinancing) had varying rates 

of default. 

As shown in the figure below, default 

rates increase noticeably among loans 

used to purchase homes at LTV ratios 

above 80 percent. The precise size of 

this increase and the LTV ratio at which 

it occurs are likely to vary across 

datasets and over time. Nonetheless, 

lenders have long experience 

underwriting loans with LTV ratios of 

80 percent or less and there is 

substantial data indicating that loans 

with LTV ratios of 80 percent or less 

perform noticeably better than those 

with LTV ratios above 80 percent.145

Data from the Enterprises concerning 

loans purchased or securitized by the 

Enterprises also show that first-lien 

purchase loans with high LTV ratios are 

riskier. The data show that purchase 

loans estimated to meet other QRM 

standards, but that exceeded the 

proposed LTV ratio cap, had serious 

delinquency rates 80 to 128 basis points 

higher when examining loans originated 

from 1997 to 2002, and 287 to 443 basis 

points higher for loans originated from 

2005 to 2007.146 Based on historical 

loan performance data, the Agencies are 

proposing a requirement for a LTV ratio 

of 80 percent for purchase mortgage 

transactions. 

According to the LPS dataset, loans 

used to refinance existing mortgages 

have a greater likelihood of default at 

every LTV ratio level than those used to 

purchase homes; moreover, the default 

rates are steeper for refinance loans than 

for purchase loans, suggesting that 

refinance loans are more sensitive to the 

LTV ratio. Thus, to control risk of 

default in a manner consistent with the 

complete exemption afforded QRMs, the 

Agencies are proposing that these loans 

have tighter LTV ratio requirements 

than purchase loans. 

The proposed rules put a combined 

LTV ratio cap for QRMs of 75 percent 

on rate and term refinance loans and 70 

percent for cash-out refinance loans.147

Again, estimates of the performance of 

these loans vary across datasets. 

However, because they have historically 

performed worse than purchase loans, 

and because they are more sensitive to 

LTV ratios than purchase loans, the 

lower combined LTV ratio caps on 

refinance loans should work to reduce 

risk of default on these loans. 

Again, the data from the Enterprises 

indicates that these LTV ratio caps 

should significantly reduce the default 

rate on QRMs that are refinancing 

transactions. These data show that rate 

and term refinancings that are estimated 

to meet other QRM standards, but are 

estimated to have exceeded the 

proposed combined LTV cap, had 

serious delinquency rates 32 to 70 basis 

points higher when examining loans 

originated from 1997 to 2002, and 196 

to 539 basis points higher for loans 

originated from 2005 to 2007. For cashout refinancings that are estimated to 

meet other QRM standards, but are 

estimated to have exceeded the 

proposed combined LTV cap, such 

loans had serious delinquency rates 42 

to 81 basis points higher when 

examining loans originated between 

1997 and 2002, and 255 to 405 basis 

points higher when examining loans 

originated from 2005 to 2007. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24124 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

148See Austin Kelly, ‘‘Skin in the Game: Zero 

Down Payment Mortgage Default,’’ Federal Housing 

Finance Agency, Journal of Housing Research, Vol. 

19, No. 2, 2008, available at http://papers.ssrn.com/ 

sol3/papers.cfm?abstract_id=1330132. 

Request for Comment 

120. The Agencies seek comment on 

the appropriateness of the proposed 

LTV and combined LTV ratios for the 

different types of mortgage transactions. 

5. Down Payment 

If a mortgage transaction is for the 

purchase of a one-to-four family 

property, then the proposed rules 

require that the borrower provide a cash 

down payment in an amount equal to at 

least the sum of: 

(i) The closing costs payable by the 

borrower in connection with the 

mortgage transaction; 

(ii) 20 percent of the lesser of— 

(A) The estimated market value of the 

one-to-four family property as 

determined by a qualifying appraisal (as 

described in the following section); and 

(B) The purchase price of the one-tofour family property to be paid in 

connection with the mortgage 

transaction; and 

(iii) If the estimated market value of 

the one-to-four family property as 

determined by a qualifying appraisal is 

less than the purchase price of the oneto-four family property to be paid in 

connection with the mortgage 

transaction, the difference between 

these amounts. 

For example, the down payment 

amount would equal $30,000 on a 

mortgage transaction with $10,000 in 

borrower-paid closing costs, and where 

the purchase price equaled $100,000 on 

a property with a qualifying appraisal 

that reflects a $100,000 market value as 

follows: (i) $10,000 in closing costs; 

plus (ii) $20,000 (based on 20 percent of 

the $100,000 purchase price which is 

less than or equal to the $100,000 

market value); plus (iii) $0 (due to 

purchase price being less than or equal 

to the market value of the property). 

However, the down payment amount 

would equal $40,000 on a mortgage 

transaction with $10,000 in closing 

costs, and where the purchase price 

equaled $110,000 on a property with a 

qualifying appraisal that reflects a 

$100,000 market value as follows: (i) 

$10,000 in closing costs; plus 

(ii) $20,000 (based on 20 percent of the 

$100,000 market value which is less 

than the $110,000 purchase price); plus 

(iii) $10,000 (difference between the 

$110,000 purchase price and the 

$100,000 market value). 

Because historical data indicate that 

borrowers with a meaningful equity 

interest in their properties exhibit a 

lower risk of default,148 the proposal 

does not permit the dilution of a 

borrower’s equity position by allowing 

the financing of closing costs. 

The proposal also provides that the 

funds used by the borrower to meet the 

20 percent down payment requirement 

must come from one or more acceptable 

sources of the borrower’s own funds as 

specified in the Additional QRM 

Standards Appendix to the proposed 

rules. The acceptable sources of funds 

included in the Additional QRM 

Standards Appendix are those that 

would be considered acceptable sources 

under the ‘‘Acceptable Sources of 

Borrower Funds’’ section in the HUD 

Handbook (e.g., savings and checking 

accounts, cash saved at home, stocks 

and bonds, and gifts, including eligible 

downpayment assistance programs). 

While the down payment must come 

from acceptable sources of borrower 

funds, which as noted above can 

include gifts, the Agencies are 

proposing to prohibit the use of any 

funds subject to a contractual obligation 

by the borrower to repay and any funds 

from a person or entity with an interest 

in the sale of the property (other than 

the borrower). In addition, the Agencies 

are proposing to require originators to 

verify and document the borrower’s 

compliance with the down payment 

requirements in accordance with the 

verification and documentation 

standards set forth in the Additional 

QRM Standards Appendix. Again, these 

standards are based on the standards in 

the HUD Handbook. 

Request for Comment 

121. The Agencies request comment 

on the proposed amount and acceptable 

sources of funds for the borrower’s 

down payment. 


srobinson on DSKHWCL6B1PROD with PROPOSALSEP29AP11.002</GPH> 
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24125 

149The appraisal regulations and guidance 

promulgated by the Federal banking agencies 

generally do not apply to real estate-related 

financial transactions that qualify for sale to a U.S. 

government agency or to the Enterprises, or in 

which the appraisal conforms to the appropriate 

Enterprise’s appraisal standards applicable to that 

category of real estate. See 12 CFR 34.43(a)(10) 

(OCC); 12 CFR 225.63(a)(10); (Board); 12 CFR 

323(a)(10) (FDIC). The Interagency Appraisal and 

Evaluation Guidelines clarify that such transactions 

are expected to meet all of the underwriting 

requirements of the appropriate agency or 

Enterprise, including its appraisal requirements. 

Residential mortgage loans sold to the Enterprises 

will, in any case, continue to be required to meet 

appraisal standards of the appropriate Enterprise 

applicable to that category of real estate. 

150Residual income is the borrower’s remaining 

or ‘‘residual’’ monthly income after all of the 

borrower’s monthly obligations, including the 

residual mortgage loan, have been paid. 

151See 15 U.S.C. 78o–11(e)(4)(B)(ii). 

152The Agencies’ assessment of the available 

information suggested that the residual income 

method for assessing the borrowers’ ability to repay 

is neither widely used nor consistently calculated. 

Therefore, the Agencies are not proposing to require 

the use of the residual income method for purposes 

of determining a borrower’s ability to repay. 

153See Appendix A to this Supplementary 

Information. 

154See National Association of Realtors, 

‘‘Financing the Home Purchase: The Real Estate 

Professional’s Guide,’’ Chicago: National 

Association of Realtors (1993), at 20. 

155Section 129C(b)(2)(A)(iii) of TILA requires that 

the originator of a QM verify and document the 

income and financial resources relied upon in 

qualifying the borrower for the loan. 

6. Qualifying Appraisal 

After considering a variety of 

valuation information sources, the 

Agencies are proposing that a QRM be 

supported by a written appraisal that 

conforms to generally accepted 

appraisal standards, as evidenced by the 

Uniform Standards of Professional 

Appraisal Practice, the appraisal 

requirements of the Federal banking 

agencies, and applicable laws.149 The 

Agencies believe these requirements 

will help ensure that the appraisal is 

prepared by an independent third party 

with the experience, competence, and 

knowledge necessary to provide an 

accurate and objective valuation based 

on the property’s actual physical 

condition. These requirements are 

intended to ensure the integrity of the 

appraisal process and the accuracy of 

the estimate of the market value of the 

residential property. 

Request for Comment 

122. Should other valuation 

approaches be considered in 

determining the value of the real 

property pledged on the mortgage 

transaction? 

7. Ability To Repay 

Section 15G provides that, in defining 

QRMs, the Agencies should take into 

consideration underwriting and product 

features that historical loan performance 

data indicate result in a lower risk of 

default, such as standards with respect 

to the borrower’s residual income,150

after taking account of all monthly 

obligations, the ratio of the borrower’s 

housing payment to the borrower’s 

monthly income, or the ratio of the 

borrower’s total monthly installment 

payments to the borrower’s income.151

Intuitively, a measure of a borrower’s 

debt service burden ought to be an 

important predictor of default. These 

burdens are often measured as the ratio 

of the borrower’s mortgage payment to 

his gross income (often known as the 

‘‘front-end ratio’’) and the ratio of all of 

the borrower’s debt payments to his 

gross income (often known as the ‘‘backend ratio’’).152

The Agencies’ review found that 

historical loan performance data did not 

always contain information on the 

borrowers’ monthly income and debt 

obligations and, where such data were 

provided, the information was not 

always captured in a consistent manner, 

making it difficult to aggregate for 

statistical analysis. For example, the 

loan performance data from the 

Enterprises reflect that borrowers with 

lower DTI ratios had lower default rates 

before consideration of other 

underwriting factors. These data show 

that, among all loan types, loans that are 

estimated to meet the other proposed 

QRM standards, but had a front-end 

ratio of more than 28 percent or a backend ratio of more than 36 percent, had 

serious delinquency rates 20 to 39 basis 

points higher when examining loans 

originated from 1997 to 2002, and 236 

to 359 basis points higher for loans 

originated from 2005 to 2007.153

However, in the LPS data described 

above, payment to income ratios did not 

add significant predictive power once 

the effects of credit history, loan type, 

and LTV were considered. These results 

could be due to different originators 

using different definitions of income 

and non-mortgage debt burdens. 

Additionally, loan officers and brokers 

may only verify and report the 

minimum income necessary to qualify a 

borrower for a loan (or for the type of 

loan or interest rate sought). For 

example, two borrowers with the same 

loan type and the same reported frontend DTI ratio might actually have 

different incomes because one 

borrower’s spouse works, but this 

additional income was not necessary to 

qualify for the loan and so was not 

reported. 

The rule proposes a front-end ratio 

limit of 28 percent and a back-end ratio 

limit of 36 percent, which are consistent 

with the overall conservative nature of 

the QRM standards. These ratios are 

consistent with the standards widely 

used in the early 1990s that limited 

front-end ratios to a maximum of 25 to 

28 percent and back-end ratios to a 

maximum of 33 to 36 percent, with the 

higher ratios only available to borrowers 

with relatively large down payments.154

As noted above and described more 

fully in Appendix A to this 

Supplementary Information, loan 

performance data from the Enterprises 

indicate that these ratios are likely to 

help contribute to a set of QRM 

standards indicative of loans of very 

high credit quality. 

For purposes of calculating these 

proposed ratios, the proposal would 

require originators to use the borrower’s 

monthly gross income, as determined in 

accordance with the effective income 

standards set forth in the HUD 

Handbook, which have been 

incorporated into the Additional QRM 

Standards Appendix to the proposed 

rules. In addition, originators would be 

required to use the borrower’s monthly 

housing debt in calculating the frontend ratio, and the borrower’s total 

monthly debt in calculating the backend ratio, as such debt amounts are 

defined in the HUD Handbook and 

incorporated into the Additional QRM 

Standards Appendix. The proposed 

rules, however, specifically provide that 

an originator must include in the 

borrower’s monthly housing debt and 

total monthly debt any monthly pro rata 

payments for real estate taxes, 

insurance, ground rent, special 

assessments, and homeowner and 

condominium association dues. This 

requirement is intended to help ensure 

that the borrower has the capacity to 

meet these ongoing, housing-related 

monthly obligations, even where the 

borrower does not pay these obligations 

on a monthly basis. 

The proposed rules also require that 

originators verify and document the 

borrower’s monthly gross income, 

monthly housing debt, and monthly 

total debt in accordance with the 

verification and documentation 

standards of the HUD Handbook, as 

incorporated into the Additional QRM 

Standards Appendix.155 The proposed 

rules also require the originator to 

determine the amount of the monthly 

first-lien mortgage payment and, in the 

case of refinancing transactions, the 

monthly payment for other debt secured 

by the property (including any open-end 

credit transaction as if fully drawn) that 

to the creditor’s knowledge would exist 

at the closing of the refinancing 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24126 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

156See section 129C(b)(2)(A)(iv) and (v) of TILA. 

157Section 129C(b)(2)(C) of TILA defines the term 

‘‘points and fees’’ with reference to the definition of 

‘‘points and fees’’ in section 103(aa)(4) of TILA, 

which deals with ‘‘high-cost’’ mortgages. Under 

section 103(aa)(4) of TILA, as amended by the 

Dodd-Frank Act, points and fees include: (i) All 

items included in the ‘‘finance charge’’ under TILA, 

except interest or the time-price differential; (ii) All 

compensation paid directly or indirectly by a 

consumer or creditor to a mortgage originator (as 

defined in section 103(cc)(2) of TILA) from any 

source, including a mortgage originator that is also 

the creditor in a table-funded transaction; (iii) Each 

of the charges listed in section 106(e) of TILA 

(except an escrow for future payment of taxes) that 

are excluded from the definition of the ‘‘finance 

charge’’ (under section 106(e) of TILA, the following 

items when charged in connection with any 

extension of credit secured by an interest in real 

property are not included in the computation of the 

finance charge with respect to that transaction: fees 

or premiums for title examination, title insurance, 

or similar purposes; fees for preparation of loanrelated documents; escrows for future payments of 

taxes and insurance; fees for notarizing deeds and 

other documents; appraisal fees, including fees 

related to any pest infestation or flood hazard 

inspections conducted prior to closing; and fees or 

charges for credit reports), unless the charge is 

reasonable, the creditor receives no direct or 

indirect compensation, and the charge is paid to a 

third party unaffiliated with the creditor; (iv) 

Premiums or other charges payable at or before 

closing for any credit life, credit disability, credit 

unemployment, or credit property insurance, or any 

other accident, loss-of-income, life or health 

insurance, or any payments made directly or 

indirectly for any debt cancellation or suspension 

agreement or contract, except that insurance 

premiums or debt cancellation or suspension fees 

calculated and paid in full on a monthly basis are 

not considered financed by the creditor; (v) The 

maximum prepayment fees and penalties that may 

be charged or collected under the terms of the credit 

transaction; (vi) All prepayment fees or penalties 

that are incurred by the consumer if the consumer 

refinances a previous loan made or currently held 

by the same creditor or an affiliate of the creditor; 

and (vii) Such other charges as the Board 

determines to be appropriate. 

For purposes of a ‘‘qualified mortgage,’’ section 

129C(b)(2)(C) of TILA provides some exceptions to 

the definition of ‘‘points and fees’’ under section 

103(aa)(4) of TILA. In calculating points and fees for 

purposes of the three percent limit applicable to 

QMs, points and fees do not include bona fide third 

party charges not retained by the mortgage 

originator, creditor, or an affiliate of the creditor or 

mortgage originator. See section 129C(b)(2)(C)(i) of 

TILA. In addition, for purposes of computing the 

total points and fees for the three percent QM limit, 

the total points and fees excludes certain bona fide 

discount points if certain conditions are met. See 

section 129C(b)(2)(C)(ii)–(iv) of TILA. 

158See 12 CFR 226.32(a)(1)(ii) and (b)(1). 

159Under section 103(aa)(4)(B) of TILA, as 

amended by the Dodd-Frank Act, compensation 

paid to a mortgage originator ‘‘from any source’’ is 

included in ‘‘points and fees.’’ 

160For clarity, the proposal does not include the 

phrase ‘‘from any source’’ because the proposal 

would include all compensation paid directly or 

indirectly by a consumer or creditor to a mortgage 

originator, which would necessarily include 

compensation from any source. 

161All such charges are included in ‘‘points and 

fees’’ under section 103(aa)(4)(D) of TILA and, thus, 

are included in points and fees under the proposal. 

Another amendment to TILA added by the DoddFrank Act (Section 129C(d) of TILA), restricts 

creditors from financing certain of these charges. 

This prohibition will be implemented when the 

Board or CFPB implements that section of TILA. 

162Section 103(aa)(4) of TILA also includes in 

‘‘points and fees’’ the maximum prepayment fees 

and penalties which may be charged or collected 

under the terms of the credit transaction. However, 

under the proposed rule, QRMs would not be 

permitted to have prepayment penalties. 

transaction. These determinations 

would be based on the maximum 

interest rate chargeable during the first 

five years after the date on which the 

first regular periodic payment will be 

due and a payment schedule that fully 

amortizes the mortgage over the full 

term of the loan, which cannot exceed 

30 years. These requirements are based 

on those that apply to QMs under 

section 129C of TILA.156

Request for Comment 

123. The Agencies seek comment on 

the appropriateness of the proposed 

front-end ratio limit of 28 percent and 

the proposed back-end ratio limit of 36 

percent. 

8. Points and Fees 

Section l.15(d)(7) of the proposed 

rules reflects the restriction on ‘‘points 

and fees’’ for QMs contained in section 

129C(b)(2)(A)(vii) of TILA. As with 

other standards set forth in TILA for 

QMs, the Agencies have considered the 

statutory provisions governing points 

and fees for QMs and have sought to 

ensure that the standards applicable to 

QRMs would be no broader than those 

that may potentially apply to QMs.157

Under the proposal, in order for a 

mortgage to be a QRM, the total points 

and fees payable by the borrower in 

connection with the mortgage 

transaction may not exceed three 

percent of the total loan amount, which 

would be calculated in the same manner 

as in Regulation Z.158 Under Regulation 

Z, the ‘‘total loan amount’’ is calculated 

by taking the ‘‘amount financed,’’ as 

defined in 12 CFR 226.18(b), and 

deducting any ‘‘points and fees’’ that are 

financed by the creditor and not 

otherwise deducted in calculating the 

amount financed. In this way, the three 

percent limit on points and fees for 

QRMs will be based on the amount of 

credit extended to the borrower without 

taking into account the financed points 

and fees themselves. 

For QRMs, the proposed rules would 

define ‘‘points and fees’’ consistent with 

the current definition of ‘‘points and 

fees’’ under the Board’s Regulation Z, 

but would include the additional items 

added to the TILA definition of ‘‘points 

and fees’’ by the Dodd-Frank Act. 

Specifically, the term ‘‘points and fees’’ 

would include: (1) All items required to 

be disclosed as ‘‘finance charges’’ under 

Regulation Z (12 CFR 226.4(a) and 

226.4(b)), except interest or the timeprice differential; (2) All compensation 

paid directly or indirectly by a 

consumer or creditor to a ‘‘mortgage 

originator’’ (as defined in section 

103(cc)(2) of TILA) from any source,159

including a mortgage originator that is 

also the creditor in a table-funded 

transaction; 160 (3) All items excluded 

from the ‘‘finance charge’’ under 

Regulation Z listed in 12 CFR 

226.4(c)(7) (other than amounts held for 

future payment of taxes), unless the 

charge is reasonable, the creditor and 

mortgage originator receive no direct or 

indirect compensation in connection 

with the charge, and the charge is not 

paid to an affiliate of the creditor or 

mortgage originator; (4) Premiums or 

other charges payable at or before 

closing for any credit life, credit 

disability, credit unemployment, or 

credit property insurance, or any other 

accident, loss-of-income, life or health 

insurance, or any payments made 

directly or indirectly for any debt 

cancellation or suspension agreement or 

contract; 161 and (5) All prepayment fees 

or penalties that are incurred by the 

consumer if the consumer refinances a 

previous loan made or currently held by 

the same creditor or an affiliate of the 

same creditor.162

Items excluded from the finance 

charge under 12 CFR 226.4(c), 226.4(d) 

and 226.4(e) would be excluded from 

the proposal’s definition of ‘‘points and 

fees,’’ unless those items are specifically 

included elsewhere in the definition of 

‘‘points and fees.’’ The proposed rules do 

not exclude ‘‘bona fide discount points’’ 

or certain bona fide third-party charges 

from ‘‘points and fees.’’ The Agencies are 

also not proposing an adjustment to the 

limitation on points and fees for smaller 

loans as required for QMs under section 

129C(b)(2)(D) of TILA. 

Request for Comment 

124(a). The Agencies request 

comment on all aspects of the proposed 

definition of ‘‘points and fees’’ for QRM 

purposes. In addition, the Agencies seek 

comment on the following matters. 

124(b). Should the exclusion for ‘‘bona 

fide discount points’’ and certain bona 

fide third-party charges be included in 

the final rule? 124(c). If so, in what 

manner? 124(d) Would an adjustment to 

the limitation on points and fees for 

smaller loans, if implemented under 

section 129C(b)(2)(D) of TILA, be 

appropriate for QRMs? 

9. Assumability Prohibition 

Under the proposed rules, a QRM 

could not be assumable by any person 

who was not a borrower under the 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24127 

163As noted above, the policies and procedures 

prescribed under the proposed rule require the 

creditor’s procedures with respect to subordinate 

liens held by the creditor or affiliates on the 

mortgaged property to be disclosed to potential 

investors if the creditor subsequently securitizes the 

QRM. In addition, the Agencies expect the 

creditor’s commitments to have servicing policies 

and procedures as specified in the proposed rule 

would be reflected in the servicing agreement(s) for 

the securitization, which set forth the terms under 

which the servicer will service the securitized 

assets, and would thus be disclosed to potential 

investors in a securitization offering covered by the 

SEC’s Regulation AB. If the servicing is transferred 

from the creditor to another entity who acts as 

securitization servicer, the Agencies expect these 

commitments would nevertheless be carried 

forward to the servicing agreements for the 

securitizations and disclosed pursuant to 

Regulation AB, because the policies and procedures 

prescribed under the proposed rule require the 

creditor not to transfer QRM servicing unless the 

agreement requires the transferee to abide by the 

same kind of default mitigation commitments as are 

required of the creditor. 

164Participating agencies in the effort include the 

Federal Reserve Board, the Office of the 

Comptroller of the Currency, the Federal Deposit 

Insurance Corporation, the Office of Thrift 

Supervision, the Federal Housing Finance Agency, 

the Department of Housing and Urban Development 

(including the Government National Mortgage 

Association (Ginnie Mae)), the Consumer Financial 

Protection Bureau, and the Department of the 

Treasury. 

original mortgage transaction. If a 

mortgage were assumable after 

origination or its securitization, it is 

possible that the new borrower would 

not satisfy the QRM requirements, 

which could result in the credit quality 

of the mortgage being significantly and 

negatively affected. While the rule could 

require that the loan essentially be reunderwritten using the QRM standards 

in connection with an assumption to 

address these concerns, such a 

requirement could impose significant 

costs on the holder or servicer of the 

mortgage, and potentially increase the 

cost and reduce the liquidity of QRMs. 

10. Default Mitigation 

The proposed rules also would 

require that the originator of a QRM 

incorporate into the mortgage 

transaction documents certain 

requirements regarding servicing 

policies and procedures for the 

mortgage, including requirements 

regarding loss mitigation actions, 

subordinate liens, and responsibility for 

assumption of these requirements if 

servicing rights with respect to the QRM 

are sold or transferred. Timely initiation 

of loss mitigation activities often 

reduces the risk of subsequent default 

on mortgages backing the securitization 

transaction. Disclosure of the policies 

and procedures governing loss 

mitigation activities also will inform 

borrowers and provide clarity regarding 

the consequences of default. 

Specifically, the proposed rules 

would require that the QRM mortgage 

transaction documents include a 

provision obliging the creditor of the 

QRM to have servicing policies and 

procedures to promptly initiate 

activities to mitigate risk of default on 

the mortgage loan (within 90 days after 

the mortgage loan becomes delinquent, 

if such delinquency has not been cured) 

and to take loss mitigation actions, such 

as engaging in loan modifications, in the 

event the estimated net present value of 

such action exceeds the estimated net 

present value of recovery through 

foreclosure, without regard to whether 

the particular loss mitigation action 

benefits the interests of a particular 

class of investors in a securitization. 

The loss mitigation policies and 

procedures must also take into account 

the borrower’s ability to repay and other 

appropriate underwriting criteria. The 

policies and procedures must include 

servicing compensation arrangements 

that are consistent with the creditor’s 

commitment to engage in loss mitigation 

activities. 

In addition, under the proposal, the 

creditor’s policies and procedures 

would be required to provide that the 

creditor will implement procedures for 

addressing any whole loan owned by 

the creditor (or any of its affiliates) and 

secured by a subordinate lien on the 

same property that secures a QRM if the 

borrower becomes more than 90 days 

past due on the QRM. If the QRM will 

collateralize any asset-backed securities, 

the creditor must disclose those 

procedures or require them to be 

disclosed to potential investors within a 

reasonable period of time prior to the 

sale of the asset-backed securities. The 

Agencies are proposing inclusion of this 

element in the policies and procedures 

because modification of the QRM could 

affect the status of subordinate 

mortgages, and the existence of a 

subordinate mortgage could affect the 

structuring of actions to mitigate losses 

on the QRM. 

As proposed, the mortgage originator 

must provide disclosure of the foregoing 

default mitigation commitments to the 

borrower at or prior to the closing of the 

mortgage transaction. Also, the mortgage 

originator would be required to include 

terms in the mortgage transaction 

documents under which the creditor 

commits to include in its servicing 

policies and procedures that it will not 

sell transfer, or assign servicing rights 

for the mortgage loan unless the transfer 

agreement requires the purchaser, 

transferee or assignee servicer to abide 

by the default mitigation commitments 

of the creditor as if the purchaser, 

transferee or assignee were the creditor 

under this section of the proposed 

rule.163

It is noted that there is an ongoing 

interagency effort among certain Federal 

regulatory agencies, including some of 

the Agencies joining in this proposed 

rulemaking, to develop national 

mortgage servicing standards that would 

apply to servicers of residential 

mortgages, including bank and bankaffiliated servicers and servicers that are 

not affiliated with a bank.164 These 

standards would apply to residential 

mortgages regardless of whether the 

mortgages are QRMs, are securitized or 

are held in portfolio by a financial 

institution. The primary objective of this 

separate interagency effort is to develop 

a comprehensive, consistent, and 

enforceable set of servicing standards 

for residential mortgages that servicers 

would have to meet. In addition to 

servicing matters covered in this 

proposal, the separate interagency effort 

on national mortgage servicing 

standards is taking into consideration a 

number of other aspects of servicing, 

including the quality of customer 

service provided throughout the life of 

a mortgage; the processing and handling 

of customer payments; foreclosure 

processing; operational and internal 

controls; and servicer compensation and 

payment obligations. The agencies 

participating in this separate effort 

currently anticipate requesting comment 

on proposed standards later this year, 

with the goal of having final standards 

issued shortly afterward. At this time, 

with respect to specific servicing 

standards, the Agencies are requesting 

comment only on those particular 

standards included in this proposed 

rulemaking. 

Request for Comment 

125. The Agencies solicit comment on 

whether the definition of QRM should 

include servicing requirements. 

126(a). Should the proposed servicing 

requirements be more or less robust? 

126(b) If so, how should the proposed 

servicing requirements be changed? 

127(a). Should servicers be required, 

as is proposed, to have policies and 

procedures that provide for loss 

mitigation activities if the borrower is 

90 days delinquent, but default may not 

have occurred under the mortgage loan 

transaction documents? 

127(b). Should the policies and 

procedures require, or at least not 

prohibit, initiation of loss mitigation 

activities, including loan modifications, 

when default is reasonably foreseeable? 

127(c). What would be the practical 

implications of such an approach? 

128(a). Should servicers be required, 

as is proposed, to have policies and 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24128 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

procedures that provide for loss 

mitigation actions for QRMs (within 90 

days after delinquency, unless the 

delinquency is cured) when the 

estimated net present value of the action 

would exceed the estimated net present 

value of recovery through foreclosure? 

128(b). Should those policies and 

procedures be required to include 

specific actions, such as (i) restructuring 

the mortgage loan; (ii) reducing the 

borrower’s payments through interest 

rate reduction, extension of loan 

maturity, or similar actions; (iii) making 

principal reductions, or (iv) taking other 

loss mitigation action in the event that 

the estimated net present value of that 

action would exceed the estimated net 

present value of recovery though loan 

foreclosure? 

128(c). What would be the practical 

implications of such an approach? 

129. The Agencies seek comment on 

whether other servicing standards 

should be included, consistent with the 

statute’s authority. 

130(a). What are the practical 

implications of the proposed QRM 

servicing standards? 

130(b). Do commenters envision 

operational issues in implementing the 

standards? 

130(c). If so, please describe. 

130(d). Are the standards sufficiently 

clear? 

130(e). If not, which should be 

clarified? 

131. Would the proposed QRM 

servicing conditions restrict or impede 

the ability or willingness of certain 

classes of originators to originate QRMs? 

132(a). Is the scope of the QRM 

servicing standards appropriate? 

132(b). Are there alternatives to QRM 

servicing standards that would better 

address servicing issues? 

133(a). Should the servicing 

requirements be part of the pooling and 

servicing agreement rather than part of 

the mortgage transaction documents? 

133(b). Should they be included in 

both sets of documentation? 

134(a). If a creditor or an affiliate has 

an ownership interest in a subordinate 

lien mortgage and the creditor services 

the first lien mortgage, should the 

creditor be required to implement predefined processes to address any 

potential conflicts of interest when the 

first lien loan becomes 90 days past 

due? 

134(b). What types of processes 

should be required? 

134(c). Would specification of a 

particular process unduly limit the 

ability of the creditor to address 

different circumstances that may arise? 

135(a). Should the Agencies impose a 

standard requiring that a particular risk 

mitigation activity maximize the 

recovery based on net present value to 

avoid potential conflicts of interests 

between different classes of investors? 

135(b). How would that be 

determined? 

135(c). Would this approach improve 

the ability of servicers to best represent 

the interest of all investors? 

135(d). What would be the practical 

implications under such an approach? 

136(a). Are the proposed 

compensation requirements 

appropriate? 

136(b). For example, should the 

compensation structure be more 

specific, depending on the type of risk 

mitigation action deemed appropriate? 

136(c). If so, how? 

137(a). Pursuant to servicers’ 

obligations to investors under the terms 

of securitization transaction documents, 

servicers are generally required to 

advance scheduled payments of 

principal and interest to investors after 

a borrower has become past due for 

some period of time (with respect to 

private label securities, usually until 

foreclosure is started), to the extent that 

such monthly advances are expected to 

be reimbursed from future payments 

and collections or insurance payments 

or proceeds of liquidation of the related 

mortgage loan. These monthly advances 

are intended to maintain a regular flow 

of scheduled principal and interest 

payments on the certificates rather than 

to guarantee or insure against losses. 

Does funding of these delinquent 

payments create liquidity constraints for 

servicers that incent servicers to take 

action (e.g., start foreclosure) that may 

not be in the investors’ best interest? 

137(b). Should the Agencies put 

limits on servicers advancing 

delinquent mortgagors’ payments of 

principal and interest to investors? 

137(c). Would such a limitation harm 

investors’ interests? 

137(d). What are the practical 

implications of such an approach? 

138(a). Should the Agencies require 

servicing standards for a broader class of 

securitized residential mortgages? 

138(b). If so, how? 

139. For commenters responding to 

any of the foregoing questions or with 

recommendations for different or 

additional approaches to servicing 

standards, are such approaches 

consistent with the statutory factors the 

Agencies are directed to take into 

account under the QRM exemption? 

140. The Agencies are in the process 

of developing national mortgage 

servicing standards, which would cover 

all residential mortgage loans, including 

QRMs. In light of this, the Agencies seek 

comment on whether the establishment 

of national mortgage servicing standards 

is a more effective means to address the 

problems associated with servicing of 

all loans. 

D. Repurchase of Loans Subsequently 

Determined To Be Non-Qualified After 

Closing 

As required by section 15G and 

discussed in greater detail in Part IV.B 

of this Supplementary Information, the 

proposed rules require that the 

depositor of the asset-backed security 

certify 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 QRMs and 

has concluded that such internal 

supervisory controls are effective. 

Nevertheless, the Agencies recognize 

that, despite the use of robust processes 

and procedures, it is possible that one 

or more loans included in a QRM 

securitization transaction may later be 

determined to have not met the QRM 

definition due to inadvertent error. For 

example, an originator conducting postorigination file reviews for compliance 

or internal audit purposes may find that 

some aspects of the documentation 

required to verify the borrower’s 

monthly gross income were not 

obtained. If the discovery of such an 

error after closing of the securitization 

terminated the securitization’s QRM 

exemption, then sponsors and investors 

may well be unwilling to participate in 

the securitization of QRMs. On the other 

hand, unless sponsors or depositors face 

some penalty for the inclusion in a QRM 

securitization transaction of loans that 

do not meet the QRM standards, 

sponsors and depositors may not have 

the proper incentives to use all 

reasonable efforts to ensure that 

securitizations relying on the QRM 

exemption are collateralized only by 

loans that meet all of the QRM 

standards. 

The proposal seeks to balance these 

interests by providing that a sponsor 

that has relied on the QRM exemption 

with respect to a securitization 

transaction would not lose the 

exemption, with respect to the 

transaction, if, after closing of the 

securitization transaction, it is 

determined that one or more of the 

mortgages collateralizing the ABS do 

not meet all of the criteria to be a QRM, 

provided that certain conditions are 

met. First, the depositor must have 

certified that it evaluated the 

effectiveness of its internal supervisory 

controls with respect to the process for 

ensuring that all of the loans that 

collateralize the ABS are QRMs and 

concluded that its internal supervisory 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24129 

controls are effective, as required by 

§ l.15(b)(4) of the proposed rules. 

Second, the sponsor must repurchase 

the loan(s) determined to not be QRMs 

from the issuing entity at a price at least 

equal to the remaining principal balance 

and accrued interest on the loan(s). The 

sponsor must complete this repurchase 

no later than ninety (90) days after the 

determination that the loan(s) does not 

satisfy the QRM requirements. Third, 

the sponsor must promptly notify (or 

cause to be notified) all investors of the 

ABS of any loan(s) that are required to 

be repurchased by the sponsor pursuant 

to this repurchase obligation, including 

the principal amount of the repurchased 

loan(s) and the cause for such 

repurchase. 

These conditions are intended to 

provide a sponsor with the opportunity 

to correct inadvertent errors by 

promptly repurchasing any nonqualified loan(s) and removing such 

non-qualifying loan(s) from the pool, 

while protecting investors. Moreover, in 

light of this buy-back requirement, 

sponsors should continue to have a 

strong economic incentive to ensure that 

all loans backing a QRM securitization 

satisfy all of the conditions applicable to 

QRMs prior to closing of the transaction. 

Request for Comment 

141(a). Should the Agencies require, 

as a condition to qualify for the QRM 

exemption, that the sponsor repurchase 

the entire pool of loans collateralizing 

the ABS if the amount or percentage of 

the loans that are required to be 

repurchased due to the failure to meet 

the QRM standards reaches a certain 

threshold? 

141(b). If so, what threshold would be 

appropriate? 

142(a). Should the Agencies permit a 

sponsor, within the first four months 

after the closing of a QRM 

securitization, to substitute a 

comparable QRM loan for a residential 

mortgage loan that is determined, postclosing, to not be a QRM (in lieu of 

purchasing the loan for cash)? 

142(b). If so, is four months an 

appropriate period or should the rule 

allow more or less time? 

E. Request for Comment on Possible 

Alternative Approach 

As discussed previously, the 

approach taken by the proposal to 

implementing the exemption for QRMs 

within the broader context of section 

15G is to limit QRMs to mortgages of 

very high credit quality, while 

providing sponsors considerable 

flexibility in how they meet the risk 

retention requirements for loans that do 

not qualify as QRMs (or for another 

exemption). An alternative approach to 

implementing the exemption for QRMs 

within the context of section 15G would 

be to create a broader definition of a 

QRM that includes a wider range of 

mortgages of potentially lower credit 

quality, and make the risk retention 

requirements stricter for non-QRM 

mortgages, such as by, for example, 

providing sponsors with less flexibility 

in how they retain risk (e.g., requiring 

vertical risk retention or increasing the 

base risk retention requirement), in 

order to provide additional incentives to 

originate QRM loans. Under this type of 

alternative approach, the proposed QRM 

standards could be modified as 

follows— 

(a) If the mortgage transaction is a 

purchase transaction or rate and term 

refinancing, the combined LTV ratio of 

the mortgage transaction could not 

exceed 90 percent (with no restriction 

on the existence of a subordinate lien at 

closing of a purchase transaction); 

(b) If the mortgage transaction is a 

cash-out refinancing, the combined LTV 

ratio of the mortgage transaction could 

not exceed 75 percent; 

(c) The borrower’s required cash 

down payment on a purchase mortgage 

could be reduced to— 

(1) 10 percent (rather than the 

proposed 20 percent) of the lesser of the 

property’s market value or purchase 

price, plus 

(2) The closing costs payable by the 

borrower in connection with the 

mortgage transaction; and 

(d) A borrower’s maximum front-end 

DTI ratio could be increased to— 

(1) 33 percent, if payments under the 

mortgage could not increase by more 

than 20 percent over the life of the 

mortgage; or 

(2) 28 percent, if payments under the 

mortgage could increase by more than 

20 percent over the life of the mortgage; 

(e) A borrower’s maximum back-end 

DTI ratio would be increased to— 

(1) 41 percent, if payments under the 

mortgage could not increase by more 

than 20 percent over the life of the 

mortgage; or 

(2) 38 percent, if payments under the 

mortgage could increase by more than 

20 percent over the life of the mortgage; 

and 

(f) Mortgage guarantee insurance or 

other types of insurance or credit 

enhancements provided by third parties 

could be taken into account in 

determining whether the borrower met 

the applicable combined LTV 

requirement, but such insurance or 

enhancements would not alter the 90 

percent maximum combined LTV for 

purchase transactions and rate and term 

refinancings and 75 percent maximum 

combined LTV for cash-out 

refinancings. 

Request for Comment 

143. The Agencies seek comment on 

the potential benefits and costs of the 

alternative approach, with a broader 

QRM exemption combined with a 

stricter set of risk retention 

requirements for non-QRM mortgages. 

144(a). If such an alternative approach 

were to be adopted, what stricter risk 

retention requirements would be 

appropriate in order to provide 

additional incentives to underwrite a 

greater share of origination volume 

within the QRM definition? 

144(b). Should such stricter 

requirements involve the form of risk 

retention or a higher amount of risk 

retention? 

144(c). Are there other changes that 

would achieve the same objective? 

145. How would this approach help to 

ensure high quality loan underwriting 

standards and align the interests of 

investors? 

146(a). Would this approach have the 

practical effect of exempting the 

securitization of most residential loans 

from the risk retention requirement? 

146(b). If so, how would this 

positively and/or negatively affect 

investors in such securitizations? 

146(c). Would an offering of an ABS 

backed by loans complying with the 

lower standards in the alternative 

approach adequately promote the 

necessary alignment of incentives 

among originators, sponsors, and 

investors? 

147. What impact might a broader 

QRM definition have on the pricing, 

liquidity, and availability of loans that 

might fall outside the broader QRM 

boundary? 

148. Would the lower QRM standards 

under the alternative approach be 

consistent with the requirement that 

QRMs be fully exempted from section 

15G’s risk retention requirements? 

149. How could this type of 

alternative approach be designed to 

limit the likelihood that loans with 

significant credit risk are included in 

the pool and thus not subject to risk 

retention? 

V. Reduced Risk Retention 

Requirements for ABS Backed by 

Qualifying Commercial Real Estate, 

Commercial or Automobile Loans 

Under Section 15G, the regulations 

issued by the Agencies must include 

underwriting standards for residential 

mortgages, commercial real estate (CRE) 

loans, commercial loans, and 

automobile loans, as well as any other 

asset class that the Federal banking 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24130 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

165See 15 U.S.C. 78o–11(c)(2)(A). 

166See id. at sec. 78o–11(c)(2)(B). 

167See id. at sec. 78o–11(c)(1)(B)(ii). 

agencies and the Commission deem 

appropriate.165 These underwriting 

standards, which are to be established 

by the Federal banking agencies, must 

specify terms, conditions, and 

characteristics of a loan within such 

asset class that indicate low credit risk 

with respect to the loan.166 Section 15G 

provides that the Agencies must allow 

a securitizer to retain less than five 

percent of the credit risk of loans within 

an asset class that meet the 

underwriting standards set jointly by 

the Federal banking agencies if such 

loans are securitized through the 

issuance of an ABS.167

The following discussion addresses 

the underwriting standards established 

by the Federal banking agencies for CRE 

loans, commercial loans, and 

automobile loans. 

A. Asset Classes 

As directed by section 15G, §l.18 to 

§ l.20 of the proposed rules include 

underwriting standards for CRE loans, 

commercial loans, and automobile loans 

that would allow ABS backed 

exclusively by loans that meet these 

underwriting standards to qualify for a 

less than five percent risk retention 

requirement. As discussed in further 

detail in Part IV of this Supplementary 

Information, the proposed rules provide 

a complete exemption from the risk 

retention requirements for securitization 

transactions that are collateralized 

solely by residential mortgages that 

qualify as QRMs. Accordingly, the 

proposed rules do establish separate 

rules for securitizations of residential 

mortgages that have terms, conditions 

and characteristics that indicate a low 

credit risk as required by section 

15G(c)(2)(B). The Agencies do not 

propose to establish additional 

underwriting standards for residential 

mortgages that would be different from 

those set forth in the QRM standards. In 

determining not to propose additional 

standards, the Agencies considered, 

among other things, whether requiring 

risk retention greater than zero percent 

but less than five percent would provide 

an adequate incentive to sponsors and 

originators to underwrite assets meeting 

those standards. 

Although the Agencies recognize that 

securitization markets include 

securitizations collateralized by various 

subcategories of assets with unique 

characteristics, the Agencies believe that 

the asset classes specified in section 

15G (e.g., residential mortgages, 

commercial mortgages, commercial 

loans and automobile loans) capture a 

predominance of all ABS issuances by 

dollar volume where the underlying 

pool is comprised of relatively 

homogeneous assets. Moreover, general 

information for ABS issuances 

collateralized exclusively by CRE, 

commercial, and automobile loans is 

widely available and, due to the 

homogeneity of the underlying pool, 

lends itself to the establishment of 

uniform underwriting standards 

establishing low credit risk for all of the 

assets within the pool. These 

characteristics also should facilitate the 

ability of investors and supervisors to 

monitor a sponsor’s compliance with 

the proposed standards and disclosure 

requirements in a timely and 

comprehensive manner. 

In contrast, many of the other types of 

ABS issuances are collateralized by 

assets that exhibit significant 

heterogeneity, or assets that by their 

nature exhibit relatively high credit risk. 

Such factors make it difficult to develop 

underwriting standards establishing low 

credit risk that can be, as a practical 

matter, applicable to an entire class of 

underlying assets in the manner 

described under section 15G. 

Accordingly, for purposes of the 

proposed rules, the Federal banking 

agencies and the Commission do not 

propose to establish asset classes in 

addition to those set forth in section 

15G. 

Request for Comment 

150(a). Should underwriting 

standards be developed for residential 

mortgage loans that are different from 

those proposed for the QRM definition 

and under which a sponsor would be 

required to retain more than zero but 

less than five percent of the credit risk? 

150(b). If so, what should those 

underwriting standards be and how 

should they differ from those 

established under the QRM provisions? 

150(c). For example, should such 

underwriting standards allow for a loanto-value ratio of up to 90 percent for 

purchase mortgage loans if there is 

mortgage insurance that would provide 

investors similar amounts of loss 

protection upon default as would be 

provided by a mortgage with a loan-tovalue ratio of 80 percent? 

150(d). If additional underwriting 

standards were established for 

residential mortgages, what amount of 

risk retention less than five percent 

should be required for loans meeting 

such standards, and should it be 

required to be held in a particular form? 

151. If any new underwriting 

standards for residential mortgages were 

to be established and permit the 

inclusion of mortgage guarantee 

insurance or other types of insurance or 

credit enhancements, what financial 

eligibility standards should be 

incorporated for mortgage insurance or 

financial product providers? 

152. Should additional asset classes 

beyond those specified in section 15G 

be established and, if so, how should 

the associated underwriting standards 

for such additional asset classes be 

defined? Commenters are encouraged to 

provide supporting data regarding the 

prevalence of each asset class in the 

ABS market, as well as loan-level 

performance data that provides 

information on the characteristics, 

terms, and conditions of the underlying 

loans and that may be useful in 

developing standards that identify loans 

within such asset class that have low 

credit risk. 

B. ABS Collateralized Exclusively by 

Qualifying CRE Loans, Commercial 

Loans, or Auto Loans 

Section 15G(c)(1)(B)(ii) provides that 

a sponsor of an ABS issuance 

collateralized exclusively by loans that 

meet the underwriting standards 

prescribed by the Federal banking 

agencies under section 15G(c)(2)(B) 

shall be required to retain less than five 

percent of the credit risk of the 

securitized loans. The Agencies are 

proposing a zero percent risk retention 

requirement (that is, the sponsor would 

not be required to retain any portion of 

the credit risk) for ABS issuances 

collateralized exclusively by loans from 

one of the asset classes specified in the 

proposed rules, and which meet the 

proposed underwriting standards. In 

proposing a zero risk retention 

requirement for ABS backed by 

qualifying loans within these asset 

classes, the Agencies considered several 

factors. As discussed below, the 

underwriting standards the Agencies 

propose are, as is appropriate for a zero 

percent risk retention requirement, very 

conservative. In addition, the Agencies 

were concerned that establishing a risk 

retention requirement between zero and 

five percent for qualifying assets within 

these asset classes may not sufficiently 

incent securitizers to allocate the 

resources necessary to ensure that the 

collateral backing an ABS issuance 

satisfies the proposed underwriting 

standards, as there may be significant 

compliance costs to structure and 

maintain the retention piece of a 

securitization structure (irrespective of 

how it is calibrated) and provide 

required disclosures to investors. 

Sections l.18 to l.20 of the 

proposed rules establish underwriting 

standards for CRE loans, commercial 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24131 

168Total liabilities ratio equals 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. 

169The leverage ratio equals the borrower’s total 

debt divided by the borrower’s annual income 

before expenses for interest, tax, depreciation, and 

amortization (EBITDA), as determined in 

accordance with GAAP. 170The DSC ratio equals the borrower’s EBITDA, 

as of the most recently completed fiscal year 

divided by the sum of the borrower’s annual 

payments for principal and interest on any debt 

obligation. 

loans, and automobile loans that are 

designed to ensure that loans in these 

asset classes, which qualify for a zero 

risk retention requirement, are of very 

low credit risk. The proposed 

underwriting standards are based on the 

Federal banking agencies’ expertise and 

supervisory experience with respect to 

the credit risk of the loans in each of the 

prescribed asset classes. Commercial, 

CRE and automobile loans that meet the 

conservative underwriting standards 

included in the proposed rules are 

referred to as ‘‘qualifying’’ commercial, 

CRE and automobile loans. 

The Federal banking agencies have 

sought to make the standards for 

qualifying commercial loans, CRE loans 

and automobile loans, transparent to, 

and verifiable by, originators, 

securitizers, investors and supervisors. 

To facilitate compliance with the rule, 

as well as the supervision and 

enforcement of the rule, the proposed 

standards are generally prescriptive, 

rather than principle-based. 

The Agencies recognize that many 

prudently underwritten CRE, 

commercial and automobile loans will 

not meet the underwriting standards set 

forth in § l.18 to § l.20 of the 

proposed rules. For example, the 

Agencies note that the proposed 

standards are significantly more prudent 

and conservative than those required to 

attain a ‘‘pass’’ credit under the Federal 

banking agencies’ supervisory practices. 

Sponsors of ABS backed by loans that 

do not meet the underwriting standards 

will be required to retain some of the 

credit risk of the securitized loans in 

accordance with the proposed 

regulation (unless another exemption is 

available). However, as noted 

previously, the proposed rules provide 

sponsors with several options for 

complying with the risk retention 

requirements of section 15G so as to 

reduce the potential for these 

requirements to disrupt securitization 

markets or materially affect the flow or 

pricing of credit to borrowers and 

businesses. Moreover, the national pool 

of commercial loans, CRE loans and 

automobile loans that do not meet the 

standards set forth in § l.18 to § l.20 

of the proposed rules should be 

sufficiently large, and include enough 

prudently underwritten loans, so that 

ABS backed by such loans will be 

routinely issued and purchased by a 

wide variety of investors. As a result, 

the market for such securities should be 

relatively liquid. 

Request for Comment 

153. The Agencies request comment 

on the appropriateness of a total 

exemption for sponsors of ABS 

issuances collateralized exclusively by 

qualifying CRE, commercial, or 

automobile loans that meet the 

underwriting standards set forth in 

§ l.18 to § l.20 of the proposed rules. 

Commenters who support a partial 

exemption are encouraged to provide 

information regarding the methodology 

the Agencies should use to calibrate the 

retention requirement, in a manner that 

considers the relative risk of the 

securitization transaction, both within 

and across the proposed asset classes. 

C. Qualifying Commercial Loans 

For an ABS issuance collateralized 

exclusively by commercial loans to 

qualify for a zero percent risk retention 

requirement, the commercial loans must 

satisfy the underwriting standards set 

forth in § l.18 of the proposed rules. 

The proposed rules define a commercial 

loan as any secured or unsecured loan 

to a company or an individual for 

business purposes, other than a loan to 

purchase or refinance a one-to-four 

family residential property, a loan for 

the purpose of financing agricultural 

production, or a loan for which the 

primary source (that is, 50 percent or 

more) of repayment is expected to be 

derived from rents collected from 

persons or entities that are not affiliates 

of the borrower. Commercial loans 

encompass a wide variety of credit types 

and terms. However, these loans 

generally are similar in that the primary 

source of repayment is revenue from the 

business operations of the borrower. 

The standards for a qualifying 

commercial loan use measures that are 

consistent with, but more prudent and 

conservative than, industry standards 

for evaluating the financial condition 

and repayment capacity of a borrower. 

1. Ability To Repay 

The historical performance of a 

borrower with respect to its outstanding 

loan obligations is, generally, a useful 

measure for evaluating whether the 

borrower will likely satisfy new debt 

obligations. However, even where a 

borrower has a consistent and 

documented record of satisfactory 

performance on prior debt obligations, 

the originator also must ensure that the 

borrower’s financial condition has not 

changed in a way that could adversely 

affect its capacity to satisfy new loan 

obligations. Accordingly, under §l.18 

of the proposed rules, the originator of 

a qualifying commercial loan must 

verify and document the financial 

condition of the borrower as of the end 

of the borrower’s two most recently 

completed fiscal years. In addition, the 

originator must conduct an analysis of 

the borrower’s ability to service its 

overall debt obligations during the next 

two years, based on reasonable 

projections. A commercial loan would 

meet the standards in the proposed 

rules only if the originator determines 

that, during the borrower’s two most 

recently completed fiscal years and the 

two-year period after the closing of the 

commercial loan, the borrower had, or 

is expected to have: (1) A total liabilities 

ratio 168 of 50 percent or less; (2) a 

leverage ratio 169 of 3.0 or less; and (3) 

a debt service coverage (DSC) ratio 170 of 

1.5 or greater. 

Under the proposed rules, the loan 

payments under the commercial loan 

must be determined based on straightline amortization of principal and 

interest that fully amortize the debt over 

a term that does not exceed five years 

from the closing date for the loan. In 

addition, the loan documentation must 

require payments no less frequently 

than quarterly over a term that does not 

exceed five years. The Federal banking 

agencies believe these proposed 

methods for assessing a borrower’s 

financial condition and ability to repay 

are consistent with industry standards 

for evaluating the financial condition 

and repayment capacity of a borrower. 

The proposal does not require that a 

commercial loan be secured by 

collateral in order to be a qualifying 

commercial loan. However, where the 

loan is made on a secured basis, the 

proposed rules include several 

conditions designed to ensure that the 

collateral is maintained and available to 

be used to satisfy the borrower’s 

obligations under the loan, if necessary. 

For example, if the commercial loan is 

originated on a secured basis, the 

originator must obtain a first-lien 

security interest on the pledged 

property and include covenants in the 

loan agreement that require the 

borrower to maintain the condition of 

the collateral and permit the originator 

to inspect the collateral and the books 

and records of the borrower. The loan 

documentation for the commercial loan 

also must include covenants that require 

the borrower to: (a) Pay all applicable 

taxes, fees, charges and claims where 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24132 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

171Section l.16 of the proposed rules defines 

NOI as income generated by a CRE property, net of 

all expenses that have been deducted for federal 

income tax purposes (except depreciation, debt 

service expenses, and federal and state income 

taxes) and any unusual or nonrecurring income 

items. 

172Under §l.16 of the proposed rules (definition 

of ‘‘Debt service coverage (DSC) ratio’’), the DSC 

ratio for a CRE loan equals the CRE property’s 

annual NOI less the annual replacement reserve of 

the CRE property at the time of origination divided 

by the sum of the borrower’s annual payments for 

principal and interest on any debt obligation. 

173For purposes of the proposed rules, a triple net 

lease means a lease pursuant to which the lessee is 

required to pay rent as well as taxes, insurance, and 

maintenance expenses associated with the property. 

nonpayment could give rise to a lien 

against the collateral; (b) take any action 

necessary to perfect or defend the 

security interest (or priority of the 

security interest) of the originator (or 

any subsequent holder of the loan) in 

the collateral against claims adverse to 

the lender’s interest; and (c) maintain 

insurance that protects against loss on 

the collateral 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. 

2. Risk Management and Monitoring 

Requirements 

To mitigate default risk during 

periods of economic stress or when the 

financial condition of the borrower 

otherwise deteriorates, the proposed 

rules require the loan documentation to 

include covenants that restrict the 

borrower’s ability to incur additional 

debt or transfer or pledge its assets. 

Specifically, the proposed rules require 

the loan documentation to provide 

certain covenants, including a covenant 

to provide to the originator (or any 

subsequent holder) and the servicer 

financial information and supporting 

schedules on an ongoing basis, but not 

less frequently than quarterly. The 

covenants must also prohibit the 

borrower from retaining or entering into 

a debt arrangement that permits 

payments-in-kind, and place limitations 

on the transfer of any of the borrower’s 

assets, on the borrower’s ability to create 

other security interests with respect to 

any of its assets, and on any change to 

the name, location, or organizational 

structure of the borrower (or any other 

party that pledges collateral for the 

loan). The loan documentation must 

also include covenants designed to 

protect the value of any collateral 

pledged to secure the loan that require 

the borrower (and any other party that 

pledges collateral for the loan) to: (a) 

Maintain insurance protecting against 

loss on any collateral at least up to the 

amount of the loan and names the 

originator (or any subsequent holder) as 

an additional insured, loss payee, or 

similar beneficiary; (b) pay any taxes, 

charges, claims and fees where 

nonpayment could give rise to a lien 

against any collateral securing the loan; 

(c) take any action necessary to perfect 

or defend the security interest of the 

originator or any subsequent holder of 

the loan in the collateral for the 

commercial loan or the priority thereof, 

and to defend the 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 the 

collateral and the books and records of 

the borrower; and (e) maintain the 

physical condition of any collateral for 

the loan. 

Request for Comment 

154(a). Are the proposed standards 

appropriate for a qualifying commercial 

loan? 154(b) Are these standards 

sufficient and appropriate to ensure that 

qualifying commercial loans are of very 

low credit risk? 

155. Are the metrics to measure a 

borrower’s financial capacity, and the 

specified parameter for each metric, an 

appropriate standard? 

D. Qualifying CRE Loans 

Section l.19 of the proposed rules 

provides the underwriting standards for 

qualifying CRE loans. Such standards 

focus predominately on the following 

criteria: The borrower’s ability to repay 

the loan; the value of, and the 

originator’s security interest in, the 

collateral; the LTV ratio; and whether 

the loan documentation includes the 

appropriate covenants to protect the 

collateral. 

For purposes of the proposed rules, a 

CRE loan is defined as a loan secured 

by a property with five or more singlefamily units, or by nonfarm nonresidential real property, the primary 

source (50 percent or more) of 

repayment for which is expected to be 

derived from: (a) The proceeds of the 

sale, refinancing, or permanent 

financing of the property; or (b) rental 

income associated with the property 

other than rental income that is derived 

from any affiliate of the borrower. 

However, under the proposal, a CRE 

loan does not include a land 

development and construction loan 

(including one-to-four family residential 

or commercial construction loans), 

loans on raw or unimproved land, a 

loan to a real estate investment trust 

(REIT), or an unsecured loan. 

1. Ability To Repay 

The Federal banking agencies believe 

that prudent underwriting standards 

should require the originator to verify 

and document the capacity of the 

borrower, or income from the 

underlying collateral, to repay the loan. 

For qualifying CRE loans, the proposed 

underwriting standards focus on both 

the sufficiency of the CRE property’s net 

operating income (NOI) 171 less 

replacement reserves to support the 

payment of principal and interest over 

the full term of the CRE loan, as well as 

the financial condition of the borrower 

(independent of the CRE property’s NOI 

less replacement reserves) to repay other 

outstanding debt obligations. 

Specifically, the proposed rules 

generally require the borrower to have a 

DSC ratio 172 of 1.7 or greater. The 

proposed rules, however, would allow a 

CRE loan on properties with a 

demonstrated history of stable NOI to 

have a slightly lower (1.5) DSC ratio. To 

qualify for the lower DSC ratio 

requirement, the CRE loan must be 

secured by either (1) a residential 

property (other than a hotel, motel, inn, 

hospital, nursing home, or other similar 

facility where dwellings are not leased 

to residents) that consists of five or more 

dwelling units primarily for residential 

use, and where at least 75 percent of the 

CRE property’s NOI is derived from 

residential rents and tenant amenities 

(such as a swimming pool, gym 

membership, or parking fees); or (2) 

commercial nonfarm real property 

(other than a multi-family property or a 

hotel, inn or similar property) that is 

occupied by, and derives at least 80 

percent of its aggregate gross revenue 

from, one or more ‘‘qualified tenants.’’ 

Under the proposed rules, a qualified 

tenant is defined as a tenant that (1) is 

subject to a triple net lease 173 that is 

current and performing with respect to 

the CRE property, or (2) was subject to 

a triple net lease that has expired, 

currently is leasing the property on a 

month-to-month basis, has occupied the 

property for at least three years prior to 

closing, and is current and performing 

with respect to all obligations associated 

with the CRE property. All outstanding 

triple net leases must have a remaining 

maturity of at least six months, unless 

the tenant leases the property on a 

month-to-month basis as described 

above. 

Under the proposed rules, the 

originator of a qualifying CRE loan must 

also determine whether the borrower 

has the ability to service its other 

outstanding debt obligations, net of any 

income generated from the CRE (based 

on the NOI). This requirement is 

intended to ensure that the CRE remains 

a reliable source of repayment and 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24133 

174The 10-year interest rate swap rate is as 

reported on the previous day’s Federal Reserve 

Statistical Release H.15: Selected Interest Rates. 

security for the CRE loan, and not other 

debts of the borrower, over the full loan 

term. Accordingly, under the proposed 

rules, the originator must conduct an 

analysis of the borrower’s ability, and 

determine that the borrower has the 

ability, to service all outstanding debt 

obligations over the two years following 

the origination date for the loan, based 

on reasonable projections and including 

the new debt obligation. A borrower’s 

historical performance in satisfying debt 

obligations is often an indicator of 

whether the borrower will satisfy a new 

debt obligation. Accordingly, as part of 

this analysis, the originator also must 

document and verify that the borrower 

has satisfied all debt obligations over a 

look-back period of at least two years. 

The proposed rules generally require 

that a qualifying CRE loan have a fixed 

stated interest rate to reduce the 

potential for the borrower to experience 

payment shock. However, the proposed 

rules allow the interest rate to be 

adjustable if the borrower obtains, prior 

to or concurrently with the origination 

date for the CRE loan, a derivative 

product that effectively results in the 

borrower paying a fixed interest rate on 

the CRE loan. Commercial borrowers 

often purchase a derivative (such as an 

interest rate swap) that effectively 

‘‘convert’’ an adjustable rate into a fixed 

rate. In addition, the proposed standards 

for qualifying CRE loans would prohibit 

terms that (1) permit the borrower to 

defer principal or interest payments; (2) 

allow the originator to establish an 

interest reserve to fund all or part of a 

payment on the loan; or, (3) provide a 

maturity date that is earlier than ten 

years following the closing date for the 

loan. Further, the loan payment amount 

must be based on straight-line 

amortization of the debt over the term 

of the loan not to exceed twenty (20) 

years, with payments made no less 

frequently than monthly over a term of 

at least ten (10) years. 

2. Loan-to-Value Requirement 

The Agencies believe that prudent 

underwriting standards should limit the 

amount an originator may advance 

relative to the market value of the CRE 

property. Therefore, the Federal banking 

agencies are proposing to require a 

combined loan-to-value (CLTV) ratio of 

less than or equal to 65 percent for 

qualifying CRE loans. However, the 

recent crisis has demonstrated that the 

use of very low capitalization rates 

generally results in significantly higher 

market values for some CRE properties. 

Where the capitalization rate used in the 

appraisal is less than the 10-year 

interest rate swap rate 174 plus 300 basis 

points, the maximum CLTV ratio 

requirement will be 60 percent to 

mitigate the effect of an artificially low 

capitalization rate. 

3. Valuation of the Collateral 

Because the credit risk of a CRE loan 

is closely linked with the commercial 

real estate collateralizing the loan, the 

proposed rules include several 

conditions relating to the collateral. For 

example, under § l.19(b) of the 

proposed rules, the originator of a 

qualifying CRE loan must determine 

whether the purchase price for the CRE 

property that secures the loan reflects 

the current market value of the property, 

so as to ensure that the collateral is 

sufficient to recover any unpaid 

principal in the event of default, and 

that the borrower has sufficient equity 

in the property to incent continued 

performance of all loan obligations 

during an economic downturn or when 

the CRE property’s NOI may not be 

sufficient to cover loan payments. To 

determine the value of the CRE 

property, the proposed rules require the 

originator to obtain an appraisal 

prepared not more than six months 

before the origination date for the loan, 

in accordance with the Uniform 

Standards of Professional Appraisal 

Practice and the appraisal requirements 

of the Federal banking agencies for the 

CRE property securing the loan. The 

appraisal report must provide an ‘‘as is’’ 

opinion of the current market value of 

the CRE property, which includes an 

income approach that uses a discounted 

cash flow analysis based on the CRE 

property’s actual NOI. These 

requirements are intended to help 

ensure that the appraisal is prepared by 

an independent third party with the 

experience, competence, and knowledge 

necessary to provide an accurate and 

objective valuation based on the CRE 

property’s actual physical condition. 

Environmental hazards, such as 

ground water contamination and the 

presence of lead or other harmful 

chemicals or substances, may 

potentially jeopardize the value of CRE 

property as well as the borrower’s 

ability to repay the loan. Accordingly, 

under the proposed rules, the originator 

also must conduct an environmental 

risk assessment of the CRE property 

securing a qualifying CRE loan and, 

based on this assessment, take 

appropriate measures to mitigate any 

risk of loss to the value of the CRE 

property. Appropriate measures may 

include a reduction in the loan amount 

sufficient to reflect potential losses; 

however, where the assessment reveals 

significant environmental hazards, 

originators are encouraged to reconsider 

the primary loan decision. The 

originator can have a qualified third 

party perform the assessment, but 

remains responsible for ensuring that 

appropriate measures are taken to 

mitigate any risk of loss due to 

environmental risks. 

4. Risk Management and Monitoring 

Requirements 

Under §l.19(b) of the proposed 

rules, the CRE loan documentation must 

provide certain covenants that are 

generally designed to facilitate the 

ability of the originator to monitor and 

manage credit risk over the full term of 

the loan. In developing the proposed 

covenants, the Federal banking agencies 

reviewed the supporting loan 

documentation for several recent ABS 

issuances collateralized by CRE loans. 

The proposed covenants are generally 

consistent with those provided in such 

loan documentation and, therefore, 

should reflect current industry practice 

and impose minimal compliance 

burden. 

As with the covenants required for 

commercial loans (as discussed in the 

previous section), the covenants for CRE 

loans require certain information be 

provided to the originator (or any 

subsequent holder) and the servicer 

financial on an ongoing basis. 

Additionally, with respect to CRE loans 

in particular, such information must 

include information on existing, 

maturing, and new leasing or rent-roll 

activity, as appropriate for the CRE 

property. This should assist the 

originator in monitoring volatility in the 

repayment capacity of the borrower, 

with respect to the CRE property’s NOI 

and the borrower’s financial condition. 

The loan documentation for a 

qualifying CRE loan also must include 

covenants restricting the ability of the 

borrower to create additional security 

interests with respect to the CRE 

property and covenants designed to 

help maintain the value of, and protect 

the originator’s (or any subsequent 

holder’s) security interest in, the 

collateral. These covenants are 

substantially the same as the covenants 

required for commercial loans (as 

discussed above). Additionally, a 

covenant must be included that requires 

the borrower to comply with all legal or 

contractual obligations applicable to the 

collateral. Finally, the loan 

documentation must include a covenant 

that prohibits the borrower from 

pledging the CRE property as security 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24134 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

175Under the proposed rules, a new vehicle is 

one that is not a used vehicle and has not been 

previously sold to an end user. A used vehicle is 

any vehicle driven more than the limited use 

necessary in transporting or road testing the vehicle 

prior to the initial sale of the vehicle and does not 

include any vehicle sold only for scrap or parts 

(title documents surrendered to the State and a 

salvage certificate issued). Salvage title is a form of 

vehicle title branding by an insurance company 

paying a claim on the vehicle, where the vehicle 

title notes that the vehicle has been severely 

damaged and/or deemed a total loss and 

uneconomical to repair. 

176A new vehicle is one that is not a used vehicle 

and has not been previously sold to an end user. 

177A used vehicle is any vehicle driven more 

than the limited use necessary in transporting or 

road testing the vehicle prior to the initial sale of 

the vehicle and does not include any vehicle sold 

only for scrap or parts (title documents surrendered 

to the State and a salvage certificate issued). 

for another loan, even where doing so 

results in the creation of a subordinate 

lien. The Agencies note, however, that 

the proposed rules provide an exception 

for loans that finance the purchase of 

machinery and equipment that is 

pledged as additional collateral for the 

CRE loan. This restriction is intended to 

ensure that the CRE property remains a 

reliable source of repayment and 

security for the CRE loan and the 

borrower does not become 

overleveraged, which could threaten the 

borrower’s ability to repay the CRE loan. 

The proposed covenants must be 

applicable to the borrower as well as 

any other party who provides collateral 

for the loan. 

Request for Comment 

156(a). Are the proposed requirements 

for a qualifying CRE loan appropriate? 

156(b). Are these standards sufficient 

to ensure that qualifying CRE loans have 

very low credit risk? 

157. Are the DSC metrics employed 

for measuring a borrower’s financial 

capacity, and the specified parameter 

for each type of CRE property, an 

appropriate standard? 

158. The Agencies are proposing the 

same DSC ratio (1.5) for qualifying 

leased CRE loans and qualifying 

multifamily CRE loans, where the DSC 

analysis is based on at least two years 

of actual performance. The Agencies 

request comment whether the risk of 

default for qualifying non-Enterprise 

multifamily CRE loans is demonstrably 

lower as to justify a lower DSC ratio 

(such as 1.3). For example, the Agencies 

acknowledge that several highlypublicized defaults on large multifamily 

CRE loans had a much weaker structure 

(e.g., pro-forma underwritten DSC ratio 

or DSC ratio lower than 1.2) than what 

is contained in the proposed rules. 

Commenters should provide relevant 

criteria to be applied to qualify for a 

reduced DSC ratio and multifamily CRE 

loan performance data supporting the 

conclusion that multifamily loans 

meeting such criteria, as a class, have a 

correspondingly reduced risk of default 

to support a reduced DSC ratio for such 

loans. 

D. Qualifying Automobile Loans 

§ l.20 of the proposed rules provides 

underwriting standards for qualifying 

automobile loans. Although automobile 

loans involve secured financing, the 

collateral represents a highly 

depreciable asset. Accordingly, in 

developing the proposed underwriting 

standards for qualifying automobile 

loans, the Federal banking agencies 

sought to establish conservative 

requirements that are consistent with 

underwriting standards commonly used 

by the industry for unsecured 

installment credits. The proposed rules 

define an automobile loan as a loan to 

an individual to finance the purchase of, 

and secured by a first lien on, a 

passenger car or other passenger 

vehicle, such as a minivan, van, sportutility vehicle, pickup truck, or similar 

light truck for personal, family, or 

household use. Under the proposed 

rules, an automobile loan would not 

include: (a) Any loan to finance fleet 

sales; (b) a personal cash loan secured 

by a previously purchased automobile; 

(c) a loan to finance the purchase of a 

commercial vehicle or farm equipment 

that is not used for personal, family, or 

household purposes; (d) any lease 

financing; or (e) a loan to finance the 

purchase of a vehicle with a salvage 

title.175 A qualifying automobile loan 

may be for a new 176 or used vehicle.177

1. Ability To Repay 

A borrower’s ability to repay an 

automobile loan primarily hinges on the 

amount of the borrower’s monthly total 

debt obligations in relation to the 

borrower’s monthly income. The 

Agencies have sought to establish 

standards for the verification and 

documentation of a borrower’s ability to 

repay an automobile loan that will help 

ensure that the loan is of very low credit 

risk. At the same time, the proposed 

standards seek to reflect the nature of 

automobile loans and allow originators 

to make qualifying automobile loans 

without undue burden or disruption to 

existing methods for making automobile 

loans. For example, originators of 

automobile loans typically do not verify 

all of a borrower’s income and debt 

obligations prior to making an 

automobile loan and requiring an 

originator to do so could significantly 

limit any incentive an originator might 

otherwise have to underwrite loans in 

accordance with the standards for a 

qualifying automobile loan. The Federal 

banking agencies have sought to balance 

these considerations in developing the 

proposed underwriting standards. 

Under the proposed rules, the 

borrower under a qualifying automobile 

loan must have a monthly DTI ratio of 

less than or equal to 36 percent, 

consistent with the proposed DTI ratio 

requirement for QRM loans. The 

originator must make this 

determination, and document the 

underlying analysis, upon origination of 

the loan. 

Originators typically consider a 

borrower’s income and debts in the 

credit approval process; however, the 

income history requirements of and the 

type of information considered by the 

originator vary widely across the 

industry. The Agencies believe that the 

use of consistent underwriting 

standards, to the extent practical and 

consistent with industry practice, 

should reduce implementation burden 

and ensure that all ABS issuances that 

qualify for an exemption from the risk 

retention requirement of the proposed 

rules are collateralized by high-quality, 

low credit risk loans. Based on the 

Federal banking agencies’ supervisory 

experience in overseeing automobile 

lending, and in an effort to address 

these inconsistencies, the Federal 

banking agencies propose to require that 

originators verify and document the 

borrower’s income using payroll stubs, 

tax returns, profit and loss statements, 

or other similar documentation, and that 

originators verify that all outstanding 

debts reported in a borrower’s credit 

report are incorporated into the 

calculation of the borrower’s ratio of 

total debt to monthly income (DTI ratio). 

For the borrower’s monthly debt 

obligations, the Agencies propose to 

require the originator to obtain 

information from the borrower about all 

monthly housing payments (rent- or 

mortgage-related, including any 

property taxes, insurance, and home 

owners association fees), plus any of the 

following that are dependent on the 

borrower’s income for payment: (1) 

Monthly payments on all debt and lease 

obligations (such as installment loans or 

credit card loans), including the 

monthly amount due on the automobile 

loan; (2) estimated monthly amortizing 

payments for any term debt, debts with 

other than monthly payments, and debts 

not in repayment (for example, deferred 

student loans, interest-only loans); and 

(3) any required monthly alimony, child 

support, or court-ordered payments. 

These elements are generally consistent 

many of the elements taken into account 

for the DTI requirement for the QRM 

standards. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24135 

178Under §l.16 of the proposed rules, a tradein allowance is 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, except that such amount 

shall not exceed the trade-in value of the used 

vehicle, as determined by a nationally recognized 

automobile pricing agency and based on the 

manufacturer, year, model, features, and condition 

of the vehicle. 

2. Loan Terms 

The Federal banking agencies have 

found that, in supervising credit risk for 

such highly depreciable assets as 

automobiles, a fixed payment amount 

helps ensure that a borrower will have 

the ability to repay a loan over the life 

of the credit. Therefore, the proposed 

rules require qualifying automobile 

loans to provide for a fixed interest rate. 

In addition, under the proposal, the 

monthly payment must be calculated 

using straight-line amortization for the 

term of the loan, not to exceed five 

years, with the first payment due within 

45 days of the closing date. The 

proposed rules also prohibit loan terms 

that permit a borrower to defer 

repayment of principal or interest. 

If the loan is for a new vehicle, the 

proposal would require the loan 

agreement provide a maturity date for 

the loan that does not exceed 5 years 

from the date of closing. If the loan is 

for a used vehicle, the loan agreement 

must provide that the term of the loan, 

plus the difference between the current 

model year and the vehicle’s model 

year, cannot exceed 5 years. In addition, 

under the proposed rules, the 

transaction documents must require that 

the originator, subsequent holder of the 

loan, or any agent of the originator or 

subsequent holder maintain physical 

possession of the vehicle title until the 

loan is repaid in full and the borrower 

has satisfied all obligations under the 

loan agreement. 

3. Reviewing Credit History 

The supervisory experience of the 

Federal banking agencies has shown 

that the historical payment performance 

of a borrower often is indicative of the 

borrower’s ability to manage debt and 

willingness to repay a new loan. 

Accordingly, the proposed rules require 

the originator to verify and document, 

within 30 days of the origination date 

for a qualifying automobile loan, that 

the borrower (1) is not currently 30 days 

or more past due, in whole or in part, 

on any debt obligation and (2) has not 

been 60 days or more past due on, in 

whole or in part, on any debt obligation 

within the past 24 months. 

Additionally, the originator must verify 

and document that, within the previous 

36 months, the borrower was not a 

debtor in any bankruptcy proceeding, 

subject to a Federal or State judgment 

for collection of any unpaid debt or 

foreclosure, repossession, deed in lieu 

of foreclosure, or short sale, and has not 

had any personal property repossessed. 

These credit history standards are the 

same as those established for QRMs. 

Similar to the safe harbor proposed in 

§ l.15 of the proposed rules for the 

QRM requirements, the Federal banking 

agencies are proposing a safe harbor that 

would allow an originator to satisfy the 

documentation and verification 

requirements regarding a borrower’s 

credit history. Under the proposal, an 

originator of a qualifying automobile 

loan will be deemed to have complied 

with the verification and documentation 

requirements related to the borrower’s 

credit history (as described above) if, no 

more than 90 days before the 

automobile loan closing, the originator 

(1) obtains a credit report regarding the 

borrower from at least two consumer 

reporting agencies that compile and 

maintain files on consumers on a 

nationwide basis (within the meaning of 

15 U.S.C. 1681a(p)); and (2) determines, 

based on the information in such credit 

reports, that the borrower meets the 

credit history requirements related 

described above. This safe harbor would 

not be available if the originator obtains 

a subsequent credit report before the 

closing of the automobile loan 

transaction that indicates that the 

borrower does not meet the credit 

history requirements. 

4. Loan-to-Value 

Limitations relative to the amount 

financed are critical for automobile 

lending because the collateral is subject 

to such rapid depreciation. Therefore, 

under the proposed rules, an originator 

must document that, at the time of the 

closing of the automobile loan, the 

borrower tendered a minimum down 

payment from the borrower’s personal 

funds and trade-in allowance,178 if any, 

that is sufficient to pay (1) the full cost 

of vehicle title, tax, and registration fees, 

as well as any dealer-imposed fees, and 

(2) 20 percent of the purchase price of 

the automobile. Under §l.16 of the 

proposed rules, the purchase price of a 

new automobile is the net amount the 

consumer paid for the vehicle after any 

manufacturer, dealer, or financing 

incentive payments or cash rebates are 

applied. However, for a used 

automobile, the purchase price is the 

lesser of either the actual purchase price 

or the value of the automobile, as 

determined by a nationally recognized 

automobile pricing agency (for example, 

N.A.D.A. or Kelley Blue Book) based on 

the manufacturer, year, model, features, 

and condition of the vehicle. 

An illustration of how to determine 

the minimum down payment is 

provided below. 

DOWN PAYMENT DETERMINATION

$30,000 ....... Invoice Purchase Price. 

$2,000 ......... Manufacturer Cash Rebate. 

$1,000 ......... Dealer Incentive. 

$27,000 ....... Purchase Price. 

$5,400 ......... 20% of Purchase Price. 

$2,700 ......... Tax, Title, and License. 

$8,100 ......... Down Payment Requirement. 

$18,900 ....... Maximum Loan Amount. 

Request for Comment 

159(a). Are the proposed requirements 

for a qualifying automobile loan 

appropriate? 

159(b). Are these standards sufficient 

and appropriate to ensure that 

qualifying automobile loans have very 

low credit risk? 

160. Are the DTI ratios employed for 

measuring a borrower’s financial 

capacity an appropriate standard? 

E. Buy-Back Requirements for ABS 

Issuances Collateralized Exclusively by 

Qualifying Commercial, CRE or 

Automobile Loans 

Under the proposed rules, for a 

securitizer to qualify for a zero percent 

risk retention requirement under 

§ l.18, §l.19 or § l.20, as applicable, 

the depositor must have (and certify that 

it has) effective internal supervisory 

controls with respect to its process for 

ensuring that all assets that collateralize 

the ABS meet the applicable 

underwriting standards set forth in 

§ l.18, §l.19 or § l.20, as applicable, 

of the proposed rules. The Federal 

banking agencies recognize that, despite 

the use of reasonable processes and 

procedures by a depositor or sponsor, it 

is possible that one or more loans 

included in a securitization transaction 

may later be determined to have not met 

the underwriting standards set forth in 

§ l.18, §l.19 or § l.20, as applicable, 

of the proposed rules due to inadvertent 

error. For example, an originator 

conducting post-origination file reviews 

for compliance or internal audit 

purposes may find that some aspects of 

the documentation required to verify the 

borrower’s monthly income were not 

obtained. The Agencies are concerned 

that if an error that is discovered after 

closing of the securitization were to 

make the issuance ineligible for the 

proposed exemption, then sponsors and 

investors may well be less willing to 

participate in securitization transactions 

that are structured to meet the 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24136 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

179See 15 U.S.C. 78o–11(e)(1) and (2). 

180See 15 U.S.C. 78o–11(e)(3)(B). 

181See 15 U.S.C. 78o–11(c)(1)(G)(ii), (e)(3)(B). 

182See section 15 U.S.C. 78o–11(c)(1)(G) and 

(e)(3)(B) and the proposed rules at §l.21(c). At this 

time, the Federal Home Loan Banks do not, and are 

not authorized to, issue or guarantee asset-backed 

securities. Similarly, neither Fannie Mae, Freddie 

Mac, nor the Federal Home Loan Banks insure or 

guarantee individual loans, and none is authorized 

to do so. These references are included in §l.21(c) 

in order to conform the rule of construction to that 

which is required by section 15G(e)(3) of the 

Exchange Act. 

underwriting standards of §l.18, 

§ l.19 or § l.20, as applicable, of the 

proposed rules. On the other hand, if 

there is no penalty for including in a 

securitization transaction a loan that 

does not meet such underwriting 

standards, sponsors and other 

participants in the securitization may 

not have the proper incentives to ensure 

that the issuance is collateralized 

exclusively by qualifying commercial, 

CRE, or automobile loans. 

The proposal seeks to balance these 

interests by providing that a sponsor 

that has relied on an exemption from 

the retention requirement under §l.18, 

§ l.19 or § l.20, as applicable, of the 

proposed rules would not lose the 

exemption, if, after closing of the 

securitization transaction, it is 

determined that one or more of the 

loans collateralizing the ABS do not 

meet all of the applicable criteria under 

§ l.18, §l.19 or § l.20, as applicable, 

of the proposed rules provided that: 

(a) The depositor certified the 

effectiveness of its internal supervisory 

controls for ensuring all of the loans 

backing the ABS are qualified loans 

under §l.18, §l.19 or § l.20, as 

applicable, of the proposed rules; 

(b) The sponsor repurchases the 

loan(s) determined to not meet the 

underwriting standards set forth in 

§ l.18, §l.19 or § l.20, as applicable, 

of the proposed rules from the issuing 

entity at a price at least equal to the 

remaining principal balance and 

accrued interest on the loan(s) no later 

than ninety (90) days after the 

determination that the loans do not 

satisfy the underwriting standards set 

forth in § l.18, §l.19 or § l.20, as 

applicable, of the proposed rules; and 

(c) The sponsor discloses to the 

investors of the ABS any loan(s) that are 

repurchased by the sponsor, including 

the principal amount of such 

repurchased loan(s) and the cause for 

such repurchase. 

These conditions, which are identical 

to those applicable to QRMs, are 

intended to provide the sponsor with 

the opportunity to correct inadvertent 

errors by repurchasing any nonqualified loan(s) and removing such 

non-qualifying loan(s) from the ABS, 

while protecting investors. Moreover, in 

light of the buy-back requirement, 

sponsors should continue to have a 

strong economic incentive to ensure that 

all loans backing a securitization subject 

to zero risk retention under §l.18, 

§ l.19 or § l.20, as applicable, of the 

proposed rules satisfy all of the 

conditions applicable to such loans 

under §l.18, §l.19 or § l.20, as 

applicable, of the proposed rules. 

Request for Comment 

161(a). The Agencies seek comment 

on whether the sponsor should be 

required to repurchase the entire pool of 

loans collateralizing the ABS if the 

amount or percentage of the loans that 

are required to be repurchased due to 

the failure to meet the underwriting 

standards under §l.18, §l.19 or 

§ l.20, as applicable, of the proposed 

rules reaches a certain threshold. 161(b). 

If so, what threshold would be 

appropriate? 

VI. 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. In addition, 

section 15G(e)(1) permits the Federal 

banking agencies and the Commission 

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, 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.179

Consistent with these provisions, 

section l.21 of the proposed rules 

exempts certain types of ABS or 

securitization transactions from the 

credit risk retention requirements of the 

rule. Certain of these exemptions would 

appear in the rules of all Agencies, and 

others would appear only in the rules of 

certain Agencies, reflecting the different 

scope of the Agencies’ rulewriting 

authority. 

A. Exemption for Federally Insured or 

Guaranteed Residential, Multifamily, 

and Health Care Mortgage Loan Assets 

Proposed §l.21(a)(1) would 

implement section 15G(e)(3)(B) of the 

Exchange Act, which exempts from the 

risk retention requirements any 

residential, multifamily, or health care 

facility mortgage loan asset, or 

securitization based directly or 

indirectly on such an asset, that is 

insured or guaranteed by the United 

States or an agency of the United 

States.180 Section 15G expressly clarifies 

that Fannie Mae, Freddie Mac, and the 

Federal Home Loan Banks are not 

agencies of the United States,181 and the 

proposed rules include a specific 

provision making clear that the 

exemptions that apply to ABS that is 

issued, guaranteed or insured by a U.S. 

government agency or that is backed by 

loans insured or guaranteed by a U.S. 

government agency do not apply where 

the issuer, insurer or guarantor is Fannie 

Mae, Freddie Mac, or a Federal Home 

Loan Bank.182

Proposed §l.21(a)(1)(i) would 

exempt any securitization transaction 

that is collateralized solely (excluding 

cash and cash equivalents) 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. Currently, the federal 

government insures or guarantees 

residential, multifamily, and healthcare 

facility loans through a variety of 

programs. Some examples include FHA 

insurance on single family mortgage 

loans which insures the lender at 

approximately 100 percent of losses 

including advanced taxes, insurance 

and foreclosure costs. The Department 

of Veterans Administration also 

guarantees between 25 percent and 50 

percent of lender losses in the event of 

residential borrower defaults. United 

States Department of Agriculture Rural 

Development also guarantees a sliding 

amount against loss of up to 90 percent 

of the original loan amount for single 

family loans. Each of the agencies sets 

underwriting and servicing standards, 

and in the case of some multifamily 

programs underwrites the mortgage 

itself. The agencies charge a fee or 

premium for the insurance/guaranty, 

and monitor the performance of 

participating lenders and borrowers. 

Proposed §l.21(a)(1)(ii) would 

exempt 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 

(excluding cash and cash equivalents) 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24137 

183See 15 U.S.C. 78o–11(c)(1)(G). 

184To avoid confusion, the proposed rules 

provide that these assets do not include the types 

of federally insured or guaranteed residential, 

mortgage, and health care mortgage loan assets that 

are covered by the exemption in proposed 

§l.21(a). 

185See 12 U.S.C. 78o–11(e)(2). 

186See 15 U.S.C. 78o–11(e)(3)(A). 

187 15 U.S.C. 77c(a)(2). 

188See 26 U.S.C. 150(d)(2). Such bonds are those 

issued by a not-for-profit corporation established 

and operated exclusively for the purpose of 

acquiring student loans incurred under the Higher 

Education Act of 1965, and organized at the request 

of a State or a political subdivision of a State. See 

10 U.S.C. chapter 28. 

189See §§l.21(a)(3) and (4) of the proposed 

rules. 

by residential, multifamily, or health 

care facility mortgage loan assets, or 

interests in such assets. Thus, proposed 

§ l.21(a)(1)(ii) would exempt ABS the 

payment of principal and interest on 

which is guaranteed by the United 

States or an agency of the United States 

and that is collateralized by ABS that 

itself is backed by residential, 

multifamily, or health care facility 

mortgage loan assets. Examples of 

securitization transactions that would 

be exempted under §l.21(a)(1)(ii) 

include securities guaranteed by the 

Government National Mortgage 

Association (Ginnie Mae). Ginnie Mae 

guarantees the issuance of securities by 

approved lender/issuers. These 

mortgage-backed securities (MBS) are 

collateralized solely by federally 

insured or guaranteed loans. The 

insurance or guarantee protects the 

lender from some or all of the credit loss 

on the loan in the event of a borrower 

default. Upon issuance of the security, 

the issuer is obligated to advance from 

its own funds principal and interest to 

the investors if the borrower fails to pay 

the mortgage. Ginnie Mae guarantees to 

the investors that, in the event the issuer 

defaults on this obligation, Ginnie Mae 

will ensure the investors are paid. 

Ginnie Mae provides a similar guarantee 

for Real Estate Mortgage Investment 

Conduits (REMICs) and Platinum 

Securities, which are collateralized by 

Ginnie Mae MBS. 

Although, historically, federally 

insured/guaranteed loans have been 

securitized largely through Ginnie Mae, 

and Ginnie Mae is statutorily restricted 

to guaranteeing only securities 

collateralized by federally insured/ 

guaranteed loans, this regulation would 

exempt a private securitization from risk 

retention to the extent it is collateralized 

solely by loans with federal insurance or 

guarantees. In addition, in cases where 

private securitization may be used the 

proposed rules do not limit the 

exemption based on the federal housing 

program involved or the nature of the 

government’s insurance or guaranty 

coverage. 

Request for Comments 

162(a). Have the Agencies 

appropriately implemented the 

exemption in section 15G(e)(3)(B) of the 

Exchange Act? 162(b). Why or why not? 

163. Are we correct in believing the 

federal department or agency issuing, 

insuring, or guaranteeing the ABS or 

collateral will monitor the quality of the 

assets securitized? 

164(a). While it appears that Congress 

may have intended to exempt all 

existing federal insurance or guarantee 

programs for residential, multifamily, or 

health care facility mortgage loans, 

comments are requested on the 

proposed rules where private 

securitization may be used in the 

following areas. Are there risks in 

exempting assets or ABS that are not 

significantly insured or guaranteed by a 

federal agency? 164(b). If so, what level 

of federal guarantee or insurance should 

be required? 164(c). Would inclusion of 

additional requirements be appropriate 

in the public interest and for the 

protection of investors? 164(d). Why or 

why not? 164(e). Would inclusion of 

additional requirements be disruptive to 

any federal guarantee or insurance 

programs established or authorized by 

Congress? 164(f). If so, how and to what 

extent? 

B. Other Exemptions 

Section 15G(c)(1)(G)(ii) of the 

Exchange Act separately requires the 

rules of the Agencies to provide for a 

total or partial exemption from risk 

retention requirements for 

securitizations of assets that are issued 

or guaranteed by the United States or an 

agency of the United States as the 

Federal banking agencies and the 

Commission jointly determine 

appropriate in the public interest and 

the protection of investors.183 This 

exemptive authority is broader than the 

statutory exemption in section 

15G(e)(3)(B) because it permits the 

exemption of any securitization of assets 

that are issued or guaranteed by the 

United States or any agency of the 

United States (and not just those based 

on residential, multifamily, or health 

care facility mortgage loan assets). 

Proposed §l.21(b)(1) fully exempts any 

securitization transaction if the assetbacked securities issued in the 

transaction are (i) collateralized solely 

(excluding cash and cash equivalents) 

by obligations issued by the United 

States or an agency of the United States; 

(ii) 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 those referred to in 

paragraph (a)(1)(i) of this section); 184 or 

(iii) fully guaranteed as to the timely 

payment of principal and interest by the 

United States or any agency of the 

United States. This exemption is being 

proposed because payments of principal 

and interest on the ABS, or on the 

collateral backing the ABS, would be 

backed by the United States or an 

agency of the United States and, thus, 

the exemption should be appropriate in 

the public interest and for the protection 

of investors. The federal department or 

agency issuing, insuring or guaranteeing 

the ABS or collateral would monitor the 

quality of the assets securitized, 

consistent with the relevant statutory 

authority.185

Proposed §l.21(a)(2) provides an 

exemption from the risk retention 

requirements of the rules 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. This provision implements 

the exemption for these types of assets 

included in section 15G(e)(3)(A) of the 

Exchange Act.186

Section 15G(c)(1)(G)(iii) requires that 

the rules of the Agencies provide a total 

or partial exemption for an ABS if the 

security is (i) 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 187 or (ii) defined as a qualified 

scholarship funding bond in section 

150(d)(2) of the Internal Revenue Code 

of 1986.188 In light of the special 

treatment afforded such securities by 

Congress, the directive in section 

15G(c)(1)(G)(iii), and the role of the 

State or municipal entity in issuing, 

insuring, or guaranteeing the ABS or 

collateral, the Agencies are proposing to 

exempt such ABS from the risk 

retention requirements of the rule as an 

exemption that is appropriate in the 

public interest and for the protection of 

investors.189

Request for Comments 

165(a). Have the Agencies 

appropriately implemented the 

exemption in section 15G(e)(3)(A) of the 

Exchange Act and the exemptive 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24138 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

190 In a resecuritization transaction, the asset pool 

underlying the ABS issued in the transaction 

comprises one or more asset-backed securities. In 

this section, we refer to the securities issued in a 

resecuritization transaction as ‘‘resecuritization 

ABS.’’ 

191According to the staff of the FHFA, Fannie 

Mae Mega Certificates are an example of a singleclass pass-through resecuritization. FHFA staff have 

indicated that these certificates represent a 

fractional undivided beneficial ownership interest 

in the pool of underlying ABS (typically MBS, 

REMICs and other Mega Certificates) and in the 

principal and interest distributions from those 

underlying ABS. The proposed exemption in 

§l.21(a)(5) of the proposed rules would be 

available to any sponsor of a securitization 

transaction that is structured in accordance with the 

rule’s requirements. 

192 15 U.S.C. 78o–11(e)(1). 

193For example, under the proposed rules, the 

sponsor of a collateralized debt obligation (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 15Gcompliant 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. 

authority in section 15G(c)(1)(G)(ii) and 

(iii)? 165(b). Why or why not? 

166(a). Is the proposed exemption for 

ABS issued or guaranteed by a State or 

municipal entity appropriate? 166(b). Is 

it under or over-inclusive? 166(c). There 

may be some ABS in which the sponsor 

is a municipal entity (i.e., a State or 

Territory of the United States, the 

District of Columbia, any political 

subdivision of any State, Territory or the 

District of Columbia, or any public 

instrumentality of one or more States, 

Territories or the District of Columbia), 

however, the ABS are issued by a 

special purpose entity, that is created at 

the direction of the municipal entity, 

but are not issued or guaranteed by the 

municipal entity. Should the rules also 

exempt from the risk retention 

requirements asset-backed securities 

where the sponsor is a municipal entity? 

166(d). There are some municipal ABS 

that are issued by a municipal entity 

and exempt by reason of Section 3(a)(2) 

of the Securities Act but may include 

assets originated using the same 

underwriting criteria as private label 

securitizations. Should the rules, as 

proposed, exempt them? 

167(a). Are there any ABS that are 

collateralized solely by obligations 

issued by the United States or an agency 

of the United States where the process 

of packaging and securitizing those 

obligations may raise issues that the risk 

retention requirement was designed to 

address? 167(b). For example, would a 

securitization by a non-governmental 

securitizer of debt issued by the 

Tennessee Valley Authority raise any 

issues such that the Agencies should 

provide only a partial exemption? 

167(c). If so, what type of transactions 

and how should the Agencies determine 

the amount and form of risk retention to 

be required? 

C. Exemption for Certain 

Resecuritization Transactions 

Section l.21(a)(5) of the proposed 

rules would exempt from the credit risk 

retention requirements certain 

resecuritization transactions that meet 

two conditions.190 First, the transaction 

must be collateralized solely by existing 

ABS issued in a securitization 

transaction for which credit risk was 

retained as required under the rule or 

which was exempted from the credit 

risk retention requirements of the rule 

(hereinafter 15G-compliant ABS). 

Second, the transaction must be 

structured so that it involves the 

issuance of only a single class of ABS 

interests and provides for the passthrough of all principal and interest 

payments received on the underlying 

ABS (net of expenses of the issuing 

entity) to the holders of such class. The 

holder of a resecuritization ABS 

structured as a single-class pass-through 

has a fractional undivided interest in 

the pool of underlying ABS and in the 

distributions of principal and interest 

(including prepayments) from these 

underlying ABS. Accordingly, the 

principal and interest payments 

allocated to each holder are identical 

(less any fees associated with the 

resecuritization) to those that would 

occur if that holder were to hold 

individual securities representing the 

same fractional interest in each of the 

underlying ABS.191 Thus, a 

resecuritization ABS structured as a 

single-class pass-through would not 

alter the level or allocation of credit risk 

and interest rate risk on the underlying 

ABS. 

The Agencies propose to adopt this 

exemption under the general exemption 

provisions of section 15G(e)(1) of the 

Exchange Act. Under that provision, 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.192 As noted above, all of the 

ABS underlying a resecuritization that 

would be exempted under proposed 

§ l.21(a)(5) would already have been 

issued in a securitization transaction in 

which the sponsor has retained credit 

risk in accordance with the rule, or for 

which an exemption from the rule was 

available. Accordingly, the 

resecuritization of a single-class passthrough would neither increase nor 

reallocate the credit risk inherent in that 

underlying 15G-compliant ABS. 

Furthermore, because this type of 

resecuritization may be used to combine 

15G-compliant ABS backed by smaller 

asset pools, the exemption for this type 

of resecuritization could improve the 

access of consumers and businesses to 

credit on reasonable terms by allowing 

for the creation of an additional 

investment vehicle for these smaller 

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 underlying 15Gcompliant ABS, which could also 

improve access to credit on reasonable 

terms. 

Under the proposed rules, sponsors of 

resecuritizations that are not structured 

purely as single-class pass-through 

transactions would be required to meet 

the credit risk retention requirements 

with respect to such resecuritizations 

unless another exemption for the 

resecuritization is available, regardless 

of whether the sponsor of the initial 

securitization transaction retained credit 

risk under the rule or whether an 

exemption applied to the initial 

securitization transaction. Thus, 

resecuritizations that re-tranche the 

credit risk of the underlying ABS would 

be subject to separate risk retention 

requirements under the proposed 

rules.193 Similarly, under the proposed 

rules, resecuritizations that re-tranche 

the prepayment risk of the underlying 

ABS, or that are structured to achieve a 

sequential paydown of tranches, would 

not be exempted. In these 

resecuritizations, 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24139 

194See 15 U.S.C. 78o–11(i) (regulations become 

effective with respect to residential mortgagebacked ABS 1 year after publication of the final 

rules in the Federal Register, and 2 years for all 

other ABS). 

195 15 U.S.C. 78o–11(e). 

196 15 U.S.C. 78o–11(b). 

197 15 U.S.C. 78o–11(c)(1)(G)(i). 

exposed to a higher level of credit risk 

than holders of shorter duration classes. 

Section 15G does not apply to ABS 

issued before the effective date of the 

Agencies’ final rules.194 As a practical 

matter, private-label ABS issued before 

the effective date of the final rules will 

typically not be 15G-compliant ABS, 

because such ABS will not have been 

structured to meet the rule’s risk 

retention requirements. ABS issued 

before the effective date that meets the 

terms of an exemption of the type 

proposed under __.21 (General 

exemptions) or __.11 (Fannie Mae and 

Freddie Mac ABS) could serve as 15Gcompliant ABS. 

Request for Comment 

168(a). Are there other types of 

resecuritization transactions backed 

solely by 15G-compliant ABS that 

should be exempt from the risk 

retention requirements? 168(b). If so, 

what principles and factors should the 

Agencies use in considering whether 

other types of resecuritizations backed 

by 15G-compliant ABS should be 

exempted from the risk retention 

requirements of section 15G? 168(c). 

Should the Agencies consider granting 

an exemption only if it is clear that the 

resecuritization transaction does not 

expose investors in the resecuritization 

to different levels or types of credit risk 

in the securitized assets than the 

underlying 15G-compliant ABS? 

169(a). Should the rule provide an 

exemption for a sequential-pay 

resecuritization that is collateralized 

only by 15G-compliant ABS? In this 

type of resecuritization, the rights to 

principal repayment of the holders of 

the different classes differ solely with 

respect to the timing of such 

repayments. Longer duration classes 

receive no payments of principal until 

shorter duration classes have been paid 

off in full and principal shortfalls are 

allocated on a pro-rata basis based upon 

the unpaid principal balance of each 

class. As the shorter duration classes are 

paid off, the unpaid principal balances 

of the longer duration classes begin to 

represent a larger portion of the total 

unpaid principal balances of the 

underlying ABS and, therefore, the 

longer duration classes are allocated an 

ever-increasing percentage of credit 

losses as the ABS matures. 169(b). If an 

exemption for sequential-pay 

resecuritizations backed by 15Gcompliant ABS is appropriate, how 

could such an exemption be written to 

ensure the exemption is limited to this 

particular structure? 

170(a). Should the Agencies provide 

an exemption for prepayment-tranched 

resecuritizations that are backed solely 

by 15G-compliant ABS? This form of 

resecuritization involves the sponsor of 

the resecuritization creating tranches 

based on the prepayments of the 

underlying ABS (i.e., prepayments 

received by the ABS in the first-level 

ABS securitization). One type of 

prepayment-tranched resecuritization is 

a planned amortization class (PAC) 

resecuritization. PAC bonds receive 

principal payments based on the level of 

prepayments and will have their 

expected duration if the actual speed of 

prepayments on the underlying ABS 

falls within a designated range. In order 

to create a PAC bond with greater 

certainty of cash flow than the 

underlying ABS, one or more support 

(SUP) classes that are highly sensitive to 

varying levels of prepayment are created 

as part of the same transaction. If the 

rate of prepayments is faster than that 

assumed in the creation of the PAC, the 

SUPs receive more principal in order to 

prevent an overpayment of principal on 

the PAC. If the rate of prepayment is 

slower, principal is redirected from the 

SUPs in order to achieve the specified 

repayment schedule on the PAC. In 

either case, credit losses are allocated on 

a pro rata basis based on the unpaid 

principal balance attributable to each 

class. Accordingly, the effect of fasterthan-expected rates of prepayment will 

tend to expose holders of the PAC bonds 

to relatively greater losses than the 

holders of the SUPs, while slower-thanexpected rates of prepayment will tend 

to have the opposite effect. Moreover, in 

transactions where more than one PAC 

bond is created, the distribution of 

principal repayments to the PACs are 

based on priority and, therefore, the 

holders of the PACs are exposed to 

levels of credit risk that differ from that 

of the underlying ABS. 170(b). If an 

exemption of prepayment-tranched 

resecuritizations or certain types of such 

resecuritizations (such as PAC 

structures) is appropriate, how could an 

exemption be written to ensure that the 

exemption does not extend to other 

resecuritizations? 

171. As noted above, the proposed 

exemptions require the underlying ABS 

be 15G-compliant ABS. In practice, 

initially this may mean that only 

resecuritizations based on ABS 

guaranteed by Fannie Mae and Freddie 

Mac will qualify for this exemption. 

Does this raise any competitive or other 

issues and if so, how can they be 

mitigated without eliminating the 

requirement there be risk retention on 

the underlying ABS? 

172(a). Is the proposed language for 

this exemption appropriate? 172(b). 

Does any portion of the exemption 

cause an ambiguity that should be 

addressed? 

D. Additional Exemptions 

Consistent with section15G of the 

Exchange Act, § l.23(b) of the proposed 

rules provides that the Federal banking 

agencies and the Commission, in 

consultation with FHFA and HUD, may 

jointly adopt or issue additional 

exemptions, exceptions or adjustments 

to the credit risk retention requirements, 

including exemptions, exceptions or 

adjustments for classes of institutions or 

assets in accordance with section 

15G(e).195 In addition, §l.23(a) of the 

proposed rules recognizes that the 

Agencies with rulewriting authority 

under section 15G(b) 196 with respect to 

the type of assets involved may jointly 

provide a total or partial exemption of 

any individual securitization 

transaction, as such Agencies determine 

may be appropriate in the public 

interest and for the protection of 

investors, as permitted by section 

15G(c)(1)(G)(i).197 The Agencies expect 

to coordinate with each other to 

facilitate the processing, review and 

action on requests for such written 

interpretations or guidance, or 

additional exemptions, exceptions or 

adjustments. 

Request for Comments 

173(a). Are there securitization 

transactions that would not be covered 

by the exemptions in the proposed rules 

that should be exempted from risk 

retention requirements pursuant to 

section 15G(e)(3) of the Exchange Act? 

173(b). If so, what are the features and 

characteristics of such securitization 

transactions that would properly 

exempt them from risk retention 

requirements pursuant to section 

15G(e)(3)? 

E. Safe Harbor for Certain ForeignRelated Transactions 

The proposed rules include 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 

proposed safe harbor is intended solely 

to provide clarity that the Agencies 

would not apply the requirements of the 

proposed rules to transactions that meet 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24140 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

198The proposed rules include a definition of 

‘‘U.S. person’’ that is substantially the same as the 

definition of ‘‘U.S. person’’ in the Commission’s 

Regulation S, although Regulation S relates solely 

to the application of section 5 of the Securities Act 

(12 U.S.C. 77e). See proposed rules at §l.23 and 

17 CFR 203.902(k). Additionally, the 10 percent 

threshold is consistent with other Commission 

exemptive rules relating to cross-border offerings 

under which the Commission has provided 

accommodations for not applying its rules even 

though there is a limited offering of securities in the 

United States. See Securities Act Rules 801 and 802 

(17 CFR 230.801 and 802). 

199See proposed rules at §l.23. 

all of the conditions of the safe harbor. 

The proposed safe harbor should not be 

interpreted as reflecting the views of 

any Agency as to the potential scope of 

transactions or persons subject to 

section 15G or the proposed rules. 

As set forth in section l.23 of the 

proposed rules, the safe harbor provides 

that the rule’s risk retention 

requirements would not apply to a 

securitization transaction if certain 

conditions are met, including: (i) The 

securitization transaction is not required 

to be and is not registered under the 

Securities Act; (ii) 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; 198 (iii) 

neither the sponsor of the securitization 

transaction nor the issuing entity is (A) 

chartered, incorporated, or organized 

under the laws of the U.S., or a U.S. 

State or Territory or (B) the 

unincorporated branch or office located 

in the U.S. of an entity not chartered, 

incorporated, or organized under the 

laws of the U.S., or a U.S. State or 

Territory (collectively, a U.S.-located 

entity); (iv) no more than 25 percent of 

the assets collateralizing the ABS sold 

in the securitization transaction 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.199

The safe harbor is 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 limit involvement by 

persons in the U.S. with respect to both 

assets being securitized in a transaction 

and the ABS sold in connection with 

the transaction. The safe harbor would 

not be available for any transaction or 

series of transactions that, although in 

technical compliance with the 

conditions of the safe harbor, is part of 

a plan or scheme to evade the 

requirements of section 15G and the 

proposed rules. 

Request for Comment 

174(a). Are there any extra or special 

considerations relating to these 

circumstances that we should take into 

account? 174(b). Should the more than 

10 percent proceeds trigger be higher or 

lower (e.g., 0 percent, 5 percent, 15 

percent, or 20 percent)? 

Appendix A to the Supplementary 

Information 

The tables below show the estimated 

effects of the proposed QRM standards 

based on data for all residential 

mortgage loans purchased or securitized 

by the Enterprises between 1997 and 

2009. The first set of results shows rates 

of serious delinquency (SDQ), that is, 

loans that are 90 days or more 

delinquent, or are in the process of 

foreclosure. The second set of results 

shows volume, in dollars of unpaid 

principal balance (UPB). 

Because the data that FHFA routinely 

receives from the Enterprises does not 

include all the factors needed to identify 

QRM eligible loans, the universe of 

loans within the data set that would 

qualify as a QRM under the proposed 

standards was estimated based on four 

of the most significant QRM elements: 

(i) Product type (i.e. excluding nonowner occupied loans, low or no 

documentation loans, interest-only or 

negative amortization loans, loans with 

balloon payments, and ARM loans that 

permit payment shocks in excess of the 

range permitted by the proposed QRM 

standards); (ii) front-end and back-end 

DTI ratios; (iii) LTV ratios; and (iv) 

credit history. 

Because of data limitations, proxies 

were used for certain of these QRM 

standards. FHFA does not have 

individual credit items in the data set 

used for analysis, such as previous 

bankruptcies or foreclosures involving 

the borrower, or current or recent 

borrower delinquencies on other debt 

obligations. However, borrowers with 

such credit issues would tend to have 

much lower credit scores than other 

borrowers (all else being equal). To 

proxy the credit history restrictions in 

the proposed QRM definition, borrowers 

with FICO scores below 690 were 

deemed to not satisfy the proposed 

QRM credit history standards for 

purposes of the analysis. 

In addition, the analysis uses first-lien 

LTV ratios as a proxy for combined LTV 

when relevant. The Agencies do not 

believe that this proxy would produce a 

large discrepancy for analysis of loans 

originated before 2002 or after 2007, but 

it may understate the proposed QRM 

definition’s effects, both on volume and 

on rates of SDQ, for originations from 

2002 to 2007, as second liens were 

increasingly used during this period. 

(That is, the proposed QRM definition 

would likely cause a greater decrease in 

SDQ rates and loan volumes than 

estimated through the use of this proxy.) 

Other proposed QRM factors may 

differ somewhat for this analysis. The 

QRM proposal is based on current FHA 

definitions of income, and standards for 

full documentation of income and full 

appraisals. The data used in this 

analysis for purposes of estimating 

whether a loan would meet the DTI and 

LTV ratios in the proposed QRM 

standards, however, is based on 

Enterprise definitions of income, and 

Enterprise documentation and appraisal 

requirements that prevailed at the time 

the loans were originated. While there 

may be some circumstances in which 

the different standards and definitions 

would have led to a different QRM 

eligibility estimate, the Agencies do not 

believe that these differences would 

have a material impact on the analysis. 

For example, the Enterprises did not 

always require an interior appraisal in 

cases where the default risk was judged 

to be low and the down payment was 

substantial. While loans originated to 

these standards would not be QRM 

eligible under this proposal, it is likely 

that the QRM standard would induce 

originators to require full appraisals 

going forward, and thus cause these 

loans to be QRM eligible. 

For the first set of results concerning 

SDQ rates, the first column shows the 

‘‘QRM qualifying’’ population. This is 

the SDQ rate for all loans that are 

estimated as meeting the proposed QRM 

standards. The last column in the first 

set of results shows the SDQ rate for all 

loans purchased or securitized by the 

Enterprises in that year. Thus, the 

difference between the first and last 

column show the cumulative estimated 

effect of the set of proposed QRM 

standards on SDQ for that cohort of 

loans. The intermediate columns show 

the SDQ rate for the population of loans 

in the relevant year that are estimated to 

meet every QRM standard other than the 

standard(s) indicated at the top of the 

column. For example, the second 

column, headed Product Type, shows 

the estimated effect of allowing low or 

no documentation loans, interest-only 

or negative amortization loans, loans 

with balloon payments, or ARM loans 

that permit payment shocks in excess of 

the range permitted by the proposed 

QRM standards, while still prohibiting 

loans with credit history (as proxied 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24141 

200That is, low or no documentation loans, 

interest-only or negative amortization loans, loans 

with a balloon payment, or ARM loans that permit payment shocks in excess of the range permitted by 

the proposed QRM standards. 

through the use of credit scores), an LTV 

ratio, or debt-to-income ratios that 

would disqualify them for QRM status. 

These columns show the differences 

between the base QRM SDQ rate and the 

higher risk population within each 

column. The analysis is shown 

separately for all loans, for purchases, 

for rate and term refinances, and for 

cash out refinances. 

The second set of results shows the 

volume of Enterprise mortgages 

purchased or securitized that are 

estimated to have met the proposed 

QRM standards. The last column shows 

total dollar originations purchased or 

securitized by the Enterprises for each 

year. The first column shows the 

percent of that volume estimated to be 

QRM eligible. The intermediate 

columns show the estimated effect on 

that volume for the population of loans 

that are estimated to meet the proposed 

QRM standards other than the one 

identified at the top of the column. For 

example, the second column, headed 

Product Type, shows the estimated 

effect on the percentage of Enterprise 

volume that would be QRM eligible by 

allowing loans that do not conform to 

the Product Type standards for 

QRMs,200 while still prohibiting loans 

with a credit history (as proxied by 

credit scores), an LTV ratio, or debt-toincome ratios that would disqualify the 

loan for QRM status. These columns 

show the differences between the base 

QRM qualifying percentage and the 

higher risk population. 

ALL LOANS

Year QRM Product type PTI/DTI LTV FICO All loans 

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

Requirements 

1997 ........................................... 0.42% +0.05% +0.39% +0.61% +3.08% +2.30% 

1998 ........................................... 0.39% +0.10% +0.31% +0.52% +2.34% +1.68% 

1999 ........................................... 0.44% +0.13% +0.34% +0.78% +3.12% +2.31% 

2000 ........................................... 0.32% +0.43% +0.20% +0.83% +2.94% +2.77% 

2001 ........................................... 0.31% +0.35% +0.27% +0.59% +2.52% +2.27% 

2002 ........................................... 0.33% +0.41% +0.32% +0.73% +2.34% +2.09% 

2003 ........................................... 0.55% +0.64% +0.66% +1.06% +2.95% +2.40% 

2004 ........................................... 0.95% +1.72% +1.16% +1.58% +4.27% +4.33% 

2005 ........................................... 1.86% +5.30% +2.36% +2.31% +6.46% +8.13% 

2006 ........................................... 2.72% +7.49% +3.35% +3.73% +7.90% +13.93% 

2007 ........................................... 2.37% +6.34% +3.59% +4.39% +8.66% +17.12% 

2008 ........................................... 0.68% +1.48% +1.64% +1.68% +5.15% +5.94% 

2009 ........................................... 0.04% +0.06% +0.11% +0.09% +0.50% +0.24% 

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

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

1997 ........................................... 20.44% +3.75% +13.04% +13.74% +5.81% $286,497,878,371 

1998 ........................................... 23.29% +2.17% +13.30% +17.10% +6.24% 691,033,994,509 

1999 ........................................... 19.48% +3.16% +14.83% +12.95% +5.37% 481,450,519,442 

2000 ........................................... 16.44% +3.70% +17.00% +8.40% +4.53% 356,779,731,420 

2001 ........................................... 19.37% +3.01% +14.33% +13.11% +4.62% 1,039,412,013,403 

2002 ........................................... 22.37% +4.28% +15.35% +10.72% +4.62% 1,385,056,256,240 

2003 ........................................... 24.57% +4.55% +16.68% +10.02% +4.98% 1,924,265,340,603 

2004 ........................................... 17.03% +6.35% +17.68% +6.25% +4.34% 937,643,914,289 

2005 ........................................... 14.41% +6.74% +18.78% +5.45% +3.36% 939,069,358,457 

2006 ........................................... 11.52% +7.11% +17.59% +3.91% +2.73% 887,443,942,464 

2007 ........................................... 10.72% +5.44% +16.14% +4.95% +2.24% 1,027,460,511,244 

2008 ........................................... 17.39% +4.64% +22.01% +9.22% +2.12% 793,136,249,487 

2009 ........................................... 30.52% +3.38% +24.47% +15.26% +1.74% 1,176,445,135,548 

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

PURCHASE LOANS

Year QRM Product type PTI/DTI LTV FICO All loans 

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

Requirements 

1997 ........................................... 0.42% +0.03% +0.36% +0.80% +3.13% +2.44% 

1998 ........................................... 0.46% +0.04% +0.30% +0.90% +2.70% +2.13% 

1999 ........................................... 0.40% +0.12% +0.30% +0.98% +3.05% +2.23% 

2000 ........................................... 0.29% +0.38% +0.17% +0.83% +2.51% +2.29% 

2001 ........................................... 0.38% +0.35% +0.28% +0.97% +2.72% +2.59% 

2002 ........................................... 0.48% +0.50% +0.32% +1.28% +2.61% +2.70% 

2003 ........................................... 0.93% +0.72% +0.78% +1.84% +3.29% +3.50% 

2004 ........................................... 1.16% +1.97% +1.24% +2.53% +3.93% +4.71% 

2005 ........................................... 2.13% +6.18% +2.49% +2.87% +5.94% +8.61% 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24142 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

PURCHASE LOANS—Continued 

Year QRM Product type PTI/DTI LTV FICO All loans 

2006 ........................................... 2.76% +8.69% +3.28% +3.29% +6.78% +13.63% 

2007 ........................................... 2.33% +6.76% +3.31% +4.33% +6.79% +16.51% 

2008 ........................................... 0.64% +1.36% +1.42% +2.10% +4.73% +5.62% 

2009 ........................................... 0.07% +0.09% +0.09% +0.07% +0.63% +0.23% 

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

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

1997 ........................................... 20.74% +4.40% +14.02% +12.11% +5.55% $171,316,168,314 

1998 ........................................... 22.08% +2.99% +15.33% +13.09% +6.23% 243,827,154,269 

1999 ........................................... 19.86% +4.02% +17.29% +10.39% +4.93% 252,736,885,540 

2000 ........................................... 18.17% +4.21% +19.37% +7.56% +4.45% 259,462,348,244 

2001 ........................................... 19.57% +4.20% +18.76% +7.94% +4.92% 334,671,388,428 

2002 ........................................... 18.43% +5.80% +18.86% +6.12% +4.51% 378,648,800,742 

2003 ........................................... 18.03% +6.81% +19.38% +5.32% +4.42% 428,404,858,343 

2004 ........................................... 16.71% +9.21% +20.88% +3.25% +3.78% 397,943,548,815 

2005 ........................................... 15.67% +10.22% +22.25% +2.51% +2.92% 433,917,427,310 

2006 ........................................... 13.57% +9.37% +21.75% +2.02% +2.48% 459,040,004,449 

2007 ........................................... 12.39% +6.88% +19.94% +3.27% +1.95% 504,879,485,500 

2008 ........................................... 17.33% +6.08% +26.06% +6.40% +1.86% 321,485,446,505 

2009 ........................................... 27.06% +7.02% +33.83% +8.18% +1.89% 225,983,942,704 

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

NO CASH-OUT REFINANCINGS

Year QRM Product type PTI/DTI LTV FICO All loans 

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

Requirements 

1997 ........................................... 0.37% +0.06% +0.43% +0.32% +2.94% +2.00% 

1998 ........................................... 0.33% +0.11% +0.27% +0.36% +2.15% +1.41% 

1999 ........................................... 0.46% +0.17% +0.43% +0.66% +3.26% +2.47% 

2000 ........................................... 0.40% +0.66% +0.31% +0.70% +3.69% +4.11% 

2001 ........................................... 0.27% +0.32% +0.24% +0.50% +2.21% +1.97% 

2002 ........................................... 0.28% +0.27% +0.28% +0.65% +2.01% +1.63% 

2003 ........................................... 0.46% +0.42% +0.54% +0.88% +2.69% +1.71% 

2004 ........................................... 0.77% +1.01% +0.97% +1.25% +4.09% +3.36% 

2005 ........................................... 1.43% +3.09% +1.92% +1.96% +6.46% +6.54% 

2006 ........................................... 2.74% +6.44% +3.70% +3.72% +8.57% +13.99% 

2007 ........................................... 2.86% +7.94% +5.20% +5.39% +10.27% +19.45% 

2008 ........................................... 0.70% +1.80% +1.94% +1.55% +5.25% +5.78% 

2009 ........................................... 0.04% +0.03% +0.11% +0.10% +0.48% +0.24% 

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

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

1997 ........................................... 21.04% +3.12% +11.92% +15.76% +6.12% $72,883,400,278 

1998 ........................................... 25.24% +1.92% +12.34% +18.72% +6.40% 302,723,323,315 

1999 ........................................... 20.34% +2.44% +12.42% +14.98% +6.23% 140,480,199,806 

2000 ........................................... 13.66% +2.31% +11.72% +10.37% +5.06% 48,878,241,470 

2001 ........................................... 22.56% +2.89% +13.21% +15.14% +4.72% 390,566,245,690 

2002 ........................................... 28.69% +4.46% +15.27% +11.65% +4.90% 584,998,514,202 

2003 ........................................... 31.06% +4.48% +16.76% +11.22% +5.22% 920,098,549,172 

2004 ........................................... 22.37% +5.15% +16.81% +8.76% +5.07% 269,562,391,201 

2005 ........................................... 16.42% +4.93% +16.06% +8.46% +3.82% 169,162,254,192 

2006 ........................................... 10.24% +6.22% +13.03% +6.20% +2.73% 131,792,837,483 

2007 ........................................... 9.41% +5.15% +12.27% +6.36% +2.16% 196,852,210,903 

2008 ........................................... 20.16% +4.61% +20.18% +10.87% +2.06% 231,714,054,542 

2009 ........................................... 32.80% +3.01% +22.10% +16.44% +1.63% 637,544,819,174 

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


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24143 

201See 5 U.S.C. 601 et seq. 

202Codified at section 15G of the Exchange Act, 

17 U.S.C. 78o–11. 

CASH-OUT REFINANCINGS

Year QRM Product type PTI/DTI LTV FICO All loans 

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

Requirements 

1997 ........................................... 0.51% +0.18% +0.48% +0.54% +3.12% +2.20% 

1998 ........................................... 0.39% +0.20% +0.37% +0.42% +2.09% +1.44% 

1999 ........................................... 0.52% +0.23% +0.42% +0.56% +3.05% +2.27% 

2000 ........................................... 0.51% +0.70% +0.41% +0.81% +4.26% +3.88% 

2001 ........................................... 0.31% +0.33% +0.23% +0.52% +2.67% +2.30% 

2002 ........................................... 0.31% +0.40% +0.28% +0.61% +2.57% +2.15% 

2003 ........................................... 0.51% +0.64% +0.60% +1.12% +3.11% +2.57% 

2004 ........................................... 0.89% +1.29% +1.08% +1.51% +4.92% +4.71% 

2005 ........................................... 1.70% +2.71% +2.22% +2.55% +7.11% +8.34% 

2006 ........................................... 2.61% +3.77% +3.34% +4.05% +9.06% +14.42% 

2007 ........................................... 2.14% +3.46% +3.37% +3.84% +9.99% +16.66% 

2008 ........................................... 0.72% +1.39% +1.73% +1.44% +5.47% +6.52% 

2009 ........................................... 0.03% +0.05% +0.10% +0.07% +0.44% +0.24% 

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

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

1997 ........................................... 18.17% +2.23% +10.98% +16.86% +6.32% $42,298,309,778 

1998 ........................................... 21.25% +1.30% +11.88% +20.45% +5.91% 144,483,516,925 

1999 ........................................... 17.05% +1.84% +11.63% +17.04% +5.28% 88,233,434,096 

2000 ........................................... 10.03% +2.40% +9.66% +10.90% +4.46% 48,439,141,706 

2001 ........................................... 15.19% +1.90% +11.01% +16.10% +4.18% 314,174,379,286 

2002 ........................................... 17.13% +2.67% +12.30% +13.58% +4.33% 421,408,941,296 

2003 ........................................... 19.05% +2.99% +14.53% +11.60% +5.00% 575,761,933,088 

2004 ........................................... 12.16% +3.34% +13.83% +8.15% +4.43% 270,137,974,274 

2005 ........................................... 11.77% +3.14% +15.67% +7.74% +3.71% 335,989,676,955 

2006 ........................................... 8.93% +4.00% +13.17% +5.81% +3.12% 296,611,100,532 

2007 ........................................... 8.93% +3.39% +12.61% +6.70% +2.75% 325,728,814,842 

2008 ........................................... 14.78% +2.75% +18.34% +11.41% +2.52% 239,936,748,440 

2009 ........................................... 28.36% +1.52% +22.56% +17.99% +1.87% 312,916,373,670 

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

VII. Solicitation of Comments on Use of 

Plain Language 

Section 722 of the Gramm-LeachBliley Act, Public Law 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 

agencies invite your comments on how 

to make this proposal easier to 

understand. For example: 

• Have we 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 we 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.201 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 organizations with total 

assets of less than or equal to $175 

million) and publishes its certification 

and a short, explanatory statement in 

the Federal Register together with the 

rule. 

As of September 30, 2010, there were 

approximately 590 small national banks. 

For the reasons provided below, the 

OCC 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 

Dodd-Frank Act 202 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, 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24144 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

203Call 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. 

204Based 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. 

205The OCC 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. 

206See 5 U.S.C. 601 et seq. 

207 13 CFR 121.201. 

208For purposes of the proposed rules, this would 

include a small bank holding company; state 

member bank; Edge corporation; agreement 

corporation; foreign banking organization; and any 

subsidiary of the foregoing. 

209Call 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. 

subject to 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 ‘‘qualified residential mortgage’’ 

(QRM) loans, 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. 

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. The OCC is aware of only 

six small banking organizations that 

currently sponsor securitizations (one of 

which is a national bank, two are state 

member banks, and three are state 

nonmember banks based on September 

30, 2010 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 national banks. 

Under the proposed rule a sponsor 

may offset the risk retention 

requirement by the amount of any 

vertical risk retention ABS interests 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 September 30, 2010 

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.203

The Call Report data indicates that 

approximately 329 small banking 

organizations, 54 of which are national 

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 would 

not be able to allocate credit risk to 

originators under this proposed rule. 

Additionally, based on publiclyavailable 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.204 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 September 30, 2010, 

only one small banking organization 

reported an outstanding principal 

balance of assets sold and securitized of 

$100 million or more.205

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 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.206 Under regulations 

promulgated by the Small Business 

Administration, a small entity includes 

a commercial bank or bank holding 

company with assets of $175 million or 

less (each, a small banking 

organization).207 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. 

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 

an ABS transaction 208 (based on 

September 30, 2010 data).209 As of 

September 30, 2010, there were 

approximately 2861 small banking 

organizations supervised by the Board, 

which includes 2412 bank holding 

companies, 398 state member banks, 9 

Edge and agreement corporations and 42 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24145 

210Call 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. 

211Based 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. 

212The 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. 

213See 5 U.S.C. 601 et seq. 

214Codified at section 15G of the Exchange Act, 

17 U.S.C. 78o–11. 

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 vertical risk retention 

ABS interests 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. 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 September 30, 2010 regulatory 

report data 210 indicates that 

approximately 329 small banking 

organizations, 37 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.211

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 September 30, 2010, 

only one small banking organization 

supervised by the Board reported an 

outstanding principal balance of assets 

sold and securitized of $100 million or 

more.212

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.213 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 than or equal to $175 million) 

and publishes its certification and a 

short, explanatory statement in the 

Federal Register together with the rule. 

As of September 30, 2010, there were 

approximately 2,768 small FDICsupervised institutions, which includes 

2,639 state nonmember banks and 129 

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 

Dodd-Frank Act 214 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 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 ‘‘qualified residential mortgage’’ 

(QRM) loans, 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. 

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 

six small banking organizations that 

currently sponsor securitizations (one of 

which is a national bank, two are state 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24146 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

215Call 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. 

216Based 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. 

217The 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. 

218See 17 U.S.C. 78o–11. 

219 5 U.S.C. 601 et seq. 

220The 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 

member banks, and three are state 

nonmember banks based on September 

30, 2010 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. 

Under the proposed rule a sponsor 

may offset the risk retention 

requirement by the amount of any 

vertical risk retention ABS interests 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 September 30, 2010 

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.215

The Call Report data indicates that 

approximately 329 small banking 

organizations, 241 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 offerings are collateralized by 

a pool of mortgages with an unpaid 

aggregate principal balance of at least 

$500 million.216 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 September 30, 2010, 

only one small banking organization 

reported an outstanding principal 

balance of assets sold and securitized of 

$100 million or more.217

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. 

SEC: 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 a 

asset-backed securities (ABS) to retain 

not less than five percent of the credit 

risk of the assets collateralizing the 

ABS.218 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.219 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. 

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 

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 3506 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 

(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 or by 

facsimile to 202–395–6974, Attention, 

Commission and Federal Banking 

Agency Desk Officer. 

2. Proposed Information Collection 

Title of Information Collection: Credit 

Risk Retention. 

Frequency of response: Event 

generated. 

Affected Public: 220


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24147 

public of the Commission is based on those entities 

not already accounted for by the FDIC, OCC, and 

Board. 

FDIC: Insured state non-member 

banks, insured state branches of foreign 

banks, 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: FDIC-insured state member 

banks. For §l.15(d)(13) the Board’s 

respondents also include bank holding 

companies, foreign banking 

organizations, Edge or agreement 

corporations, any nonbank financial 

company (as defined in §l.1(c)(5)), 

savings and loan holding companies, (as 

defined in 12 U.S.C. 1467a, on and after 

the transfer date established under 

section 311 of the Dodd-Frank Act (12 

U.S.C. 5411)), or any subsidiary of the 

foregoing. 

SEC: 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 information 

requirements in joint regulations 

proposed by the three Federal banking 

agencies and the Commission are found 

in §§l.4, l.5, l.6, l.7, l.8, l.9, 

l.10, l.12, l.13, l.15, l.18, l.19, 

and l.20. 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 as provided below, there would 

be no mandatory retention period for 

proposed collections of information. 

Section-by-Section Analysis 

Section l.4 sets forth the conditions 

that must be met by sponsors electing to 

use the vertical risk retention option. 

Section l.4(b)(1) requires disclosure of 

the amount of each class of ABS 

interests retained and required to be 

retained by the sponsor and §l.4(b)(2) 

requires disclosure of material 

assumptions used to determine the 

aggregate dollar amount of ABS interests 

issued in the transaction. 

Section l.5 specifies the conditions 

that must be met by sponsors using the 

horizontal risk retention option, 

including disclosure of the amount of 

the eligible horizontal residual interest 

retained by the sponsor and the amount 

required to be retained (§l.5(c)(1)(i)); 

disclosure of the material terms of the 

eligible horizontal residual interest 

(§ l.5(c)(1)(ii)); disclosure of the dollar 

amount to be placed in a cash reserve 

account and the amount required to be 

placed in the account (§l.5(c)(2)(i)), if 

applicable; disclosure of the material 

terms governing the cash reserve 

account (§l.5(c)(2)(ii)), if applicable; 

and disclosure of material assumptions 

and methodology used in determining 

the aggregate dollar amount of ABS 

interests issued in the transaction 

(§ l.5(c)(3)). 

Section l.6 identifies the 

requirements for sponsors opting to use 

the hybrid L-shaped risk retention 

method, including disclosures in 

compliance with those set forth for the 

vertical and horizontal risk retention 

methods (§l.6(b)). 

Section l.7 requires sponsors using a 

revolving master trust structure for 

securitizations to disclose the amount of 

seller’s interest retained by the sponsor 

and the amount the sponsor is required 

to retain (§ l.7(b)(1)); the material terms 

of the seller’s interest retained by the 

sponsor (§l.7(b)(2)); and the material 

assumptions and methodology used in 

determining the aggregate dollar amount 

of ABS issued in the transaction 

(§ l.7(b)(3)). 

Section l.8 discusses the 

representative sample method of risk 

retention and requires that the sponsor 

adopt and adhere to policies and 

procedures to, among other things, 

document the material characteristics 

used to identify the designated pool and 

randomly select assets using a process 

that does not take account of any asset 

characteristic other than the unpaid 

balance (§l.8(c)); maintaining, until all 

ABS interests are paid in full, 

documentation that clearly identifies 

the assets included in the representative 

sample (§l.8(c)); obtaining an agreed 

upon procedures report from an 

independent public accounting firm 

(§ l.8(d)(1)); disclose the amount of 

assets included in the representative 

sample and retained by the sponsor and 

the amount of assets required to be 

retained by the sponsor (§l.8(g)(1)(i)); 

disclose prior to sale a description of the 

material characteristics of the 

designated pool (§l.8(g)(1)(ii)); 

disclose prior to sale a description of the 

policies and procedures used by the 

sponsor to ensure compliance with 

random selection and equivalent risk 

determination requirements 

(§ l.8(g)(1)(iii)); confirm prior to sale 

that the required agreed upon 

procedures report was obtained 

(§ l.8(g)(1)(iv)); disclose the material 

assumptions and methodology used in 

determining the aggregate dollar amount 

of ABS interests issued in the 

transaction (§l.8(g)(1)(v)); and disclose 

after sale the performance of the pool of 

assets in the securitization transaction 

as compared to performance of assets in 

the representative sample (§l.8(g)(2)); 

and disclose to holders of the assetbacked securities information 

concerning the assets in the 

representative sample (§l.8(g)(3)). 

Section l.9 addresses the 

requirements for sponsors utilizing the 

ABCP conduit risk retention approach. 

The requirements for the ABCP conduit 

risk retention approach include 

disclosure of each originator-seller with 

a retained eligible horizontal residual 

interest and the form, amount, and 

nature of the interest (§ l.9(b)(1)); 

disclosure of each regulated liquidity 

provider providing liquidity support to 

the ABCP conduit and the form, 

amount, and nature of the support 

(§ l.9(b)(2)); maintenance of policies 

and procedures that are reasonably 

designed to monitor regulatory 

compliance by each originator-seller of 

the eligible ABCP conduit 

(§ l.9(c)(2)(i)); and notice to holders of 

the ABS interests issued in the 

transaction in the event of originatorseller regulatory non-compliance 

(§ l.9(c)(2)(ii)). 

Section l.10 sets forth the 

requirements for sponsors utilizing the 

commercial mortgage-backed securities 

risk retention option, and includes 

disclosures of the name and form of 

organization of the third-party 

purchaser (§l.10(a)(5)(i)), the thirdparty purchaser’s experience 

(§ l.10(a)(5)(ii)), other material 

information (§l.10(a)(5)(iii)), the 

amount and purchase price of eligible 

horizontal residual interest retained by 

the third-party purchaser and the 

amount that the sponsor would have 

been required to retain (§l.10(a)(5)(iv) 

and (v)), a description of the material 

terms of the eligible residual horizontal 

interest retained by the third-party 

purchaser (§l.10(a)(5)(vi)), the material 

assumptions and methodology used to 

determine the aggregate amount of ABS 

interests issued by the issuing entity 

(§ l.10(a)(5)(vii)), representations and 

warranties concerning the securitized 

assets and factors used to determine the 

assets should be included in the pool 

(§ l.10(a)(5)(viii)); sponsor 

maintenance of policies and procedures 

to monitor third-party compliance with 

regulatory requirements 

(§ l.10(b)(2)(A)); and sponsor notice to 

holders of ABS interests in the event of 

third-party non-compliance with 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24148 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

regulatory requirements 

(§ l.10(b)(2)(B)). 

Section l.12 requires the 

establishment of a premium cash 

reserve account, in addition to the 

sponsor’s base risk retention 

requirement, in instances where the 

sponsor structures a securitization to 

monetize excess spread on the 

underlying assets. The premium cash 

reserve account would be used to 

‘‘capture’’ the premium received on sale 

of such tranches for purposes of 

covering losses on the underlying assets 

and would require the sponsor to make 

disclosures regarding the dollar amount 

required by regulation to be placed in 

the account and any other amounts 

placed in the account by the sponsor 

(§ l.12(d)(1)) and the material 

assumptions and methodology used in 

determining fair value of any ABS 

interest that does not have a par value 

and that was used in calculating the 

amount required for the premium 

capture cash reserve account 

(§ l.12(d)(2)). 

Section l.13 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 with an 

acquired and retained interest 

(§ l.13(a)(2)); maintenance of policies 

and procedures that are reasonably 

designed to monitor originator 

compliance with retention amount and 

hedging, transferring and pledging 

requirements (§l.13(b)(2)(A)); and 

notice to holders of ABS interests in the 

transaction in the event of originator 

non-compliance with regulatory 

requirements (§l.13(b)(2)(B)). 

Section l.15 provides an exemption 

from the risk retention requirements for 

qualified residential mortgages that 

meet certain specified criteria including 

certification by the depositor of the 

asset-backed security that it has 

evaluated the effectiveness of its 

internal supervisory controls and 

concluded that the controls are effective 

(§ l.15(b)(4)(i)), and sponsor disclosure 

prior to sale of asset-backed securities in 

the issuing entity of a copy of the 

certification to potential investors 

(§ l.15(b)(4)(iii)). In addition 

§ l.15(e)(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 l.15 also contains additional 

information collection requirements on 

the mortgage originator to include terms 

in the mortgage transaction documents 

under which the creditor commits to 

having servicing policies and 

procedures (§l.15(d)(13)(i)) and to 

provide disclosure of the foregoing 

default mitigation commitments to the 

borrower at or prior to the closing of the 

mortgage transaction (§l.15(d)(13)(ii)). 

Sections l.18, l.19, and l.20 

provide exemptions from the risk 

retention requirements for qualifying 

commercial real estate loans, 

commercial mortgages, and auto loans 

that meet specified criteria. Each section 

requires that the depositor of the assetbacked security certify that it has 

evaluated the effectiveness of its 

internal supervisory controls and 

concluded that its controls are effective 

(§§ l.18(b)(7)(i), l.19(b)(10)(i), and 

l.20(b)(9)(i)); that the sponsor provide 

a copy of the certification to potential 

investors prior to the sale of assetbacked securities (§§l.18(b)(7)(iii), 

l.19(b)(10)(iii), and l.20(b)(9)(iii)); 

and that the sponsor promptly notify the 

holders of the securities of any loan 

included in the transaction that is 

required to be repurchased by the 

sponsor (§§l.18(c)(3), l.19(c)(3), and 

l.20(c)(3)). 

Estimated Paperwork Burden 

Estimated Burden per Response: 

§ l.4—Vertical risk retention: 

disclosures—2 hours. 

§ l.5—Horizontal risk retention: 

disclosures—2.5 hours. 

§ l.6—L-Shaped risk retention: 

disclosures—3 hours. 

§ l.7—Revolving master trusts: 

disclosures—2.5 hours. 

§ l.8—Representative sample: 

recordkeeping—120 hours; 

disclosures—23.25 hours. 

§ l.9—Eligible ABCP conduits: 

recordkeeping—20 hours; 

disclosures—3 hours. 

§ l.10—Commercial mortgage-backed 

securities: recordkeeping—20 

hours; disclosures—19.75 hours. 

§ l.12—Premium capture cash reserve 

account: disclosures—1.75 hours. 

§ l.13—Allocation of risk retention: 

recordkeeping—20 hours; 

disclosures—2.5 hours. 

§ l.15—Exemption for qualified 

residential mortgages: 

recordkeeping—40 hours; 

disclosures—9.25 hours. 

§ l.18—Exemption for qualifying CRE 

loans: recordkeeping—40 hours; 

disclosures—1.25 hours. 

§ l.19—Exemption for qualifying 

commercial mortgages: 

recordkeeping—40 hours; 

disclosures—1.25 hours. 

§ l.20—Exemption for qualifying auto 

loans: recordkeeping—40 hours; 

disclosures—1.25 hours. 

FDIC 

Number of Respondents: 90 sponsors 

and 4,715 creditors. 

Total Estimated Annual Burden: 

59,463 hours. 

OCC 

Number of Respondents: 30 sponsors 

and 1,650 creditors. 

Total Estimated Annual Burden: 

20,483 hours. 

Board 

Number of Respondents: 20 sponsors 

and 7,636 creditors. 

Total Estimated Annual Burden: 

70,430 hours. 

Commission 

Number of Respondents: 104 sponsors 

and 1,500 creditors. 

Total Estimated Annual Burden: 

37,166 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 243 unique sponsors 

conduct ABS offerings per year. This 

estimate was based on 2010 data 

reported on the commercial bank Call 

Report (FFIEC 031 and 041) and from 

the ABS database AB Alert. Of the 243 

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. In some 

cases, the proposed rule is estimated to 

incur only an incremental burden on 

respondents. For example, in the 

representative sample option, the 

proposed rule requires that the sponsor 

cause to be disclosed information 

regarding the securitized assets, but the 

Agencies believe similar information 

regarding the securitized assets are 

already being made to investors, and 

therefore the proposed rule would only 

incur an incremental burden on 

sponsors. 

Next, the Agencies estimated how 

frequent 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 2009, and therefore, 

we estimate the total number of annual 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24149 

221We use the ABS issuance data from AssetBacked Alert on the initial terms of offerings, and 

we supplement that data with information from 

Securities Data Corporation (SDC). This estimate 

includes registered offerings and offerings made 

under Securities Act Rule 144A. We also note that 

this estimate is for offerings that are not exempted 

under §§l.21 and l.22 of the proposed rule. 

222Estimate of 1,700 offerings per year minus the 

estimate of the number of offerings qualifying for 

an exemption under §l.15, §l.18, §l.19, and 

§l.20 (220 total). 

223 243 * 43% = 104. 

224 1,500 creditors * 8 hours = 12,000 hours 

225These are the disclosures required by 

§§l.4(b)(1)–(2); l.5(c)(1)(i)–(ii), (2)(i)–(ii), and (3); 

l.6(b); l.7(b)(1)–(3); l.8(g)(1)(i)–(iv) and (g)(3); 

l.9(b)(1)–(2); l.10(a)(5)(i)–(viii); l.12(d)(1)–(3); 

l.13(a)(2); l.15(b)(4)(iii); l.18(b)(7)(iii); 

l.19(b)(10)(iii); and l.20(b)(9)(iii). 

226These are the disclosures required by 

§§l.8(g)(2); l.9(c)(2)(ii); l.10(b)(2)(B); 

l.13(b)(2)(B); l15(e)(3); l.18(c)(3); l19(c)(3); and 

l.20(c)(3). 

227 40 * 104 = 4,160 hours. 

228See 15 U.S.C. 78o–11(b), (c)(1)(A) and 

(c)(1)(B)(ii). 

offerings per year to be 1,700.221 We 

also made the following additional 

estimates: 

• 12 offerings per year will be subject 

to disclosure and recordkeeping 

requirements under sections §l.12 and 

§ l.13, which are divided equally 

among the four agencies (i.e., 3 offering 

per year per agency); 

• 100 offerings per year will be 

subject to disclosure and recordkeeping 

requirements under section §l.15, 

which are divided proportionately 

among the agencies based on the entity 

percentages described above (i.e., 8 

offerings per year subject to §l.15 for 

the Board; 12 offerings per year subject 

to §l.15 for the OCC; 37 offerings per 

year subject to §l.15 for the FDIC; and 

43 offerings per year subject to §l.15 

for the Commission); and 

• 40 offerings per year will be subject 

to disclosure and recordkeeping 

requirements under §l.18, §l.19, and 

§ l.20, 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). 

To obtain the estimated number of 

responses (equal to the number of 

offerings) for each option in Part B of 

the proposed rule, the Agencies 

multiplied the number of offerings 

estimated to be subject to the base risk 

retention requirements (i.e., 1,480) 222

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 1,480 

offerings per year by 43 percent, which 

equals 636 offerings per year. This 

number was then divided by the 

number of base risk retention options (7) 

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 636 offerings per year by 7 

options, resulting in 91 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 (except 

with respect to the recordkeeping 

burden hours under §l.8 and 

§ l.15(d)(13) as described below) by the 

number of burden hours estimated for 

the respective section, then adding these 

subtotals together. For example, under 

§ l.4, the Commission multiplied the 

estimated number of offerings per year 

per §l.4 (i.e., 91 offerings per year) by 

the disclosure burden hour estimate for 

§ l.4 of 2.0 hours. Thus, the estimated 

annual burden hours for respondents to 

which the Commission accounts for the 

burden hours under §l.4 is 182 hours 

(91 * 2.0 hours = 182 hours). For the 

recordkeeping burden estimate under 

§§ l.8(c) andl.8(d)(2), instead of using 

the number of offerings per year per 

base risk retention option, the Agencies 

multiplied the number of recordkeeping 

burden hours by the number of unique 

sponsors assigned to such Agency per 

year (i.e., 104 in the case of the 

Commission).223 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. 

To obtain an estimate for the number 

of burden hours required by 

§ l.15(d)(13), the Agencies multiplied 

the estimate of the number of creditors 

assigned to such Agency for purposes of 

this risk retention rule by an estimate of 

the number of hours that it will take 

creditors to perform a one-time update 

to their systems to account for the 

requirements of this section, which we 

estimate to be 8 hours.224 This estimate 

was added to the other disclosure and 

recordkeeping burden estimates as 

described above to achieve a total 

estimated annual burden for 

respondents assigned to the 

Commission. 

For disclosures made at the time of 

the securitization transaction,225 the 

Commission allocates 25 percent of 

these hours (1,009 hours) to internal 

burden for all sponsors. For the 

remaining 75 percent of these hours, 

(3,028 hours), the Commission uses an 

estimate of $400 per hour for external 

costs for retaining outside professionals 

totaling $1,211,200. For disclosures 

made after the time of sale in a 

securitization transaction,226 the 

Commission allocated 75 percent of the 

total estimated burden hours (892 

hours) to internal burden for all 

sponsors. For the remaining 25 percent 

of these hours (297 hours), the 

Commission uses an estimate of $400 

per hour for external costs for retaining 

outside professionals totaling $118,800. 

With respect to the agreed upon 

procedures report by an independent 

public accounting firm under the 

representative sample option, the 

Commission allocated 100 percent of 

the total estimated burden hours (4,160 

hours 227) to retaining outside 

professionals at an estimate of $400 per 

hour, for a total cost of $1,664,000. 

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 

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 five 

percent of the credit risk of any asset 

that the sponsor, through the issuance of 

an 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.228

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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24150 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

229See 15 U.S.C. 78o–11(c)(1)(C)(iii), (4)(A) and 

(B). 

230See id. at § 78o–11(c)(1)(B)(ii) and (2). 

231 15 U.S.C. 78w(a). 

232 17 U.S.C. 78c(f). 

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.229 In addition, section 15G 

states that the Agencies must permit a 

sponsor to retain less than five 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.230

Section 15G requires the Agencies to 

prescribe risk retention requirements for 

‘‘securitizers,’’ which the Agencies 

interpret are depositors or sponsors of 

ABS. The proposal would require that a 

‘‘sponsor’’ of a securitization transaction 

to 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. The proposed rules 

provide several options sponsors may 

choose from in meeting the risk 

retention requirements of section 15G, 

including, but not limited to, retention 

of a five percent ‘‘vertical’’ slice of each 

class of interests issued in the 

securitization or retention of a five 

percent ‘‘horizontal’’ first-loss interest in 

the securitization, as well as other risk 

retention options that take into account 

the manners in which risk retention 

often has occurred in credit card 

receivable and automobile loan and 

lease securitizations and in connection 

with the issuance of asset-backed 

commercial paper. The proposed rules 

also include a special ‘‘premium 

capture’’ mechanism designed to 

prevent a sponsor from structuring an 

ABS transaction in a manner that would 

allow the sponsor to effectively negate 

or reduce its retained economic 

exposure to the securitized assets by 

immediately monetizing the excess 

spread created by the securitization 

transaction. In designing these options 

and the proposed rules in general, 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 that is 

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 QRMs on 

the housing and housing finance 

markets. 

As discussed in greater detail in Part 

IV of this Supplementary Information, 

the proposed rule would generally 

prohibit QRMs from having product 

features that contributed significantly to 

the high levels of delinquencies and 

foreclosures since 2007—such as terms 

permitting negative amortization, 

interest-only payments, or significant 

interest rate increases—and also would 

establish underwriting standards 

designed to ensure that QRMs are of 

very high credit quality consistent with 

their exemption from risk retention 

requirements. These underwriting 

standards include, among other things, 

maximum front-end and back-end debtto-income ratios of 28 percent and 36 

percent, respectively; a maximum loanto-value ratio of 80 percent in the case 

of a purchase transaction (with a lesser 

combined LTV permitted for refinance 

transactions); a 20 percent down 

payment requirement in the case of a 

purchase transaction; and credit history 

restrictions. 

The proposed rules also would not 

require a sponsor to retain any portion 

of the credit risk associated with a 

securitization transaction if the ABS 

issued are exclusively collateralized by 

qualified assets (QAs)—commercial 

loans, commercial mortgages, or 

automobile loans that meet 

underwriting standards included in the 

proposed rule for the individual asset 

class. 

The Commission is sensitive to the 

costs and benefits imposed by its rules. 

The discussion below focuses on the 

costs and benefits of the decisions made 

by the Commission, together with the 

other Agencies, to fulfill the mandates 

of the Dodd-Frank Act within its 

permitted discretion, rather than the 

costs and benefits of the mandates of the 

Dodd-Frank Act itself. For instance, the 

analysis below assumes as a baseline 

that a standard for QRM is in place, 

since such a standard is mandated by 

statute. Rather than assessing the 

economic costs and benefits of 

implementing such a standard, the 

analysis below focuses on the relative 

costs and benefits of alternative QRM 

standards. Similarly, the analysis 

assumes the following: A risk retention 

requirement of at least 5 percent for 

non-qualified mortgages and nonqualified assets, 0% for QRMs and less 

than 5 percent for qualified assets. Thus, 

our analysis below examines the costs 

and benefits of alternative 

implementations of a risk retention 

requirement meeting the mandates of 

the Dodd-Frank Act, rather than the 

existence of a risk retention 

requirement. Although our intent is to 

limit the economic analysis of this rule 

to decisions made by the Commission, 

to the extent that the Commission’s 

discretion is exercised to further the 

benefits intended by the Dodd-Frank 

Act, the two types of benefits might not 

be entirely separable. 

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.231

Further, Section 2(b) of the Securities 

Act of 193381 and Section 3(f) of the 

Exchange Act requires the 

Commission,232 when engaging in 

rulemaking where we are 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. The 

Commission has considered and 

discussed below the effects of the 

proposed rules on efficiency, 

competition, and capital formation, as 

well as the benefits and costs associated 

with the Commission’s decisions in the 

proposed rulemaking. 

2. Risk Retention Methods for NonQRMs and Non-Qualifying Assets 

(‘‘QAs’’) 

The proposed rules require not less 

than 5 percent risk retention for all nonQRMs and non-QAs. The form of the 

retention is to be chosen from a menu 

of options, which should provide 

flexibility to sponsors in meeting the 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24151 

233See Board of Governors of the Federal Reserve 

System, Report to the Congress on Risk Retention, 

October 2010 available at http://federalreserve.gov/ 

boarddocs/rptcongress/securitization/

riskretention.pdf. 

234For example, Chen, Liu, and Ryan (2008) show 

that banks retain more risk when loans have higher 

or less externally verifiable credit risk. See 

Characteristics of Securitizations that Determine 

Issuers’ Retention of the Risks of the Securitized, 

Weitzu Chen, Chi-Chun Liu, and Stephen Ryan 

(2008), The Accounting Review, 2008.83.5.1181. 

235As discussed in the introduction, this 

statement refers to the choice made by the 

Commission and other agencies by having proposed 

a menu of options rather than the statutory mandate 

to require risk retention. 

risk retention requirement mandated by 

Section 15G, as added by the DoddFrank Act. Section 15G directs the 

Agencies to set appropriate risk 

retention rules, which will require the 

retention of no less than 5 percent of the 

credit risk in the securitized assets for 

all ABS classes not exempt from the 

requirement. Section 15G provides for a 

risk retention exemption for sponsors of 

ABS backed solely by QRMs and for 

certain other sponsors or ABS asset 

classes as discussed below and a less 

than five percent risk retention 

requirement for QAs. 

Empirical evidence points to a 

significant heterogeneity of 

securitization structures, practices and 

risk characteristics across ABS asset 

classes.233 Accordingly, allowing 

sponsors to choose a form of risk 

retention from a menu of options 

provides them with the flexibility of 

choosing the form that best suits their 

operational and financing preferences. 

By including most of the risk retention 

forms currently observed in the 

marketplace, the Agencies’ proposal 

benefits sponsors, originators, and 

investors alike by limiting disruption to 

current securitization practices to the 

extent possible. Historically, most 

sponsors have been exposed to some 

level of credit risk by retaining an 

economic interest in the pools they 

securitize in the form of first-loss or prorata positions.234 Thus, the proposed 

rule allows sponsors that have existing 

risk retention programs to minimize 

their compliance costs resultant from 

the statute’s mandate. Without the 

flexibility allowed by a broad menu-ofoptions approach, there likely would be 

an increase in borrowing costs to 

sponsors and to the borrowers whose 

loans are in the securitized pools. In 

some cases, this increase could be large 

enough to make certain types of 

securitizations economically unfeasible. 

It is possible that the flexibility 

allowed by the proposed approach to 

implementing the risk retention 

mandate of Section 15G might result in 

some sponsors choosing risk retention 

methods that do not align fully their 

incentives with those of investors. In 

such cases, underwriting standards and 

pool selection procedures may not 

improve. If investors are reluctant to 

invest in ABS where a sponsor has 

selected such a suboptimal risk 

retention method, risk retention might 

not have the effect of facilitating capital 

formation. To the extent that such 

reluctance on part of investors provides 

sponsors with the incentive to choose 

risk retention methods that investors 

demand, this effect on capital formation 

is mitigated. 

An integral part of the proposed rules 

are new risk retention disclosure 

requirements specifically tailored to 

each of the permissible forms of risk 

retention. The required disclosure 

would provide investors with 

information on the sponsor’s retained 

interest in an ABS transaction, such as 

the amount and form of the interest 

retained and the assumptions used in 

determining the aggregate value of ABS 

to be issued. This information would 

benefit investors by providing them 

with an efficient mechanism to monitor 

compliance with the proposed rules and 

make informed investment decisions. 

However, compliance costs to sponsors 

would increase, since sponsors would 

now have to prepare and provide these 

disclosures to investors. 

Therefore, the Commission believes 

that the proposed menu-of-options 

approach and the accompanying 

disclosures will have no competitive 

effects, and will implement the 

mandates of Section 15G without 

causing economic inefficiencies or 

hindering capital formation.235

Vertical Risk Retention Method 

By requiring the retention of five 

percent of each interest backed by the 

securitized asset pool, regardless of 

whether the interest is certificated or 

not, the vertical risk retention method is 

the most straightforward method to 

implement. The transparency and ease 

of verification of this method will likely 

benefit investors to the extent that they 

view their ability to discern a sponsor’s 

risk retention important. This provides 

the sponsor an interest in the entire 

structure of the securitization 

transaction. However, the vertical risk 

retention method requires a sponsor to 

bear only a small fraction of the losses 

incurred by the pool, thus possibly 

failing to align sufficiently originators’ 

and sponsors’ interests with those of 

investors when it comes to the 

origination and underwriting of riskier 

asset classes. Since 5 percent is a lower 

bound on the risk required to be 

retained, it is possible some sponsors 

may hold more if it were economically 

optimal. 

Horizontal Risk Retention Method 

This method exposes a sponsor to the 

first 5 percent of all pool-asset losses 

and thus results in the sponsor retaining 

substantially more than five percent of 

the credit risk in a securitization. That 

is, a sponsor will be exposed to 100 

percent of all losses as long as those 

losses are up to 5 percent. Therefore, 

this method imposes a significant 

disincentive on sponsors of poorly 

underwritten assets. As a result, the 

horizontal method of risk retention 

should benefit investors by aligning 

their incentives with those of originators 

and sponsors when originating and 

underwriting riskier asset classes. 

Since the retention of a horizontal 

first-loss position in securitizations 

leaves the sponsor holding a significant 

amount of risk, it is possible that for less 

risky asset classes a 5 percent risk 

retention might be unnecessarily high. 

For such asset classes, a sponsor might 

be constrained to raising external 

financing for only 95 percent of the 

asset pool, while the market might have 

allowed for a smaller equity interest. As 

a result, the sponsor might have to incur 

additional financing costs which would 

have the effect of impeding capital 

formation. 

The retention of a first-loss position 

has been a common market practice for 

many asset classes, so this method 

should not be unnecessarily disruptive 

and should therefore impose limited 

additional costs on sponsors. The effect 

would be that of no decrease in 

efficiency and no new impediment to 

capital formation. 

Premium Capture Cash Reserve Account 

Securitization transactions often 

contain pools of assets that are expected 

to earn substantially higher returns 

compared to the financing rates on the 

ABS issued in the securitization. This is 

generally referred to as excess spread. In 

situations where there is substantial 

excess spread, the sponsor can obtain 

significant economic income by selling 

an interest based on the excess spread. 

If the sponsor is able to recover more 

than 5 percent of the balance of the pool 

in a short period of time, then the 

sponsor would be left with limited 

economic interest in the securitization. 

This is particularly true if defaults occur 

later in the life of pool assets. For this 

reason, the proposed rules prohibit the 

cash flows from the excess spread (or 

cash proceeds from selling it) to be 

distributed to the sponsor. This benefits 

investors by helping to ensure that the 

incentive-alignment objectives of the 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24152 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

236See Demyanyk, Yuliya, and Otto Van Hemert, 

‘‘Understanding the Subprime Crisis,’’ Working 

paper. St. Louis, Missouri: Federal Reserve Bank of 

St. Louis (2008); Quercia, Roberto, Michael 

Stegman, and Walter R. Davis, ‘‘Residential 

Mortgage Default: A Review of the Literature,’’ 

Journal of Housing Research 3(2): 341–379 (2005); 

Ambrose, Brent W., Michael LaCour-Little, and 

Zsuzsa Huszar, ‘‘A Note on Hybrid Mortgages,’’ Real 

Estate Economics 33(4): 765–782 (2005); Anderson, 

Dennis Capozza and Robert Van Order, 

‘‘Deconstructing the Mortgage Meltdown: A 

Methodology for Decomposing Underwriting 

Quality,’’ Social Science Research Network. 

http://ssrn.com/abstract=1411782 (2009); Gerardi, 

Kristopher, Andreas Lehnert, Shane Sherlund, and 

Paul Willen ‘‘Making Sense of the Subprime Crisis,’’ 

Brookings Papers on Economic Activity (Fall 2008), 

59–145; Austin Kelly, ‘‘Skin in the Game: Zero 

Down Payment Mortgage Default,’’ Federal Housing 

Finance Agency, Journal of Housing Research, Vol. 

19, No. 2 (2008); Neil Bhutta, Jane Dokko and Hui 

Shan, ‘‘The Depth of Negative Equity and Mortgage 

Default Decisions,’’ Finance and Economics 

Discussion Series, Federal Reserve Board, 2010–35 

(2010); Deng, Yongheng, John M. Quigley and 

Robert van Order (2000), ‘‘Mortgage Terminations, 

Heterogeneity and the Exercise of Mortgage 

Options,’’ Econometrica, Vol. 68, No. 2 (2000), pp. 

275–307. 

proposed rules are achieved. However, 

this may reduce the flexibility of 

sponsors in structuring their deals, thus 

imposing a cost. 

L-Shaped Method 

Another risk retention option in the 

proposed rules would allow a sponsor, 

subject to certain conditions, to use an 

equal combination of a vertical risk 

retention and horizontal risk retention 

as a means of retaining the required five 

percent exposure to the credit risk of the 

securitized assets. This form of risk 

retention is referred to as an ‘‘L-Shaped’’ 

form of risk retention because it 

combines both vertical and horizontal 

forms. Overall, this has the benefits and 

costs associated with the two 

approaches as described above. Also, 

the proposed requirement that the 

sponsor retain 50 percent vertical and 

50 percent horizontal facilitates the 

monitoring of the risk retention 

compliance by investors, Agencies and 

other market participants. 

Representative Sample Method 

The representative sample method 

requires risk retention of a randomly 

selected loan pool that is ‘‘similar’’ in 

risk attributes to the securitized loans 

prior to a securitization. Since it may be 

costly to ensure the true ‘‘randomness’’ 

of the selection or ‘‘representativeness’’ 

of the sample, and since sponsors’ prior 

knowledge of the sample selection bias 

might alter their incentives to put wellunderwritten assets into the pool, this 

method may not fulfill its incentivealignment benefits without mechanisms 

in place to ensure there is no selection 

bias. Thus, the proposed rules require 

that sponsors have plans and 

procedures in place, maintain 

documentation, and have the sampling 

procedures agreed upon by an 

independent auditing firm. In addition, 

the proposed rules would require 

ongoing disclosures about the 

performance of the assets in the 

representative sample in the same form, 

level, and manner as is provided 

concerning the securitized assets. 

Although this will increase sponsors’ 

compliance costs, the Commission 

believes that it will also further the 

incentive-alignment benefits 

contemplated in Section 15G of the 

Exchange Act. 

For some asset classes, such as 

automobile loans, retaining a portion of 

the loans that would ordinarily be 

securitized has been used as a method 

of risk retention. Therefore, permitting a 

representative sample risk retention 

option with the appropriate safeguards 

will likely benefit sponsors of such asset 

classes, whose compliance costs—other 

than reporting costs—will not increase 

as a result of the proposed rules. 

Furthermore, the borrowers whose loans 

back such securitizations will also likely 

experience no increase in their 

borrowing costs. 

Seller’s Interest Method 

Securitizations of revolving lines of 

credit, such as credit card accounts or 

dealer floorplan 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 

asset master trust that is collateralized 

by revolving loans or other extensions of 

revolving 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 

issuer. The definitions of a seller’s 

interest and a revolving asset master 

trust are intended to be consistent with 

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. This should 

benefit all parties to the securitization 

by balancing implementation costs for 

sponsors utilizing the master trust 

structure with incentive-alignment 

benefits for investors. 

3. Definition of Qualified Residential 

Mortgages 

Section 15G requires the Commission, 

along with the other Agencies, to jointly 

specify underwriting standards for 

QRMs that take into consideration 

underwriting and product features that 

historical loan performance data 

indicate result in lower risk of default. 

Section 15G exempts ABS entirely 

backed by QRMs from the risk retention 

mandated by Section 15G. In defining 

QRMs, the Agencies examined data on 

mortgage performance supplied by 

Lender Processing Services’ (‘‘LPS’’) 

Applied Analytics division (formerly 

McDash Analytics). To minimize 

performance differences arising from 

unobservable changes across products, 

and to focus on loan performance 

through stressful environments, the 

analysis generally used prime fixed-rate 

loans originated from 2005 to 2008. 

Since the LPS data do not include 

detailed borrower information, the 

Agencies also analyzed data from the 

triennial Survey of Consumer Finances 

(‘‘SCF’’) for the 1992–2007 period. To 

isolate the borrower characteristics 

closest in time to the mortgage 

origination, the analysis was limited to 

the approximately 1,500 families, who 

purchased their homes in the year prior 

to or of the survey. The Agencies also 

examined a combined data set of loans 

purchased or securitized by the 

Enterprises from 1997 to 2009. This data 

set 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. 

The analysis of the data described 

above and the conclusions of numerous 

academic studies support a definition of 

QRM that takes into account the 

following underwriting and product 

features: the borrower’s ability to repay 

the mortgage (as captured the borrower’s 

debt-to-income ratio); the borrower’s 

credit history; the borrower’s down 

payment amount and sources; the loanto-value ratio for the loan; the form of 

valuation used in underwriting the loan; 

the type of mortgage involved; and the 

owner-occupancy status of the property 

securing the mortgage.236 The 

Commission believes that selecting this 

subset of features will be beneficial to 

loan originators, because these are the 

features typically considered in the 

mortgage underwriting process. 

Although there might be factors among 

those listed above that loan originators 

had not previously used in their lending 

decisions, the Commission believes that 

this is unlikely. Thus, the Commission 

expects that loan originators would not 

have to incur significant new or 

additional costs to collect information 

on these specific underwriting and 

product features, which should have the 

effect of not unnecessarily disrupting 

existing lending practices. As a result, 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24153 

the Commission expects that mortgage 

rates would not be adversely impacted 

by the Agencies’ choice of the features 

used to define QRMs and therefore this 

choice would not have a negative effect 

on efficiency and capital formation. 

The Agencies also have sought to 

make the standards applicable to QRMs 

transparent to, and verifiable by, 

originators, securitizers, investors and 

supervisors. The Commission believes 

that investors will also benefit from the 

proposed approach to defining QRMs 

using the above subset of mortgage 

features, since these include the factors 

most commonly considered by the 

market as determinants of loan quality 

and expected mortgage default. 

Therefore, investors will likely be 

familiar with them, which will have the 

effect of facilitating investors’ 

interpretation and understanding of the 

QRM standard as proposed. 

When considering the underwriting 

and product features to be used in the 

QRM definition, the Agencies selected 

features that are transparent or 

verifiable. The Commission believes 

that this will benefit all entities 

involved in the securitization process. 

Loan originators will be able to easily 

discern whether a mortgage is a QRM 

during the underwriting process. 

Sponsors will be able to unambiguously 

determine whether an ABS is backed by 

QRMs alone and therefore qualifies for 

the risk retention exemption. And 

finally, investors will be able to assess 

without difficulty whether they are 

investing in a QRM ABS or not. Thus, 

the Commission expects that as a result 

of the transparency and verifiability of 

the mortgage features used to define 

QRMs, there will be no reduction in 

efficiency or impediment to capital 

formation. 

Some of the QRM standards proposed 

by the Agencies rely on definitions and 

calculations which may be defined in 

multiple ways. To provide clarity, the 

Agencies are proposing the use of 

definitions of key terms as established 

in the U.S. Department of Housing and 

Urban Development (HUD) Handbook 

4155.1 (New Version), Mortgage Credit 

Analysis for Mortgage Insurance, as in 

effect on December 31, 2010. Since the 

HUD definitions have been time-tested 

and are well understood by the market, 

the Commission believes this approach 

will be efficient and beneficial to both 

investors and sponsors. On the other 

hand, loan originators and sponsors 

who have been using alternative 

definitions might incur adjustment 

costs, if they have to modify their loan 

origination systems and processes. 

These new lending costs might be 

passed onto borrowers in the form of 

higher mortgage rates or fees, thus 

impeding capital formation. 

The QRM standards that the Agencies 

are proposing prescribe fixed thresholds 

for several borrower and loan features. 

For instance, a QRM cannot have a 

front-end debt-to-income ratio higher 

than 28 percent or a loan-to-value ratio 

higher than 80 percent. The thresholds 

chosen in the proposed rule reflect a 

balance between setting standards that 

are over- or under-conservative with 

regard to mortgage default risk. If the 

Agencies had been more conservative in 

their choices of thresholds such that 

fewer mortgages were QRMs, more 

sponsors would have incurred 

compliance costs for risk retention for 

non-QRMs. These additional costs 

would likely be passed on to borrowers 

whose loans comprise the securitized 

pool, which would have the effect of 

increasing mortgage rates for a larger 

proportion of home buyers. On the other 

hand, QRM standards that are more 

restrictive and that result in more nonQRMs would likely create a larger and 

therefore more liquid secondary market 

for non-QRMs, and thus reduce the 

liquidity premium for non-QRM ABS. 

The reduced liquidity premium, which 

would decrease non-QRM rates, might 

counteract the possible increase in nonQRM rates resulting from risk retention 

compliance costs. 

The opposite would also have been 

true. If the Agencies had been less 

conservative in their choices of 

thresholds such that a larger fraction of 

mortgages would have qualified as 

QRMs, then non-QRMs might face 

illiquidity in the secondary market. 

However, fewer borrowers would have 

had to face increased mortgage rates 

resulting from compliance costs for risk 

retention. 

4. Risk Retention Allocation for NonQRMs and Non-QAs 

Many securitization transactions are 

brought to the market by aggregators 

who purchase assets from one or many 

originators, combine these assets in a 

pool, and then issue securities backed 

by the assets to investors. This 

securitization chain allows for the 

possibility of implementing risk 

retention at either the originator or the 

sponsor level. Risk retention imposed 

directly on originators may be more 

effective in improving underwriting 

standards than if imposed on sponsors. 

On the other hand, many of the risk 

retention forms discussed earlier would 

be unfeasible to implement due to the 

complexity introduced by the two-stage 

nature of a securitization by an 

aggregator. Nonetheless, the Agencies 

believe that the imposition of risk 

retention on sponsors should still have 

the effect of improving underwriting 

standards. Sponsors would have strong 

incentives to monitor the lending 

practices of originators and consider 

these practices when acquiring pool 

assets. This likely will align originators’ 

interests with those of sponsors, whose 

interests would now be aligned with 

those of investors through risk retention. 

The proposed rules allow sponsors to 

allocate some of their risk retention 

responsibilities to originators, which 

would provide additional flexibility in 

complying with the requirements. 

However, the proposed rules do not 

allow the allocation of risk to an 

originator contributing a small share of 

assets to the securitized pool. Thus, the 

proposed allocation of risk retention is 

likely to benefit small loan originators 

by not allowing sponsors to pass onto 

them their own risk retention costs. 

The Agencies are also proposing to 

allow risk retention allocation to a thirdparty purchaser in the securitization of 

commercial real estate loans. It has been 

a common market practice for a thirdparty purchaser to retain the first-loss 

position in commercial mortgage-backed 

transactions. This third-party buyer, 

also known as ‘‘B-piece buyer,’’ is 

typically involved in the securitization 

early on and thus can significantly affect 

pool asset selection. The B-piece buyer 

reviews the loans and corresponding 

mortgage properties, and may ask for 

loans to be removed from the pool if 

underwriting issues are uncovered. 

Thus, the Agencies’ decision to allow a 

B-piece buyer to meet a sponsor’s risk 

retention obligations under Section 15G 

of the Exchange Act, will likely benefit 

both sponsors and investors. It 

accommodates existing market 

practices, thus minimizing sponsors’ 

compliance costs while aligning the 

interests of investors with those of 

parties performing due diligence on the 

pool assets. In this way, the proposal 

should provide incentives for good 

underwriting and origination practices. 

Since a sponsor’s risk retention 

obligation can be met by a B-piece buyer 

only under certain conditions described 

earlier, these conditions may increase Bpiece buyers’ cost of participating in 

CMBS transactions. B-piece buyers may 

be able to pass these costs to borrowers 

with an adverse effect on capital 

formation. However, the Commission 

preliminary believes that the conditions 

help ensure that the B-piece buyer’s risk 

retention is consistent with the intent of 

Section 15G and would benefit 

investors, and ultimately facilitating 

capital formation. 

As noted earlier, the B-piece buyer in 

CMBS transactions often acts in the 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24154 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

capacity of a special servicer, which can 

create conflicts of interest between the 

B-piece buyer and senior tranche 

holders. To mitigate these conflicts of 

interest, the Agencies are proposing to 

have an operating adviser oversee the 

servicing activities of the B-piece buyer 

when the B-piece buyer acts in a 

capacity of a special servicer. While 

such a requirement would increase 

compliance costs, it should have the 

benefit of minimizing B-piece buyers’ 

ability to manipulate cash flows through 

special servicing and by limiting Bpiece buyers’ ability to offset the 

consequences of poor underwriting 

through special servicing. In addition, it 

should incentivize B-piece buyers to 

avoid adding into the pool poorly 

underwritten or originated assets. This 

would be consistent with the purpose of 

Section 15G and would benefit 

investors, thus facilitating capital 

formation. 

The Agencies are proposing yet 

another option for risk retention 

allocation, which is specifically 

designed for asset-backed commercial 

paper (‘‘ABCP’’) conduits. This option 

takes into account the special structures 

through which this type of ABS is 

typically issued, as well as the manner 

in which exposure to the credit risk of 

the underlying assets is typically 

retained. 

Although the proposal would allow 

the originator-sellers (rather than the 

sponsor) to retain the required eligible 

horizontal residual interest, the 

proposal also imposes certain 

obligations directly on the sponsor in 

recognition of the key role the sponsor 

plays in organizing and operating an 

eligible ABCP conduit. Most 

importantly, the proposal provides that 

the sponsor of an eligible ABCP conduit 

that issues ABCP in reliance on this 

option would be the securitization party 

ultimately responsible for compliance 

with the risk retention requirements of 

Section 15G of the Exchange Act. The 

proposal allows for an ABCP sponsor to 

be in compliance if each originatorseller retains a five-percent horizontal 

residual interest in each intermediate 

SPV established by or on behalf of that 

originator-seller for purposes of issuing 

interests to an eligible ABCP conduit. 

Since eligible ABCP conduits also 

provide full liquidity guarantees to 

commercial-paper investors by 

regulated liquidity providers, the 

flexibility allowed by the proposed rule 

benefits ABCP sponsors by allowing 

them to avoid costly duplicative risk 

retention and should have the effect of 

promoting capital formation in this 

important segment of the securitization 

market. 

Further, the proposed rule avoids an 

outcome in which one originator-seller 

would have to be exposed to risks 

underwritten by other originator-sellers. 

Each originator-seller would be required 

to retain credit exposure only to its own 

receivables, thus properly aligning its 

incentives with those of ABCP 

investors. 

5. Hedging Prohibitions 

Hedging helps sponsors manage and 

mitigate their exposure to unwanted 

risks. For example, a securitizer may 

want to mitigate the interest rate risk of 

its ABS portfolio. Hedging is also a 

beneficial activity from a systemic risk 

perspective because it helps market 

participants redistribute risk. Given the 

benefits from hedging, the proposed rule 

aims to implement the risk retention 

mandate of Section 15G without unduly 

limiting a sponsor’s risk management 

activities. This is accomplished by 

prohibiting hedging only to the extent 

that hedging would result in a sponsor 

no longer being exposed to the risk 

required to be retained by Section 15G 

of the Exchange Act. 

The ability to hedge interest rate risk 

and similar risks increases economic 

efficiency and facilitates capital 

formation, because it allows securitizers 

to direct their capital and efforts 

towards activities of comparative 

advantage. For instance, a securitizer 

might have a superior ability of 

assessing the credit risk of residential 

mortgages, but be less skilled in 

forecasting interest-rate changes. Such a 

securitizer might find it more efficient 

to hedge the interest-rate risk of the 

residential mortgages collateralizing an 

RMBS rather than invest resources in 

improving its ability to understand and 

price this interest-rate risk. 

Furthermore, since interest-rate 

fluctuations are unrelated to 

underwriting deficiencies in the loan 

origination process, allowing a 

securitizer to hedge interest-rate risk 

will not compromise the incentive 

alignment contemplated by the Act. The 

ability to hedge also may help 

competition, because by hedging less 

diversified companies may be able to 

compete with more diversified 

companies that have weaker hedging 

incentives. Therefore, the proposed 

rules are designed to promote efficiency, 

competition and capital formation. 

6. Treatment of Government-Sponsored 

Enterprises 

The proposed rules, which allows the 

guarantees of Fannie Mae and Freddie 

Mac to satisfy the risk retention 

requirements while they are operating 

under the conservatorship or 

receivership of FHFA with capital 

support from the United States, as well 

as for any limited-life regulated entity 

succeeding to the charter and also 

operating with such capital support, 

avoid unnecessary costs to be incurred 

by sponsors until the statutory and 

regulatory framework for the Enterprises 

becomes clearer. The Commission 

believes that the capital support 

provided by the United States 

government makes additional risk 

retention unnecessary because as a 

result of the support investors in GSE 

ABS are not exposed to any credit 

losses. Thus, there would be no 

incremental benefit to be gained by 

requiring GSEs to retain risk. 

7. Resecuritization Transactions 

The Agencies have identified certain 

resecuritizations where duplicative risk 

retention requirements would provide 

no added benefit. Resecuritizations 

collateralized only by existing 15Gcompliant 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 

them, the resecuritization process 

would neither increase nor reallocate 

the credit risk of the underlying ABS. 

Therefore, there would be no cost to 

investors from 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 underlying 15Gcompliant 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 retranche 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24155 

237 5 U.S.C. 603. 238See 12 U.S.C. 4513. 

resecuritizations, the proposed rule 

seeks to ensure that this misalignment is 

addressed by not granting these 

resecuritizations with an exemption 

from risk retention. However, the 

proposed rules may have an adverse 

impact on capital formation and 

efficiency if they make some types of 

resecuritization transactions costlier or 

infeasible to conduct as a result of risk 

retention costs. 

D. Executive Order 12866 Determination 

The Office of Management and Budget 

(OMB) reviewed this proposed rule as it 

relates to programs and activities of the 

Department of Housing and Urban 

Development (HUD) under Executive 

Order 12866 (entitled ‘‘Regulatory 

Planning and Review’’), and determined 

the rule as it relates to HUD to be an 

economically significant regulatory 

action, as provided in section 3(f)(1) of 

the Order. The docket file is available 

for public inspection in the Regulations 

Division, Office of General Counsel, 

Department of Housing and Urban 

Development, 451 7th Street, SW., 

Room 10276 Washington, DC 20410– 

0500. Due to security measures at the 

HUD Headquarters building, please 

schedule an appointment to review the 

docket file by calling the Regulations 

Division at 202–402–3055 (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. 

E. OCC Unfunded Mandates Reform Act 

of 1995 Determination 

Section 202 of the Unfunded 

Mandates Reform Act of 1995, Public 

Law 104–4 (Unfunded Mandates Act) 

requires that an agency prepare a 

budgetary impact statement before 

promulgating a rule that includes a 

Federal mandate that may result in 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million (adjusted 

for inflation) or more in any one year. 

The current inflation-adjusted 

expenditure threshold is $126.4 million. 

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 

securitization activity, the OCC 

estimates that, pursuant to the proposed 

rule, national banks would be required 

to retain approximately $2.8 billion of 

credit risk, after taking into 

consideration the proposed exemptions 

for qualified residential mortgages and 

other qualified assets. The cost of 

retaining this risk amount 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 

$2.8 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 point. To capture any 

additional lost fees, the OCC 

conservatively estimated that the total 

cost of lost fees to be two percent of the 

retained amount, or approximately $56 

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 required disclosures. The 

OCC estimates that implementation and 

disclosure will require approximately 

480 hours per institution, or at $100 per 

hour, approximately $48,000 per 

institution. The OCC estimates that the 

rule will apply to approximately 25 

national banking organizations. Thus, 

the estimate of the total administrative 

cost of the proposed rule is 

approximately $1.2 million. Thus, the 

estimated total cost of the proposed rule 

applied to ABS is $57.2 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 $126.4 million or more. 

Accordingly, the OCC has not prepared 

a budgetary impact statement or 

specifically addressed the regulatory 

alternatives considered. 

F. Commission: Small Business 

Regulatory Enforcement Fairness Act 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 237 the Commission 

solicits data to determine whether the 

proposal 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. 

G. 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.238 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 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 ll—Credit Risk Retention 

Subpart A—Authority, Purpose, Scope and 

Definitions 

Sec. 

ll.1 [Reserved] 

ll.2 Definitions. 

Subpart B—Credit Risk Retention 

ll.3 Base risk retention requirement. 

ll.4 Vertical risk retention. 

ll.5 Horizontal risk retention. 

ll.6 L-Shaped risk retention. 

ll.7 Revolving asset master trusts. 

ll.8 Representative sample. 

ll.9 Eligible ABCP conduits. 

ll.10 Commercial mortgage-backed 

securities. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24156 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

ll.11 Federal National Mortgage 

Association and Federal Home Loan 

Mortgage Corporation ABS. 

ll.12 Premium capture cash reserve 

account. 

Subpart C—Transfer of Risk Retention 

ll.13 Allocation of risk retention to an 

originator. 

ll.14 Hedging, transfer and financing 

prohibitions. 

Subpart D—Exceptions and Exemptions 

ll.15 Exemption for qualified residential 

mortgages. 

ll.16 Definitions applicable to qualifying 

commercial loans, commercial 

mortgages, and auto loans. 

ll.17 Exceptions for qualifying 

commercial loans, commercial 

mortgages, and auto loans. 

ll.18 Underwriting standards for 

qualifying commercial loans. 

ll.19 Underwriting standards for 

qualifying CRE loans. 

ll.20 Underwriting standards for 

qualifying auto loans. 

ll.21 General exemptions. 

ll.22 Safe harbor for certain foreignrelated transactions. 

ll.23 Additional exemptions. 

Appendix A to Part ___— Additional QRM 

Standards; Standards for Determining 

Acceptable Sources of Borrower Funds, 

Borrower’s Monthly Gross Income, 

Monthly Housing Debt, and Total 

Monthly Debt 

Subpart A—Authority, Purpose, Scope 

and Definitions 

§ ll.1 [Reserved] 

§ ll.2 Definitions. 

For purposes of this part, the 

following definitions apply: 

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. 

ABS interest: 

(1) Includes 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, 

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. 

Affiliate. 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. 

Appropriate Federal banking agency 

has the same meaning as in section 3 of 

the Federal Deposit Insurance Act (12 

U.S.C. 1813). 

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)(77) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(77)). 

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 undivided property 

interests in the assets or other property 

of the issuing entity, or any other 

property interest in such assets or other 

property. 

Collateralize. 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 § _.16 of this part. 

Commission means the Securities and 

Exchange Commission. 

Consolidated affiliate means, with 

respect to a sponsor, an entity (other 

than the issuing entity) the financial 

statements of which are consolidated 

with those of: 

(1) The sponsor under applicable 

accounting standards; or 

(2) Another entity the financial 

statements of which are consolidated 

with those of the sponsor under 

applicable accounting standards. 

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 a 

company if the person: 

(i) Owns, controls or holds with 

power to vote 25 percent or more of any 

class of voting securities of the 

company; or 

(ii) Controls in any manner the 

election of a majority of the directors, 

trustees or persons performing similar 

functions of the company. 

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; 

(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. 

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 ABCP conduit means an 

issuing entity that issues ABCP 

provided that: 

(1) The issuing entity is bankruptcy 

remote or otherwise isolated for 

insolvency purposes from the sponsor of 

the issuing entity and from any 

intermediate SPV; 

(2) The interests issued by an 

intermediate SPV to the issuing entity 

are collateralized solely by the assets 

originated by a single originator-seller; 

(3) All of the interests issued by an 

intermediate SPV are transferred to one 

or more ABCP conduits or retained by 

the originator-seller; 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 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. 

Eligible horizontal residual interest 

means, with respect to any 

securitization transaction, an ABS 

interest in the issuing entity that: 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24157 

(1) Is allocated all losses on the 

securitized assets (other than losses that 

are first absorbed through the release of 

funds from a premium capture cash 

reserve account, if such an account is 

required to be established under §l.12 

of this part) until the par value of such 

ABS interest is reduced to zero; 

(2) Has the most subordinated claim 

to payments of both principal and 

interest by the issuing entity; and 

(3) Until all other ABS interests in the 

issuing entity are paid in full, is not 

entitled to receive any payments of 

principal made on a securitized asset, 

provided, however, an eligible 

horizontal residual interest may receive 

its current proportionate share of 

scheduled payments of principal 

received on the securitized assets in 

accordance with the transaction 

documents. 

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. 

Intermediate SPV means, with respect 

to an originator-seller, a special purpose 

vehicle that: 

(1) Is bankruptcy remote or otherwise 

isolated for insolvency purposes from 

the originator-seller; 

(2) Purchases assets from the 

originator-seller; and 

(3) Issues interests collateralized by 

such assets to one or more ABCP 

conduits. 

Issuing entity means, with respect to 

a securitization transaction, the trust or 

other entity: 

(1) That is created at the direction of 

the sponsor; 

(2) That owns or holds the pool of 

assets to be securitized; and 

(3) In whose name the asset-backed 

securities are issued. 

Originator means a person who: 

(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. 

Originator-seller means an entity that 

creates assets through one or more 

extensions of credit and sells those 

assets (and no other assets) to an 

intermediate SPV, which in turn sells 

interests collateralized by those assets to 

one or more ABCP conduits. 

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; 

(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. 

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. 

Revolving asset master trust means an 

issuing entity that is: 

(1) A master trust; and 

(2) Established to issue more than one 

series of asset-backed securities all of 

which are collateralized by a single pool 

of revolving securitized assets that are 

expected to change in composition over 

time. 

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; or 

(2) A sponsor of the asset-backed 

securities. 

Seller’s interest means an ABS 

interest: 

(1) In all of the assets that: 

(i) Are owned or held by the issuing 

entity; and 

(ii) Do not collateralize any other ABS 

interests issued by the issuing entity; 

(2) 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 

(3) That adjusts for fluctuations in the 

outstanding principal balances of the 

securitized assets. 

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 such allocations or 

distributions from a servicer and the 

trustee does not otherwise perform the 

functions of a servicer. 

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. 

U.S. person: 

(1) Means— 

(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 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. 

(2) Does not include— 

(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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24158 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

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 

pension plans, and any other similar 

international organizations, their 

agencies, affiliates and pension plans. 

(3) For purposes of the definition of 

a U.S. person, the term United States 

means the United States of America, its 

territories and possessions, any State of 

the United States, and the District of 

Columbia. 

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 shall retain an economic 

interest in the credit risk of the 

securitized assets in accordance with 

any one of § __.4 through § __.11 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 retains an economic interest 

in the credit risk of the securitized 

assets in accordance with any one of 

§ __.4 through § __.11 of this part. 

§ __.4 Vertical risk retention. 

(a) In general. At the closing of the 

securitization transaction, the sponsor 

retains not less than five percent of each 

class of ABS interests in the issuing 

entity issued as part of the securitization 

transaction. 

(b) Disclosures. A sponsor utilizing 

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 to its 

appropriate Federal banking agency, if 

any, the following disclosure in written 

form under the caption ‘‘Credit Risk 

Retention’’: 

(1) The amount (expressed as a 

percentage and dollar amount) 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 

amount (expressed as a percentage and 

dollar amount) of each class of ABS 

interests in the issuing entity that the 

sponsor is required to retain under this 

section; and 

(2) The material assumptions and 

methodology used in determining the 

aggregate dollar amount of ABS interests 

issued by the issuing entity in the 

securitization transaction, including 

those pertaining to any estimated cash 

flows and the discount rate used. 

§ __.5 Horizontal risk retention. 

(a) General requirement. At the 

closing of the securitization transaction, 

the sponsor retains an eligible 

horizontal residual interest in an 

amount that is equal to at least five 

percent of the par value of all ABS 

interests in the issuing entity issued as 

part of the securitization transaction. 

(b) Option to hold base amount in 

horizontal cash reserve account. In lieu 

of retaining an eligible horizontal 

residual interest in the amount required 

by paragraph (a) 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 specified in paragraph (a), 

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: 

(i) United States Treasury securities 

with maturities of 1 year or less; or 

(ii) 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; 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 (including any premium capture 

cash reserve account established 

pursuant to § __.12 of this part) to satisfy 

an amount due on any ABS interest; and 

(ii) No other amounts may be 

withdrawn or distributed from the 

account except that: 

(A) Amounts in the account may be 

released to the sponsor or any other 

person due to the receipt by the issuing 

entity of scheduled payments of 

principal on the securitized assets, 

provided that, the issuing entity 

distributes such payments of principal 

in accordance with the transaction 

documents and the amount released 

from the account on any date does not 

exceed the product of: 

(1) The amount of scheduled 

payments of principal received by the 

issuing entity and for which the release 

is being made; and 

(2) The ratio of the current balance in 

the horizontal cash reserve account to 

the aggregate remaining principal 

balance of all ABS interests in the 

issuing entity; and 

(B) Interest on investments made in 

accordance with paragraph (b)(2) may 

be released once received by the 

account. 

(c) Disclosures. A sponsor utilizing 

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’’: 

(1) If the sponsor retains risk through 

an eligible horizontal residual interest: 

(i) The amount (expressed as a 

percentage and dollar amount) of the 

eligible horizontal residual interest the 

sponsor will retain (or did retain) at the 

closing of the securitization transaction, 

and the amount (expressed as a 

percentage and dollar amount) of the 

eligible horizontal residual interest that 

the sponsor is required to retain under 

this section; and 

(ii) A description of the material terms 

of the eligible horizontal residual 

interest to be retained by the sponsor; 

(2) If the sponsor retains risk through 

the funding of a horizontal cash reserve 

account: 

(i) The dollar amount to be placed (or 

placed) by the sponsor in the horizontal 

cash reserve account and the dollar 

amount the sponsor is required to place 

in such an account pursuant to this 

section; and 

(ii) A description of the material terms 

of the horizontal cash reserve account; 

and 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24159 

(3) The material assumptions and 

methodology used in determining the 

aggregate dollar amount of ABS interests 

issued by the issuing entity in the 

securitization transaction, including 

those pertaining to any estimated cash 

flows and the discount rate used. 

§ __.6 L-Shaped risk retention. 

(a) General requirement. At the 

closing of the securitization transaction, 

the sponsor: 

(1) Retains not less than 2.5 percent 

of each class of ABS interests in the 

issuing entity issued as part of the 

securitization transaction; and 

(2) Retains an eligible horizontal 

residual interest in the issuing entity, or 

establishes and funds in cash a 

horizontal cash reserve account that 

meets all of the requirements of § __.5(b) 

of this part, in an amount that in either 

case is 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 any 

portion of such ABS interests that the 

sponsor is required to retain pursuant to 

paragraph (a)(1) of this section. 

(b) Disclosure requirements. A 

sponsor utilizing this section shall 

comply with all of the disclosure 

requirements set forth in § __.4(b) and 

§ __.5(c) of this part. 

§ __.7 Revolving asset master trusts. 

(a) General requirement. At the 

closing of the securitization transaction 

and until all ABS interests in the issuing 

entity are paid in full, the sponsor 

retains a seller’s interest of not less than 

five percent of the unpaid principal 

balance of all the assets owned or held 

by the issuing entity provided that: 

(1) The issuing entity is a revolving 

asset master trust; and 

(2) All of the securitized assets are 

loans or other extensions of credit that 

arise under revolving accounts. 

(b) Disclosures. A sponsor utilizing 

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’’: 

(1) The amount (expressed as a 

percentage and dollar amount) of the 

seller’s interest that the sponsor will 

retain (or did retain) at the closing of the 

securitization transaction and the 

amount (expressed as a percentage and 

dollar amount) that the sponsor is 

required to retain pursuant to this 

section; 

(2) A description of the material terms 

of the seller’s interest; and 

(3) The material assumptions and 

methodology used in determining the 

aggregate dollar amount of ABS interests 

issued by the issuing entity in the 

securitization transaction, including 

those pertaining to any estimated cash 

flows and the discount rate used. 

§ __.8 Representative sample. 

(a) In general. At the closing of the 

securitization transaction, the sponsor 

retains ownership of a representative 

sample of the pool of assets that are 

designated for securitization in the 

securitization transaction and draws 

from such pool all of the securitized 

assets for the securitization transaction, 

provided that: 

(1) At the time of issuance of assetbacked securities by the issuing entity, 

the unpaid principal balance of the 

assets comprising the representative 

sample retained by the sponsor is equal 

to at least 5.264 percent of the unpaid 

principal balance of all the securitized 

assets in the securitization transaction; 

and 

(2) The sponsor complies with 

paragraphs (b) through (g) of this 

section. 

(b) Construction of representative 

sample—(1) Designated pool. Prior to 

the sale of the asset-backed securities as 

part of the securitization transaction, the 

sponsor identifies a designated pool (the 

‘‘designated pool’’) of assets: 

(i) That consists of a minimum of 

1000 separate assets; 

(ii) From which the securitized assets 

and the assets comprising the 

representative sample are exclusively 

drawn; and 

(iii) That contains no assets other than 

those described in paragraph (b)(1)(ii) of 

this section. 

(2) Random selection from designated 

pool. (i) Prior to the sale of the assetbacked securities as part of the 

securitization transaction, the sponsor 

selects from the assets that comprise the 

designated pool a sample of such assets 

using a random selection process that 

does not take account of any 

characteristic of the assets other than 

the unpaid principal balance of the 

assets. 

(ii) The unpaid principal balance of 

the assets selected through the random 

selection process described in paragraph 

(b)(2)(i) of this section must represent at 

least 5 percent of the aggregate unpaid 

principal balance of all the assets that 

comprise the designated pool. 

(3) Equivalent risk determination. 

Prior to the sale of the asset-backed 

securities as part of the securitization 

transaction, the sponsor determines, 

using a statistically valid methodology, 

that for each material characteristic of 

the assets in the designated pool, 

including the average unpaid principal 

balance of all the assets, that the mean 

of any quantitative characteristic, and 

the proportion of any characteristic that 

is categorical in nature, of the sample of 

assets randomly selected from the 

designated pool pursuant to paragraph 

(b)(2) of this section is within a 95 

percent two-tailed confidence interval 

of the mean or proportion, respectively, 

of the same characteristic of the assets 

in the designated pool. 

(c) Sponsor policies, procedures and 

documentation. (1) The sponsor has in 

place, and adheres to, policies and 

procedures for: 

(i) Identifying and documenting the 

material characteristics of assets 

included in the designated pool; 

(ii) Selecting assets randomly in 

accordance with paragraph (b)(2) of this 

section; 

(iii) Testing the randomly-selected 

sample of assets for compliance with 

paragraph (b)(3) of this section; 

(iv) Maintaining, until all ABS 

interests are paid in full, documentation 

that clearly identifies the assets 

included in the representative sample 

established under paragraphs (b)(2) and 

(3) of this section; and 

(v) Prohibiting, until all ABS interests 

are paid in full, assets in the 

representative sample from being 

included in the designated pool of any 

other securitization transaction. 

(2) The sponsor maintains 

documentation that clearly identifies 

the assets in the representative sample 

established under paragraphs (b)(2) and 

(3) of this section. 

(d) Agreed upon procedures report. 

(1) Prior to the sale of the asset-backed 

securities as part of the securitization 

transaction, the sponsor has obtained an 

agreed upon procedures report that 

satisfies the requirements of paragraph 

(d)(2) of this section from an 

independent public accounting firm. 

(2) The independent public 

accounting firm providing the agreed 

upon procedures report required by 

paragraph (d)(1) of this section must at 

a minimum report on whether the 

sponsor has: 

(i) Policies and procedures that 

require the sponsor to identify and 

document the material characteristics of 

assets included in a designated pool of 

assets that meets the requirements of 

paragraph (b)(1) of this section; 

(ii) Policies and procedures that 

require the sponsor to select assets 

randomly in accordance with paragraph 

(b)(2) of this section; 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24160 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

(iii) Policies and procedures that 

require the sponsor to test the 

randomly-selected sample of assets in 

accordance with paragraph (b)(3) of this 

section; 

(iv) Policies and procedures that 

require the sponsor to maintain, until all 

ABS interests are paid in full, 

documentation that identifies the assets 

in the representative sample established 

under paragraphs (b)(2) and (3) of this 

section; and 

(v) Policies and procedures that 

require the sponsor to prohibit, until all 

ABS interests are paid in full, assets in 

the representative sample from being 

included in the designated pool of any 

other securitization transaction. 

(e) Servicing. Until such time as all 

ABS interests in the issuing entity have 

been fully paid or the issuing entity has 

been dissolved: 

(1) Servicing of the assets included in 

the representative sample must be 

conducted by the same entity and under 

the same contractual standards as the 

servicing of the securitized assets; and 

(2) The individuals responsible for 

servicing the assets included in the 

representative sample or the securitized 

assets must not be able to determine 

whether an asset is owned or held by 

the sponsor or owned or held by the 

issuing entity. 

(f) Sale, hedging or pledging 

prohibited. Until such time as all ABS 

interests in the issuing entity have been 

fully paid or the issuing entity has been 

dissolved, the sponsor: 

(1) Shall comply with the restrictions 

in § __.14 of this part with respect to the 

assets in the representative sample; 

(2) Shall not remove any assets from 

the representative sample; and 

(3) Shall not cause or permit any 

assets in the representative sample to be 

included in any designated pool or 

representative sample established in 

connection with any other issuance of 

asset-backed securities. 

(g) Disclosures—(1) Disclosure prior to 

sale. A sponsor utilizing 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 as part of the 

securitization transaction and, upon 

request, to the Commission and its 

appropriate Federal banking agency, if 

any, the following disclosure with 

respect to the securitization transaction 

in written form under the caption 

‘‘Credit Risk Retention’’: 

(i) The amount (expressed as a 

percentage of the designated pool and 

dollar amount) of assets included in the 

representative sample and to be retained 

(or retained) by the sponsor, and the 

amount (expressed as a percentage of 

the designated pool and dollar amount) 

of assets required to be included in the 

representative sample and retained by 

the sponsor pursuant to this section; 

(ii) A description of the material 

characteristics of the designated pool, 

including, but not limited to, the 

average unpaid principal balance of all 

the assets, the means of the quantitative 

characteristics and the proportions of 

categorical characteristics of the assets, 

appropriate introductory and 

explanatory information to introduce 

the characteristics, the methodology 

used in determining or calculating the 

characteristics, and any terms or 

abbreviations used; 

(iii) A description of the policies and 

procedures that the sponsor used for 

ensuring that the process for identifying 

the representative sample complies with 

paragraph (b)(2) of this section and that 

the representative sample has 

equivalent material characteristics as 

required by paragraph (b)(3) of this 

section; 

(iv) Confirmation that an agreed upon 

procedures report was obtained 

pursuant to paragraph (d) of this 

section; and 

(v) The material assumptions and 

methodology used in determining the 

aggregate dollar amount of ABS interests 

issued by the issuing entity in the 

securitization transaction, including 

those pertaining to any estimated cash 

flows and the discount rate used. 

(2) Disclosure after sale. A sponsor 

utilizing this section shall provide, or 

cause to be provided, to the holders of 

the asset-backed securities issued as 

part of the securitization transaction 

and, upon request, provide, or cause to 

be provided, to the Commission and its 

appropriate Federal banking agency, if 

any, at the end of each distribution 

period, as specified in the governing 

documents for such asset-backed 

securities, a comparison of the 

performance of the pool of securitized 

assets included in the securitization 

transaction for the related distribution 

period with the performance of the 

assets in the representative sample for 

the related distribution period. 

(3) Conforming disclosure of 

representative sample. A sponsor 

utilizing this section shall provide, or 

cause to be provided, to holders of the 

asset-backed securities issued as part of 

the securitization transaction and, upon 

request, provide to the Commission and 

its appropriate Federal banking agency, 

if any, disclosure concerning the assets 

in the representative sample in the same 

form, level, and manner as it provides, 

pursuant to rule or otherwise, 

concerning the securitized assets. 

§ __.9 Eligible ABCP conduits. 

(a) In general. A 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: 

(1) Each originator-seller of the ABCP 

conduit: 

(i) Retains an eligible horizontal 

residual interest in each intermediate 

SPV established by or on behalf of that 

originator-seller for purposes of issuing 

interests collateralized by assets of such 

intermediate SPV to the eligible ABCP 

conduit in the same form, amount, and 

manner as would be required under 

§ __.5(a) of this part if the originatorseller was the only sponsor of the 

intermediate SPV; and 

(ii) Complies with the provisions of 

§ __.14 of this part with respect to the 

eligible horizontal residual interest 

retained pursuant to paragraph (a)(1)(i) 

of this section as if it were a retaining 

sponsor with respect to such interest; 

(2) The sponsor: 

(i) Establishes the eligible ABCP 

conduit; 

(ii) Approves each originator-seller 

permitted to sell or transfer assets, 

indirectly through an intermediate SPV, 

to the eligible ABCP conduit; 

(iii) Establishes criteria governing the 

assets that the originator-sellers referred 

to in paragraph (a)(2)(ii) of this section 

are permitted to sell or transfer to an 

intermediate SPV; 

(iv) Approves all interests in an 

intermediate SPV to be purchased by 

the eligible ABCP conduit; 

(v) Administers the eligible ABCP 

conduit by monitoring the interests in 

any intermediate SPV acquired by the 

conduit and the assets collateralizing 

those interests, arranging for debt 

placement, compiling monthly reports, 

and ensuring compliance with the 

conduit documents and with the 

conduit’s credit and investment policy; 

and 

(vi) Maintains and adheres to policies 

and procedures for ensuring that the 

conditions in this paragraph (a) have 

been met. 

(b) Disclosures. A sponsor utilizing 

this section shall provide, or cause to be 

provided, to potential investors a 

reasonable period of time prior to the 

sale of any ABCP by the eligible ABCP 

conduit 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: 

(1) Each originator-seller that will 

retain (or has retained) an eligible 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24161 

horizontal residual interest in the 

securitization transaction pursuant to 

this section, including a description of 

the form, amount (expressed as a 

percentage and as a dollar amount), and 

nature of such interest; and 

(2) Each regulated liquidity provider 

that provides liquidity support to the 

eligible ABCP conduit, including a 

description of the form, amount, and 

nature of such liquidity coverage. 

(c) Duty to comply. 

(1) The retaining sponsor shall be 

responsible for compliance with this 

section. 

(2) A 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 of 

the eligible ABCP conduit with the 

requirements of paragraph (a)(1) of this 

section; and 

(ii) In the event that the sponsor 

determines that an originator-seller no 

longer complies with the requirements 

of paragraph (a)(1) of this section, shall 

promptly notify the holders of the ABS 

interests issued in the securitization 

transaction of such noncompliance by 

such originator-seller. 

§ __.10 Commercial mortgage-backed 

securities. 

(a) Third-Party Purchaser. A sponsor 

satisfies the risk retention requirements 

of § __.3 of this part with respect to a 

securitization transaction if a third party 

purchases an eligible horizontal residual 

interest in the issuing entity in the same 

form, amount, and manner as would be 

required of the sponsor under § __.5(a) 

of this part and all of the following 

conditions are met: 

(1) Composition of collateral. At the 

closing of the securitization transaction, 

at least 95 percent of the total unpaid 

principal balance of the securitized 

assets in the securitization transaction 

are commercial real estate loans. 

(2) Source of funds. The third-party 

purchaser: 

(i) Pays for the eligible horizontal 

residual interest in cash at the closing 

of the securitization transaction; and 

(ii) Does not obtain financing, directly 

or indirectly, for the purchase of such 

interest 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 to the transaction solely by reason 

of being an investor. 

(3) Third-party review. The thirdparty purchaser conducts a 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. 

(4) Affiliation and control rights. (i) 

Except as provided in paragraphs 

(a)(4)(ii) or (iii) of this section: 

(A) The third-party purchaser is not 

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; and 

(B) The third-party purchaser or an 

affiliate of such third-party purchaser 

does not have control rights in 

connection with the securitization 

transaction (including, but not limited 

to, acting as a servicer for the 

securitized assets) that are not 

collectively shared with all other 

investors in the securitization. 

(ii) Notwithstanding paragraph 

(a)(4)(i)(A) of this section, the thirdparty purchaser may be affiliated with 

one or more originators of the 

securitized assets so 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. 

(iii) Paragraph (a)(4)(i) of this section 

shall not prevent the third-party 

purchaser from acting as, or being an 

affiliate of, a servicer for any of the 

securitized assets, and having such 

controls rights that are related to such 

servicing, if the underlying 

securitization transaction documents 

provide for the following: 

(A) The appointment of an operating 

advisor (the ‘‘Operating Advisor’’) that: 

(1) Is not affiliated with other parties 

to the securitization transaction; 

(2) Does not directly or indirectly 

have any financial interest in the 

securitization transaction other than in 

fees from its role as Operating Advisor; 

and 

(3) Is required to act in the best 

interest of, and for the benefit of, 

investors as a collective whole. 

(B) Any servicer for the securitized 

assets that is, or is affiliated with, the 

third-party purchaser must consult with 

the Operating Advisor in connection 

with, and prior to, any major decision 

in connection with the servicing of the 

securitized assets, including, without 

limitation: 

(1) 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); 

(2) Foreclosure upon or comparable 

conversion of the ownership of a 

property; or 

(3) Any acquisition of a property. 

(C) The Operating Advisor shall be 

responsible for reviewing the actions of 

any servicer that is, or is affiliated with, 

the third-party purchaser and for 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 such servicer is 

operating in compliance with any 

standard required of the servicer as 

provided in the applicable transaction 

documents; and 

(2) What, if any, standard(s) the 

Operating Advisor believes, in its sole 

discretion exercised in good faith, with 

which such servicer has failed to 

comply; 

(D) The Operating Advisor shall have 

the authority to recommend that a 

servicer that is, or is affiliated with, a 

third-party purchaser be replaced by a 

successor servicer if the Operating 

Advisor determines, in its sole 

discretion exercised in good faith, that: 

(1) The servicer that is, or is affiliated 

with, the third-party purchaser has 

failed to comply with a standard 

required of the servicer as provided in 

the transaction documents; and 

(2) Such replacement would be in the 

best interest of the investors as a 

collective whole; and 

(E) If a recommendation described in 

paragraph (a)(4)(iii)(D) of this section is 

made, the servicer that is, or is affiliated 

with, the third-party purchaser must be 

replaced unless a majority of each class 

of ABS interests in the issuing entity 

eligible to vote on the matter votes to 

retain the servicer. 

(5) 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, and, with 

respect to paragraphs (a)(5)(i) through 

(vii) of this section, under the caption 

‘‘Credit Risk Retention’’: 

(i) The name and form of organization 

of the third-party purchaser; 

(ii) A description of the third-party 

purchaser’s experience in investing in 

commercial mortgage-backed securities; 

(iii) Any other information regarding 

the third-party purchaser or the thirdparty purchaser’s retention of the 

eligible horizontal residual interest that 

is material to investors in light of the 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24162 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

circumstances of the particular 

securitization transaction; 

(iv) A description of the amount 

(expressed as a percentage and dollar 

amount) of the eligible horizontal 

residual interest that will be retained (or 

was retained) by the third-party 

purchaser, as well as the amount of the 

purchase price paid by the third-party 

purchaser for such interest; 

(v) The amount (expressed as a 

percentage and dollar amount) of the 

eligible horizontal residual interest in 

the securitization transaction that the 

sponsor would have been required to 

retain pursuant to § __.5(a) of this part 

if the sponsor had relied on such 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 residual horizontal 

interest retained by the third-party 

purchaser; 

(vii) The material assumptions and 

methodology used in determining the 

aggregate amount of ABS interests 

issued by the issuing entity in the 

securitization transaction, including 

those pertaining to any estimated cash 

flows and the discount rate used; 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. 

(6) Hedging, transfer and pledging. 

The third-party purchaser complies 

with the hedging and other restrictions 

in § __.14 of 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 § __.5 of this part. 

(b) Duty to comply. (1) The retaining 

sponsor shall be responsible for 

compliance with this section. 

(2) A retaining sponsor relying on this 

section: 

(i) Shall maintain and adhere to 

policies and procedures to monitor the 

third-party purchaser’s compliance with 

the requirements in paragraph (a) of this 

section (other than paragraphs (a)(1) and 

(a)(5)); and 

(ii) In the event that the sponsor 

determines that the third-party 

purchaser no longer complies with any 

of the requirements of paragraph (a) of 

this section (other than paragraphs (a)(1) 

and (a)(5)), shall promptly notify, or 

cause to be notified, the holders of the 

ABS interests issued in the 

securitization transaction of such 

noncompliance by the third-party 

purchaser. 

§ __.11 Federal National Mortgage 

Association and Federal Home Loan 

Mortgage Corporation ABS. 

(a) In general. 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 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 and § __.14(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 utilizing 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. 

§ __.12 Premium capture cash reserve 

account. 

(a) When creation of a premium 

capture cash reserve account is required 

and calculation of amount. In addition 

to the economic interest in the credit 

risk that a retaining sponsor is required 

to retain, or cause to be retained under 

§ __.3 of this part, the retaining sponsor 

shall, at closing of the securitization 

transaction, cause to be established and 

funded, in cash, a premium capture 

cash reserve account (as defined in 

paragraph (b) of this section) in an 

amount equal to the difference, if a 

positive amount, between: 

(1) The gross proceeds, net of closing 

costs paid by the sponsor(s) or issuing 

entity to unaffiliated parties, received by 

the issuing entity from the sale of ABS 

interests in the issuing entity to persons 

other than the retaining sponsor; and 

(2)(i) If the retaining sponsor has 

relied on § __.4, § __.5, § __.6, or § __.7 

of this part with respect to the 

securitization transaction, 95 percent of 

the par value of all ABS interests in the 

issuing entity issued as part of the 

securitization transaction; or 

(ii) If the retaining sponsor has relied 

on § __.8, § __.9, or § __.10 of this part 

with respect to the securitization 

transaction, 100 percent of the par value 

of all ABS interests in the issuing entity 

issued as part of the securitization 

transaction. 

(b) Operation of premium capture 

cash reserve account. For purposes of 

this section, a premium capture cash 

reserve account means an account that 

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 may be 

invested only in: 

(i) United States Treasury securities 

with maturities of 1 year or less; and 

(ii) 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; and 

(3) Until all ABS interests in the 

issuing entity are paid in full or the 

issuing entity is dissolved, no funds 

may be withdrawn or distributed from 

the account except as follows: 

(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 to satisfy 

an amount due on an ABS interest prior 

to the allocation of any losses to: 

(A) An eligible horizontal residual 

interest held pursuant to § __.5, § __.6, 

§ __.9, § __.10, or § __.13 of this part, if 

any; or 

(B) If an eligible horizontal residual 

interest in the issuing entity is not held 

pursuant to § __.5, § __.6, § __.9, § __.10, 

or § __.13 of this part, the class of ABS 

interests in the issuing entity that: 

(1) Is allocated losses before other 

classes; or 

(2) If the contractual terms of the 

securitization transaction do not 

provide for the allocation of losses by 

class, the class of ABS interests that has 

the most subordinate claim to payment 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24163 

of principal or interest by the issuing 

entity; and 

(ii) Interest on investments made in 

accordance with paragraph (b)(2) of this 

section may be released to any person 

once received by the account. 

(c) Calculation of gross proceeds 

received by issuing entity—(1) Antievasion provision for certain resales and 

senior excess spread tranches. For 

purposes of paragraph (a)(1) of this 

section, the gross proceeds received by 

the issuing entity from the sale of ABS 

interests to persons other than the 

retaining sponsor shall include the par 

value, or if an ABS interest does not 

have a par value, the fair value, of any 

ABS interest in the issuing entity that is 

directly or indirectly transferred to the 

retaining sponsor in connection with 

the closing of the securitization 

transaction and that: 

(i) The retaining sponsor does not 

intend to hold to maturity; or 

(ii) Represents a contractual right to 

receive some or all of the interest and 

no more than a minimal amount of 

principal payments received by the 

issuing entity and that has priority of 

payment of interest (or principal, if any) 

senior to the most subordinated class of 

ABS interests in the issuing entity, 

provided, however, this paragraph 

(c)(1)(ii) shall not apply to any ABS 

interest that: 

(A) Does not have a par value; 

(B) Is held by a sponsor that is relying 

on § __.4 or § __.6 of this part with 

respect to the securitization transaction; 

and 

(C) The sponsor is required to retain 

pursuant to § __.4 or § __.6(a)(1) of this 

part. 

(d) Disclosures. A sponsor that is 

required to establish and fund a 

premium capture cash reserve account 

pursuant to 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 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’’: 

(1) The dollar amount required to be 

placed in the account pursuant to this 

section and any other amounts the 

sponsor will place (or has placed) in the 

account in connection with the 

securitization transaction; and 

(2) The material assumptions and 

methodology used in determining the 

fair value of any ABS interest in the 

issuing entity that does not have a par 

value and that was used in calculating 

the amount required for the premium 

capture cash reserve account pursuant 

to paragraph (c) of this section. 

Subpart C—Transfer of Risk Retention 

§ __.13 Allocation of risk retention to 

an originator 

(a) In general. A sponsor choosing to 

retain a portion of each class of ABS 

interests in the issuing entity under the 

vertical risk retention option in § __.4 of 

this part or an eligible horizontal 

residual interest pursuant to § __.5(a) of 

this part with respect to a securitization 

transaction may offset the amount of its 

risk retention requirements under § __.4 

or § __.5(a) of this part, as applicable, by 

the amount of the ABS interests or 

eligible horizontal residual interest, 

respectively, acquired by an originator 

of one or more of the securitized assets 

if: 

(1) Amount of retention. At the 

closing of the securitization transaction: 

(i) The originator acquires and retains 

the ABS interests or eligible horizontal 

residual interest from the sponsor in the 

same manner as would have been 

retained by the sponsor under § __.4 or 

§ __.5(a) of this part, as applicable; 

(ii) The ratio of the dollar amount of 

ABS interests or eligible horizontal 

residual interest acquired and retained 

by the originator to the total dollar 

amount of ABS interests or eligible 

horizontal residual interest otherwise 

required to be retained by the sponsor 

pursuant to § __.4 or § __.5(a) of this 

part, as applicable, 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 or § __.5(a) of 

this part, as applicable; and 

(iv) The originator purchases the ABS 

interests or eligible horizontal residual 

interest 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 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(b) or § __.5(c) 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), and 

nature of the interest, as well as the 

method of payment for such interest 

under paragraph (a)(1)(iv). 

(3) Hedging, transferring and 

pledging. The originator complies with 

the hedging and other restrictions in 

§ __.14 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. 

(2) A retaining sponsor relying on this 

section: 

(i) 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 

(ii) 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. 

§ __.14. 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 consolidated 

affiliate. 

(b) Prohibited hedging by sponsor and 

affiliates. A retaining sponsor and its 

consolidated 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: 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24164 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

(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, 

assets, or securitized assets 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 

(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, assets, or securitized assets 

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 interests, assets, 

or securitized assets 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 interests or assets 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 

by a retaining sponsor, a consolidated 

affiliate or an issuing entity 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, assets, or securitized assets 

required to be retained by the sponsor 

under subpart B of this part or one or 

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 assetbacked 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 

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 of all 

instruments included in the index. 

(e) Prohibited non-recourse financing. 

Neither a retaining sponsor nor any of 

its consolidated affiliates may pledge as 

collateral for any obligation (including a 

loan, repurchase agreement, or other 

financing transaction) any interest or 

asset 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 consolidated 

affiliate, respectively. 

Subpart D—Exceptions and Exemptions 

§ ___.15 Exemption for qualified 

residential mortgages. 

(a) Definitions. For purposes of this 

section, the following definitions shall 

apply: 

Borrower includes any co-borrower, 

unless the context otherwise requires. 

Borrower funds means funds: 

(1) Derived from one or more sources 

identified as acceptable sources of funds 

in the Additional QRM Standards 

Appendix to this part; and 

(2) That are verified in accordance 

with the requirements set forth in the 

Additional QRM Standards Appendix to 

this part. 

Cash-out refinancing means a 

refinancing transaction in a principal 

amount that exceeds the sum of the 

amount used to: 

(1) Fully repay the balance 

outstanding on the borrower’s existing 

first-lien mortgage that is secured by the 

one-to-four family property being 

refinanced; 

(2) Fully repay the balance 

outstanding as of the date of the 

mortgage transaction on any 

subordinate-lien mortgage that was used 

in its entirety to purchase such one-tofour family property; 

(3) Pay closing or settlement charges 

required to be included on the related 

HUD–1 or HUD–1A Settlement 

Statement or a successor form in 

accordance with 24 CFR Part 3500 or a 

successor regulation; and 

(4) Disburse up to $500 of cash to the 

borrower or any other payee. 

Closed-end credit means any 

consumer credit extended by a creditor 

other than open-end credit. 

Combined loan-to-value ratio means, 

with respect to a first-lien refinancing 

transaction on a one-to-four family 

property, the ratio (expressed as a 

percentage) of: 

(1) The sum of: 

(i) The principal amount of the firstlien mortgage transaction at the closing 

of the transaction; 

(ii) The unpaid principal amount of 

any other closed-end credit transaction 

that to the creditor’s knowledge would 

exist at the closing of the refinancing 

transaction and that is or would be 

secured by the same one-to-four family 

property; and 

(iii) The face amount (as if fully 

drawn) of any open-end credit 

transaction that to the creditor’s 

knowledge would exist at the closing of 

the refinancing transaction and that is or 

would be secured by the same one-tofour family property; to 

(2) The estimated market value of the 

one-to-four family property as 

determined by a qualifying appraisal. 

Consumer credit means credit offered 

or extended to a borrower primarily for 

personal, family, or household 

purposes. 

Consumer reporting agency that 

compiles and maintains files on 

consumers on a nationwide basis has 

the same meaning as in 15 U.S.C. 

1681a(p). 

Creditor has the same meaning as in 

15 U.S.C. 1602(f). 

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. 

Loan-to-value ratio means, with 

respect to a mortgage transaction to 

purchase a one-to-four family property, 

the ratio (expressed as a percentage) of: 

(1) The principal amount of the firstlien mortgage transaction at the closing 

of the mortgage transaction; to 

(2) The lesser of: 

(i) The estimated market value of the 

one-to-four family property as 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24165 

determined by a qualifying appraisal; 

and 

(ii) The purchase price of the one-tofour family property to be paid in 

connection with the mortgage 

transaction. 

Mortgage originator has the same 

meaning as in 15 U.S.C. 1602(cc)(2) and 

the regulations issued thereunder. 

Mortgage transaction means a closedend credit transaction to purchase or 

refinance a one-to-four family property 

at least one unit of which is the 

borrower’s principal dwelling. 

One-to-four family property means 

real property that is held in fee simple, 

on leasehold under a lease for not less 

than 99 years which is renewable, or 

under a lease having a period of not less 

than 10 years to run beyond the 

maturity date of the mortgage and that 

is improved by a residential structure 

that contains one to four units, 

including but not limited to: 

(1) An individual condominium; 

(2) An individual cooperative unit; or 

(3) An individual manufactured home 

that is constructed in conformance with 

the National Manufactured Home 

Construction and Safety Standards, as 

evidenced by a certification label affixed 

to the exterior of the home, and that is 

erected on or that otherwise is affixed to 

a foundation in accordance with 

requirements established by the Federal 

Housing Administration. 

Open-end credit means any consumer 

credit extended by a creditor under a 

plan in which: 

(1) The creditor reasonably 

contemplates repeated consumer credit 

transactions; 

(2) The creditor may impose a finance 

charge from time to time on an 

outstanding unpaid balance; and 

(3) The amount of credit that may be 

extended to the borrower during the 

term of the plan (up to any limit set by 

the creditor) is generally made available 

to the extent that any outstanding 

balance is repaid. 

Points and fees means: 

(1) All items considered to be a 

finance charge under 12 CFR 226.4(a) 

and 226.4(b), except: 

(i) Interest or the time-price 

differential; and 

(ii) Items excluded from the finance 

charge under 12 CFR 226.4(c), 226.4(d) 

and 226.4(e), unless included in 

paragraphs (2) through (5) of this 

definition; 

(2) All compensation paid directly or 

indirectly by the borrower or creditor to 

a mortgage originator, including a 

mortgage originator that is also the 

creditor in a table-funded transaction; 

(3) All items (other than amounts held 

for future payment of taxes) listed in 12 

CFR 226.4(c)(7) unless: 

(i) The charge is bona fide and 

reasonable; 

(ii) The creditor and mortgage 

originator receive no direct or indirect 

compensation in connection with the 

charge; and 

(iii) The charge is not paid to an 

affiliate of the creditor or mortgage 

originator; 

(4) Premiums or other charges payable 

at or before closing for any credit life, 

credit disability, credit unemployment, 

or credit property insurance, or any 

other accident, loss-of-income, life or 

health insurance, or any payments 

directly or indirectly for any debt 

cancellation or suspension agreement or 

contract; and 

(5) If the mortgage transaction 

refinances a previous loan made or 

currently held by the same creditor or 

an affiliate of the same creditor, all 

prepayment fees or penalties that are 

incurred by the consumer in connection 

with the payment of the previous loan. 

Prepayment penalty means a penalty 

imposed solely because the mortgage 

obligation is prepaid in full or in part. 

For purposes of this definition, a 

prepayment penalty does not include, 

for example, fees imposed for preparing 

and providing documents in connection 

with prepayment, such as a loan payoff 

statement, a reconveyance, or other 

document releasing the creditor’s 

security interest in the one-to-four 

family property securing the loan. 

Principal dwelling means a one-tofour family property, or unit thereof, 

that is occupied or will be occupied by 

at least one borrower as a principal 

residence. For purposes of this 

definition, a borrower can only have one 

principal dwelling at a time; however, if 

a borrower buys a new dwelling that 

will become the borrower’s principal 

dwelling within a year or upon the 

completion of construction, the new 

dwelling is considered the principal 

dwelling for purposes of applying this 

definition to a credit transaction to 

purchase the new dwelling. 

Qualifying appraisal means an 

appraisal that meets the requirements of 

§ __.15(d)(11) of this part. 

Rate and term refinancing means a 

refinancing transaction that is not a 

cash-out refinancing. 

Refinancing transaction means: 

(1) A closed-end credit transaction 

secured by a one-to-four family property 

that is entered into by the borrower that 

satisfies and replaces an existing credit 

transaction that was entered into by the 

same borrower and that is secured by 

the same one-to-four family property; or 

(2) A closed-end credit transaction 

secured by the borrower’s principal 

dwelling on which there are no existing 

liens. 

Reverse mortgage means a 

nonrecourse consumer credit 

transaction in which: 

(1) A mortgage, deed of trust, or 

equivalent consensual security interest 

securing one or more advances is 

created in the borrower’s principal 

dwelling; and 

(2) Any principal, interest, or shared 

appreciation or equity is due and 

payable (other than in the case of 

default) only after: 

(i) The borrower dies; 

(ii) The dwelling is transferred; or 

(iii) The borrower ceases to occupy 

the one-to-four family property as a 

principal dwelling. 

Total loan amount means the amount 

financed, as determined according to 12 

CFR 226.18(b), less any cost listed in 

paragraphs (3), (4) and (5) of the 

definition of ‘‘points of fees’’ that is both 

included in the definition of points and 

fees and financed by the creditor. 

(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 securitized assets that 

collateralize the asset-backed securities 

are qualified residential mortgages; 

(2) None of the securitized assets that 

collateralize the asset-backed securities 

are other asset-backed securities; 

(3) At the closing of the securitization 

transaction, each qualified residential 

mortgage collateralizing the assetbacked securities is currently 

performing; and 

(4)(i) The depositor of the assetbacked 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 assetbacked security are qualified residential 

mortgages 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 (b)(4)(i) 

of this section shall 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24166 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

securities in the issuing entity, and, 

upon request, to the Commission and its 

appropriate Federal banking agency, if 

any. 

(c) Qualified residential mortgage. 

The term ‘‘qualified residential 

mortgage’’ means 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: 

(1) Meets all of the criteria in 

paragraph (d) of this section; and 

(2) Is 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 twelve months or less, such as 

a loan to purchase a new dwelling 

where the borrower plans to sell a 

current dwelling within twelve months; 

or 

(iv) A timeshare plan described in 11 

U.S.C. 101(53D). 

(d) Eligibility criteria—(1) First-lien 

required. The mortgage transaction is 

secured by a first lien: 

(i) On the one-to-four family property 

to be purchased or refinanced; and 

(ii) That is perfected in accordance 

with applicable law. 

(2) Subordinate liens. If the mortgage 

transaction is to purchase a one-to-four 

family property, no other recorded or 

perfected liens on the one-to-four family 

property would exist, to the creditor’s 

knowledge at the time of the closing of 

the mortgage transaction, upon the 

closing of that transaction. 

(3) Original maturity. At the closing of 

the mortgage transaction, the maturity 

date of the mortgage transaction does 

not exceed 30 years. 

(4) Written Application. The borrower 

completed and submitted to the creditor 

a written application for the mortgage 

transaction that, as supplemented or 

amended prior to closing, includes an 

acknowledgement by the borrower that 

the information provided in the 

application is true and correct as of the 

date executed by the borrower and that 

any intentional or negligent 

misrepresentation of the information 

provided in the application may result 

in civil liability and/or criminal 

penalties under 18 U.S.C. 1001. 

(5) Credit history—(i) In general. The 

creditor has verified and documented 

that within ninety (90) days prior to the 

closing of the mortgage transaction: 

(A) The borrower is not currently 30 

days or more past due, in whole or in 

part, on any debt obligation; 

(B) Within the previous twenty-four 

(24) months, the borrower has not been 

60 days or more past due, in whole or 

in part, on any debt obligation; and 

(C) Within the previous thirty-six (36) 

months: 

(1) The borrower has not been a 

debtor in a case commenced under 

Chapter 7, Chapter 12, or Chapter 13 of 

Title 11, United States Code, or been the 

subject of any Federal or State judicial 

judgment for the collection of any 

unpaid debt; 

(2) The borrower has not had any 

personal property repossessed; and 

(3) 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. 

(ii) Safe harbor. A creditor will be 

deemed to have met the requirements of 

paragraph (d)(5)(i) of this section if: 

(A) The creditor, no more than 90 

days before the closing of the mortgage 

transaction, obtains a credit report 

regarding the borrower from at least two 

consumer reporting agencies that 

compile and maintain files on 

consumers on a nationwide basis; 

(B) Based on the information in such 

credit reports, the borrower meets all of 

the requirements of paragraph (d)(5)(i) 

of this section, and no information in a 

credit report subsequently obtained by 

the creditor before the closing of the 

mortgage transaction contains contrary 

information; and 

(C) The creditor maintains copies of 

such credit reports in the loan file for 

the mortgage transaction. 

(6) Payment terms. Based on the terms 

of the mortgage transaction at the 

closing of the transaction: 

(i) The regularly scheduled principal 

and interest payments on the mortgage 

transaction: 

(A) Would not result in an increase of 

the principal balance of the mortgage 

transaction; and 

(B) Do not allow the borrower to defer 

payment of interest or repayment of 

principal; 

(ii) No scheduled payment of 

principal and interest would be more 

than twice as large as any earlier 

scheduled payment of principal and 

interest; 

(iii) If the rate of interest applicable to 

the mortgage transaction may increase 

after the closing of the mortgage 

transaction, any such increase may not 

exceed: 

(A) 2 percent (200 basis points) in any 

twelve month period; and 

(B) 6 percent (600 basis points) over 

the life of the mortgage transaction; and 

(iv) The mortgage transaction does not 

include or provide for any prepayment 

penalty. 

(7) Points and fees. The total points 

and fees payable by the borrower in 

connection with the mortgage 

transaction shall not exceed three 

percent of the total loan amount. 

(8) Debt-to-income ratios—(i) In 

general. The creditor has determined 

that, as of a date that is no more than 

60 days prior to the closing of the 

mortgage transaction, the ratio of: 

(A) The borrower’s monthly housing 

debt to the borrower’s monthly gross 

income does not exceed 28 percent; and 

(B) The borrower’s total monthly debt 

to the borrower’s monthly gross income 

does not exceed 36 percent. 

(ii) Applicable standards. For 

purposes of determining the borrower’s 

compliance with the ratios set forth in 

paragraph (d)(8)(i) of this section, the 

creditor shall: 

(A) Verify, document, and determine 

the borrower’s monthly gross income in 

accordance with the effective income 

standards established in the Additional 

QRM Standards Appendix to this part; 

and 

(B) Except as provided in paragraph 

(d)(8)(iii) of this section, verify, 

document, and determine the 

borrower’s monthly housing debt and 

total monthly debt in accordance with 

the standards established in the 

Additional QRM Standards Appendix to 

this part. 

(iii) Housing debt. Notwithstanding 

paragraph (d)(8)(ii)(B) of this section, for 

purposes of determining the borrower’s 

compliance with the ratios set forth in 

paragraph (d)(8)(i) of this section, the 

creditor shall: 

(A) Determine the borrower’s monthly 

periodic payment for principal and 

interest on the mortgage transaction 

and, if the mortgage transaction is a 

refinancing transaction, any other credit 

transaction (including any open-end 

credit transaction as if fully drawn) that 

to the creditor’s knowledge would exist 

at the closing of the refinancing 

transaction and that would be secured 

by the one-to-four family property being 

refinanced, based on: 

(1) The maximum interest rate that is 

permitted or required under any feature 

(including any conversion or other 

feature that allows a variable interest 

rate to convert to a fixed interest rate) 

of the relevant credit transaction 

documents during the first five years 

after the date on which the first regular 

periodic payment will be due; and 

(2) A payment schedule that fully 

amortizes the mortgage transaction over 

the term of the mortgage transaction; 

and 

(B) Include in the borrower’s monthly 

housing debt and total monthly debt the 

monthly pro rata amount of the 

following, as applicable, with respect to 

the one-to-four family property being 

purchased or refinanced: 

(1) Real estate taxes; 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24167 

(2) Hazard insurance, flood insurance, 

mortgage guarantee insurance, and any 

other required insurance; 

(3) Homeowners’ and condominium 

association dues; 

(4) Ground rent or leasehold 

payments; and 

(5) Special assessments. 

(9) Loan-to-value ratio—(i) Purchase 

mortgages. If the mortgage transaction is 

to purchase a one-to-four family 

property, at the closing of the mortgage 

transaction, the loan-to-value ratio of 

the mortgage transaction does not 

exceed 80 percent. 

(ii) Rate and term refinancings. If the 

mortgage transaction is a rate and term 

refinancing, at the closing of the 

mortgage transaction, the combined 

loan-to-value ratio of the mortgage 

transaction does not exceed 75 percent. 

(iii) Cash-out refinancings. If the 

mortgage transaction is a cash-out 

refinancing, at the closing of the 

mortgage transaction, the combined 

loan-to-value ratio of the mortgage 

transaction does not exceed 70 percent. 

(10) Down payment. If the mortgage 

transaction is for the purchase of a oneto-four family property: 

(i) The borrower provides, at closing, 

a cash down payment in an amount 

equal to at least the sum of: 

(A) The closing costs payable by the 

borrower in connection with the 

mortgage transaction; 

(B) 20 percent of the lesser of: 

(1) The estimated market value of the 

one-to-four family property as 

determined by a qualifying appraisal; 

and 

(2) The purchase price of the one-tofour family property to be paid in 

connection with the mortgage 

transaction; and 

(C) The difference, if a positive 

amount, between: 

(1) The purchase price of the one-tofour family property to be paid in 

connection with the mortgage 

transaction; and 

(2) The estimated market value of the 

one-to-four family property as 

determined by a qualifying appraisal; 

(ii) The funds used by the borrower to 

satisfy the down payment required by 

paragraph (d)(10)(i) of this section: 

(A) Must come solely from borrower 

funds; 

(B) May not be subject to any 

contractual obligation by the borrower 

to repay; and 

(C) May not have been obtained by the 

borrower from a person or entity with 

an interest in the sale of the property 

(other than the borrower); and 

(iii) The creditor shall verify and 

document the borrower’s compliance 

with the conditions set forth in 

paragraphs (d)(10)(i) and (d)(10)(ii) of 

this section. 

(11) Appraisal. The creditor obtained 

a written appraisal of the property 

securing the mortgage that was 

performed not more than 90 days prior 

to the closing of the mortgage 

transaction by an appropriately statecertified or state-licensed appraiser that 

conforms to generally accepted 

appraisal standards as evidenced by the 

Uniform Standards of Professional 

Appraisal Practice (USPAP) 

promulgated by the Appraisal Standards 

Board (ASB) of the Appraisal 

Foundation, the appraisal requirements 

of the Federal banking agencies, and 

applicable laws. 

(12) Assumability. The mortgage 

transaction is not assumable by any 

person that was not a borrower under 

the mortgage transaction at closing. 

(13) Default mitigation. The mortgage 

originator— 

(i) Includes terms in the mortgage 

transaction documents under which the 

creditor commits to have servicing 

policies and procedures under which 

the creditor shall— 

(A) Mitigate risk of default on the 

mortgage loan by taking loss mitigation 

actions, such as loan modification or 

other loss mitigation alternative, in the 

event the estimated resulting net present 

value of such action exceeds the 

estimated net present value of recovery 

through foreclosure, without regard to 

whether the particular action benefits 

the interests of a particular class of 

investors in a securitization; 

(B) Take into account the borrower’s 

ability to repay and other appropriate 

underwriting criteria in such loss 

mitigation actions; 

(C) Initiate loss mitigation activities 

within 90 days after the mortgage loan 

becomes delinquent (if the delinquency 

has not been cured); 

(D) Implement or maintain servicing 

compensation arrangements consistent 

with the obligations under paragraphs 

(d)(13)(i)(A), (B), and (C) of this section; 

(E) Implement procedures for 

addressing any whole loan owned by 

the creditor (or any of its affiliates) and 

secured by a subordinate lien on the 

same property that secures the first 

mortgage loan if the borrower becomes 

more than 90 days past due on the first 

mortgage loan; 

(F) If the first mortgage loan will 

collateralize any asset-backed securities, 

disclose or require to be disclosed to 

potential investors within a reasonable 

period of time prior to the sale of the 

asset-backed securities a description of 

the procedures to be implemented 

pursuant to paragraph (d)(13)(i)(E) of 

this section; and 

(G) Not sell, transfer or assign 

servicing rights for the mortgage loan 

unless the agreement requires the 

purchaser, transferee or assignee 

servicer to abide by the default 

mitigation commitments of the creditor 

under this paragraph (d)(13)(i) as if the 

purchaser, transferee or assignee were 

the creditor under this section. 

(ii) Provides disclosure of the 

foregoing default mitigation 

commitments to the borrower at or prior 

to the closing of the mortgage 

transaction. 

(e) 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 asset-backed 

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 (e)(2) of this section, 

including the amount of such 

repurchased loan(s) and the cause for 

such repurchase. 

§ __.16 Definitions applicable to 

qualifying commercial mortgages, 

commercial loans, and auto loans. 

The following definitions apply for 

purposes of §§ __.17 through __.20 of 

this part: 

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 is 

secured by a first lien on, a passenger 

car or other passenger vehicle, such as 

a minivan, van, sport-utility vehicle, 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24168 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

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; or 

(v) Loan to finance the purchase of a 

vehicle with a salvage title. 

Combined loan-to-value (CLTV) ratio 

means, at the time of origination, the 

sum of the principal balance of a firstlien 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 § __.19(b)(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 § __.19(b)(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) Loan for the purpose of financing 

agricultural production; or 

(3) Loan for which the primary source 

(fifty (50) percent or more) of repayment 

is expected to be derived from rents 

collected from persons or firms that are 

not affiliates of the borrower. 

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 (fifty (50) 

percent or more) of repayment for which 

is expected to be derived from: 

(i) The proceeds of the sale, 

refinancing, or permanent financing of 

the property; or 

(ii) Rental income associated with the 

property other than rental income 

derived from any affiliate of the 

borrower; 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; 

(iii) A loan to a real estate investment 

trusts (REITs); or 

(iv) 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, the ratio of: 

(i) The annual NOI less the annual 

replacement reserve of the CRE property 

at the time of origination of the CRE 

loans; to 

(ii) The sum of the borrower’s annual 

payments for principal and interest on 

any debt obligation. 

(2) For commercial loans, the ratio of: 

(i) The borrower’s EBITDA as of the 

most recently completed fiscal year; to 

(ii) The sum of the borrower’s annual 

payments for principal and interest on 

any debt obligation. 

Debt to income (DTI) ratio means the 

ratio of: 

(1) The borrower’s total debt (for 

automobile loans), including the 

monthly amount due on the automobile 

loan; to 

(2) 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, as 

determined in accordance with U.S. 

Generally Accepted Accounting 

Principles (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 ratio of: 

(1) The borrower’s total debt (for 

commercial loans); to 

(2) The borrower’s EBITDA. 

Machinery and equipment (M&E) 

collateral means collateral for a 

commercial loan that consists of 

machinery and equipment that is 

identifiable by make, model, and serial 

number. 

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 

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. 

New vehicle means any vehicle that: 

(1) Is not a used vehicle; and 

(2) Has not been previously sold to an 

end user. 

Payment-in-kind (PIK) means 

payments of principal or accrued 

interest that are not paid in cash when 

due, and instead are paid by increasing 

the principal or by providing shares or 

stock in the borrowing company. A PIK 

loan is a type of loan that typically does 

not provide for any cash payments of 

principal or interest from the borrower 

to the lender between the drawdown 

date and the maturity or refinancing 

date. 

Purchase price means: 

(1) For a new vehicle, the amount 

paid by the borrower for the new 

vehicle net of any incentive payments or 

manufacturer cash rebates; and 

(2) For a vehicle other than a new 

vehicle, the lesser of: 

(i) The purchase price as would be 

determined for a new vehicle; or 

(ii) The retail value of the used 

vehicle, as determined by a nationally 

recognized automobile pricing agency 

and based on the manufacturer, year, 

model, features, and condition of the 

vehicle. 

Qualified tenant means 

(1) A tenant with a triple net lease 

who has satisfied all obligations with 

respect to the property in a timely 

manner; or 

(2) A tenant who originally had a 

triple net 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: 

(1) 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): 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24169 

(i) That consists of five or more 

dwelling units (including apartment 

buildings, condominiums, cooperatives 

and other similar structures) primarily 

for residential use; and 

(ii) Where at least seventy-five (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. 

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: 

(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 ratio 

of: 

(1) The borrower’s total liabilities, 

determined in accordance with U.S. 

GAAP; to 

(2) The sum of the borrower’s total 

liabilities and equity, less the borrower’s 

intangible assets, with each component 

determined in accordance with U.S. 

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, except that such amount shall not 

exceed the trade-in value of the used 

vehicle, as determined by a nationally 

recognized automobile pricing agency 

and based on the manufacturer, year, 

model, features, and condition of the 

vehicle. 

Triple net lease means a lease 

pursuant to which the lessee is required 

to pay rent as well as all taxes, 

insurance, and maintenance expenses 

associated with the property. 

Uniform Standards of Professional 

Appraisal Practice (USPAP) means the 

standards issued by the Appraisal 

Standards Board for the performance of 

an appraisal, an appraisal review, or an 

appraisal consulting assignment. 

Used vehicle: 

(1) Means any vehicle driven more 

than the limited use necessary in 

transporting or road testing the vehicle 

prior to the initial sale of the vehicle; 

and 

(2) Does not include any vehicle sold 

only for scrap or parts (title documents 

surrendered to the State and a salvage 

certificate issued). 

§ __.17 Exceptions for qualifying 

commercial loans, commercial 

mortgages, and auto loans. 

The risk retention requirements in 

subpart B of this part shall not apply to 

securitization transactions that satisfy 

the standards provided in §§ __.18, 

__.19, or __.20 of this part. 

§ __.18 Underwriting standards for 

qualifying commercial loans. 

(a) General. The securitization 

transaction–– 

(1) Is collateralized solely (excluding 

cash and cash equivalents) by one or 

more commercial loans, each of which 

meets all of the requirements of 

paragraph (b) of this section; and 

(2) Does not permit reinvestment 

periods. 

(b) Underwriting, product and other 

standards. (1) Prior to origination of the 

commercial loan, the originator: 

(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; 

(C) A DSC ratio of 1.5 or greater; and 

(v) If the loan is originated on a 

secured basis, obtained a first-lien 

security interest on all of the property 

pledged to collateralize the loan. 

(2) The loan documentation for the 

commercial loan includes covenants 

that: 

(i) Require the borrower to provide to 

the originator or subsequent holder, and 

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-inkind; 

(iii) Impose limits on: 

(A) The creation or existence of any 

other security interest with respect to 

any of the borrower’s property; 

(B) The transfer of any of the 

borrower’s assets; 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 any 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 of the 

originator or any subsequent holder of 

the loan in the collateral for the 

commercial loan or the priority thereof, 

and to defend the 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 the 

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. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24170 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

(3) 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. 

(4) The primary source of repayment 

for the loan is revenue from the business 

operations of the borrower. 

(5) The loan was funded within the 

six (6) months prior to the closing of the 

securitization transaction. 

(6) At the closing of the securitization 

transaction, all payments due on the 

loan are contractually current. 

(7) (i) The depositor of the assetbacked 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 assetbacked security meet all of the 

requirements set forth in paragraphs 

(b)(1) through (b)(6) 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 (b)(7)(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 asset-backed 

security; and 

(iii) The sponsor provides, or causes 

to be provided, a copy of the 

certification described in paragraph 

(b)(7)(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. 

(c) Buy-back requirement. A sponsor 

that has relied on the exception 

provided in paragraph (a) of this section 

with respect to a securitization 

transaction shall not lose such 

exception with respect to such 

transaction if, after the closing of the 

securitization transaction, it is 

determined that one or more of the 

loans collateralizing the asset-backed 

securities did not meet all of the 

requirements set forth in paragraphs 

(b)(1) through (b)(6) of this section 

provided that: 

(1) The depositor complied with the 

certification requirement set forth in 

paragraph (b)(7) of this section; 

(2) The sponsor 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) no later than ninety (90) days 

after the determination that the loans do 

not satisfy all of the requirements of 

paragraphs (b)(1) through (b)(6) of this 

section; 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 required to be 

repurchased by the sponsor pursuant to 

paragraph (c)(2) of this section, 

including the principal amount of such 

repurchased loan(s) and the cause for 

such repurchase. 

§ __.19 Underwriting standards for 

qualifying CRE loans. 

(a) General. The securitization 

transaction is collateralized solely 

(excluding cash and cash equivalents) 

by one or more CRE loans, each of 

which meets all of the requirements of 

paragraph (b) of this section. 

(b) Underwriting, product and other 

standards.(1) The CRE loan must be 

secured by a first lien on the 

commercial real estate. 

(2) Prior to origination of the CRE 

loan, the originator: 

(i) Verified and documented the 

current financial condition of the 

borrower; 

(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 (USPAP) 

promulgated by the Appraisal Standards 

Board and the appraisal requirements of 

the Federal banking agencies (OCC: 12 

CFR part 34, subpart C; FRB: 12 CFR 

part 208, subpart E, and 12 CFR part 

225, subpart G; and FDIC: 12 CFR part 

323); 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 (but not 

exceeding 20 years); 

(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: 

(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 1.5 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 1.5 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 to 

the originator and any subsequent 

holder of the commercial loan, and the 

servicer, the borrower’s financial 

statements and supporting schedules 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 

any collateral for the CRE loan; 

(B) The transfer of any collateral 

pledged to support the CRE 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; 

(iii) Require the borrower and any 

other party that pledges collateral for 

the loan to: 

(A) Maintain insurance that protects 

against loss on any collateral for the 

CRE loan, 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 any collateral for the 

CRE loan; 

(C) Take any action required to perfect 

or protect the security interest of the 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24171 

originator or any subsequent holder of 

the loan in the collateral for the CRE 

loan or the priority thereof, and to 

defend such collateral against claims 

adverse to the originator’s or subsequent 

holder’s interest; 

(D) Permit the originator or any 

subsequent holder of the loan, and the 

servicer, to inspect the collateral for the 

CRE loan and the books and records of 

the borrower or other party relating to 

the collateral for the CRE loan; 

(E) Maintain the physical condition of 

the collateral for the CRE loan; 

(F) Comply with all environmental, 

zoning, building code, licensing and 

other laws, regulations, agreements, 

covenants, use restrictions, and proffers 

applicable to the collateral; 

(G) Comply with leases, franchise 

agreements, condominium declarations, 

and other documents and agreements 

relating to the operation of the 

collateral, 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 the collateral 

for the CRE loan 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 from 

obtaining a loan secured by a junior lien 

on any property that serves as collateral 

for the CRE loan, unless such loan 

finances the purchase of machinery and 

equipment and the borrower pledges 

such machinery and equipment as 

additional collateral for the CRE loan. 

(5) The CLTV ratio for the loan is: 

(i) Less than or equal to 65 percent; 

or 

(ii) Less than or equal to 60 percent, 

if the capitalization rate used in an 

appraisal that meets the requirements 

set forth in paragraph (b)(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 Board H.15 

Report as of the date concurrent with 

the effective date of an appraisal that 

meets the requirements set forth in 

paragraph (b)(2)(ii) of this section; and 

(B) 300 basis points. 

(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 20 years; 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; 

(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 assetbacked 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 assetbacked security meet all of the 

requirements set forth in paragraphs 

(b)(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 

(b)(10)(i) of this section shall be 

performed, for each issuance of an assetbacked 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 

(b)(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. 

(c) Buy-back requirement. A sponsor 

that has relied on the exception 

provided in paragraph (a) of this section 

with respect to a securitization 

transaction shall not lose such 

exception with respect to such 

transaction if, after the closing of the 

securitization transaction, it is 

determined that one or more of the CRE 

loans collateralizing the asset-backed 

securities did not meet all of the 

requirements set forth in paragraphs 

(b)(1) through (b)(9) of this section 

provided that: 

(1) The depositor has complied with 

the certification requirement set forth in 

paragraph (b)(10) of this section; 

(2) The sponsor 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) no later than ninety (90) days 

after the determination that the loans do 

not satisfy all of the requirements of 

paragraphs (b)(1) through (b)(9) of this 

section; 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 required to be 

repurchased by the sponsor pursuant to 

paragraph (c)(2) of this section, 

including the principal amount of such 

repurchased loan(s) and the cause for 

such repurchase. 

§ __.20 Underwriting standards for 

qualifying auto loans. 

(a) General. The securitization 

transaction is collateralized solely 

(excluding cash and cash equivalents) 

by one or more automobile loans, each 

of which meets all of the requirements 

of paragraph (b) of this section. 

(b) 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 twenty-four 

(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 thirty-six (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 

(2) Been the subject of any Federal or 

State judicial judgment for the 

collection of any unpaid debt; 

(D) Within the previous thirty-six (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 thirty-six (36) 

months, the borrower has not had any 

personal property repossessed; 

(ii) Determined and documented that, 

upon the origination of the loan, the 

borrower’s DTI ratio is less than or equal 

to thirty-six (36) percent. For the 

purpose of making the determination 

under paragraph (b)(1)(ii) of this section, 

the originator must: 

(A) Verify and document all income 

of the borrower that the originator 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24172 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

includes in the borrower’s effective 

monthly income (using payroll stubs, 

tax returns, profit and loss statements, 

or other similar documentation); and 

(B) 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 

(b)(1)(ii) of this section; 

(2) An originator will be deemed to 

have met the requirements of paragraph 

(b)(1)(i) of this section if: 

(i) The originator, no more than 90 

days before the closing of the loan, 

obtains a credit report regarding the 

borrower from at least two consumer 

reporting agencies that compile and 

maintain 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 reports, the borrower meets all of 

the requirements of paragraph (b)(1)(i) 

of this section, and no information in a 

credit report subsequently obtained by 

the originator before the closing of the 

mortgage transaction contains contrary 

information; and 

(iii) The originator obtains electronic 

or hard copies of such credit reports. 

(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; and 

(iii) 20 percent of the vehicle 

purchase price. 

(4) The transaction documents require 

the originator, subsequent holder of the 

loan, or an agent of the originator or 

subsequent holder of the loan to 

maintain physical possession of the title 

for the vehicle until the loan is repaid 

in full and the borrower has otherwise 

satisfied all obligations under the terms 

of the loan agreement. 

(5) If the loan is for a new vehicle, the 

terms of the loan agreement provide a 

maturity date for the loan that does not 

exceed 5 years from the date of 

origination. 

(6) If the loan is for a vehicle other 

than a new vehicle, the term of the loan 

(as set forth in the loan agreement) plus 

the difference between the current 

model year and the vehicle’s model year 

does not exceed 5 years. 

(7) The terms of the loan agreement: 

(i) Specify a fixed rate of interest for 

the life of the loan; 

(ii) Provide for a monthly payment 

amount that: 

(A) Is based on straight-line 

amortization of principal and interest 

over the term of the loan; and 

(B) Do not permit the borrower to 

defer repayment of principal or payment 

of interest; and 

(C) Require the borrower to make the 

first payment on the automobile loan 

within 45 days of the date of 

origination. 

(8) At the closing of the securitization 

transaction, all payments due on the 

loan are contractually current; and 

(9) (i) The depositor of the assetbacked 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 assetbacked security meet all of the 

requirements set forth in paragraphs 

(b)(1) through (b)(8) 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 (b)(9)(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 asset-backed 

security; and 

(iii) The sponsor provides, or causes 

to be provided, a copy of the 

certification described in paragraph 

(b)(9)(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. 

(c) Buy-back requirement. A sponsor 

that has relied on the exception 

provided in this paragraph (a) of this 

section with respect to a securitization 

transaction shall not lose such 

exception with respect to such 

transaction if, after the closing of the 

securitization transaction, it is 

determined that one or more of the 

automobile loans collateralizing the 

asset-backed securities did not meet all 

of the requirements set forth in 

paragraphs (b)(1) through (b)(8) of this 

section provided that: 

(1) The depositor has complied with 

the certification requirement set forth in 

paragraph (b)(9) of this section; 

(2) The sponsor 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) no later than 90 days after the 

determination that the loans do not 

satisfy all of the requirements of 

paragraphs (b)(1) through (b)(8) of this 

section; 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 required to be 

repurchased by the sponsor pursuant to 

paragraph (c)(2) of this section, 

including the principal amount of such 

repurchased loan(s) and the cause for 

such repurchase. 

§ l.21 General exemptions. 

(a) This part shall not apply to: 

(1) Any securitization transaction 

that: 

(i) Is collateralized solely (excluding 

cash and cash equivalents) by 

residential, multifamily, or health care 

facility mortgage loan assets that are 

insured or guaranteed as to the payment 

of principal and interest by the United 

States or an agency of the United States; 

or 

(ii) Involves the issuance of assetbacked securities that: 

(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 

(excluding cash and cash equivalents) 

by residential, multifamily, or health 

care facility mortgage loan assets or 

interests in such assets. 

(2) 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; 

(3) Any asset-backed security that is a 

security 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 of 

1933 by reason of section 3(a)(2) of that 

Act (15 U.S.C. 77c(a)(2)); and 

(4) 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) Any securitization transaction 

that: 

(i) Is collateralized solely (other than 

cash and cash equivalents) by existing 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24173 

asset-backed securities issued in a 

securitization transaction: 

(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) 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. 

(b) This part shall not apply to any 

securitization transaction if the assetbacked securities issued in the 

transaction are: 

(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 those referred to in 

paragraph (a)(1)(i) of this section); or 

(3) Fully guaranteed as to the timely 

payment of principal and interest by the 

United States or any agency of the 

United States; 

(c) 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 

Corporation, or a Federal home loan 

bank shall not on that basis qualify for 

exemption under this section. 

§ l.22 Safe harbor for certain foreignrelated transactions. 

(a) 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 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, any State of the United States, 

the District of Columbia, Puerto Rico, 

the Virgin Islands, or any other 

possession of the United States (each of 

the foregoing, a ‘‘U.S. jurisdiction’’); 

(ii) An unincorporated branch or 

office (wherever located) of an entity 

chartered, incorporated, or organized 

under the laws of a U.S. jurisdiction; or 

(iii) An unincorporated branch or 

office located in a U.S. jurisdiction of an 

entity that is chartered, incorporated, or 

organized under the laws of a 

jurisdiction other than a U.S. 

jurisdiction; and 

(4) If the sponsor or issuing entity is 

chartered, incorporated, or organized 

under the laws of a jurisdiction other 

than a U.S. jurisdiction, 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: 

(i) A consolidated affiliate of the 

sponsor or issuing entity that is 

chartered, incorporated, or organized 

under the laws of a U.S. jurisdiction; or 

(ii) An unincorporated branch or 

office of the sponsor or issuing entity 

that is located in a U.S. jurisdiction. 

(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), 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. 

§ l.23 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)). 

Appendix A to Part ll—Additional 

QRM Standards; Standards for 

Determining Acceptable Sources of 

Borrower Funds, Borrower’s Monthly 

Gross Income, Monthly Housing Debt, 

and Total Monthly Debt 

I. Borrower Funds to Close 

A. Cash and Savings/Checking 

Accounts as Acceptable Sources of 

Funds 

1. Earnest Money Deposit 

a. The lender must verify with 

documentation, the deposit amount and 

source of funds, if the amount of the 

earnest money deposit: 

i. Exceeds 2 percent of the sales price, 

or 

ii. Appears excessive based on the 

borrower’s history of accumulating 

savings. Satisfactory documentation 

includes: 

iii. A copy of the borrower’s cancelled 

check 

iv. Certification from the depositholder acknowledging receipt of funds, 

or 

v. Separate evidence of the source of 

funds. 

b. Separate evidence includes a 

verification of deposit (VOD) or bank 

statement showing that the average 

balance was sufficient to cover the 

amount of the earnest money deposit, at 

the time of the deposit. 

2. Savings and Checking Accounts 

a. A VOD, along with the most recent 

bank statement, may be used to verify 

savings and checking accounts. 

b. If there is a large increase in an 

account, or the account was recently 

opened, the lender must obtain from the 

borrower a credible explanation of the 

source of the funds. 

3. Cash Saved at Home 

a. Borrowers who have saved cash at 

home and are able to adequately 

demonstrate the ability to do so, are 

permitted to have this money included 

as an acceptable source of funds to close 

the mortgage. 

b. To include cash saved at home 

when assessing the borrower’s cash 

assets, the: 

i. Money must be verified, whether 

deposited in a financial institution, or 

held by the escrow/title company, and 

ii. Borrower must provide satisfactory 

evidence of the ability to accumulate 

such savings. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24174 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

4. Verifying Cash Saved at Home 

Verifying the cash saved at home 

assets requires the borrower to explain 

in writing: 

a. How the funds were accumulated, 

and 

b. The amount of time it took to 

accumulate the funds. 

The lender must determine the 

reasonableness of the accumulation, 

based on the: 

c. Borrower’s income stream 

d. Time period during which the 

funds were saved 

e. Borrower’s spending habits, and 

f. Documented expenses and the 

borrower’s history of using financial 

institutions. 

Note: Borrowers with checking and/or 

savings accounts are less likely to save 

money at home, than individuals with no 

history of such accounts. 

5. Cash Accumulated With Private 

Savings Clubs 

a. Some borrowers may choose to use 

non-traditional methods to save money 

by making deposits into private savings 

clubs. Often, these private savings clubs 

pool resources for use among the 

membership. 

b. If a borrower claims that the cash 

to close mortgage is from savings held 

with a private savings club, he/she must 

be able to adequately document the 

accumulation of the funds with the 

club. 

6. Requirements for Private Savings 

Clubs 

a. While private savings clubs are not 

supervised banking institutions, the 

clubs must, at a minimum, have: 

i. Account ledgers 

ii. Receipts from the club 

iii. Verification from the club 

treasurer, and 

iv. Identification of the club. 

b. The lender must reverify the 

information, and the underwriter must 

be able to determine that: 

i. It was reasonable for the borrower 

to have saved the money claimed, and 

ii. There is no evidence that the funds 

were borrowed with an expectation of 

repayment. 

B. Investments as an Acceptable Source 

of Funds 

1. IRAs, Thrift Savings Plans, and 

401(k)s and Keogh Accounts 

Up to 60 percent of the value of assets 

such as IRAs, thrift savings plans, 401(k) 

and Keogh accounts may be included in 

the underwriting analysis, unless the 

borrower provides conclusive evidence 

that a higher percentage may be 

withdrawn, after subtracting any: 

a. Federal income tax, and 

b. Withdrawal penalties. 

Notes: 

i. Redemption evidence is required. 

ii. The portion of the assets not used 

to meet closing requirements, after 

adjusting for taxes and penalties may be 

counted as reserves. 

2. Stocks and Bonds 

The monthly or quarterly statement 

provided by the stockbroker or financial 

institution managing the portfolio may 

be used to verify the value of stocks and 

bonds. 

Note: The actual receipt of funds must be 

verified and documented. 

3. Savings Bonds 

Government issued bonds are counted 

at the original purchase price, unless 

eligibility for redemption and the 

redemption value are confirmed. 

Note: The actual receipt of funds at 

redemption must be verified. 

C. Gifts as an Acceptable Source of 

Funds 

1. Description of Gift Funds 

In order for funds to be considered a 

gift there must be no expected or 

implied repayment of the funds to the 

donor by the borrower. 

Note: The portion of the gift not used to 

meet closing requirements may be counted as 

reserves. 

2. Who can provide a gift? 

An outright gift of the cash 

investment is acceptable if the donor is: 

a. The borrower’s relative 

b. The borrower’s employer or labor 

union 

c. A charitable organization 

d. A governmental agency or public 

entity that has a program providing 

home ownership assistance to 

i. Low- and moderate-income families 

ii. First-time homebuyers, or 

e. A close friend with a clearly 

defined and documented interest in the 

borrower. 

3. Who cannot provide a gift? 

a. The gift donor may not be a person 

or entity with an interest in the sale of 

the property, such as: 

i. The seller 

ii. The real estate agent or broker 

iii. The builder, or 

iv. An associated entity. 

b. Gifts from these sources are 

considered inducements to purchase, 

and must be subtracted from the sales 

price. 

Note: This applies to properties where the 

seller is a government agency selling 

foreclosed properties, such as the US 

Department of Veterans Affairs (VA) or Rural 

Housing Services. 

4. Lender Responsibility for Verifying 

the Acceptability of Gift Fund Sources 

a. Regardless of when gift funds are 

made available to a borrower, the lender 

must be able to determine that the gift 

funds were not provided by an 

unacceptable source, and were the 

donor’s own funds. 

b. When the transfer occurs at closing, 

the lender is responsible for verifying 

that the closing agent received the funds 

from the donor for the amount of the 

gift, and that the funds were from an 

acceptable source. 

5. Requirements Regarding Donor 

Source of Funds 

a. As a general rule, how a donor 

obtains gift funds is not of concern, 

provided that the funds are not derived 

in any manner from a party to the sales 

transaction. 

b. Donors may borrow gift funds from 

any other acceptable source, provided 

the mortgage borrowers are not obligors 

to any note to secure money borrowed 

to give the gift. 

6. Equity Credit 

Only family members may provide 

equity credit as a gift on property being 

sold to other family members. 

7. Payment of Consumer Debt Must 

Result in Sales Price Reduction 

a. The payment of consumer debt by 

third parties is considered to be an 

inducement to purchase. 

b. While sellers and other parties may 

make contributions subject to any 

percentage limitation of the sales price 

of a property toward a buyer’s actual 

closing costs and financing concessions, 

this applies exclusively to the mortgage 

financing provision. 

c. When someone other than a family 

member has paid off debts or other 

expenses on behalf of the borrower: 

i. The funds must be treated as an 

inducement to purchase, and 

ii. There must be a dollar for dollar 

reduction to the sales price when 

calculating the maximum insurable 

mortgage. 

Note: The dollar for dollar reduction to the 

sales price also applies to gift funds not 

meeting the requirement that: 

i. The gift be for down payment assistance, 

and 

ii. That it be provided by an acceptable 

source. 

8. Using Downpayment Assistance 

Programs 

a. Downpayment assistance programs 

providing gifts administered by 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24175 

charitable organizations, such as 

nonprofits should be carefully 

monitored. Nonprofit entities should 

not provide gifts to pay off: 

i. Installment loans 

ii. Credit cards 

iii. Collections 

iv. Judgments, and 

v. Similar debts. 

b. Lenders must ensure that a gift 

provided by a charitable organization 

meets these requirements and that the 

transfer of funds is properly 

documented. 

9. Gifts From Charitable Organizations 

That Lose or Give Up Their Federal TaxExempt Status 

If a charitable organization makes a 

gift that is to be used for all, or part, of 

a borrower’s down payment, and the 

organization providing the gift loses or 

gives up its Federal tax exempt status, 

the gift will be recognized as an 

acceptable source of the down payment 

provided that: 

a. The gift is made to the borrower 

b. The gift is properly documented, 

and 

c. The borrower has entered into a 

contract of sale (including any 

amendments to purchase price) on, or 

before, the date the IRS officially 

announces that the charitable 

organization’s tax exempt status is 

terminated. 

10. Lender Responsibility for Ensuring 

That an Entity Is a Charitable 

Organization 

a. The lender is responsible for 

ensuring that an entity is a charitable 

organization as defined by Section 

501(a) of the Internal Revenue Code 

(IRC) of 1986 (26 U.S.C. 150(d)(2)) 

pursuant to Section 501(c)(3) of the IRC. 

b. One resource available to lenders 

for obtaining this information is the 

Internal Revenue Service (IRS) 

Publication 78, Cumulative List of 

Organizations described in Section 

170(c) of the Internal Revenue Code of 

1986, which contains a list of 

organizations eligible to receive taxdeductible charitable contributions. 

c. The IRS has an online version of 

this list that can help lenders and others 

conduct a search of these organizations. 

The online version can be found at 

http://apps.irs.gov/app/pub78 using the 

following instructions to obtain the 

latest update: 

i. Enter search data and click ‘‘Search’’ 

ii. Click ‘‘Search for Charities’’ under 

the ‘‘Charities & Non-Profits Topics’’ 

heading on the left-hand side of the 

page 

iii. Click ‘‘Recent Revocations and 

Deletions from Cumulative List’’ under 

the ‘‘Additional Information’’ heading in 

the middle of the page, and 

iv. Click the name of the organization 

if the name appears on the list 

displayed. 

D. Gift Fund Required Documentation 

1. Gift Letter Requirement 

A lender must document any 

borrower gift funds through a gift letter, 

signed by the donor and borrower. The 

gift letter must show the donor’s name, 

address, telephone number, specify the 

dollar amount of the gift, and state the 

nature of the donor’s relationship to the 

borrower and that no repayment is 

required. If sufficient funds required for 

closing are not already verified in the 

borrower’s accounts, document the 

transfer of the gift funds to the 

borrower’s accounts, in accordance with 

the instructions described in section 

(I)(D)(2). 

2. Documenting the Transfer of Gift 

Funds 

The lender must document the 

transfer of the gift funds from the donor 

to the borrower. The table below 

describes the requirements for the 

transfer of gift funds. 

If the gift funds . . . Then . . . 

• Are in the borrower’s account ............................................................... Obtain 

• A copy of the withdrawal document showing that the withdrawal is 

from the donor’s account, and 

• The borrower’s deposit slip and bank statement showing the deposit. 

• Are to be provided at closing, and 

• Are in the form of a certified check from the donor’s account 

Obtain a 

• Bank statement showing the withdrawal from the donor’s account, 

and 

• Copy of the certified check. 

• Are to be provided at closing, and 

• Are in the form of a cashier’s check, money order, official check, or 

other type of bank check 

Have the donor provide a withdrawal document or cancelled check for 

the amount of the gift, showing that the funds came from the donor’s 

personal account. 

• Are to be provided at closing, and 

• Are in the form of an electronic wire transfer to the closing agent 

Have the donor provide documentation of the wire transfer. 

Note: The lender must obtain and keep the documentation of the wire 

transfer in its mortgage loan application binder. While the document 

does not need to be provided in the insurance binder, it must be 

available for inspection. 

• Are being borrowed by the donor, and 

• Documentation from the bank or other savings account is not available 

Have the donor provide written evidence that the funds were borrowed 

from an acceptable source, not from a party to the transaction, including the lender. 

IMPORTANT: Cash on hand is not an acceptable source of donor gift 

funds. 

E. Property Related Acceptable Sources 

of Funds 

1. Type of Personal Property 

In order to obtain cash for closing, a 

borrower may sell various personal 

property items. The types of personal 

property items that a borrower can sell 

include 

a. Cars 

b. Recreational vehicles 

c. Stamps 

d. Coins, and 

e. Baseball card collections. 

2. Sale of Personal Property 

Documentation Requirement 

a. If a borrower plans to sell personal 

property items to obtain funds for 

closing, he/she must provide 

i. Satisfactory estimate of the worth of 

the personal property items, and 

ii. Evidence that the items were sold. 

b. The estimated worth of the items 

being sold may be in the form of 

i. Published value estimates issued by 

organizations, such as automobile 

dealers, or philatelic or numismatic 

associations, or 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24176 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

ii. A separate written appraisal by a 

qualified appraiser with no financial 

interest in the loan transaction. 

c. Only the lesser of the estimated 

value or actual sales prices are 

considered as assets to close. 

3. Net Sales Proceeds From a Property 

a. The net proceeds from an armslength sale of a currently owned 

property may be used for the cash 

investment on a new house. The 

borrower must provide satisfactory 

evidence of the accrued cash sales 

proceeds. 

b. If the property has not sold by the 

time of underwriting, condition loan 

approval by verifying the actual 

proceeds received by the borrower. The 

lender must document the 

i. Actual sale, and 

ii. Sufficiency of the net proceeds 

required for settlement. 

Note: If the property has not sold by the 

time of the subject settlement, the existing 

mortgage must be included as a liability for 

qualifying purposes. 

4. Commission From the Sale of the 

Property 

a. If the borrower is a licensed real 

estate agent entitled to a real estate 

commission from the sale of the 

property being purchased, then he/she 

may use that amount for the cash 

investment, with no adjustment to the 

maximum mortgage required. 

b. A family member entitled to the 

commission may also provide gift funds 

to the borrower. 

5. Trade Equity 

a. The borrower may agree to trade 

his/her real property to the seller as part 

of the cash investment. The amount of 

the borrower’s equity contribution is 

determined by 

i. Using the lesser of the property’s 

appraised value or sales price, and 

ii. Subtracting all liens against the 

property being traded, along with any 

real estate commission. 

b. In order to establish the property 

value, the borrower must provide 

i. A residential appraisal no more 

than six months old to determine the 

property’s value, and 

ii. Evidence of ownership. 

Note: If the property being traded has an 

FHA-insured mortgage, assumption 

processing requirements and restrictions 

apply. 

6. Rent Credit 

a. The cumulative amount of rental 

payments that exceed the appraiser’s 

estimate of fair market rent may be 

considered accumulation of the 

borrower’s cash investment. 

b. The following must be included in 

the endorsement package: 

i. Rent with option to purchase 

agreement, and 

ii. Appraiser’s estimate of market rent. 

c. Conversely, treat the rent as an 

inducement to purchase with an 

appropriate reduction to the mortgage, if 

the sales agreement reveals that the 

borrower 

i. Has been living in the property rentfree, or 

ii. Has an agreement to occupy the 

property as a rental considerably below 

fair market value in anticipation of 

eventual purchase. 

d. Exception: An exception may be 

granted when a builder 

i. Fails to deliver a property at an 

agreed to time, and 

ii. Permits the borrower to occupy an 

existing or other unit for less than 

market rent until construction is 

complete. 

7. Sweat Equity Considered a Cash 

Equivalent 

Labor performed, or materials 

furnished by the borrower before closing 

on the property being purchased 

(known as ‘‘sweat equity’’), may be 

considered the equivalent of a cash 

investment, to the amount of the 

estimated cost of the work or materials. 

Note: Sweat equity may also be ‘‘gifted,’’ 

subject to 

i. The additional requirements in section 

(I)(E)(8), and 

ii. The gift fund requirements described in 

section (I)(D). 

8. Additional Sweat Equity 

Requirements 

The table below describes additional 

requirements for applying sweat equity 

as a cash equivalent and as an 

acceptable source of borrower funds. 

Sweat Equity Category Requirement 

Existing Construction ................................................................................ Only repairs or improvements listed on the appraisal are eligible for 

sweat equity. 

Any work completed or materials provided before the appraisal are not 

eligible. 

Proposed Construction ............................................................................. The sales contract must indicate the tasks to be performed by the borrower during construction. 

Borrower’s Labor ...................................................................................... The borrower must demonstrate his/her ability to complete the work in 

a satisfactory manner. 

The lender must document the contributory value of the labor either 

through 

• The appraiser’s estimate, or 

• A cost-estimating service. 

Delayed Work ........................................................................................... The following cannot be included as sweat equity: 

• Delayed work (on-site escrow) 

• Clean up 

• Debris removal, and 

• Other general maintenance. 

Cash Back ................................................................................................ Cash back to the borrower in sweat equity transactions is not permitted. 

Sweat Equity on Property Not Being Purchased ..................................... Sweat equity is not acceptable on property other than the property 

being purchased. 

Compensation for work performed on other properties must be 

• In cash, and 

• Properly documented. 

Source of Funds Evidence ....................................................................... Evidence of the following must be provided if the borrower furnishes 

funds and materials: 

• Source of the funds, and 

• Market value of the materials. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24177 

9. Trade-In Manufactured Home 

An acceptable source of borrower 

cash investment commonly associated 

with manufactured homes is the sale or 

trade-in of another manufactured home 

that is not considered real estate. Tradeins for cash funds are considered a 

seller inducement and are not 

permitted. 

II. Borrower Eligibility 

A. Stability of Income 

1. Effective Income 

Income may not be used in 

calculating the borrower’s income ratios 

if it comes from any source that cannot 

be verified, is not stable, or will not 

continue. 

2. Verifying Employment History 

a. The lender must verify the 

borrower’s employment for the most 

recent two full years, and the borrower 

must 

i. Explain any gaps in employment 

that span one or more months, and 

ii. Indicate if he/she was in school or 

the military for the recent two full years, 

providing Evidence supporting this 

claim, such as college transcripts, or 

discharge papers. 

b. Allowances can be made for 

seasonal employment, typical for the 

building trades and agriculture, if 

documented by the lender. 

Note: A borrower with a 25 percent or 

greater ownership interest in a business is 

considered self employed and will be 

evaluated as a self employed borrower for 

underwriting purposes. 

3. Analyzing a Borrower’s Employment 

Record 

a. When analyzing the probability of 

continued employment, lenders must 

examine: 

i. The borrower’s past employment 

record 

ii. Qualifications for the position 

iii. Previous training and education, 

and 

iv. The employer’s confirmation of 

continued employment. 

b. Favorably consider a borrower for 

a mortgage if he/she changes jobs 

frequently within the same line of work, 

but continues to advance in income or 

benefits. In this analysis, income 

stability takes precedence over job 

stability. 

4. Borrowers Returning to Work After an 

Extended Absence 

A borrower’s income may be 

considered effective and stable when 

recently returning to work after an 

extended absence if he/she: 

a. Is employed in the current job for 

six months or longer, and 

b. Can document a two year work 

history prior to an absence from 

employment using 

i. Traditional employment 

verifications, and/or 

ii. Copies of W–2 forms or pay stubs. 

Note: An acceptable employment situation 

includes individuals who took several years 

off from employment to raise children, then 

returned to the workforce. 

c. Important: Situations not meeting 

the criteria listed above may only be 

considered as compensating factors. 

Extended absence is defined as six 

months. 

B. Salary, Wage and Other Forms of 

Income 

1. General Policy on Borrower Income 

Analysis 

a. The income of each borrower who 

will be obligated for the mortgage debt 

must be analyzed to determine whether 

his/her income level can be reasonably 

expected to continue through at least 

the first three years of the mortgage 

loan. 

b. In most cases, a borrower’s income 

is limited to salaries or wages. Income 

from other sources can be considered as 

effective, when properly verified and 

documented by the lender. 

Notes: 

i. Effective income for borrowers planning 

to retire during the first three-year period 

must include the amount of: 

a. Documented retirement benefits 

b. Social Security payments, or 

c. Other payments expected to be received 

in retirement. 

ii. Lenders must not ask the borrower about 

possible, future maternity leave. 

2. Overtime and Bonus Income 

a. Overtime and bonus income can be 

used to qualify the borrower if he/she 

has received this income for the past 

two years, and it will likely continue. If 

the employment verification states that 

the overtime and bonus income is 

unlikely to continue, it may not be used 

in qualifying. 

b. The lender must develop an 

average of bonus or overtime income for 

the past two years. Periods of overtime 

and bonus income less than two years 

may be acceptable, provided the lender 

can justify and document in writing the 

reason for using the income for 

qualifying purposes. 

3. Establishing an Overtime and Bonus 

Income Earning Trend 

a. The lender must establish and 

document an earnings trend for 

overtime and bonus income. If either 

type of income shows a continual 

decline, the lender must document in 

writing a sound rationalization for 

including the income when qualifying 

the borrower. 

b. A period of more than two years 

must be used in calculating the average 

overtime and bonus income if the 

income varies significantly from year to 

year. 

4. Qualifying Part-Time Income 

a. Part-time and seasonal income can 

be used to qualify the borrower if the 

lender documents that the borrower has 

worked the part-time job uninterrupted 

for the past two years, and plans to 

continue. Many low and moderate 

income families rely on part-time and 

seasonal income for day to day needs, 

and lenders should not restrict 

consideration of such income when 

qualifying these borrowers. 

b. Part-time income received for less 

than two years may be included as 

effective income, provided that the 

lender justifies and documents that the 

income is likely to continue. 

c. Part-time income not meeting the 

qualifying requirements may be 

considered as a compensating factor 

only. 

Note: For qualifying purposes, ‘‘part-time’’ 

income refers to employment taken to 

supplement the borrower’s income from 

regular employment; part-time employment 

is not a primary job and it is worked less than 

40 hours. 

5. Income from Seasonal Employment 

a. Seasonal income is considered 

uninterrupted, and may be used to 

qualify the borrower, if the lender 

documents that the borrower: 

i. Has worked the same job for the 

past two years, and 

ii. Expects to be rehired the next 

season. 

b. Seasonal employment includes: 

i. Umpiring baseball games in the 

summer, or 

ii. Working at a department store 

during the holiday shopping season. 

6. Primary Employment Less Than 40 

Hour Work Week 

a. When a borrower’s primary 

employment is less than a typical 

40-hour work week, the lender should 

evaluate the stability of that income as 

regular, on-going primary employment. 

b. Example: A registered nurse may 

have worked 24 hours per week for the 

last year. Although this job is less than 

the 40-hour work week, it is the 

borrower’s primary employment, and 

should be considered effective income. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24178 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

7. Commission Income 

a. Commission income must be 

averaged over the previous two years. 

To qualify commission income, the 

borrower must provide: 

i. Copies of signed tax returns for the 

last two years, and 

ii. The most recent pay stub. 

b. Commission income showing a 

decrease from one year to the next 

requires significant compensating 

factors before a borrower can be 

approved for the loan. 

c. Borrowers whose commission 

income was received for more than one 

year, but less than two years may be 

considered favorably if the underwriter 

can: 

i. Document the likelihood that the 

income will continue, and 

ii. Soundly rationalize accepting the 

commission income. 

Notes: 

i. Unreimbursed business expenses must 

be subtracted from gross income. 

ii. A commissioned borrower is one who 

receives more than 25 percent of his/her 

annual income from commissions. 

iii. A tax transcript obtained directly from 

the IRS may be used in lieu of signed tax 

returns, and the cost of the transcript may be 

charged to the borrower. 

8. Qualifying Commission Income 

Earned for Less Than One Year 

a. Commission income earned for less 

than one year is not considered effective 

income. Exceptions may be made for 

situations in which the borrower’s 

compensation was changed from salary 

to commission within a similar position 

with the same employer. 

b. A borrower may also qualify when 

the portion of earnings not attributed to 

commissions would be sufficient to 

qualify the borrower for the mortgage. 

9. Employer Differential Payments 

If the employer subsidizes a 

borrower’s mortgage payment through 

direct payments, the amount of the 

payments: 

a. Is considered gross income, and 

b. Cannot be used to offset the 

mortgage payment directly, even if the 

employer pays the servicing lender 

directly. 

10. Retirement Income 

Retirement income must be verified 

from the former employer, or from 

Federal tax returns. If any retirement 

income, such as employer pensions or 

401(k)s, will cease within the first full 

three years of the mortgage loan, the 

income may only be considered as a 

compensating factor. 

11. Social Security Income 

Social Security income must be 

verified by the Social Security 

Administration or on Federal tax 

returns. If any benefits expire within the 

first full three years of the loan, the 

income source may be considered only 

as a compensating factor. 

Notes: 

i. The lender must obtain a complete copy 

of the current awards letter. 

ii. Not all Social Security income is for 

retirement-aged recipients; therefore, 

documented continuation is required. 

iii. Some portion of Social Security income 

may be ‘‘grossed up’’ if deemed nontaxable by 

the IRS. 

12. Automobile Allowances and 

Expense Account Payments 

a. Only the amount by which the 

borrower’s automobile allowance or 

expense account payments exceed 

actual expenditures may be considered 

income. 

b. To establish the amount to add to 

gross income, the borrower must 

provide the following: 

i. IRS Form 2106, Employee Business 

Expenses, for the previous two years, 

and 

ii. Employer verification that the 

payments will continue. 

c. If the borrower uses the standard 

per-mile rate in calculating automobile 

expenses, as opposed to the actual cost 

method, the portion that the IRS 

considers depreciation may be added 

back to income. 

d. Expenses that must be treated as 

recurring debt include: 

i. The borrower’s monthly car 

payment, and 

ii. Any loss resulting from the 

calculation of the difference between 

the actual expenditures and the expense 

account allowance. 

C. Borrowers Employed by a Family 

Owned Business 

1. Income Documentation Requirement 

In addition to normal employment 

verification, a borrower employed by a 

family owned businesses are required to 

provide evidence that he/she is not an 

owner of the business, which may 

include: 

a. Copies of signed personal tax 

returns, or 

b. A signed copy of the corporate tax 

return showing ownership percentage. 

Note: A tax transcript obtained directly 

from the IRS may be used in lieu of signed 

tax returns, and the cost of the transcript may 

be charged to the borrower. 

D. General Information on Self 

Employed Borrowers and Income 

Analysis 

1. Definition: Self Employed Borrower 

A borrower with a 25 percent or 

greater ownership interest in a business 

is considered self employed. 

2. Types of Business Structures 

There are four basic types of business 

structures. They include: 

a. Sole proprietorships 

b. Corporations 

c. Limited liability or ‘‘S’’ 

corporations, and 

d. Partnerships. 

3. Minimum Length of Self Employment 

a. Income from self employment is 

considered stable, and effective, if the 

borrower has been self employed for 

two or more years. 

b. Due to the high probability of 

failure during the first few years of a 

business, the requirements described in 

the table below are necessary for 

borrowers who have been self employed 

for less than two years. 

If the period of self employment is . . . Then . . . 

Between one and two years .................... To be eligible for a mortgage loan, the individual must have at least two years of documented previous successful employment in the line of work in which the individual is self employed, or in a related occupation. 

Note: A combination of one year of employment and formal education or training in the line of work 

in which the individual is self employed or in a related occupation is also acceptable. 

Less than one year .................................. The income from the borrower may not be considered effective income. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24179 

4. General Documentation Requirements 

for Self Employed Borrowers 

Self employed borrowers must 

provide the following documentation: 

a. Signed, dated individual tax 

returns, with all applicable tax 

schedules for the most recent two years 

b. For a corporation, ‘‘S’’ corporation, 

or partnership, signed copies of Federal 

business income tax returns for the last 

two years, with all applicable tax 

schedules 

c. Year to date profit and loss (P&L) 

statement and balance sheet, and 

d. Business credit report for 

corporations and ‘‘S’’ corporations. 

5. Establishing a Borrower’s Earnings 

Trend 

a. When qualifying a borrower for a 

mortgage loan, the lender must establish 

the borrower’s earnings trend from the 

previous two years using the borrower’s 

tax returns. 

b. If a borrower: 

i. Provides quarterly tax returns, the 

income analysis may include income 

through the period covered by the tax 

filings, or 

ii. Is not subject to quarterly tax 

returns, or does not file them, then the 

income shown on the P&L statement 

may be included in the analysis, 

provided the income stream based on 

the P&L is consistent with the previous 

years’ earnings. 

c. If the P&L statements submitted for 

the current year show an income stream 

considerably greater than what is 

supported by the previous year’s tax 

returns, the lender must base the 

income analysis solely on the income 

verified through the tax returns. 

d. If the borrower’s earnings trend for 

the previous two years is downward and 

the most recent tax return or P&L is less 

than the prior year’s tax return, the 

borrower’s most recent year’s tax return 

or P&L must be used to calculate his/her 

income. 

6. Analyzing the Business’s Financial 

Strength 

a. To determine if the business is 

expected to generate sufficient income 

for the borrower’s needs, the lender 

must carefully analyze the business’s 

financial strength, including the: 

i. Source of the business’s income 

ii. General economic outlook for 

similar businesses in the area. 

b. Annual earnings that are stable or 

increasing are acceptable, while 

businesses that show a significant 

decline in income over the analysis 

period are not acceptable. 

E. Income Analysis: Individual Tax 

Returns (IRS Form 1040) 

1. General Policy on Adjusting Income 

Based on a Review of IRS Form 1040 

The amount shown on a borrower’s 

IRS Form 1040 as adjusted gross income 

must either be increased or decreased 

based on the lender’s analysis of the 

individual tax return and any related tax 

schedules. 

2. Guidelines for Analyzing IRS Form 

1040 

The table below contains guidelines 

for analyzing IRS Form 1040: 

IRS Form 1040 heading Description 

Wages, Salaries and Tips ....................... An amount shown under this heading may indicate that the individual 

• Is a salaried employee of a corporation, or 

• Has other sources of income. 

This section may also indicate that the spouse is employed, in which case the spouse’s income must 

be subtracted from the borrower’s adjusted gross income. 

Business Income and Loss (from Schedule C).Sole proprietorship income calculated on Schedule C is business income. 

Depreciation or depletion may be added back to the adjusted gross income. 

Rents, Royalties, Partnerships (from 

Schedule E).

Any income received from rental properties or royalties may be used as income, after adding back 

any depreciation shown on Schedule E. xxx 

Capital Gain and Losses (from Schedule 

D).

Capital gains or losses generally occur only one time, and should not be considered when determining effective income. 

However, if the individual has a constant turnover of assets resulting in gains or losses, the capital 

gain or loss must be considered when determining the income. Three years’ tax returns are required to evaluate an earning trend. If the trend 

• Results in a gain, it may be added as effective income, or 

• Consistently shows a loss, it must be deducted from the total income. 

Lender must document anticipated continuation of income through verified assets. 

Example: A lender can consider the capital gains for an individual who purchases old houses, remodels them, and sells them for profit. 

Interest and Dividend Income (from 

Schedule B).

This taxable/tax-exempt income may be added back to the adjusted gross income only if it 

• Has been received for the past two years, and 

• Is expected to continue. 

If the interest-bearing asset will be liquidated as a source of the cash investment, the lender must appropriately adjust the amount. 

Farm Income or Loss (from Schedule F) Any depreciation shown on Schedule F may be added back to the adjusted gross income. 

IRA Distributions, Pensions, Annuities, 

and Social Security Benefits.

The non-taxable portion of these items may be added back to the adjusted gross income, if the income is expected to continue for the first three years of the mortgage. 

Adjustments to Income ............................ Adjustments to income may be added back to the adjusted gross income if they are 

• IRA and Keogh retirement deductions 

• Penalties on early withdrawal of savings 

• Health insurance deductions, and 

• Alimony payments. 

Employee Business Expenses ................ Employee business expenses are actual cash expenses that must be deducted from the adjusted 

gross income. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24180 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

F. Income Analysis: Corporate Tax 

Returns (IRS Form 1120) 

1. Description: Corporation 

A Corporation is a state-chartered 

business owned by its stockholders. 

2. Need To Obtain Borrower Percentage 

of Ownership Information 

a. Corporate compensation to the 

officers, generally in proportion to the 

percentage of ownership, is shown on 

the 

i. Corporate tax return IRS Form 1120, 

and 

ii. Individual tax returns. 

b. When a borrower’s percentage of 

ownership does not appear on the tax 

returns, the lender must obtain the 

information from the corporation’s 

accountant, along with evidence that the 

borrower has the right to any 

compensation. 

3. Analyzing Corporate Tax Returns 

a. In order to determine a borrower’s 

self employed income from a 

corporation the adjusted business 

income must 

i. Be determined, and 

ii. Multiplied by the borrower’s 

percentage of ownership in the 

business. 

b. The table below describes the items 

found on IRS Form 1120 for which an 

adjustment must be made in order to 

determine adjusted business income. 

Adjustment item Description of adjustment 

Depreciation and Depletion ..................... Add the corporation’s depreciation and depletion back to the after-tax income. 

Taxable Income ....................................... Taxable income is the corporation’s net income before Federal taxes. Reduce taxable income by the 

tax liability. 

Fiscal Year vs. Calendar Year ................ If the corporation operates on a fiscal year that is different from the calendar year, an adjustment 

must be made to relate corporate income to the individual tax return. 

Cash Withdrawals .................................... The borrower’s withdrawal of cash from the corporation may have a severe negative impact on the 

corporation’s ability to continue operating. 

G. Income Analysis: ‘‘S’’ Corporation 

Tax Returns (IRS Form 1120S) 

1. Description: ‘‘S’’ Corporation 

a. An ‘‘S’’ Corporation is generally a 

small, start-up business, with gains and 

losses passed to stockholders in 

proportion to each stockholder’s 

percentage of business ownership. 

b. Income for owners of ‘‘S’’ 

corporations comes from W–2 wages, 

and is taxed at the individual rate. The 

IRS Form 1120S, Compensation of 

Officers line item is transferred to the 

borrower’s individual IRS Form 1040. 

2. Analyzing ‘‘S’’ Corporation Tax 

Returns 

a. ‘‘S’’ corporation depreciation and 

depletion may be added back to income 

in proportion to the borrower’s share of 

the corporation’s income. 

b. In addition, the income must also 

be reduced proportionately by the total 

obligations payable by the corporation 

in less than one year. 

c. IMPORTANT: The borrower’s 

withdrawal of cash from the corporation 

may have a severe negative impact on 

the corporation’s ability to continue 

operating, and must be considered in 

the income analysis. 

H. Income Analysis: Partnership Tax 

Returns (IRS Form 1065) 

1. Description: Partnership 

a. A Partnership is formed when two 

or more individuals form a business, 

and share in profits, losses, and 

responsibility for running the company. 

b. Each partner pays taxes on his/her 

proportionate share of the partnership’s 

net income. 

2. Analyzing Partnership Tax Returns 

a. Both general and limited 

partnerships report income on IRS Form 

1065, and the partners’ share of income 

is carried over to Schedule E of IRS 

Form 1040. 

b. The lender must review IRS Form 

1065 to assess the viability of the 

business. Both depreciation and 

depletion may be added back to the 

income in proportion to the borrower’s 

share of income. 

c. Income must also be reduced 

proportionately by the total obligations 

payable by the partnership in less than 

one year. 

d. IMPORTANT: Cash withdrawals 

from the partnership may have a severe 

negative impact on the partnership’s 

ability to continue operating, and must 

be considered in the income analysis. 

III. Non-Employment Related Borrower 

Income 

A. Alimony, Child Support, and 

Maintenance Income Criteria 

Alimony, child support, or 

maintenance income may be considered 

effective, if: 

1. Payments are likely to be received 

consistently for the first three years of 

the mortgage 

2. The borrower provides the required 

documentation, which includes a copy 

of the 

1. Final divorce decree 

ii. Legal separation agreement, 

iii. Court order, or 

iv. Voluntary payment agreement, and 

3. The borrower can provide 

acceptable evidence that payments have 

been received during the last 12 months, 

such as 

i. Cancelled checks 

ii. Deposit slips 

iii. Tax returns, or 

iv. Court records. 

Notes: 

i. Periods less than 12 months may be 

acceptable, provided the lender can 

adequately document the payer’s ability 

and willingness to make timely 

payments. 

ii. Child support may be ‘‘grossed up’’ 

under the same provisions as nontaxable income sources. 

B. Investment and Trust Income 

1. Analyzing Interest and Dividends 

a. Interest and dividend income may 

be used as long as tax returns or account 

statements support a two-year receipt 

history. This income must be averaged 

over the two years. 

b. Subtract any funds that are derived 

from these sources, and are required for 

the cash investment, before calculating 

the projected interest or dividend 

income. 

2. Trust Income 

a. Income from trusts may be used if 

guaranteed, constant payments will 

continue for at least the first three years 

of the mortgage term. 

b. Required trust income 

documentation includes a copy of the 

Trust Agreement or other trustee 

statement, confirming the 

i. Amount of the trust 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24181 

ii. Frequency of distribution, and 

iii. Duration of payments. 

c. Trust account funds may be used 

for the required cash investment if the 

borrower provides adequate 

documentation that the withdrawal of 

funds will not negatively affect income. 

The borrower may use funds from the 

trust account for the required cash 

investment, but the trust income used to 

determine repayment ability cannot be 

affected negatively by its use. 

3. Notes Receivable Income 

a. In order to include notes receivable 

income to qualify a borrower, he/she 

must provide 

i. A copy of the note to establish the 

amount and length of payment, and 

ii. Evidence that these payments have 

been consistently received for the last 

12 months through deposit slips, 

cancelled checks, or tax returns. 

b. If the borrower is not the original 

payee on the note, the lender must 

establish that the borrower is now a 

holder in due course, and able to 

enforce the note. 

4. Eligible Investment Properties 

Follow the steps in the table below to 

calculate an investment property’s 

income or loss if the property to be 

subject to a mortgage is an eligible 

investment property. 

Step Action 

1 .............................. Subtract the monthly payment (PITI) from the monthly net rental income of the subject property. 

Note: Calculate the monthly net rental by taking the gross rents, and subtracting the 25 percent reduction for vacancies 

and repairs. 

2 .............................. Does the calculation in Step 1 yield a positive number? 

• If yes, add the number to the borrower’s monthly gross income. 

• If no, and the calculation yields a negative number, consider it a recurring monthly obligation. 

C. Military, Government Agency, and 

Assistance Program Income 

1. Military Income 

a. Military personnel not only receive 

base pay, but often times are entitled to 

additional forms of pay, such as 

i. Income from variable housing 

allowances 

ii. Clothing allowances 

iii. Flight or hazard pay 

iv. Rations, and 

v. Proficiency pay. 

b. These types of additional pay are 

acceptable when analyzing a borrower’s 

income as long as the probability of 

such pay to continue is verified in 

writing. 

Note: The tax-exempt nature of some of the 

above payments should also be considered. 

2. VA Benefits 

a. Direct compensation for servicerelated disabilities from the Department 

of Veterans Affairs (VA) is acceptable, 

provided the lender receives 

documentation from the VA. 

b. Education benefits used to offset 

education expenses are not acceptable. 

3. Government Assistance Programs 

a. Income received from government 

assistance programs is acceptable as 

long as the paying agency provides 

documentation indicating that the 

income is expected to continue for at 

least three years. 

b. If the income from government 

assistance programs will not be received 

for at least three years, it may be 

considered as a compensating factor. 

c. Unemployment income must be 

documented for two years, and there 

must be reasonable assurance that this 

income will continue. This requirement 

may apply to seasonal employment. 

4. Mortgage Credit Certificates 

a. If a government entity subsidizes 

the mortgage payments either through 

direct payments or tax rebates, these 

payments may be considered as 

acceptable income. 

b. Either type of subsidy may be 

added to gross income, or used directly 

to offset the mortgage payment, before 

calculating the qualifying ratios. 

5. Homeownership Subsidies 

a. A monthly subsidy may be treated 

as income, if a borrower is receiving 

subsidies under the housing choice 

voucher home ownership option from a 

public housing agency (PHA). Although 

continuation of the homeownership 

voucher subsidy beyond the first year is 

subject to Congressional appropriation, 

for the purposes of underwriting, the 

subsidy will be assumed to continue for 

at least three years. 

b. If the borrower is receiving the 

subsidy directly, the amount received is 

treated as income. The amount received 

may also be treated as non taxable 

income and be ‘‘grossed up’’ by 25 

percent, which means that the amount 

of the subsidy, plus 25 percent of that 

subsidy may be added to the borrower’s 

income from employment and/or other 

sources. 

c. Lenders may treat this subsidy as 

an ‘‘offset’’ to the monthly mortgage 

payment (that is, reduce the monthly 

mortgage payment by the amount of the 

home ownership assistance payment 

before dividing by the monthly income 

to determine the payment-to-income 

and debt-to-income ratios). The subsidy 

payment must not pass through the 

borrower’s hands. 

d. The assistance payment must be: 

i. Paid directly to the servicing lender, 

or 

ii. Placed in an account that only the 

servicing lender may access. 

Note: Assistance payments made directly 

to the borrower must be treated as income. 

D. Rental Income 

1. Analyzing the Stability of Rental 

Income 

a. Rent received for properties owned 

by the borrower is acceptable as long as 

the lender can document the stability of 

the rental income through 

i. A current lease 

ii. An agreement to lease, or 

iii. A rental history over the previous 

24 months that is free of unexplained 

gaps greater than three months (such 

gaps could be explained by student, 

seasonal, or military renters, or property 

rehabilitation). 

b. A separate schedule of real estate 

is not required for rental properties as 

long as all properties are documented 

on the URLA. 

Note: The underwriting analysis may not 

consider rental income from any property 

being vacated by the borrower, except under 

the circumstances described below. 

2. Rental Income From Borrower 

Occupied Property 

a. The rent for multiple unit property 

where the borrower resides in one or 

more units and charges rent to tenants 

of other units may be used for qualifying 

purposes. 

b. Projected rent for the tenantoccupied units only may: 

i. Be considered gross income, only 

after deducting vacancy and 

maintenance factors, and 

ii. Not be used as a direct offset to the 

mortgage payment. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24182 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

3. Income from Roommates in a Single 

Family Property 

a. Income from roommates in a single 

family property occupied as the 

borrower’s primary residence is not 

acceptable. Rental income from boarders 

however, is acceptable, if the boarders 

are related by blood, marriage, or law. 

b. The rental income may be 

considered effective, if shown on the 

borrower’s tax return. If not on the tax 

return, rental income paid by the 

boarder 

i. May be considered a compensating 

factor, and 

ii. Must be adequately documented by 

the lender. 

4. Documentation Required To Verify 

Rental Income 

Analysis of the following required 

documentation is necessary to verify all 

borrower rental income: 

a. IRS Form 1040 Schedule E; and 

b. Current leases/rental agreements. 

5. Analyzing IRS Form 1040 Schedule E 

a. The IRS Form 1040 Schedule E is 

required to verify all rental income. 

Depreciation shown on Schedule E may 

be added back to the net income or loss. 

b. Positive rental income is 

considered gross income for qualifying 

purposes, while negative income must 

be treated as a recurring liability. 

c. The lender must confirm that the 

borrower still owns each property listed, 

by comparing Schedule E with the real 

estate owned section of the URLA. If the 

borrower owns six or more units in the 

same general area, a map must be 

provided disclosing the locations of the 

units, as evidence of compliance with 

FHA’s seven-unit limitation. 

6. Using Current Leases To Analyze 

Rental Income 

a. The borrower can provide a current 

signed lease or other rental agreement 

for a property that was acquired since 

the last income tax filing, and is not 

shown on Schedule E. 

b. In order to calculate the rental 

income: 

i. Reduce the gross rental amount by 

25 percent for vacancies and 

maintenance 

ii. Subtract PITI and any homeowners’ 

association dues, and 

iii. Apply the resulting amount to 

income, if positive, or recurring debts, if 

negative. 

7. Exclusion of Rental Income From 

Property Being Vacated by the Borrower 

Underwriters may not consider any 

rental income from a borrower’s 

principal residence that is being vacated 

in favor of another principal residence, 

except under the conditions described 

below: 

Notes: i. This policy assures that a 

borrower either has sufficient income to 

make both mortgage payments without any 

rental income, or has an equity position not 

likely to result in defaulting on the mortgage 

on the property being vacated. 

ii. This applies solely to a principal 

residence being vacated in favor of another 

principal residence. It does not apply to 

existing rental properties disclosed on the 

loan application and confirmed by tax 

returns (Schedule E of form IRS 1040). 

8. Policy Exceptions Regarding the 

Exclusion of Rental Income From a 

Principal Residence Being Vacated by a 

Borrower 

When a borrower vacates a principal 

residence in favor of another principal 

residence, the rental income, reduced by 

the appropriate vacancy factor, may be 

considered in the underwriting analysis 

under the circumstances listed in the 

table below. 

Exception Description 

Relocations .............................................. The borrower is relocating with a new employer, or being transferred by the current employer to an 

area not within reasonable and locally-recognized commuting distance. 

A properly executed lease agreement (that is, a lease signed by the borrower and the lessee) of at 

least one year’s duration after the loan is closed is required. 

Note: Underwriters should also obtain evidence of the security deposit and/or evidence the first 

month’s rent was paid to the homeowner. 

Sufficient Equity in Vacated Property ...... The borrower has a loan-to-value ratio of 75 percent or less, as determined either by 

• A current (no more than six months old) residential appraisal, or 

• Comparing the unpaid principal balance to the original sales price of the property. 

Note: The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterioronly appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie 

Mae 1075/Freddie Mac 466. 

E. Non Taxable and Projected Income 

1. Types of Non Taxable Income 

Certain types of regular income may 

not be subject to Federal tax. Such types 

of non taxable income include 

a. Some portion of Social Security, 

some Federal government employee 

retirement income, Railroad Retirement 

Benefits, and some state government 

retirement income 

b. Certain types of disability and 

public assistance payments 

c. Child support 

d. Military allowances, and 

e. Other income that is documented as 

being exempt from Federal income 

taxes. 

2. Adding Non Taxable Income to a 

Borrower’s Gross Income 

a. The amount of continuing tax 

savings attributed to regular income not 

subject to Federal taxes may be added 

to the borrower’s gross income. 

b. The percentage of non-taxable 

income that may be added cannot 

exceed the appropriate tax rate for the 

income amount. Additional allowances 

for dependents are not acceptable. 

c. The lender: 

i. Must document and support the 

amount of income grossed up for any 

non-taxable income source, and 

ii. Should use the tax rate used to 

calculate the borrower’s last year’s 

income tax. 

Note: If the borrower is not required to file 

a Federal tax return, the tax rate to use is 25 

percent. 

3. Analyzing Projected Income 

a. Projected or hypothetical income is 

not acceptable for qualifying purposes. 

However, exceptions are permitted for 

income from the following sources: 

i. Cost-of-living adjustments 

ii. Performance raises, and 

iii. Bonuses. 

b. For the above exceptions to apply, 

the income must be 

i. Verified in writing by the employer, 

and 

ii. Scheduled to begin within 60 days 

of loan closing. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24183 

4. Project Income for New Job 

a. Projected income is acceptable for 

qualifying purposes for a borrower 

scheduled to start a new job within 60 

days of loan closing if there is a 

guaranteed, non-revocable contract for 

employment. 

b. The lender must verify that the 

borrower will have sufficient income or 

cash reserves to support the mortgage 

payment and any other obligations 

between loan closing and the start of 

employment. Examples of this type of 

scenario are teachers whose contracts 

begin with the new school year, or 

physicians beginning a residency after 

the loan closes fall under this category. 

c. The loan is not eligible for 

endorsement if the loan closes more 

than 60 days before the borrower starts 

the new job. To be eligible for 

endorsement, the lender must obtain 

from the borrower a pay stub or other 

acceptable evidence indicating that 

he/she has started the new job. 

IV. Borrower Liabilities: Recurring 

Obligations 

1. Types of Recurring Obligations 

Recurring obligations include: 

a. All installment loans 

b. Revolving charge accounts 

c. Real estate loans 

d. Alimony 

e. Child support, and 

f. Other continuing obligations. 

2. Debt to Income Ratio Computation for 

Recurring Obligations 

a. The lender must include the 

following when computing the debt to 

income ratios for recurring obligations: 

i. Monthly housing expense, and 

ii. Additional recurring charges 

extending ten months or more, such as 

a. Payments on installment accounts 

b. Child support or separate 

maintenance payments 

c. Revolving accounts, and 

d. Alimony. 

b. Debts lasting less than ten months 

must be included if the amount of the 

debt affects the borrower’s ability to pay 

the mortgage during the months 

immediately after loan closing, 

especially if the borrower will have 

limited or no cash assets after loan 

closing. 

Note: Monthly payments on revolving or 

open-ended accounts, regardless of the 

balance, are counted as a liability for 

qualifying purposes even if the account 

appears likely to be paid off within 10 

months or less. 

3. Revolving Account Monthly Payment 

Calculation 

If the credit report shows any 

revolving accounts with an outstanding 

balance but no specific minimum 

monthly payment, the payment must be 

calculated as the greater of 

a. 5 percent of the balance, or 

b. $10. 

Note: If the actual monthly payment is 

documented from the creditor or the lender 

obtains a copy of the current statement 

reflecting the monthly payment, that amount 

may be used for qualifying purposes. 

4. Reduction of Alimony Payment for 

Qualifying Ratio Calculation 

Since there are tax consequences of 

alimony payments, the lender may 

choose to treat the monthly alimony 

obligation as a reduction from the 

borrower’s gross income when 

calculating qualifying ratios, rather than 

treating it as a monthly obligation. 

V. Borrower Liabilities: Contingent 

Liability 

1. Definition: Contingent Liability 

A contingent liability exists when an 

individual is held responsible for 

payment of a debt if another party, 

jointly or severally obligated, defaults 

on the payment. 

2. Application of Contingent Liability 

Policies 

The contingent liability policies 

described in this topic apply unless the 

borrower can provide conclusive 

evidence from the debt holder that there 

is no possibility that the debt holder 

will pursue debt collection against him/ 

her should the other party default. 

3. Contingent Liability on Mortgage 

Assumptions 

Contingent liability must be 

considered when the borrower remains 

obligated on an outstanding FHAinsured, VA-guaranteed, or 

conventional mortgage secured by 

property that: 

a. Has been sold or traded within the 

last 12 months without a release of 

liability, or 

b. Is to be sold on assumption without 

a release of liability being obtained. 

4. Exemption From Contingent Liability 

Policy on Mortgage Assumptions 

When a mortgage is assumed, 

contingent liabilities need not be 

considered if the 

a. Originating lender of the mortgage 

being underwritten obtains, from the 

servicer of the assumed loan, a payment 

history showing that the mortgage has 

been current during the previous 12 

months, or 

b. Value of the property, as 

established by an appraisal or the sales 

price on the HUD–1 Settlement 

Statement from the sale of the property, 

results in a loan-to-value (LTV) ratio of 

75 percent or less. 

5. Contingent Liability on Cosigned 

Obligations 

a. Contingent liability applies, and the 

debt must be included in the 

underwriting analysis, if an individual 

applying for a mortgage is a cosigner/coobligor on: 

i. A car loan 

ii. A student loan 

iii. A mortgage, or 

iv. Any other obligation. 

b. If the lender obtains documented 

proof that the primary obligor has been 

making regular payments during the 

previous 12 months, and does not have 

a history of delinquent payments on the 

loan during that time, the payment does 

not have to be included in the 

borrower’s monthly obligations. 

VI. Borrower Liabilities: Projected 

Obligations and Obligations Not 

Considered Debt 

1. Projected Obligations 

a. Debt payments, such as a student 

loan or balloon note scheduled to begin 

or come due within 12 months of the 

mortgage loan closing, must be included 

by the lender as anticipated monthly 

obligations during the underwriting 

analysis. 

b. Debt payments do not have to be 

classified as projected obligations if the 

borrower provides written evidence that 

the debt will be deferred to a period 

outside the 12-month timeframe. 

c. Balloon notes that come due within 

one year of loan closing must be 

considered in the underwriting analysis. 

2. Obligations Not Considered Debt 

Obligations not considered debt, and 

therefore not subtracted from gross 

income, include 

a. Federal, state, and local taxes 

b. Federal Insurance Contributions 

Act (FICA) or other retirement 

contributions, such as 401(k) accounts 

(including repayment of debt secured by 

these funds) 

c. Commuting costs 

d. Union dues 

e. Open accounts with zero balances 

f. Automatic deductions to savings 

accounts 

g. Child care, and 

h.Voluntary deductions. 

END OF COMMON RULE 

Adoption of the Common Rule Text 

The proposed adoption of the 

common rules by the agencies, as 

modified by agency-specific text, is set 

forth below: 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24184 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

12 CFR Chapter I 

List of Subjects in 12 CFR Part 43 

Banks and banking, Credit risk, 

National banks, Reporting and 

recordkeeping requirements, Risk 

retention, Securitization, Mortgages, 

Commercial loans, Commercial real 

estate, Auto loans. 

Authority and Issuance 

For the reasons stated in the Common 

Preamble, 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 citation for part 43 is 

added to read as follows: 

Authority: 12 U.S.C. 1 et seq., 93a, 161, 

1818, and 15 U.S.C. 78o–11. 

2. Part 43 is added as set forth at the 

end of the Common Preamble. 

3. Section 43.1 is added 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, 1818, 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 branch or agency of a foreign 

bank, or an operating 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. 

BOARD OF GOVERNORS OF THE 

FEDERAL RESERVE SYSTEM 

12 CFR Chapter II 

List of Subjects in 12 CFR Part 244 

Banks and banking, Bank holding 

companies, State member banks, 

Foreign banking organizations, Edge and 

agreement corporations, Credit risk, 

Reporting and recordkeeping 

requirements, Risk retention, 

Securitization, Mortgages, Commercial 

loans, Commercial real estate, Auto 

loans. 

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 read 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 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) 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. 

(3) On and after the transfer date 

established under section 311 of the 

Dodd-Frank Act (12 U.S.C. 5411), 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 securitizer that is a 

savings and loan holding company and 

any subsidiary thereof (as defined in 12 

U.S.C. 1467a). 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Chapter III 

List of Subjects in 12 CFR Part 373 

Banks, Banking, State nonmember 

banks, Credit risk, Reporting and 

recordkeeping requirements, Risk 

retention, Securitization, Mortgages, 

Commercial loans, Commercial real 

estate, Auto loans. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24185 

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 read 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 added 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 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. 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); or 

(3) Any subsidiary of the foregoing. 

FEDERAL HOUSING FINANCE 

AGENCY 

List of Subjects in 12 CFR Part 1234 

Government sponsored enterprises, 

Mortgages, Securities. 

Authority and Issuance 

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 

8. 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). 

9. Section 1234.1 is added 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 

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 [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. 

10. Amend § 1234.16 as follows: 

a. Revise the section heading to read 

as set forth below. 

b. In the introductory text, remove the 

words ‘‘§ 1234.17 through § 1234.20’’ 

and add in their place the words 

‘‘§ 1234.19’’. 

c. Remove the definitions of 

‘‘Automobile loan’’, ‘‘Commercial loan’’, 

‘‘Debt to income (DTI) ratio’’, ‘‘Earnings 

before interest, taxes, depreciation, and 

amortization (EBITDA)’’, ‘‘Leverage 

Ratio’’, ‘‘Machinery and equipment 

(M&E) collateral’’, ‘‘Model year’’, ‘‘New 

vehicle’’, ‘‘Payment-in-kind (PIK)’’, 

‘‘Purchase price’’, ‘‘Salvage title’’, ‘‘Total 

debt’’, ‘‘Total liabilities ratio’’, ‘‘Trade-in 

allowance’’ and ‘‘Used vehicle’’. 

d. Revise the definition of ‘‘Debt 

service coverage (DSC) ratio’’ to read as 

follows: 

§ 1234.16 Definitions applicable to 

qualifying commercial mortgages. 

* * * * * 

Debt service coverage (DSC) ratio 

means the ratio of: 

(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. 

* * * * * 

§§ 1234.17, 1234.18, and 1234.20 

[Removed and reserved] 

11. Remove and reserve §§ 1234.17, 

1234.18 and 1234.20. 

12. Amend § 1234.19 as follows: 

a. Revise the section heading to read 

as set forth below. 

b. Add introductory text to read as set 

forth below. 

§ 1234.19 Exception for qualifying CRE 

loans. 

The risk retention requirements in 

subpart B of this part shall not apply to 

securitization transactions that satisfy 

the standards provided in this section. 

* * * * * 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Chapter II 

List of Subjects in 17 CFR Part 246 

Reporting and recordkeeping 

requirements, Securities. 

Authority and Issuance 

For the reasons stated in the 

Supplementary Information, the 

Securities and Exchange Commission 

proposes the amendments to 17 CFR 

chapter II 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. 

PART 246—CREDIT RISK RETENTION 

13. 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. 

14. Part 246 is added as set forth at 

the end of the Common Preamble. 

15. Section 246.1 is added to read as 

follows: 


srobinson on DSKHWCL6B1PROD with PROPOSALS
24186 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

§ 246.1 Authority, purpose and scope. 

(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. 

(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. 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 267 

List of Subjects in 24 CFR Part 267 

Mortgages. 

Authority and Issuance 

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. 

Dated: March 28, 2011. 

John Walsh, 

Acting Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System, March 30, 2011. 

Jennifer J. Johnson, 

Secretary of the Board. 

Dated at Washington, DC, this 29th of 

March 2011. 

By order of the Board of Directors. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

Dated: March 29, 2011. 

Edward J. Demarco, 

Acting Director, Federal Housing Finance 

Agency. 

By the Securities and Exchange 

Commission. 

Dated: March 30, 2011. 

Elizabeth M. Murphy, 

Secretary. 

Jointly prescribed with the Agencies. 

By the Department of Housing and Urban 

Development. 

Dated: March 31, 2011. 

Shaun Donovan, 

Secretary. 

[FR Doc. 2011–8364 Filed 4–28–11; 8:45 am] 

BILLING CODE P 


srobinson on DSKHWCL6B1PROD with PROPOSALS