[Federal Register Volume 74, Number 194 (Thursday, October 8, 2009)]
[Proposed Rules]
[Pages 51806-51813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24252]


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FEDERAL RESERVE SYSTEM

[Regulation A; Docket No. R-1371]

12 CFR Part 201


Extensions of Credit by Federal Reserve Banks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board of Governors (Board) is publishing for public 
comment a proposed amendment to Regulation A that would provide a 
process by which the Federal Reserve Bank of New York may determine the 
eligibility of credit rating agencies and the ratings they issue for 
use in the Term Asset-Backed Securities Loan Facility, which is 
maintained by the Federal Reserve Bank of New York and for which the 
Board has expressly set a particular credit rating requirement for 
collateral offered by the borrower. The proposed rule would not apply 
to discount window lending or other extensions of credit provided by 
the Federal Reserve System. In addition, the rule would only apply to 
asset-backed securities that are not backed by commercial real estate. 
This proposed amendment is designed to provide the Federal Reserve Bank 
of New York with a consistent framework for determining the eligibility 
of ratings issued by individual credit rating agencies when used in 
conjunction with a separate asset-level risk assessment process. The 
proposed amendment does not represent a change in the stance of 
monetary policy. The Board solicits comment on all aspects of the 
proposal, as well as specific aspects of the proposal as set out in the 
preamble.

DATES: Written comments on this notice of proposed rulemaking must be 
submitted on or before November 9, 2009.

ADDRESSES: You may submit comments, identified by Docket Number R-1371, 
by any of the following methods:
    <bullet> Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#d3a1b6b4a0fdb0bcbebeb6bda7a093b5b6b7b6a1b2bfa1b6a0b6a1a5b6fdb4bca5"><span class="__cf_email__" data-cfemail="67150200144904080a0a02091314270102030215060b1502140215110249000811">[email protected]</span></a>. Include docket 
number in the subject line of the message.
    <bullet> Fax: (202) 452-3819 or (202) 452-3102.
    <bullet> Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm, as 
submitted, unless modified for technical reasons. Accordingly, your 
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.

[[Page 51807]]


FOR FURTHER INFORMATION CONTACT: William R. Nelson, Associate Director 
(202/452-3579), Division of Monetary Affairs; Christopher W. Clubb, 
Senior Counsel (202/452-3904), Legal Division; for users of 
Telecommunication Devices for the Deaf (TDD) only, contact 202/263-
4869.

SUPPLEMENTARY INFORMATION:

I. Background

    Credit rating agencies. Credit rating agencies assess the credit 
risk of corporate or government borrowers and issuers of bonds, debt 
securities, and other financial obligations.\1\ A credit rating is a 
credit rating agency's opinion of how likely an issuer is to make 
timely payments on a financial obligation, based on a variety of 
information regarding the issuer, the market in which the issuer 
operates, the overall economy, and the nature of the security. Because 
issuers may issue different types of fixed-income securities, different 
securities by the same issuer may have different credit ratings 
according to their different risk profiles. Credit rating agencies 
issue credit ratings for debt securities of public companies, sovereign 
governments, and municipalities, and for structured products such as 
asset-backed securities.\2\
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    \1\ See International Organization of Securities Commissions, 
Report on the Activities of Credit Rating Agencies, (Sept. 2003).
    \2\ See Securities and Exchange Commission, Proposed Rule: 
Oversight of Credit Rating Agencies as Nationally Recognized 
Statistical Rating Organizations, 72 FR 6378-01 (Feb. 9, 2007) 
(herein ``CRA Proposed Rule'').
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    Some credit rating agencies emphasize quantitative models based on 
statistical analysis of an issuer's financial disclosures to derive 
their ratings, while other credit rating agencies review both 
quantitative and qualitative indicators (including information that may 
be provided by the issuer and other sources) to form an assessment that 
is recommended to a rating committee, which then assigns the rating. 
While the exact processes used by a credit rating agency to derive a 
credit rating may be proprietary in some cases, credit rating agencies 
generally provide public statements outlining their rating philosophy 
or general methodology for a particular asset class. After the credit 
rating is issued, the credit rating agency will generally continue to 
monitor the issuer and/or its securities on an ongoing basis, although 
the U.S. Securities and Exchange Commission (SEC) has found that such 
monitoring tends to be less comprehensive than the initial review.\3\
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    \3\ U.S. Securities and Exchange Commission, Office of Inspector 
General, The SEC's Role Regarding and Oversight of Nationally 
Recognized Statistical Rating Organizations (NRSROs), (Sept. 2009) 
p. 44.
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    NRSRO credit ratings. The term ``nationally recognized statistical 
rating organization'' was originally adopted by the SEC in 1975 for use 
in determining capital charges for broker-dealers on different grades 
of debt securities.\4\ The concept of ratings by ``nationally 
recognized statistical rating organizations'' has been incorporated 
into a range of state and federal legislation and regulations.\5\
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    \4\ U.S. Securities and Exchange Commission, Report on the Role 
and Function of Credit Rating Agencies in the Operation of the 
Securities Markets, (Jan. 2003) p. 6.
    \5\ See, e.g., 12 U.S.C. 24a(a)(3)(A)(i) (financial subsidiaries 
of national banks); 12 U.S.C. 1831e(d)(4)(A) (activities of savings 
associations); 15 U.S.C. 78c(a)(41) (definition of ``mortgage 
related security''); 15 U.S.C. 80a-6(a)(5)(A)(iv)(I) (exemption from 
Investment Company Act provisions); and 29 U.S.C. 
1341(b)(5)(B)(i)(I) (ERISA termination of single employer plans); 
Cal. Gov. Code Sec.  53601 (West 2009); N.Y. Gen. Municipal Law 
Sec.  10 (McKinney 2009).
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    The Credit Rating Agency Reform Act of 2006 (CRARA) sets out a 
statutory definition of ``nationally recognized statistical rating 
organization'' (NRSRO) and provides the SEC with the authority to 
implement registration and oversight rules with respect to registered 
credit rating agencies.\6\ The CRARA's provisions, and the grants of 
SEC rulemaking authority under these provisions, establish a voluntary 
registration process and regulatory program for credit rating agencies 
opting to have their credit ratings qualify for purposes of laws and 
rules using the term ``nationally recognized statistical rating 
organization.'' \7\ Such credit rating agencies are required to 
register with the SEC; make public certain information to help persons 
assess their credibility; make and retain certain records; furnish the 
SEC with certain financial reports; implement policies and manage the 
handling of material non-public information and conflicts of interest; 
and abide by certain prohibitions against unfair, coercive, or abusive 
practices. The CRARA also prohibits the SEC from evaluating the quality 
of rating methodologies in making a determination about whether a 
credit rating agency is an NRSRO. The SEC has promulgated regulations 
to implement the CRARA statutory provisions.\8\
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    \6\ CRARA (Pub. L. No. 109-291, 120 Stat. 1327) is primarily 
codified at 15 U.S.C. 78o-7.
    \7\ The CRARA replaced the existing SEC staff approval system 
with ``a transparent and voluntary registration system that favors 
no particular business model, thus encouraging purely statistical 
models to compete with the qualitative models of the dominant rating 
agencies and investor-based models to compete with fee-based 
models.'' S. Rep. No. 109-326 at p. 7.
    \8\ See 17 CFR 240.17g-1 through 240.17g-6.
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    Like other participants in the financial markets, the Federal 
Reserve System is an active user of NRSRO credit ratings. Credit 
ratings are used to support the efforts of several System programs, 
including discount window lending and recent specialized System 
liquidity and securities lending programs in response to the financial 
crisis.\9\ Reserve Banks make credit available to depository 
institutions through the discount window to meet various liquidity 
needs. Under the Board's Regulation A, the Reserve Banks have the 
discretion to determine when a discount window advance to a depository 
institution is adequately secured.\10\
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    \9\ In addition to the use of ratings in helping to manage the 
credit risk of the Federal Reserve's balance sheet, credit ratings 
also play a role in the Federal Reserve's banking supervision and 
regulation function.
    \10\ Regulation A states that a Reserve Bank's advance to a 
depository institution must be secured to the satisfaction of the 
Reserve Bank. 12 CFR 201.3(a)(2).
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    TALF. The Term Asset-backed Securities Lending Facility (TALF) is a 
funding facility to help market participants meet the credit needs of 
households and businesses by supporting the issuance of new asset-
backed securities (ABS) collateralized by loans of various types to 
consumers and businesses of all sizes.\11\ The underlying credit 
exposures of TALF-eligible ABS must be auto loans, student loans, 
credit card receivables, equipment loans, floorplan loans, insurance 
premium finance loans, receivables related to residential mortgage 
servicing advances (servicing advance receivables), or commercial 
mortgages.\12\ The TALF was established under section 13(3) of the 
Federal Reserve Act, which permits the Board of Governors of the 
Federal Reserve Board, in unusual and exigent circumstances, to 
authorize Reserve Banks to extend credit to individuals, partnerships 
and corporations that are unable to obtain adequate credit 
accommodations. The Board has determined the terms and conditions for 
TALF borrowing and eligible collateral, including minimum credit 
ratings and the set of credit rating agencies whose ratings may be 
accepted

[[Page 51808]]

for purposes of TALF by the Federal Reserve Bank of New York.
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    \11\ For the terms and conditions and frequently asked question 
of the TALF, refer to http://www.federalreserve.gov/monetarypolicy/talf.htm.
    \12\ Small business loans whose principal and interest payments 
are fully guaranteed by the full faith and credit of the United 
States are also accepted at the TALF, however, no credit rating is 
required for ABS backed by such loans.
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    In authorizing the TALF, the Board directed that TALF-eligible 
collateral must be ABS denominated in U.S. dollars that has a credit 
rating in the highest long-term or short-term investment-grade rating 
category from two or more eligible NRSROs and does not have a credit 
rating below the highest investment-grade category from an eligible 
NRSRO. When TALF was established, the Board and the Federal Reserve 
Bank of New York accepted credit ratings from three NRSROs (Standard & 
Poor's, Moody's Investors Service, and Fitch Ratings). The Federal 
Reserve put a high priority on making the TALF available expeditiously 
while ensuring appropriate protection against credit risk for the U.S. 
taxpayer. In its efforts to provide liquidity to TALF ABS sectors as 
expeditiously as possible, the Board recognized that market 
participants have continued to rely upon the ratings of these NRSROs, 
generally to the exclusion of those with less experience rating ABS.
    Since the establishment of TALF, the Federal Reserve has been 
conducting a broader review of its approach to using rating agencies 
encompassing the ratings of securities of all types accepted as 
collateral at all of the Federal Reserve's recently established credit 
facilities as well as collateral accepted to secure regular discount 
window loans. In May 2009, the Board announced an extension of eligible 
TALF collateral to include certain high-quality newly issued and legacy 
commercial mortgage-backed securities (CMBS).\13\ Due to concerns about 
the historical accuracy of CMBS ratings, the role of ratings in the 
evaluation of legacy CMBS (which depend on the NRSROs continued 
monitoring activities), and the presence of two additional NRSROs with 
substantial experience rating CMBS, the Board and the Federal Reserve 
Bank of New York conducted a review of the five NRSROs who expressed 
interest in having their ratings accepted for CMBS pledged to the TALF. 
The review concluded that the ratings of these five NRSROs were of 
sufficient quality to provide useful information in the Federal Reserve 
Bank of New York's verification of the credit quality on the most 
senior classes of newly issued and legacy CMBS when used in conjunction 
with a separate asset-level risk assessment process. As a result, the 
Board amended the terms of the TALF to provide that TALF-eligible CMBS 
must have a triple-A long-term rating from at least two of those five 
NRSROs, and not have a lower rating from any of the other five NRSROs. 
Due to the factors listed above, particularly the importance of 
verifying the monitoring capabilities of the NRSROs that rate CMBS, the 
rule proposed in this notice will not apply to the NRSRO ratings that 
are accepted for CMBS pledged to the TALF.
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    \13\ Only ABS issued on or after January 1, 2009 may qualify for 
TALF funding except for ABS guaranteed by the Small Business 
Administration, which can be issued on or after January 1, 2008. All 
outstanding CMBS meeting the other TALF requirements may qualify for 
TALF funding.
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II. Proposed Rule

    The proposed rule presented in this notice is another step in the 
Federal Reserve's process of reviewing the appropriate use of NRSROs in 
its credit facilities. By this notice, the Board is proposing an 
amendment to the Board's Regulation A to govern the Federal Reserve 
Bank of New York's acceptance of credit ratings in connection with TALF 
ABS other than CMBS. As noted above, the proposed rule would apply only 
to the acceptance of credit ratings with respect to ABS pledged to the 
TALF and does not apply to general discount window lending under the 
primary, secondary, or seasonal credit facilities established in 
Regulation A, or any other credit facilities. Extensions of credit 
through the discount window are structured differently from those 
extended under TALF and the approach presented in the proposed rule 
would likely not be feasible in the discount window scenario. In such 
cases, the Reserve Banks would continue to ensure that they are 
adequately secured as otherwise provided in Regulation A.\14\ The 
Federal Reserve will continue to review the use of credit ratings with 
respect to its other credit facilities.
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    \14\ 12 CFR 201.3(a)(2).
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    The proposed rule adopts an objective minimal experience-based 
approach specific to the types of assets accepted as collateral in 
TALF. The proposed rule is intended to strike a balance between the 
goal of promoting competition among NRSROs and the goal of ensuring 
appropriate protection against credit risk for the U.S. taxpayer. As 
explained below, an additional risk assessment by the Federal Reserve 
Bank of New York with respect to TALF collateral is an important 
complement to the proposed rule's broadening of the set of eligible 
NRSROs.
    As a threshold requirement, the proposed rule states that the 
Federal Reserve Bank of New York may only accept a credit rating issued 
by a credit rating agency that is registered with the SEC as an NRSRO 
for issuers of asset-backed securities pursuant to the CRARA. The 
proposed rule would leverage off of the NRSRO framework established by 
CRARA and the SEC regulations. A registered NRSRO must comply with SEC 
rules regarding the prevention of misuse of material nonpublic 
information; conflicts of interest; and prohibitions against unfair, 
coercive, or abusive practices. In particular, an NRSRO is expressly 
prohibited from having certain types of conflicts of interest relating 
to the issuance of credit ratings (such as the NRSRO being paid by 
issuers to determine credit ratings with respect to securities they 
issue) unless the conflicts are publicly disclosed in the NRSRO's 
registration materials and the NRSRO establishes and enforces written 
policies and procedures to address and manage the conflict of 
interest.\15\ In addition, SEC rules prohibit NRSROs from having 
certain enumerated conflicts of interest under any circumstances (such 
as the NRSRO directly owning securities of the organization that is 
subject to the credit rating).\16\ The Board believes that these 
disclosure provisions and conflict of interest prohibitions are prudent 
and relevant to the evaluation of credit rating agencies with respect 
to TALF.
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    \15\ SEC Form NRSRO (SEC 1541) (4-09) Exhibits 6 and 7. See also 
17 CFR 240.17g-5(a) and (b); 15 U.S.C. 78o-7(h).
    \16\ 17 CFR 240.17g-5(c)(2).
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    Registration with the SEC as an NRSRO is not, however, a guarantee 
of the quality of the credit ratings issued. The CRARA expressly 
prohibits the SEC and any state from regulating the substance of credit 
ratings or the procedures and methodologies by which any NRSRO 
determines credit ratings.\17\ Therefore, the Board believes additional 
criteria should be established to ensure that the Federal Reserve Bank 
of New York only accepts credit ratings that are reasonably likely to 
assist in the Federal Reserve Bank of New York's risk assessment to 
determine eligibility of ABS pledged as collateral to the TALF. The 
Board specifically solicits public comment regarding whether NRSRO 
registration is an appropriate threshold requirement for being accepted 
at TALF and whether NRSRO registration should be the sole requirement 
for eligibility for use in TALF. In responding, a commenter should 
explain how credit risk can be controlled with NRSRO registration as 
the sole criterion.
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    \17\ 15 U.S.C. 78o-7(c)(2).
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    The Board is proposing a rule for reviewing the acceptability of a 
particular NRSRO generally by reference to certain experience-based 
criteria. The experience requirement is consistent

[[Page 51809]]

with the intent of CRARA, which requires a measure of market acceptance 
for NRSRO designation as well as the SEC rules regarding the NRSRO 
designation that require market acceptance within a defined asset 
category. Rather than requiring attestations from a particular number 
of Qualified Institutional Buyers (QIBs) that they rely upon an NRSRO's 
ratings, the rule would require that the NRSRO had issued ratings on at 
least ten transactions within a specified asset category. The asset 
categories are:
    <bullet> Category 1--auto loans, floorplan loans, and equipment 
loans TALF sectors;
    <bullet> Category 2--credit card receivables and insurance premium 
finance loans TALF sectors;
    <bullet> Category 3--mortgage servicing advance receivables TALF 
sector; \18\ and
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    \18\ The proposed rule would permit an NRSRO to aggregate 
ratings on residential mortgage-backed securities (not currently 
included in the TALF) for purposes of meeting the ten-transaction 
requirement for Category 3 (mortgage servicing advance loans TALF 
sector).
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    <bullet> Category 4--student loans TALF sector.
    The Board believes that experience in any of the TALF sectors 
grouped together in an asset category provides similar experience for 
each of the TALF sectors within that asset category. For example, 
Category 1 includes the auto loans, floorplan loans, and equipment 
loans TALF sectors. The Board believes that the ABS sectors within each 
category are similar in terms of the types of collateral, the manner in 
which the collateral is typically evaluated, and typical transactional 
structures and legal features. Experience across asset categories would 
not, however, be permitted to be aggregated under the proposed rule 
because the Board believes that the competencies required for ratings 
of ABS across different categories are not sufficiently similar.
    The four asset categories defined in the rule are significantly 
narrower than the ``ABS'' category in which a credit rating agency may 
be approved as an NRSRO by the SEC. Relying upon the issuance of a 
minimal number of ratings as opposed to attestations from QIBs in each 
of the four asset categories should ensure a minimal level of expertise 
in rating the types of assets for which the ratings will be accepted. 
Furthermore, the Board believes that credit rating agencies' expertise 
when rating collateral of any given type can increase considerably upon 
reviewing a modest number of transactions. The experience requirement, 
therefore, would ensure that TALF-eligible NRSROs have accumulated 
sufficient knowledge of the specific asset category. The Board 
specifically solicits comments on whether an experience-based approach 
is appropriate for determining the suitability of NRSROs for the TALF 
program.
    In addition, the proposed rule would allow the Federal Reserve Bank 
of New York to accept credit ratings only from a credit rating agency 
that has a current and publicly available rating methodology specific 
to ABS in the particular TALF asset sector (as defined in the TALF 
haircut schedule) for which the credit rating agency wishes its ratings 
to be considered for TALF. The Board believes that this is a prudent 
requirement because it ensures that the NRSRO has carefully thought 
about its approach to the TALF sector and that market participants are 
aware of the methodology and have had an opportunity to provide 
feedback to the NRSRO. The Board requests comment on whether a 
published methodology specific to asset-backed securities in the 
relevant TALF sector is an appropriate requirement for credit rating 
agencies in the TALF program.
    In specifying that only transactions denominated in U.S. dollars 
would qualify under the experience requirement, the Board recognizes 
that rating opinions rely heavily upon expert judgment regarding 
conditions in the market within which the collateral is originated, the 
legal environment in which lenders and borrowers operate (both at 
origination and in the event of default), and complex transactional 
features that have resulted as a response to legal and institutional 
considerations specific to the United States.\19\
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    \19\ Such legal and institutional considerations include: legal 
standards for recognition of ``true sale'' of assets into a special 
purpose vehicle; legal standards for determining substantive 
consolidation and their impact on the rights of creditors and the 
management of ``clawback risk''; treatment of issuer bankruptcies 
across different regulators; and tax considerations.
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    The Board considered both the number of transactions and period 
within which they must have occurred in determining an appropriate 
experience threshold for the rule. The Board believes that, while the 
learning curve for rating ABS is relatively steep, developing expertise 
in assessing the credit risk of an ABS transaction requires exposure to 
a diversity of transactional features within a given asset category. 
The types of collateral backing the securities within each of the TALF 
ABS sectors is relatively more homogenous than other types of ABS (such 
as CMBS), and therefore a threshold of ten transactions within 
approximately a three-year period (a little more than three 
transactions per year) appeared to be appropriate. Recognizing that ABS 
has evolved and rating agencies have turnover that can degrade 
institutional memory, a three-year window appeared to be an appropriate 
amount of time within which past expertise would be generally 
applicable in the present.
    The Board requests comment generally on whether the experience 
approach set out in the proposed rule is appropriate. In addition, the 
Board invites comment on whether ten transactions within the 
approximately three-year window is appropriate to achieve the goals of 
the proposed rule. The Board also requests comment on whether the TALF 
asset sectors grouped together in the asset categories set out in the 
proposed rule are sufficiently similar that experience gained by 
issuing ratings with respect to one of the TALF sectors in a asset 
category can act as a substitute for experience gained by issuing 
ratings with respect to the other TALF sectors in the category. The 
Board also solicits comment on whether experience issuing credit 
ratings with respect to residential mortgage-backed securities should 
be treated as a substitute for experience in issuing credit ratings in 
the mortgage servicing advances TALF sector. Finally, the Board 
requests comment on whether the experience requirement is appropriately 
limited to transactions denominated in U.S. dollars for the reasons set 
out above.
    The proposed rule also describes the process whereby the Federal 
Reserve Bank of New York would determine whether an NRSRO becomes 
eligible to have its ratings accepted for TALF ABS. Under the proposal, 
a credit rating agency that wishes to have its ratings accepted for 
TALF ABS transactions would send a written notice to the Credit, 
Investment, and Payment Risk group of the Federal Reserve Bank of New 
York and include the information addressing the factors listed above 
(i.e., registered NRSRO for ABS, published methodology, and experience 
issuing ratings in the TALF category) with respect to each TALF asset 
sector for which it wishes its ratings to be accepted. The Federal 
Reserve Bank of New York will review the submission and notify the 
NRSRO within five business days as to whether any additional 
information is necessary. After review of all information necessary to 
determine the eligibility of an NRSRO pursuant to the factors in the 
proposed rule, the Federal Reserve Bank of New York will notify the 
NRSRO regarding its eligibility to have its ratings accepted at the 
TALF. The Board

[[Page 51810]]

requests comment on whether this process will be efficient for purposes 
of NRSROs wishing to have their ratings accepted at TALF and, in 
particular, whether the proposed time frames are appropriate.
    Under the proposed rule, the Federal Reserve Bank of New York 
could, at any time, review the continued use of ratings from a credit 
rating agency in one or more TALF ABS sectors and determine that such 
credit ratings were no longer acceptable if the credit rating agency no 
longer met the eligibility requirements or conditions. The NRSRO would 
be notified by the Federal Reserve Bank of New York of its concerns.
    Finally, the proposed rule sets out two conditions that the Federal 
Reserve Bank of New York must ensure are met by an NRSRO in order for 
an NRSRO to have its credit ratings accepted for TALF ABS. First, the 
NRSRO must agree to discuss with the Federal Reserve its views of the 
credit risk of any transaction within the TALF asset sector that has 
been submitted to TALF and upon which the NRSRO is being or has been 
consulted by the issuer. The Board recognizes that qualitative analysis 
and expert judgment constitutes much of the value provided to investors 
by credit rating agencies and therefore can assist the Federal Reserve 
Bank of New York in the risk assessment process. In addition, issuers 
typically consult with several NRSROs about a transaction, but request 
formal ratings from only a subset. The condition will enable the 
Federal Reserve to learn the views of NRSROs consulted but ultimately 
not hired by the issuer to provide a rating. Second, the NRSRO must 
agree to provide any information requested by the Federal Reserve 
regarding the credit rating agency's continued eligibility for its 
ratings to be accepted at TALF under the factors set out in the 
proposed rules. Submission of this information is necessary to ensure 
that NRSROs that are accepted for TALF continue to meet the eligibility 
requirements for TALF under the proposed rule. The Board solicits 
comment on whether these conditions are appropriate for NRSROs 
submitting credit ratings for purposes of TALF.
    Additional risk assessment. Expanding the set of NRSROs accepted at 
TALF could increase credit risk in the program by increasing the risk 
of less rigorous credit rating standards or by increasing the risk of 
``rating-shopping.'' To address this and to protect against TALF 
accepting excessive risk, the Federal Reserve Bank of New York will 
implement an additional risk assessment process for TALF ABS 
transactions.\20\ The business reasons for the additional risk 
assessment process are independent of an expansion of the set of NRSROs 
accepted for purpose of TALF, but the Board believes that such a risk 
assessment could serve to mitigate any increase in credit risk to the 
U.S. taxpayer that could potentially result from an expansion of the 
set of NRSROs accepted at TALF.
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    \20\ The additional risk assessment is being adopted to clarify 
and make systematic the process whereby the Federal Reserve Bank of 
New York determines whether a bond is acceptable as TALF collateral 
based on the TALF terms and conditions. The Federal Reserve Bank of 
New York already uses an additional risk assessment process to 
determine whether CMBS is eligible for TALF. Satisfaction of the 
Federal Reserve Bank of New York's risk assessment process for ABS 
is being added to the TALF program terms and conditions.
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    In order for the Federal Reserve Bank of New York to be able to 
conduct the additional risk assessment in a timely manner, the TALF ABS 
terms and conditions include a provision that each issuer wishing to 
bring a TALF-eligible ABS transaction to market is required to provide 
to the Reserve Bank, at least three weeks prior to the subscription 
date of the transaction, a specific set of information, including, but 
not limited to, all data the issuer has provided to any NRSRO regarding 
the transaction. The Federal Reserve Bank of New York (along with the 
TALF collateral monitor) will use that information to assist in its 
risk assessment process. Issuers would also be required to submit an 
executed waiver or consent for each prospective TALF transaction that 
would authorize any NRSRO from which the issuer has sought preliminary 
ratings or any other form of feedback on the transaction to share its 
view of the credit quality of the transaction with the Federal Reserve 
Bank of New York. This provision is intended to mitigate the credit 
risk associated with ``rating shopping.''

III. Administrative Law Matters

A. Initial Regulatory Flexibility Analysis

    Congress enacted the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
et seq.) to address concerns related to the effects of agency rules on 
small entities and the Board is sensitive to the impact its rules may 
impose on small entities. The RFA requires agencies either to provide 
an initial regulatory flexibility analysis with a proposed rule or to 
certify that the proposed rule will not have a significant economic 
impact on a substantial number of small entities. Under regulations 
issued by the Small Business Administration (SBA), a small credit 
rating agency includes those institutions with $7 million in 
assets.\21\ In accordance with section 3(a) of the RFA, the Board has 
reviewed the proposed rule. An Initial Regulatory Flexibility Analysis 
(IRFA) has been prepared in accordance with the RFA.\22\
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    \21\ 13 CFR 121.201.
    \22\ 5 U.S.C. 603.
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    The Board encourages comments with respect to any aspect of this 
IRFA, including comments with respect to the number of small entities 
that may be affected by the proposed rule. Comments should specify the 
costs of compliance with the proposed rule and suggest alternatives 
that would accomplish the goals of the rules, including an estimate of 
any cost savings. Comments will be considered in determining whether a 
Final Regulatory Flexibility Analysis (FRFA) is required and will be 
placed in the same public file as comments on the proposed rule. 
Comments should be submitted to the Board at the addresses previously 
indicated. The Board will determine whether a FRFA is necessary after 
consideration of comments received during the public comment period.
1. Reasons for the Proposed Action
    As discussed in the preamble above, the Board is proposing these 
rules to govern the Federal Reserve Bank of New York's determination of 
eligibility of NRSROs and their credit ratings for use in TALF ABS for 
which the Board has established a requirement for collateral to be 
rated by one or more NRSROs. The Board anticipates that implementation 
of the proposed rule will permit an expansion of the set of NRSROs 
accepted for TALF ABS, while maintaining appropriate protection against 
credit risk for the U.S. taxpayer in connection with TALF.
2. Objective
    As discussed in the preamble above, the objective of the proposed 
rule is to govern the Federal Reserve Bank of New York's determinations 
of eligibility of particular credit ratings for TALF ABS to meet a 
Board requirement for collateral to be rated by one or more credit 
rating agencies. The Board intends for the proposed rules to provide 
for an objective, prudent, and reasonably consistent process for the 
Federal Reserve Bank of New York to determine the eligibility of NRSROs 
and their credit ratings for purposes of TALF ABS.
3. Legal Basis
    Section 11 of the Federal Reserve Act (12 U.S.C. 248(j)) authorizes 
the Board

[[Page 51811]]

to exercise general supervision over the Reserve Banks. The TALF is 
authorized under section 13(3) of the Federal Reserve Act (12 U.S.C. 
343).
4. Small Entities Subject to the Rule
    The proposed rule would establish criteria and conditions governing 
the acceptance of credit ratings by the Federal Reserve Bank of New 
York for use in TALF. The Board has prepared this IRFA in order to 
determine any impact on small entities in order to determine if there 
is a more cost-effective manner to accomplish the goals of the 
regulation.
    At present, there are ten NRSROs registered with the SEC. Of those 
ten, the Board's review of publicly available information indicates 
that three NRSROs are not ``small entities'' under the RFA because 
their asset size (or the asset size of the NRSRO's parent company) is 
larger than the level set in the SBA regulation. The Board does not 
have access to appropriate non-public information on the asset sizes of 
the other NRSROs. For purposes of estimating costs for this IRFA, the 
Board will assume that all seven of the NRSROs would qualify as a 
``small entity'' under the SBA regulations and could be indirectly 
impacted by the proposed rule.
5. Reporting, Recordkeeping, and Other Compliance Requirements
    As noted above, the proposed rule would leverage off the SEC's 
existing NRSRO registration process. The Board believes that the 
proposed rule would not establish any reporting, recordkeeping, or 
other compliance requirements that are not already part of the NRSRO 
registration process or involve records that would not otherwise be 
created in the normal course of an NRSRO's business. Other than that 
which is normally required in the credit rating agency industry, 
special expertise should not be required to compile the information 
necessary to submit an eligibility request to the Federal Reserve Bank 
of New York for use of an NRSRO's credit ratings in TALF. An NRSRO that 
wishes for its credit ratings to be accepted for TALF would merely have 
to supply its methodology for rating the relevant TALF asset sector and 
document how it has the relevant experience issuing ratings in the TALF 
asset sector. Most NRSROs should have this information readily 
available in the normal and customary course of business. The Board 
estimates that the costs of compiling this information and submitting a 
notice to the Federal Reserve Bank of New York would be nominal.\23\
---------------------------------------------------------------------------

    \23\ As noted above, for purposes of this IRFA, the Board 
assumes that there are no more than seven NRSROs that would qualify 
as ``small entities. The Board estimates that compiling the 
necessary information and submitting a notice to the Federal Reserve 
Bank of New York should take no more than four hours per NRSRO. 
Total cost was estimated using the following formula: percent of 
staff time, multiplied by annual burden hours, multiplied by hourly 
rate (30% Administrative or Junior Analyst @ $25, 10% Managerial or 
Technical @ $55, 10% Senior Management @ $100, and 50% Legal Counsel 
@ $144). Hourly rate estimates for each occupational group are 
averages using data from the Bureau of Labor and Statistics (BLS), 
Occupational Employment and Wages 2007, http://www.bls.gov/news.release/ocwage.nr0.htm. Occupations are defined using the BLS 
Occupational Classification System, http://www.bls.gov/soc/. The 
total costs are estimated at $2,660 if seven small entity NRSROs 
applied to have their ratings accepted for all TALF sectors.
---------------------------------------------------------------------------

    The conditions required for the Federal Reserve Bank of New York to 
accept ratings from an NRSRO similarly also should require minimal 
expenditure of resources. If requested by the Federal Reserve Bank of 
New York, an NRSRO may be requested to provide information on its 
continued eligibility under the proposed rule. Such information, 
however, would be in connection with the eligibility criteria in the 
proposed rule (such as continued NRSRO registration with the SEC) and 
should be readily available in the normal course of business. An NRSRO 
that has been consulted on a transaction in TALF may be requested by 
the Federal Reserve Bank of New York to discuss its views of the 
particular transaction, but it would not be required to conduct any 
more analysis than it had already conducted in the course of its 
business.
    The Board requests comment on the description of burden for 
compliance with the proposed rule described above. Commenters should 
provide identify any potential burdens not discussed herein, as well as 
any actual or estimated cost data.
6. Duplicative, Overlapping, or Conflicting Federal Rules
    The Board believes that there are no federal rules that duplicate, 
overlap, or conflict with the proposed rules.
7. Significant Alternatives
    Pursuant to section 3(a) of the RFA, the Board must consider 
certain types of alternatives, including: (1) The establishment of 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities; (2) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the rule for small entities; (3) the use 
of performance rather than design standards; and (4) an exemption from 
coverage of the rule, or any part of the rule, for small entities.
    The proposed rule does not establish any compliance or reporting 
requirements, including any performance or design standards. Because 
the proposed rule provides a process through which credit rating 
agencies can have their credit ratings accepted by the Federal Reserve 
Bank of New York for purposes of the TALF, the Board preliminarily 
believes that small entities that wish to apply should be covered by 
the rule. Like the NRSRO registration procedure, the process set out in 
the proposed rule for a credit rating agency to have its ratings 
accepted by the Federal Reserve Bank of New York is voluntary.
    The Board considered two substantive alternatives to the approach 
adopted in the proposed rule. First, the Board considered accepting for 
TALF all NRSROs registered with the SEC without any further 
requirements. The Board determined that this was not prudent as the 
SEC's registration process did not address the quality of credit 
ratings issued by registered NRSROs. In addition, the SEC ABS 
registration does not sufficiently track the TALF asset sectors to 
ensure that NRSROs would have experience to rate ABS transactions of 
the type being pledged to TALF. The Board also considered an approach 
wherein the Federal Reserve Bank of New York would conduct an extensive 
review of the methodology and resources of each NRSRO applying to be 
accepted at TALF in order to determine whether the NRSRO had the 
expertise and facilities to issue ratings suitable for use in each of 
the TALF asset sectors for which the NRSRO wished its ratings to be 
accepted. The Board did not propose this approach because of the time 
and resources that such in-depth reviews would require of the Federal 
Reserve Bank of New York; these resources also would likely be diverted 
away from the risk assessment process discussed above. The time and 
resource issue would be significant as it would involve detailed 
analysis of multiple NRSROs across seven different TALF asset sectors. 
Even with unlimited resources, designing the in-depth reviews, 
including the role that subjective judgment would play, would require 
time to perfect. TALF is intended as a temporary facility and there is 
the risk that the in-depth reviews would take longer than the remaining 
life of TALF.

[[Page 51812]]

8. Request for Comments
    The Board encourages the submission of comments on any aspect of 
the IRFA. In addition, the Board specifically requests comments on the 
estimate of the number of NRSROs that would be considered ``small 
entities'' indirectly impacted by the proposed rule for purposes of the 
RFA. Commenters that disagree with these estimates are requested to 
describe in detail the basis for their conclusions and identify the 
sources of any industry statistics they relied on to reach their 
conclusions. The Board also requests comment on any alternatives to the 
approach adopted in the proposed rule that would accomplish the goals 
of the proposed rule in a more cost-effective manner.

B. Paperwork Reduction Act Analysis

    Office of Management and Budget (OMB) regulations implementing the 
Paperwork Reduction Act (PRA) state that agencies must submit 
``collections of information'' contained in proposed rules published 
for public comment in the Federal Register in accordance with OMB 
regulations.\24\ OMB regulations define a ``collection of information'' 
as obtaining, causing to be obtained, soliciting, or requiring the 
disclosure to an agency, third parties or the public of information by 
or for an agency ``by means of identical questions posed to, or 
identical reporting, recordkeeping, or disclosure requirements imposed 
on, ten or more persons, whether such collection of information is 
mandatory, voluntary, or required to obtain or retain a benefit.'' \25\
---------------------------------------------------------------------------

    \24\ 5 CFR 1320.11. The PRA is codified at 44 U.S.C. 3506 et 
seq.
    \25\ 5 CFR 1320.11(c).
---------------------------------------------------------------------------

    In accordance with the PRA, the Board reviewed the proposed rule 
under the authority delegated to the Board by OMB. The Federal Reserve 
may not conduct or sponsor, and an organization is not required to 
respond to, this information collection unless it displays a currently 
valid OMB control number, which will be assigned. The collections of 
information that are proposed to be revised by this rulemaking are 
found in subsection 201.3(e)(1)(ii) and (iii) of the proposed rule (to 
be codified at 12 CFR 201.3(e)(1)(ii) and (iii)). This information is 
required to permit the Federal Reserve Bank of New York to determine 
eligibility of credit rating agencies to have their ratings accepted in 
TALF in accordance with Board regulations. The respondents are NRSROs, 
which may be small entities. There is no record retention requirement 
in the proposed rule.
    The estimated burden per response is two hours. It is estimated 
that there will be ten respondents providing information on a one-time 
basis. Therefore, the total amount of annual burden is estimated to be 
20 hours.
    The proposed rule in this notice implements a threshold requirement 
of registration with the SEC as an NRSRO. As noted above, registration 
with the SEC as an NRSRO requires, among other things, the completion 
of the SEC Form NRSRO. This form includes exhibits regarding a general 
description of the procedures and methodologies used by the credit 
rating agency to determine credit ratings for the classes of assets for 
which the credit rating agency is seeking registration. The SEC, 
however, already budgets for paperwork burden connected with its NRSRO 
registration program. Accordingly, it would be redundant for the Board 
to budget additional paperwork burden for the SEC's registration 
process.
    In addition to NRSRO registration, the proposed rule would require 
the NRSRO to submit to the Federal Reserve Bank of New York additional 
information to demonstrate that it has sufficient expertise and 
experience to provide credit ratings that would assist in the Reserve 
Bank's risk assessment on the most senior classes of newly issued 
asset-backed securities in a particular TALF asset sector. The 
additional requirements includes an NRSRO (i) having a current and 
publicly available rating methodology specific to asset-backed 
securities in the particular TALF asset sector for which it wishes its 
ratings to be accepted; and (ii) having made public or made available 
to a paying subscriber base, since September 30, 2006, at least ten 
ratings on U.S. dollar-denominated transactions within a particular 
group of complementary ABS categories as set out in the proposed rule. 
These requirements are found in subsection 201.3(e)(1)(ii) and (iii) of 
the proposed rule (to be codified at 12 CFR 201.3(e)(1)(ii) and (iii)).
    The Board believes that each of these requirements should require 
minimal effort on the part of an NRSRO. Most NRSROs that issue credit 
ratings for a type of asset make public their methodology. In addition, 
it should be a relatively simple matter for an NRSRO to certify that it 
has issued ten ratings in the appropriate asset category by enclosing a 
list containing the CUSIP number and original and current rating of the 
most senior tranche from at least ten transactions it has rated within 
the appropriate asset category and timeframe.
    Comments are invited regarding (a) whether the proposed collection 
of information is necessary for the proper performance of the Federal 
Reserve's functions, including whether the information has practical 
utility; (b) the accuracy of the Federal Reserve's estimate of the 
burden of the proposed information collection, including the cost of 
compliance; (c) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (d) ways to minimize the burden of 
information collection on respondents, including through the use of 
automated collection techniques or other forms of information 
technology. Comments on the collection of information should be sent to 
Secretary, Board of Governors of the Federal Reserve System, 
Washington, DC 20551, with copies of such comments to be sent to the 
Office of Management and Budget, Paperwork Reduction Project, 
Washington, DC 20503.

C. Plain Language

    Each Federal banking agency, such as the Board, is required to use 
plain language in all proposed and final rulemakings published after 
January 1, 2000. 12 U.S.C. 4809. The Board has sought to present the 
proposed rule, to the extent possible, in a simple and straightforward 
manner. The Board invites comment on whether there are additional steps 
that could be taken to make the proposed rule easier to understand, 
such as with respect to the organization of the materials or the 
clarity of the presentation.

IV. Statutory Authority

    Pursuant to the authority set out in the Federal Reserve Act and 
particularly section 11 (codified at 12 U.S.C. 248(j)), the Board 
proposes the rules set out below.

V. Text of Proposed Rule

List of Subjects in 12 CFR Part 201

    Credit.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR Chapter II to read as follows:

PART 201--EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION 
A)

    1. The authority citation for part 201 continues to read as 
follows:

    Authority:  12 U.S.C. 248(i)-(j), 343 et seq., 347a, 347b, 347c, 
348 et seq., 357, 374, 374a, and 461.

    2. In Sec.  201.3, paragraph (e) is added to read as follows:

[[Page 51813]]

Sec.  201.3  Extensions of credit generally.

* * * * *
    (e) Credit ratings for Term Asset-Backed Securities Loan Facility 
(TALF).
    (1) If the Board requires that a TALF advance, discount, or other 
extension of credit be against collateral (other than commercial 
mortgage-backed securities) that is rated by one or more credit rating 
agencies, the Federal Reserve Bank of New York may accept the ratings 
of any credit rating agency that:
    (i) Is registered with the Securities and Exchange Commission as a 
Nationally Recognized Statistical Rating Organization for issuers of 
asset-backed securities;
    (ii) Has a current and publicly available rating methodology 
specific to asset-backed securities in the particular TALF asset sector 
(as defined in the TALF haircut schedule) for which it wishes its 
ratings to be accepted; and
    (iii) Demonstrates that it has sufficient experience to provide 
credit ratings that would assist in the Federal Reserve Bank of New 
York's risk assessment on the most senior classes of newly issued 
asset-backed securities in the particular TALF asset sector by having 
made public or made available to a paying subscriber base, since 
September 30, 2006, ratings on at least ten transactions denominated in 
U.S. dollars within the particular category to which the particular 
TALF asset sector is assigned as set out below--
    (A) Category 1--auto, floorplan, and equipment TALF sectors;
    (B) Category 2--credit card and insurance premium finance TALF 
sectors;
    (C) Category 3--mortgage servicing advances TALF sector; and
    (D) Category 4--student loans TALF sector.
    (2) For purposes of the requirement in paragraph (e)(1)(iii) of 
this section, ratings on residential mortgage-backed securities may be 
included in Category 3 (servicer advances).
    (3) The Federal Reserve Bank of New York may in its discretion 
review at any time the eligibility of a credit rating agency to rate 
one or more types of assets being offered as collateral.
    (4) Process.
    (i) Credit rating agencies that wish to have their ratings accepted 
for TALF transactions should send a written notice to the Credit, 
Investment, and Payment Risk group of the Federal Reserve Bank of New 
York including information on the factors listed in paragraph (e)(1) of 
this section with respect to each TALF asset sector for which they wish 
their ratings to be accepted.
    (ii) The Federal Reserve Bank of New York will notify the submitter 
within 5 business days of receipt of a submission whether additional 
information needs to be submitted.
    (iii) Within 5 business days of receipt of all necessary 
information to evaluate a credit rating agency pursuant to the factors 
set out in paragraph (e)(1) of this section, the Federal Reserve Bank 
of New York will notify the credit rating agency regarding its 
eligibility.
    (5) Conditions. The Federal Reserve Bank of New York may accept 
credit ratings under this subsection only from a credit rating agency 
that agrees to--
    (i) Discuss with the Federal Reserve its views of the credit risk 
of any transaction within the TALF asset sector that has been submitted 
to TALF and upon which the credit rating agency is being or has been 
consulted by the issuer; and
    (ii) Provide any information requested by the Federal Reserve 
regarding the credit rating agency's continued eligibility under 
paragraph (e)(1) of this section.

    By the Board of Governors of the Federal Reserve System, October 
5, 2009.
Jennifer J. Johnson,
Secretary.
[FR Doc. E9-24252 Filed 10-7-09; 8:45 am]
BILLING CODE 6210-01-P


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