59–006 

114TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 114–596 

EXPANDING PROVEN FINANCING FOR AMERICAN 

EMPLOYERS ACT 

MAY 26, 2016.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. HENSARLING, from the Committee on Financial Services, 

submitted the following 

R E P O R T 

together with 

MINORITY VIEWS 

[To accompany H.R. 4166] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 4166) to amend the Securities Exchange Act of 1934 to 

provide specific credit risk retention requirements to certain qualifying collateralized loan obligations, having considered the same, 

report favorably thereon with an amendment and recommend that 

the bill as amended do pass. 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Expanding Proven Financing for American Employers Act’’. 

SEC. 2. RISK RETENTION REQUIREMENT FOR QUALIFIED COLLATERALIZED LOAN OBLIGATIONS. 

Section 15G(e) of the Securities Exchange Act of 1934 (15 U.S.C. 780–11(e)) is 

amended by inserting after paragraph (6) the following new paragraphs: 

‘‘(7) REQUIREMENTS FOR QUALIFIED COLLATERALIZED LOAN OBLIGATIONS.— 

‘‘(A) RISK RETENTION REQUIREMENT.—Notwithstanding any other provision of this section, as of the effective date set forth in subsection (i)(2), the 

risk retention requirement for qualified collateralized loan obligations may 

be met by the purchase and, during the applicable duration of risk retention specified by the rules of the Federal banking agencies under subsection 

(c)(1)(C)(ii), holding (without hedging or otherwise transferring the credit 

risk), of the value of no less than five percent of the equity distributed 

among each of the higher tranches of the issuance with no less than 3.5 


sradovich on DSK3TPTVN1PROD with HEARING
2 

percent retained as equity of the collateralized loan obligation by the manager of the qualified collateralized loan obligation or one or more of the majority-owned affiliates of the manager or its knowledgeable employees and 

other employees. 

‘‘(B) QUALIFIED COLLATERALIZED LOAN OBLIGATIONS.—For purposes of this 

paragraph, a qualified collateralized loan obligation is a collateralized loan 

obligation that meets all of the following requirements: 

‘‘(i) ASSET QUALITY PROTECTIONS.—The collateralized loan obligation 

shall— 

‘‘(I) have at least 100 percent of its assets comprised of senior secured loans and cash equivalents; 

‘‘(II) have 100 percent of its loan assets issued by companies; 

‘‘(III) have no assets that are asset-backed securities or derivatives, except that this limitation shall not prohibit a qualified 

collateralized loan obligation from acquiring a loan participation or 

any interest related to or in a letter of credit, or entering into derivative transactions to hedge interest rate or currency rate 

mismatches; 

‘‘(IV) not purchase assets in default, margin stock, or equity convertible securities; 

‘‘(V) acquire only loans held or acquired by three or more investors or lenders unaffiliated with the manager; 

‘‘(VI) hold only loans to borrowers whose financial statements are 

subject to an annual audit from an independent, accredited accounting firm; 

‘‘(VII) have no more than 60 percent of its assets comprised of 

covenant lite loans, except that each asset shall require the disclosure of unaudited financial statements quarterly within 45 days of 

the end of the quarter and audited financial statements annually 

within 90 days of the end of the fiscal year; and 

‘‘(VIII) at the time of purchase of any asset, comply with the requirements of subclauses (I) and (VII) and clause (ii) of this subparagraph, or, if not in compliance with any such requirement, 

maintain or improve the level of compliance after giving effect to 

such purchase. 

‘‘(ii) ASSET PORTFOLIO PROTECTIONS.— 

‘‘(I) No more than 3.5 percent of the assets of the collateralized 

loan obligation may relate to any single borrower. 

‘‘(II) No more than 15 percent of the assets of the collateralized 

loan obligation may relate to any single industry. 

‘‘(iii) STRUCTURAL PROTECTIONS.— 

‘‘(I) The collateralized loan obligation’s equity shall be at least 8 

percent of the value of its assets. 

‘‘(II) The governing transaction documents of the collateralized 

loan obligation specify over-collateralization and interest coverage 

tests, and if any such test falls below the required level specified 

for the collateralized loan obligation in such documents, available 

interest collections (and if necessary, available principal collections) 

must be applied to repay the collateralized loan obligation’s debt in 

order of seniority until compliance with the applicable test is restored. 

‘‘(iv) REQUIREMENT TO MAINTAIN ALIGNMENT OF MANAGER AND INVESTOR INTERESTS.— 

‘‘(I) The collateralized loan obligation shall be an open market 

collateralized loan obligation. 

‘‘(II) The holders of the equity of the collateralized loan obligation 

(excluding the risk retention equity held as required by subparagraph (A)) shall have the right to remove by vote the manager for 

cause. 

‘‘(III) A majority of the manager’s fees, including any incentive 

fee, shall be subordinated to payments then due in relation to the 

collateralized loan obligation’s debt securities. 

‘‘(IV) The manager’s discretionary sales of assets on behalf of the 

issuer of the collateralized loan obligation shall be limited each 

year to not more than 30 percent of the principal amount of the 

assets of the collateralized loan obligation (other than sales of defaulted or credit-deteriorated, credit-risk, or credit-improved loans). 

‘‘(V) The risk retention equity requirement set forth in subparagraph (A) is met. 


sradovich on DSK3TPTVN1PROD with HEARING
3 

‘‘(VI) All holders of collateralized loan obligation securities that 

are U.S. persons within the meaning of Regulation S (17 C.F.R. 

230; 249) under the Securities Act of 1933, are qualified investors. 

‘‘(v) REGULATORY OVERSIGHT REQUIREMENTS.— ‘‘(I) The manager of the collateralized loan obligation shall be 

registered with the Commission as an investment adviser under 

section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b– 

3). 

‘‘(II) All purchases and sales of the assets of the collateralized 

loan obligation shall be conducted on an arm’s-length basis and in 

compliance with any applicable provisions of the Investment Advisers Act of 1940. 

‘‘(vi) REQUIREMENTS RELATING TO TRANSPARENCY AND DISCLOSURE.— A monthly report shall be made available to holders of debt securities 

of the collateralized loan obligation, which includes information regarding— 

‘‘(I) a list of assets of the collateralized loan obligation, including, 

with respect to each asset, the obligor name; the CUSIP (or security identifier) if applicable, the interest rate and maturity date, 

the type of asset, and the market price for each asset where available; 

‘‘(II) with respect to the portfolio of assets, the aggregate principal balance and aggregate adjusted collateral principal amount 

(adjusted as required by the collateralized loan obligation governing transaction documents) and the percentage of such aggregate adjusted collateral principal represented by each asset; 

‘‘(III) information relating to each applicable overcollateralization test and interest coverage test and the level of 

compliance in relation to each test; 

‘‘(IV) all purchases, repayments, and sales of assets; and 

‘‘(V) the identity of each defaulted asset as defined in the related 

transaction documents. 

‘‘(8) DEFINITIONS FOR PURPOSES OF PARAGRAPH (7).—For purposes of paragraph 

(7), the following definitions apply: 

‘‘(A) BALANCE SHEET COLLATERALIZED LOAN OBLIGATION.—The term ‘balance sheet collateralized loan obligation’ means a collateralized loan obligation— 

‘‘(i) whose assets consist predominantly of loans originated and transferred to the collateralized loan obligation by one or more of its affiliates other than in— 

‘‘(I) open market transactions; 

‘‘(II) from an open market collateralized loan obligation; or 

‘‘(III) from a collateralized loan obligation in existence as of the 

effective date of this paragraph that is not a balance sheet 

collateralized loan obligation; and 

‘‘(ii) the assets and liabilities of which are, immediately after 

issuance of its asset-backed securities in a securitization transaction, 

included under generally accepted accounting principles in the consolidated balance sheet of one or more of its affiliates. 

‘‘(B) COLLATERALIZED LOAN OBLIGATION.—The term ‘collateralized loan obligation’ means any issuing entity of an asset-backed security, as defined 

in section 3(a)(79) of the Securities Exchange Act of 1934 (15 U.S.C. 

78c(a)(79)), that is comprised primarily of commercial loans. 

‘‘(C) COVENANT LITE LOAN.—The term ‘covenant lite loan’ means, at the 

time the collateralized loan obligation enters into a commitment to acquire 

such loan, a loan for which the underlying instruments neither— 

‘‘(i) require the obligor to comply with any maintenance covenant; nor 

‘‘(ii) contain a cross-default provision to a financing facility of the obligor that requires the obligor to comply with a maintenance covenant 

(including one that may apply only upon the funding of such other loan 

or financing facility); except that if such loan is pari passu with another 

loan of the obligor that would not be a covenant lite loan under the criteria in this clause, such loan shall be deemed not to be a covenant lite 

loan. For purposes of this clause, the term ‘pari passu’ means treated 

equally and without preference. 

‘‘(D) EQUITY.—The term ‘equity’ means the most junior class of securities 

issued by the collateralized loan obligation (excluding any non-economic security such as the issuer’s common stock) and any additional class(es) of securities junior to the collateralized loan obligation’s debt securities. 


sradovich on DSK3TPTVN1PROD with HEARING
4 

‘‘(E) MANAGER.—The term ‘manager’ means an investment manager that 

is responsible for managing a collateralized loan obligation under the 

collateralized loan obligation’s governing transaction documents. 

‘‘(F) OPEN MARKET COLLATERALIZED LOAN OBLIGATION.—The term ‘open 

market collateralized loan obligation’ means a collateralized loan obligation— 

‘‘(i) whose assets consist predominantly of senior, secured syndicated 

loans acquired by such collateralized loan obligation directly from the 

sellers thereof in an open market transaction or from another 

collateralized loan obligation and of temporary investments; 

‘‘(ii) that is managed by a manager; and 

‘‘(iii) that is not a balance sheet collateralized loan obligation. 

‘‘(G) OPEN MARKET TRANSACTION.—The term ‘open market transaction’ means— ‘‘(i) either an initial loan syndication transaction or a secondary market transaction in which a seller offers senior, secured syndicated loans 

to prospective purchasers in the loan market on market terms on an 

arm’s length basis, which prospective purchasers include, but are not 

limited to, entities that are not affiliated with the seller; or 

‘‘(ii) a reverse inquiry from a prospective purchaser of a senior, secured syndicated loan through a dealer in the loan market to purchase 

a senior, secured syndicated loan to be sourced by the dealer in the 

loan market. 

‘‘(H) QUALIFIED INVESTOR.—The term ‘qualified investor’ means— 

‘‘(i) with respect to securities that require the payment of principal 

and interest, an investor that is a qualified purchaser, within the 

meaning of section 3(c)(7) of the Investment Company Act of 1940 (15 

U.S.C. 80a–3(c)(7)) or an entity owned exclusively by one or more qualified purchasers; or 

‘‘(ii) with respect to securities that do not require the payment of 

principal and interest— 

‘‘(I) if the qualified collateralized loan obligation relies on such 

section for its exclusion from the definition of investment company 

under the Investment Company Act of 1940— 

‘‘(aa) a qualified purchaser; 

‘‘(bb) a knowledgeable employee, within the meaning of Rule 

3c–5 promulgated under the Investment Company Act of 1940; 

or ‘‘(cc) an entity owned exclusively by such a qualified purchaser or knowledgeable employee; or 

‘‘(II) if the qualified collateralized loan obligation relies on Rule 

3a–7 promulgated under the Investment Company Act of 1940 for 

its exclusion from the definition of investment company under that 

Act and such securities are not fixed-income securities, as defined 

in such rule— 

‘‘(aa) a qualified institutional buyer, within the meaning of 

Rule 144A under the Securities Act of 1933; 

‘‘(bb) a person (other than any rating organization rating the 

issuer’s securities) involved in the organization or operation of 

the issuer or an affiliate of such a person, as defined in Rule 

405 under the Securities Act of 1933; or 

‘‘(cc) any entity in which all of the equity owners are such 

qualified institutional buyers as described in item (aa) or persons described in item (bb).’’. 

PURPOSE AND SUMMARY

Introduced by Representatives Andy Barr and David Scott of 

Georgia on December 3, 2015, H.R. 4166, the Expanding Proven Financing for American Employers Act, amends the risk retention requirements contained in Section 941 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank Act) for managers that organize collateralized loan obligations (‘‘CLOs’’) that 

are ‘‘qualified collateralized loan obligations’’ or ‘‘QCLOs.’’ The bill 

establishes objective and substantive criteria to qualify as a QCLO 

and defines the types of investors who would be eligible to purchase the QCLO. 


sradovich on DSK3TPTVN1PROD with HEARING
5 

BACKGROUND AND NEED FOR LEGISLATION

Section 941 (Regulation of Credit Risk Retention) of the DoddFrank Act aims to align the interests of securitizers and investors 

in asset-backed securities by requiring securitizers to retain no less 

than 5 percent of the credit risk in assets they sell into a 

securitization. Section 941 is premised on a view that requiring 

securitizers to retain some credit risk—or ‘‘skin in the game’’—and 

forcing them to bear losses if a borrower defaults incentivizes 

securitizers to better monitor the quality of bundled loans. The 

Dodd-Frank Act required the SEC, the federal banking agencies, 

the Department of Housing and Urban Development, and the Federal Housing Finance Agency (collectively, the ‘‘Agencies’’) to jointly 

prescribe rules implementing the risk retention requirement (the 

‘‘Final Rules’’). The Final Rules do not provide an exemption for 

QCLOs despite the fact that many market participants had requested such an exemption during the comment period. 

Consequently, QCLOs are subject to risk retention requirements 

that are extremely detrimental to the $4 trillion corporate loan 

market. Specifically, banks and non-bank lenders provide nearly $4 

trillion in syndicated loan and loan commitments to companies. 

Some of these companies that utilize QCLOs for financing are blue 

chip investment grade companies like IBM, UPS, McDonalds and 

Microsoft. It is important to note that CLOs represent a critical, 

steady, and proven source of financing; they are not complicated 

derivatives. 

Despite these facts, the Agencies refused to apply risk retention 

requirements to CLOs in an appropriately tailored way. When the 

rules become effective in December 2016, they will significantly impair the CLO market and, as a result, make credit more expensive 

or unavailable to borrowers. As noted in testimony before the Capital Markets and Government Sponsored Enterprises Subcommittee 

by Meredith Coffey, the Executive Vice President of the Loan Syndications and Trading Association, the risk retention rules have already negatively impacted the markets. In 2014, U.S. CLO formation equaled $124 billion; CLOs were not structured to comply with 

the risk retention rule, which was not finalized. However, in anticipation of the Final Rules becoming effective, in mid-2015, investors 

started to ask managers to make their new CLOs compliant with 

the new risk retention rules. Complying with the burdensome new 

rules had a direct impact on the number of CLOs issued, which declined by 20% from 2014 levels. This represents a direct impact on 

the amount of available financing for companies. 

Unfortunately, the Agencies’ Final Rules also inappropriately 

pick ‘‘winners’’ and ‘‘losers’’ among CLO managers. Only the large 

CLO managers have the capital to retain the risk pursuant to the 

Final Rules, whereas smaller CLO managers would struggle. 

Specifically, there are three problems with the Agencies’ Final 

Rules: 

(1) They are inconsistent with Section 941 of the DoddFrank Act’s plain language because they deem the buyer 

of assets—i.e., the CLO manager—to be the securitizer 

that is subject to risk retention requirements, rather than 

the originating seller; 


sradovich on DSK3TPTVN1PROD with HEARING
6 

(2) The Agencies required securitizers to retain 5% of the 

full amount of any securitization rather than 5% of the 

credit risk. The reality is that the credit risk is concentrated in the first loss position—indeed, that is why it 

is called the first loss position—so holding equity equivalent to 5% of the full securitization is far more than 5% of 

the credit risk; and 

(3) As a practical economic matter, it is challenging for 

open market CLO managers to purchase and retain 5% of 

the notes of the CLOs they manage. It is simply too much 

money. Requiring a CLO manager to purchase and retain 

5% of every new CLO is akin to requiring a mutual fund 

manager to buy $5 of Apple stock for every $100 of Apple 

stock it buys, as a fiduciary, for the benefit of its investors. 

The mutual fund manager would quickly run out of money 

and would no longer be able to offer mutual funds to its 

investors. The same is true with CLO managers. 

H.R. 4166 corrects the regulators’ failure to adopt risk retention 

requirements that are appropriately tailored to a products’ risk. As 

noted previously, the current risk retention requirements would severely limit available credit to companies, which, in some cases, is 

necessary to pay for expenses such as employees’ payroll. H.R. 4166 

is consistent with the policy objectives of Section 941 of the DoddFrank Act, because it requires managers to hold 5% of the credit 

risk of assets (rather than their fair value). Additionally, H.R. 4166 

mandates that QCLOs adhere to a number of best practices. 

According to testimony received by the Subcommittee on Capital 

Markets, as of January 2016, ‘‘CLOs provided more than $420 billion in financing to U.S. non-investment grade companies like Del 

Monte, Chrysler and United Continental Airlines. All told, more 

than 1,200 companies—employing more than six million people— 

receive financing from CLOs.’’ On February 16, 2016, Moody’s published a report noting that U.S. non-investment grade companies 

will have a record amount of debt coming due through 2020. This 

debt will need to be refinanced or the companies could face a credit 

crunch; by tailoring risk retention rules for QCLOs, H.R. 4166 will 

ensure the continued availability of credit. 

CLOs have been a stable, safe and proven source of financing for 

U.S. companies for 20 years. CLOs survived the worst financial crisis since the Great Depression with extremely low default and loss 

rates. Moreover, they continue to provide over $400 billion in financing to U.S. companies. Unfortunately, risk retention has the 

potential to decimate this important market. This diminution of the 

CLO market will either reduce financing for companies or raise 

their financing costs. Fortunately, the QCLO category established 

by H.R. 4166 represents a commonsense solution that would implement risk retention requirements consistent with the goals of the 

Dodd-Frank Act, and ensure that such requirements are appropriately tailored to the risks associated with a QCLO. In conclusion, H.R. 4166 permits the CLO market to function efficiently and 

provide financing to the 1,200 American companies that rely upon 

a vibrant secondary market for corporate loans. 


sradovich on DSK3TPTVN1PROD with HEARING
7 

HEARINGS

The Committee on Financial Services’ Subcommittee on Capital 

Markets and Government Sponsored Enterprises held a hearing examining matters relating to H.R. 4166 on February 24, 2016. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

March 2, 2016, and ordered H.R. 4166 to be reported favorably to 

the House as amended by a recorded vote of 42 yeas to 15 nays (recorded vote no. FC–99), a quorum being present. An amendment offered by Mr. Foster (no. 1) was agreed to by voice vote. A second 

amendment offered by Mr. Foster (no. 2) was withdrawn. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. The sole record vote 

in Committee was a motion by Chairman Hensarling to report the 

bill favorably to the House as amended. That motion was agreed 

to by a recorded vote of 42 yeas to 15 nays (Record vote no. FC– 

99), a quorum being present. 


sradovich on DSK3TPTVN1PROD with HEARING
8 


sradovich on DSK3TPTVN1PROD with HEARINGInsert graphic folio 8 HR596.001
9 

COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the findings and recommendations of the committee based on oversight activities under clause 2(b)(1) of rule X 

of the Rules of the House of Representatives, are incorporated in 

the descriptive portions of this report. 

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee states that H.R. 4166 will reduce regulatory burden and increase access to capital by amending 

the Dodd-Frank Act’s risk retention requirements for managers 

that organize ‘‘qualified collateralized loan obligations,’’ so that 

they are appropriately tailored to such products’ risks. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

COMMITTEE COST ESTIMATE

The Committee adopts as its own the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the following is the cost estimate provided by 

the Congressional Budget Office pursuant to section 402 of the 

Congressional Budget Act of 1974: 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, May 23, 2016. 

Hon. JEB HENSARLING, 

Chairman, Committee on Financial Services, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4166, the Expanding 

Proven Financing for American Employers Act. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Stephen Rabent. 

Sincerely, 

KEITH HALL. 

Enclosure. 


sradovich on DSK3TPTVN1PROD with HEARING
10 

H.R. 4166—Expanding Proven Financing for American Employers 

Act 

H.R. 4166 would modify the regulatory standards that govern the 

sales of securities that are backed by a pool of financial assets. 

Under current law, the federal banking agencies—the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the 

Federal Deposit Insurance Corporation (FDIC)—and the Securities 

and Exchange Commission (SEC) require firms that issue assetbacked securities to retain an economic interest in a portion of the 

credit risk stemming from those assets, a feature known as risk retention. This bill would allow firms to meet some of those requirements by retaining a financial interest in certain qualified 

collateralized loan obligations (a type of debt security), including 

assets primarily backed by commercial loans. 

Implementing H.R. 4166 would require the SEC and the federal 

banking agencies to revise current regulations concerning exemptions to risk-retention requirements. Based on information from 

those four agencies, CBO estimates that the costs of revising the 

regulations would not be significant. The SEC is authorized to collect fees sufficient to offset its annual appropriation; therefore, 

CBO estimates that the net effect on discretionary spending would 

be negligible, assuming appropriations actions consistent with that 

authority. 

Costs incurred by the FDIC and the OCC are recorded in the 

budget as increases in direct spending. Those two agencies are authorized to collect premiums and fees from insured depository institutions to cover administrative expenses. CBO expects that they 

would do so to recover any costs associated with amending current 

regulations under the bill. Costs to the Federal Reserve System are 

reflected on the federal budget as a reduction in remittances to the 

Treasury (which are recorded in the budget as revenues). Because 

enacting H.R. 4166 would affect direct spending and revenues, payas-you-go procedures apply. However, CBO estimates that the net 

effects would be insignificant for each year. CBO estimates that enacting H.R. 4166 would not increase net direct spending or onbudget deficits in any of the four consecutive 10-year periods beginning in 2027. 

H.R. 4166 contains no intergovernmental mandates as defined in 

the Unfunded Mandates Reform Act (UMRA) and would not affect 

the budgets of state, local, or tribal governments. 

If the SEC, FDIC, or OCC increase fees to offset the costs of implementing the bill, H.R. 4166 would increase the cost of an existing mandate on private entities required to pay those fees. Based 

on information from the affected agencies, CBO estimates that the 

incremental cost of the mandate, if imposed, would be minimal and 

would fall well below the annual threshold for private-sector mandates established in UMRA ($154 million in 2016, adjusted annually for inflation). 

The CBO staff contact for this estimate is Stephen Rabent. The 

estimate was approved by H. Samuel Papenfuss, Deputy Assistant 

Director for Budget Analysis. 


sradovich on DSK3TPTVN1PROD with HEARING
11 

FEDERAL MANDATES STATEMENT

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office 

pursuant to section 423 of the Unfunded Mandates Reform Act. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of the section 102(b)(3) of the 

Congressional Accountability Act. 

EARMARK IDENTIFICATION

H.R. 4166 does not contain any congressional earmarks, limited 

tax benefits, or limited tariff benefits as defined in clause 9 of rule 

XXI. 

DUPLICATION OF FEDERAL PROGRAMS

Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), the 

Committee states that no provision of H.R. 4166 establishes or reauthorizes a program of the Federal Government known to be duplicative of another Federal program, a program that was included 

in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111–139, or a program 

related to a program identified in the most recent Catalog of Federal Domestic Assistance. 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), the 

Committee states that H.R. 4166 contains no directed rulemaking. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1: Short title 

This section cites H.R. 4166 as the ‘‘Expanding Proven Financing 

for American Employers Act.’’ 

Section 2: Risk retention requirement for qualified collateralized 

loan obligations 

This section amends Section 15G(e) of the Securities Exchange 

Act of 1934 relating to risk retention requirements for managers 

that organize ‘‘qualified collateralized loan obligations.’’ Specifically, this section modifies the risk retention requirement from 5% 

of the ‘‘fair value’’ of any collateralized loan obligation (CLO) to 5% 

of the equity of a qualified collateralized loan obligation (QCLO). 

This section also establishes QCLOs as a subset of CLOs. Specifically, QCLOs must satisfy six criteria relating to: (1) Quality of assets—for example, at least 90% of the assets must be senior secured loans and cash equivalents; (2) portfolio diversification; (3) 

minimum capital structure requirements; (4) alignment of manger 


sradovich on DSK3TPTVN1PROD with HEARING
12 

and investor interests; (5) reporting and disclosure obligations; and 

(6) manager regulation. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italics 

and existing law in which no change is proposed is shown in 

roman): 

SECURITIES EXCHANGE ACT OF 1934 

TITLE I—REGULATION OF SECURITIES EXCHANGES 

* * * * * * * 

SEC. 15G. CREDIT RISK RETENTION. 

(a) DEFINITIONS.—In this section— 

(1) the term ‘‘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; 

(2) the term ‘‘insured depository institution’’ has the same 

meaning as in section 3(c) of the Federal Deposit Insurance Act 

(12 U.S.C. 1813(c)); 

(3) the term ‘‘securitizer’’ means— 

(A) an issuer of an asset-backed security; or 

(B) a person who organizes and initiates an asset-backed 

securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to 

the issuer; and 

(4) the term ‘‘originator’’ means a person who— 

(A) through the extension of credit or otherwise, creates 

a financial asset that collateralizes an asset-backed security; and 

(B) sells an asset directly or indirectly to a securitizer. 

(b) REGULATIONS REQUIRED.— (1) IN GENERAL.—Not later than 270 days after the date of 

enactment of this section, the Federal banking agencies and 

the Commission shall jointly prescribe regulations to require 

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. 

(2) RESIDENTIAL MORTGAGES.—Not later than 270 days after 

the date of the enactment of this section, the Federal banking 

agencies, the Commission, the Secretary of Housing and Urban 

Development, and the Federal Housing Finance Agency, shall 

jointly prescribe regulations to require any securitizer 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. 

(c) STANDARDS FOR REGULATIONS.— 

(1) STANDARDS.—The regulations prescribed under subsection (b) shall— 


sradovich on DSK3TPTVN1PROD with HEARING
13 

(A) prohibit a securitizer from directly or indirectly 

hedging or otherwise transferring the credit risk that the 

securitizer is required to retain with respect to an asset; 

(B) require a securitizer to retain— 

(i) not less than 5 percent of the credit risk for any 

asset— 

(I) that is not a qualified residential mortgage 

that is transferred, sold, or conveyed through the 

issuance of an asset-backed security by the 

securitizer; or 

(II) that is a qualified residential mortgage that 

is transferred, sold, or conveyed through the 

issuance of an asset-backed security by the 

securitizer, if 1 or more of the assets that 

collateralize the asset-backed security are not 

qualified residential mortgages; or 

(ii) less than 5 percent of the credit risk for an asset 

that is not a qualified residential mortgage that is 

transferred, sold, or conveyed through the issuance of 

an asset-backed security by the securitizer, if the originator of the asset meets the underwriting standards 

prescribed under paragraph (2)(B); 

(C) specify— 

(i) the permissible forms of risk retention for purposes of this section; 

(ii) the minimum duration of the risk retention required under this section; and 

(iii) that a securitizer is not required to retain any 

part of the credit risk for an asset that is transferred, 

sold or conveyed through the issuance of an assetbacked security by the securitizer, if all of the assets 

that collateralize the asset-backed security are qualified residential mortgages; 

(D) apply, regardless of whether the securitizer is an insured depository institution; 

(E) with respect to a commercial mortgage, specify the 

permissible types, forms, and amounts of risk retention 

that would meet the requirements of subparagraph (B), 

which in the determination of the Federal banking agencies and the Commission may include— 

(i) retention of a specified amount or percentage of 

the total credit risk of the asset; 

(ii) retention of the first-loss position by a thirdparty 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; 

(iii) a determination by the Federal banking agencies and the Commission that the underwriting standards and controls for the asset are adequate; and 


sradovich on DSK3TPTVN1PROD with HEARING
14 

(iv) provision of adequate representations and warranties and related enforcement mechanisms; and 

(F) establish appropriate standards for retention of an 

economic interest with respect to collateralized debt obligations, securities collateralized by collateralized debt obligations, and similar instruments collateralized by other 

asset-backed securities; and 

(G) provide for— 

(i) a total or partial exemption of any securitization, 

as may be appropriate in the public interest and for 

the protection of investors; 

(ii) a total or partial exemption for the securitization 

of an asset 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 for the 

protection of investors, except that, for purposes of 

this clause, the Federal National Mortgage Association 

and the Federal Home Loan Mortgage Corporation are 

not agencies of the United States; 

(iii) a total or partial exemption for 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)), or a security defined as a qualified scholarship funding bond in section 150(d)(2) of the Internal 

Revenue Code of 1986, as may be appropriate in the 

public interest and for the protection of investors; and 

(iv) the allocation of risk retention obligations between a securitizer and an originator in the case of a 

securitizer that purchases assets from an originator, 

as the Federal banking agencies and the Commission 

jointly determine appropriate. 

(2) ASSET CLASSES.— (A) ASSET CLASSES.—The regulations prescribed under 

subsection (b) shall establish asset classes with separate 

rules for securitizers of different classes of assets, including residential mortgages, commercial mortgages, commercial loans, auto loans, and any other class of assets that 

the Federal banking agencies and the Commission deem 

appropriate. 

(B) CONTENTS.—For each asset class established under 

subparagraph (A), the regulations prescribed under subsection (b) shall include underwriting standards established by the Federal banking agencies that specify the 

terms, conditions, and characteristics of a loan within the 

asset class that indicate a low credit risk with respect to 

the loan. 

(d) ORIGINATORS.—In determining how to allocate risk retention 

obligations between a securitizer and an originator under subsection (c)(1)(E)(iv), the Federal banking agencies and the Commission shall— 


sradovich on DSK3TPTVN1PROD with HEARING
15 

(1) reduce the percentage of risk retention obligations required of the securitizer by the percentage of risk retention obligations required of the originator; and 

(2) consider— 

(A) whether the assets sold to the securitizer have 

terms, conditions, and characteristics that reflect low credit risk; 

(B) 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 

(C) 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. 

(e) EXEMPTIONS, EXCEPTIONS, AND ADJUSTMENTS.— 

(1) IN GENERAL.—The Federal banking agencies and the 

Commission may jointly adopt or issue exemptions, exceptions, 

or adjustments to the rules issued under this section, including 

exemptions, exceptions, or adjustments for classes of institutions or assets relating to the risk retention requirement and 

the prohibition on hedging under subsection (c)(1). 

(2) APPLICABLE STANDARDS.—Any exemption, exception, or 

adjustment adopted or issued by the Federal banking agencies 

and the Commission under this paragraph shall— 

(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. 

(3) CERTAIN INSTITUTIONS AND PROGRAMS EXEMPT.— 

(A) FARM CREDIT SYSTEM INSTITUTIONS.—Notwithstanding any other provision of this section, the requirements of this section shall not apply to any loan or other 

financial asset 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. 

(B) OTHER FEDERAL PROGRAMS.—This section shall not 

apply to any residential, multifamily, or health care facility mortgage loan asset, or securitization based directly or 

indirectly on such an asset, which is insured or guaranteed 

by the United States or an agency of the United States. 

For purposes of this subsection, the Federal National 

Mortgage Association, the Federal Home Loan Mortgage 

Corporation, and the Federal home loan banks shall not be 

considered an agency of the United States. 

(4) EXEMPTION FOR QUALIFIED RESIDENTIAL MORTGAGES.— (A) IN GENERAL.—The Federal banking agencies, the 

Commission, the Secretary of Housing and Urban Development, and the Director of the Federal Housing Finance 

Agency shall jointly issue regulations to exempt qualified 


sradovich on DSK3TPTVN1PROD with HEARING
16 

residential mortgages from the risk retention requirements 

of this subsection. 

(B) QUALIFIED RESIDENTIAL MORTGAGE.—The Federal 

banking agencies, the Commission, the Secretary of Housing and Urban Development, and the Director of the Federal Housing Finance Agency shall jointly define the term 

‘‘qualified residential mortgage’’ for purposes of this subsection, taking into consideration underwriting and product features that historical loan performance data indicate 

result in a lower risk of default, such as— 

(i) documentation and verification of the financial 

resources relied upon to qualify the mortgagor; 

(ii) standards with respect to— 

(I) the residual income of the mortgagor after all 

monthly obligations; 

(II) the ratio of the housing payments of the 

mortgagor to the monthly income of the mortgagor; 

(III) the ratio of total monthly installment payments of the mortgagor to the income of the mortgagor; 

(iii) mitigating the potential for payment shock on 

adjustable rate mortgages through product features 

and underwriting standards; 

(iv) mortgage guarantee insurance or other types of 

insurance or credit enhancement obtained at the time 

of origination, to the extent such insurance or credit 

enhancement reduces the risk of default; and 

(v) prohibiting or restricting the use of balloon payments, negative amortization, prepayment penalties, 

interest-only payments, and other features that have 

been demonstrated to exhibit a higher risk of borrower 

default. 

(C) LIMITATION ON DEFINITION.—The Federal banking 

agencies, the Commission, the Secretary of Housing and 

Urban Development, and the Director of the Federal Housing Finance Agency in defining the term ‘‘qualified residential mortgage’’, as required by subparagraph (B), shall 

define that term to be no broader than the definition 

‘‘qualified mortgage’’ as the term is defined under section 

129C(c)(2) of the Truth in Lending Act, as amended by the 

Consumer Financial Protection Act of 2010, and regulations adopted thereunder. 

(5) CONDITION FOR QUALIFIED RESIDENTIAL MORTGAGE EXEMPTION.—The regulations issued under paragraph (4) shall 

provide that an asset-backed security that is collateralized by 

tranches of other asset-backed securities shall not be exempt 

from the risk retention requirements of this subsection. 

(6) CERTIFICATION.—The Commission shall require an issuer 

to certify, for each issuance of an asset-backed security 

collateralized exclusively by qualified residential mortgages, 

that the issuer has evaluated the effectiveness of the internal 

supervisory controls of the issuer with respect to the process 

for ensuring that all assets that collateralize the asset-backed 

security are qualified residential mortgages. 


sradovich on DSK3TPTVN1PROD with HEARING
17 

(7) REQUIREMENTS FOR QUALIFIED COLLATERALIZED LOAN OBLIGATIONS.— 

(A) RISK RETENTION REQUIREMENT.—Notwithstanding 

any other provision of this section, as of the effective date 

set forth in subsection (i)(2), the risk retention requirement 

for qualified collateralized loan obligations may be met by 

the purchase and, during the applicable duration of risk retention specified by the rules of the Federal banking agencies under subsection (c)(1)(C)(ii), holding (without hedging 

or otherwise transferring the credit risk), of the value of no 

less than five percent of the equity distributed among each 

of the higher tranches of the issuance with no less than 3.5 

percent retained as equity of the collateralized loan obligation by the manager of the qualified collateralized loan obligation or one or more of the majority-owned affiliates of 

the manager or its knowledgeable employees and other employees. 

(B) QUALIFIED COLLATERALIZED LOAN OBLIGATIONS.—For 

purposes of this paragraph, a qualified collateralized loan 

obligation is a collateralized loan obligation that meets all 

of the following requirements: 

(i) ASSET QUALITY PROTECTIONS.—The collateralized 

loan obligation shall— 

(I) have at least 100 percent of its assets comprised of senior secured loans and cash equivalents; 

(II) have 100 percent of its loan assets issued by 

companies; 

(III) have no assets that are asset-backed securities or derivatives, except that this limitation shall 

not prohibit a qualified collateralized loan obligation from acquiring a loan participation or any interest related to or in a letter of credit, or entering 

into derivative transactions to hedge interest rate 

or currency rate mismatches; 

(IV) not purchase assets in default, margin 

stock, or equity convertible securities; 

(V) acquire only loans held or acquired by three 

or more investors or lenders unaffiliated with the 

manager; 

(VI) hold only loans to borrowers whose financial statements are subject to an annual audit 

from an independent, accredited accounting firm; 

(VII) have no more than 60 percent of its assets 

comprised of covenant lite loans, except that each 

asset shall require the disclosure of unaudited financial statements quarterly within 45 days of the 

end of the quarter and audited financial statements annually within 90 days of the end of the 

fiscal year; and 

(VIII) at the time of purchase of any asset, comply with the requirements of subclauses (I) and 

(VII) and clause (ii) of this subparagraph, or, if 

not in compliance with any such requirement, 


sradovich on DSK3TPTVN1PROD with HEARING
18 

maintain or improve the level of compliance after 

giving effect to such purchase. 

(ii) ASSET PORTFOLIO PROTECTIONS.— (I) No more than 3.5 percent of the assets of the 

collateralized loan obligation may relate to any 

single borrower. 

(II) No more than 15 percent of the assets of the 

collateralized loan obligation may relate to any 

single industry. 

(iii) STRUCTURAL PROTECTIONS.— (I) The collateralized loan obligation’s equity 

shall be at least 8 percent of the value of its assets. 

(II) The governing transaction documents of the 

collateralized loan obligation specify overcollateralization and interest coverage tests, and if 

any such test falls below the required level specified for the collateralized loan obligation in such 

documents, available interest collections (and if 

necessary, available principal collections) must be 

applied to repay the collateralized loan obligation’s 

debt in order of seniority until compliance with the 

applicable test is restored. 

(iv) REQUIREMENT TO MAINTAIN ALIGNMENT OF MAN- AGER AND INVESTOR INTERESTS.— (I) The collateralized loan obligation shall be an 

open market collateralized loan obligation. 

(II) The holders of the equity of the collateralized 

loan obligation (excluding the risk retention equity 

held as required by subparagraph (A)) shall have 

the right to remove by vote the manager for cause. 

(III) A majority of the manager’s fees, including 

any incentive fee, shall be subordinated to payments then due in relation to the collateralized 

loan obligation’s debt securities. 

(IV) The manager’s discretionary sales of assets 

on behalf of the issuer of the collateralized loan obligation shall be limited each year to not more 

than 30 percent of the principal amount of the assets of the collateralized loan obligation (other 

than sales of defaulted or credit-deteriorated, credit-risk, or credit-improved loans). 

(V) The risk retention equity requirement set 

forth in subparagraph (A) is met. 

(VI) All holders of collateralized loan obligation 

securities that are U.S. persons within the meaning of Regulation S (17 C.F.R. 230; 249) under the 

Securities Act of 1933, are qualified investors. 

(v) REGULATORY OVERSIGHT REQUIREMENTS.— 

(I) The manager of the collateralized loan obligation shall be registered with the Commission as an 

investment adviser under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3). 

(II) All purchases and sales of the assets of the 

collateralized loan obligation shall be conducted 

on an arm’s-length basis and in compliance with 


sradovich on DSK3TPTVN1PROD with HEARING
19 

any applicable provisions of the Investment Advisers Act of 1940. 

(vi) REQUIREMENTS RELATING TO TRANSPARENCY AND

DISCLOSURE.—A monthly report shall be made available to holders of debt securities of the collateralized 

loan obligation, which includes information regarding— 

(I) a list of assets of the collateralized loan obligation, including, with respect to each asset, the 

obligor name; the CUSIP (or security identifier) if 

applicable, the interest rate and maturity date, the 

type of asset, and the market price for each asset 

where available; 

(II) with respect to the portfolio of assets, the aggregate principal balance and aggregate adjusted 

collateral principal amount (adjusted as required 

by the collateralized loan obligation governing 

transaction documents) and the percentage of such 

aggregate adjusted collateral principal represented 

by each asset; 

(III) information relating to each applicable 

over-collateralization test and interest coverage test 

and the level of compliance in relation to each test; 

(IV) all purchases, repayments, and sales of assets; and 

(V) the identity of each defaulted asset as defined in the related transaction documents. 

(8) DEFINITIONS FOR PURPOSES OF PARAGRAPH (7).—For purposes of paragraph (7), the following definitions apply: 

(A) BALANCE SHEET COLLATERALIZED LOAN OBLIGATION.—The term ‘‘balance sheet collateralized loan obligation’’ means a collateralized loan obligation— 

(i) whose assets consist predominantly of loans originated and transferred to the collateralized loan obligation by one or more of its affiliates other than in— 

(I) open market transactions; 

(II) from an open market collateralized loan obligation; or 

(III) from a collateralized loan obligation in existence as of the effective date of this paragraph 

that is not a balance sheet collateralized loan obligation; and 

(ii) the assets and liabilities of which are, immediately after issuance of its asset-backed securities in a 

securitization transaction, included under generally accepted accounting principles in the consolidated balance sheet of one or more of its affiliates. 

(B) COLLATERALIZED LOAN OBLIGATION.—The term 

‘‘collateralized loan obligation’’ means any issuing entity of 

an asset-backed security, as defined in section 3(a)(79) of 

the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(79)), 

that is comprised primarily of commercial loans. 

(C) COVENANT LITE LOAN.—The term ‘‘covenant lite loan’’ 

means, at the time the collateralized loan obligation enters 


sradovich on DSK3TPTVN1PROD with HEARING
20 

into a commitment to acquire such loan, a loan for which 

the underlying instruments neither— 

(i) require the obligor to comply with any maintenance covenant; nor 

(ii) contain a cross-default provision to a financing 

facility of the obligor that requires the obligor to comply with a maintenance covenant (including one that 

may apply only upon the funding of such other loan or 

financing facility); except that if such loan is pari 

passu with another loan of the obligor that would not 

be a covenant lite loan under the criteria in this clause, 

such loan shall be deemed not to be a covenant lite 

loan. For purposes of this clause, the term ‘‘pari passu’’ 

means treated equally and without preference. 

(D) EQUITY.—The term ‘‘equity’’ means the most junior 

class of securities issued by the collateralized loan obligation (excluding any non-economic security such as the 

issuer’s common stock) and any additional class(es) of securities junior to the collateralized loan obligation’s debt securities. 

(E) MANAGER.—The term ‘‘manager’’ means an investment manager that is responsible for managing a 

collateralized loan obligation under the collateralized loan 

obligation’s governing transaction documents. 

(F) OPEN MARKET COLLATERALIZED LOAN OBLIGATION.— The term ‘‘open market collateralized loan obligation’’ 

means a collateralized loan obligation— 

(i) whose assets consist predominantly of senior, secured syndicated loans acquired by such collateralized 

loan obligation directly from the sellers thereof in an 

open market transaction or from another collateralized 

loan obligation and of temporary investments; 

(ii) that is managed by a manager; and 

(iii) that is not a balance sheet collateralized loan obligation. 

(G) OPEN MARKET TRANSACTION.—The term ‘‘open market 

transaction’’ means— 

(i) either an initial loan syndication transaction or a 

secondary market transaction in which a seller offers 

senior, secured syndicated loans to prospective purchasers in the loan market on market terms on an 

arm’s length basis, which prospective purchasers include, but are not limited to, entities that are not affiliated with the seller; or 

(ii) a reverse inquiry from a prospective purchaser of 

a senior, secured syndicated loan through a dealer in 

the loan market to purchase a senior, secured syndicated loan to be sourced by the dealer in the loan 

market. 

(H) QUALIFIED INVESTOR.—The term ‘‘qualified investor’’ 

means— 

(i) with respect to securities that require the payment 

of principal and interest, an investor that is a qualified 

purchaser, within the meaning of section 3(c)(7) of the 

Investment Company Act of 1940 (15 U.S.C. 80a– 


sradovich on DSK3TPTVN1PROD with HEARING
21 

3(c)(7)) or an entity owned exclusively by one or more 

qualified purchasers; or 

(ii) with respect to securities that do not require the 

payment of principal and interest— 

(I) if the qualified collateralized loan obligation 

relies on such section for its exclusion from the definition of investment company under the Investment Company Act of 1940— 

(aa) a qualified purchaser; 

(bb) a knowledgeable employee, within the 

meaning of Rule 3c–5 promulgated under the 

Investment Company Act of 1940; or 

(cc) an entity owned exclusively by such a 

qualified purchaser or knowledgeable employee; or 

(II) if the qualified collateralized loan obligation 

relies on Rule 3a–7 promulgated under the Investment Company Act of 1940 for its exclusion from 

the definition of investment company under that 

Act and such securities are not fixed-income securities, as defined in such rule— 

(aa) a qualified institutional buyer, within 

the meaning of Rule 144A under the Securities 

Act of 1933; 

(bb) a person (other than any rating organization rating the issuer’s securities) involved 

in the organization or operation of the issuer 

or an affiliate of such a person, as defined in 

Rule 405 under the Securities Act of 1933; or 

(cc) any entity in which all of the equity 

owners are such qualified institutional buyers 

as described in item (aa) or persons described 

in item (bb). 

(f) ENFORCEMENT.—The regulations issued under this section 

shall be enforced by— 

(1) the appropriate Federal banking agency, with respect to 

any securitizer that is an insured depository institution; and 

(2) the Commission, with respect to any securitizer that is 

not an insured depository institution. 

(g) AUTHORITY OF COMMISSION.—The authority of the Commission under this section shall be in addition to the authority of the 

Commission to otherwise enforce the securities laws. 

(h) AUTHORITY TO COORDINATE ON RULEMAKING.—The Chairperson of the Financial Stability Oversight Council shall coordinate 

all joint rulemaking required under this section. 

(i) EFFECTIVE DATE OF REGULATIONS.—The regulations issued 

under this section shall become effective— 

(1) with respect to securitizers and originators of assetbacked securities backed by residential mortgages, 1 year after 

the date on which final rules under this section are published 

in the Federal Register; and 

(2) with respect to securitizers and originators of all other 

classes of asset-backed securities, 2 years after the date on 


sradovich on DSK3TPTVN1PROD with HEARING
22 

which final rules under this section are published in the Federal Register. 

* * * * * * * 


sradovich on DSK3TPTVN1PROD with HEARING
(23) 

MINORITY VIEWS 

H.R. 4166, the so-called ‘‘Expanding Proven Financing for American Employers Act,’’ creates an exemption from the credit risk retention, or ‘‘skin in the game,’’ requirements of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act of 2010 (or 

‘‘Dodd-Frank;’’ P.L. 111–203) by creating a new category of ‘‘qualified collateralized loan obligations,’’ or QCLOs, with no underwriting standards and little risk retention. 

The Minority recalls that the 2008 crisis was caused—in large 

part—by mortgage companies that originated loans to borrowers 

that had no ability to repay. These companies were able to charge 

high upfront fees for these doomed-to-fail mortgages and then, with 

the help of securitizers, pass the risk of default off to unwitting investors. To address this problematic ‘‘originate to distribute’’ model, 

Dodd-Frank required securitizers to retain an economic interest in 

the credit risk of the mortgages and other assets they securitize 

alongside investors. By retaining this risk, the securitizer becomes 

more concerned with the quality of the underlying loans because its 

money is also at stake. 

While the 2008 crisis primarily related to residential mortgages, 

Congress recognized that all classes of asset-backed securities, including collateralized loan obligations (CLOs), were subject to the 

same misalignment of incentives Rather than only endeavoring to 

narrowly address the last crisis, Congress passed the Dodd-Frank 

Act to prevent and mitigate systemic risk that may lead to future 

crises, and therefore provided for risk retention requirements for 

all classes of assets. 

However, H.R. 4166 would diminish the risk retention provisions 

in Dodd-Frank by providing a carve-out for certain CLOs, which 

are typically comprised of loans to riskier companies. We note that 

CLOs are often used to finance private equity takeovers of companies through ‘‘leveraged buyouts.’’ Trade associations representing 

the CLO industry advocated for the QCLO exemption contemplated 

in H.R. 4166 during the financial regulators’ comment period on 

the proposed, and reproposed, implementing rules. The regulators 

rejected those comments, noting that the leveraged loan market 

may be getting overheated, and that ‘‘characteristics of the leveraged loan market pose potential systemic risks similar to those observed in the residential mortgage market,’’ before the 2008 crisis. 

Specifically, H.R. 4166 provides that managers of QCLOs would 

only be required to retain 5 percent of the equity tranche, or the 

riskiest tranche, of the CLO (with the optionality for the manager 

to hold onto 1.5 percent of that 5 percent elsewhere along the 

securitization chain; i.e., not in the riskiest tranche). This proposal 

stands in contrast to regulators’ final credit risk retention rule, 

which requires that securitizers retain 5 percent of the aggregate 

credit risk of the securitization—not just 5 percent of the equity 


sradovich on DSK3TPTVN1PROD with HEARING
24 

tranche. By way of example, if the equity tranche was 8 percent of 

the entire securitization, CLO managers would only be required to 

retain 0.4 percent of the aggregate credit risk. If H.R. 4166 is 

adopted, the credit risk requirements in Dodd-Frank would be rendered largely meaningless for CLOs, as information from industry 

and regulators has stated that nearly all existing CLOs issued in 

recent years would meet the parameters to be considered a QCLO 

under the bill. 

Finally, the Minority notes that the Federal Reserve, the Office 

of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have in recent years expressed strong concerns 

with what they see as deteriorating underwriting standards in leveraged lending. Additionally, the Democratic witnesses at the 

hearing where H.R. 4166 was considered stated that this legislation does not offer substantial structural protections to justify the 

exemption, and further stipulated that the final risk retention rule 

already offers an exemption for certain high-quality commercial 

loans. 

For the foregoing reasons, the Minority opposes H.R. 4166. 

MAXINE WATERS. 

KEITH ELLISON. 

RUBE ́ N HINOJOSA. 

Æ 


sradovich on DSK3TPTVN1PROD with HEARING