This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

53230 

Vol. 86, No. 184 

Monday, September 27, 2021 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1240 

RIN 2590–AB17 

Enterprise Regulatory Capital 

Framework Rule—Prescribed Leverage 

Buffer Amount and Credit Risk 

Transfer 

AGENCY: Federal Housing Finance 

Agency. 

ACTION: Notice of proposed rulemaking: 

request for comments. 

SUMMARY: The Federal Housing Finance 

Agency (FHFA or the Agency) is seeking 

comments on a notice of proposed 

rulemaking (proposed rule) that would 

amend the Enterprise Regulatory Capital 

Framework (ERCF) by refining the 

prescribed leverage buffer amount 

(PLBA or leverage buffer) and credit risk 

transfer (CRT) securitization framework 

for the Federal National Mortgage 

Association (Fannie Mae) and the 

Federal Home Loan Mortgage 

Corporation (Freddie Mac, and with 

Fannie Mae, each an Enterprise). The 

proposed rule would also make 

technical corrections to various 

provisions of the ERCF that was 

published on December 17, 2020. 

DATES: Comments must be received on 

or before November 26, 2021. 

ADDRESSES: You may submit your 

comments on the proposed rule, 

identified by regulatory information 

number (RIN) 2590–AB17, by any one of 

the following methods: 

• Agency Website: www.fhfa.gov/ 

open-for-comment-or-input. 

• Federal eRulemaking Portal: 

https://www.regulations.gov. Follow the 

instructions for submitting comments. If 

you submit your comment to the 

Federal eRulemaking Portal, please also 

send it by email to FHFA at 

RegComments@fhfa.gov to ensure 

timely receipt by FHFA. Include the 

following information in the subject line 

of your submission: Comments/RIN 

2590–AB17. 

• Hand Delivered/Courier: The hand 

delivery address is: Clinton Jones, 

General Counsel, Attention: Comments/ 

RIN 2590–AB17, Federal Housing 

Finance Agency, 400 Seventh Street 

SW, Washington, DC 20219. Deliver the 

package at the Seventh Street entrance 

Guard Desk, First Floor, on business 

days between 9 a.m. and 5 p.m. 

• U.S. Mail, United Parcel Service, 

Federal Express, or Other Mail Service: 

The mailing address for comments is: 

Clinton Jones, General Counsel, 

Attention: Comments/RIN 2590–AB17, 

Federal Housing Finance Agency, 400 

Seventh Street SW, Washington, DC 

20219. Please note that all mail sent to 

FHFA via U.S. Mail is routed through a 

national irradiation facility, a process 

that may delay delivery by 

approximately two weeks. For any timesensitive correspondence, please plan 

accordingly. 

FOR FURTHER INFORMATION CONTACT: 

Andrew Varrieur, Senior Associate 

Director, Office of Capital Policy, (202) 

649–3141, Andrew.Varrieur@fhfa.gov; 

Christopher Vincent, Senior Financial 

Analyst, Office of Capital Policy, (202) 

649–3685, Christopher.Vincent@

fhfa.gov; or James Jordan, Associate 

General Counsel, Office of General 

Counsel, (202) 649–3075, 

James.Jordan@fhfa.gov. These are not 

toll-free numbers. The telephone 

number for the Telecommunications 

Device for the Deaf is (800) 877–8339. 

SUPPLEMENTARY INFORMATION: 

Comments 

FHFA invites comments on all aspects 

of the proposed rule. Copies of all 

comments will be posted without 

change and will include any personal 

information you provide, such as your 

name, address, email address, and 

telephone number, on the FHFA website 

at https://www.fhfa.gov. In addition, 

copies of all comments received will be 

available for examination by the public 

through the electronic rulemaking 

docket for this proposed rule also 

located on the FHFA website. 

Table of Contents 

I. Introduction 

II. Background and Rationale for the 

Proposed Rule 

A. PLBA 

B. CRT 

III. Proposed Requirements 

A. PLBA 

B. CRT 

C. ERCF Technical Corrections 

IV. Paperwork Reduction Act 

V. Regulatory Flexibility Act 

I. Introduction 

FHFA is seeking comments on 

amendments to the ERCF that would 

refine the leverage buffer and the riskbased capital treatment for CRT 

transactions. The proposed amendments 

would better reflect the risks inherent in 

the Enterprises’ business models and 

encourage the Enterprises to distribute 

acquired credit risk to private investors 

rather than to buy and hold that risk. 

The dynamic PLBA considered in this 

proposed rule is intended to achieve 

FHFA’s objective stated in the ERCF of 

having the Enterprises’ leverage capital 

requirements provide a credible 

backstop to risk-based capital 

requirements. Linking the PLBA to the 

ERCF’s stability capital buffer, in 

conjunction with the proposed rule’s 

refinements to the ERCF’s CRT 

securitization framework, would 

enhance the safety and soundness of the 

Enterprises by removing inappropriate 

capital disincentives to the Enterprises 

to transfer risk. 

FHFA adopted the ERCF on December 

17, 2020 (85 FR 82150), with the 

purpose of implementing a goingconcern regulatory capital standard to 

ensure that each of Fannie Mae and 

Freddie Mac operates in a safe and 

sound manner and is positioned to 

fulfill its statutory mission to provide 

stability and ongoing assistance to the 

secondary mortgage market across the 

economic cycle. In doing so, the ERCF 

accomplished a statutory requirement 

that FHFA establish by regulation riskbased capital requirements to safeguard 

the Enterprises against the risks that 

arise in the operation and management 

of their businesses, and implemented a 

new leverage framework that included 

both a minimum requirement and a 

leverage buffer. The ERCF became 

effective on February 16, 2021. 

The ERCF evolved from FHFA’s 

proposals for Enterprise Regulatory 

Capital Frameworks in 2018 and 2020, 

which were based on the FHFA 

Conservatorship Capital Framework 

(CCF) established in 2017. The ERCF 

successfully addressed issues identified 

through the notice and comment 

process on the pro-cyclicality of the 

proposed risk-based capital 

requirements, the quality of Enterprise 

capital used to meet the capital 


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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 53231 

1Fannie Mae’s Amended and Restated Senior 

Preferred Stock Purchase Agreement with Treasury 

(September 26, 2008), https://www.fhfa.gov/ 

Conservatorship/Documents/Senior-PreferredStock-Agree/FNM/SPSPA-amends/FNM-Amendand-Restated-SPSPA_09-26-2008.pdf; Freddie 

Mac’s Amended and Restated Senior Preferred 

Stock Purchase Agreement with Treasury 

(September 26, 2008), https://www.fhfa.gov/ 

Conservatorship/Documents/Senior-PreferredStock-Agree/FRE/SPSPA-amends/FRE-Amendedand-Restated-SPSPA_09-26-2008.pdf. 

2 2021 Fannie Mae Letter Agreement (January 14, 

2021), https://home.treasury.gov/system/files/136/ 

Executed-Letter-Agreement-for-Fannie-Mae.pdf; 

2021 Freddie Mac Letter Agreement (January 14. 

2021), https://home.treasury.gov/system/files/136/ 

Executed-Letter-Agreement-for-Freddie%20

Mac.pdf. 

requirements, and the quantity of 

capital requirements. 

However, FHFA is concerned that 

certain aspects of the ERCF might create 

disincentives in the Enterprises’ CRT 

programs that may result in taxpayers 

bearing excessive undue risk for as long 

as the Enterprises are in 

conservatorships and excessive risk to 

the housing finance market both during 

and after conservatorships. This concern 

is heightened by the fact that the 

Enterprises presently are severely 

undercapitalized and lack the resources 

on their own to safely absorb the credit 

risk associated with their normal 

operations. In conservatorships, the 

Enterprises are supported by Senior 

Preferred Stock Purchase Agreements 1

(PSPAs) between the U.S. Department of 

the Treasury (the Treasury) and each 

Enterprise, through FHFA as its 

conservator. Until recently, the PSPAs 

significantly limited the Enterprises’ 

ability to hold capital, and only in 

January 2021 were the upper bounds on 

retained capital removed. During this 

period where the Enterprises are 

building capital, the taxpayers continue 

to be at heightened risk through 

potential PSPA draws in the event of a 

significant stress to the housing sector. 

The Enterprises have developed their 

CRT programs over the last several years 

under FHFA’s oversight through 

guidelines, instructions, strategic plans, 

and scorecard objectives. FHFA views 

the transfer of risk, particularly credit 

risk, to a broad set of investors as an 

important tool to reduce taxpayer 

exposure to the risks posed by the 

Enterprises and to mitigate systemic risk 

caused by the size and monoline nature 

of the Enterprises’ businesses. If the 

Enterprises were to substantially shrink 

their risk transfer programs for an 

extended period, either in response to 

regulatory policies or macroeconomic 

conditions, potential taxpayer exposure 

and systemic risk may increase as a 

result. 

The refinements in this proposal 

would lessen the potential deterrents to 

Enterprise risk transfer. Specifically, the 

proposed rule would amend the ERCF 

to: 

• Replace the fixed PLBA equal to 1.5 

percent of an Enterprise’s adjusted total 

assets with a dynamic PLBA equal to 50 

percent of the Enterprise’s stability 

capital buffer as calculated in 

accordance with 12 CFR 1240.400; 

• Replace the prudential floor of 10 

percent on the risk weight assigned to 

any retained CRT exposure with a 

prudential floor of 5 percent on the risk 

weight assigned to any retained CRT 

exposure; and 

• Remove the requirement that an 

Enterprise must apply an overall 

effectiveness adjustment to its retained 

CRT exposures in accordance with the 

ERCF’s securitization framework in 12 

CFR 1240.44(f) and (i). 

The proposed rule would also make 

technical corrections to various 

provisions of the ERCF that was 

published on December 17, 2020. 

The PSPAs between the Treasury and 

each Enterprise, through FHFA as its 

conservator, as amended by letter 

agreements executed by the parties on 

January 14, 2021,2 include a covenant at 

section 5.15 which states: ‘‘[The 

Enterprise] shall comply with the 

Enterprise Regulatory Capital 

Framework [published in the Federal 

Register at 85 FR 82150 on December 

17, 2020] disregarding any subsequent 

amendment or other modifications to 

that rule.’’ Modifying that covenant will 

require agreement between the Treasury 

and FHFA under section 6.3 of the 

PSPAs. 

II. Background and Rationale for the 

Proposed Rule 

A. PLBA 

Background 

The ERCF requires an Enterprise to 

maintain a leverage ratio of tier 1 capital 

to adjusted total assets of at least 2.5 

percent. In addition, to avoid limits on 

capital distributions and discretionary 

bonus payments, an Enterprise must 

also maintain a fixed tier 1 capital PLBA 

equal to at least 1.5 percent of adjusted 

total assets. 

The primary purpose of the combined 

leverage requirement and PLBA is to 

serve as a non-risk-based supplementary 

measure that provides a credible 

backstop to the combined risk-based 

capital requirements and prescribed 

capital conservation buffer amount 

(PCCBA), where the PCCBA comprises 

the stability capital buffer, the stress 

capital buffer, and the countercyclical 

capital buffer. This type of simple, 

transparent, and independent measure 

of risk provides an important safeguard 

against model risk and measurement 

error in the risk-based capital 

requirements and acquisition strategies 

of the Enterprises. FHFA’s rationale for 

the leverage requirement and buffer is 

consistent with that of U.S. and 

international banking regulators, 

although the size of each regulator’s 

leverage buffer varies by regulatory 

regime. In the U.S., large banking 

organizations must maintain an 

enhanced supplementary leverage ratio 

(eSLR) of 2 percent of total leverage 

exposure on top of their 3 percent 

supplementary leverage ratio (SLR) to 

avoid restrictions on distributions and 

discretionary bonuses. Internationally, 

systemically important banks are 

required to hold a leverage buffer that 

varies by the bank’s systemic 

importance. 

The Enterprises are chartered to fulfill 

a countercyclical role in the housing 

finance market. The COVID–19 

pandemic, while unique and not the 

basis for this proposed rule, has 

effectively illustrated why a dynamic 

leverage buffer may be appropriate for 

the Enterprises. During the pandemic, as 

many mortgage market participants 

pulled back from the market due to 

capital and liquidity constraints, the 

Enterprises stepped in to fulfill their 

countercyclical role, leading to greater 

reliance on Enterprise execution for 

conforming mortgages. This, combined 

with the Board of Governors of the 

Federal Reserve System’s (Federal 

Reserve) monthly purchases of $40 

billion in Agency mortgage-backed 

securities (MBS), caused the 

Enterprises’ balance sheets to expand 

considerably. As a result, the PLBA 

represents an increasingly large 

component of the Enterprises’ capital 

requirements and capital buffers relative 

to when FHFA calibrated the PLBA in 

2019. In addition, the combined 

leverage requirement and PLBA exceeds 

the combined risk-based capital 

requirement and PCCBA at some level 

for both Enterprises. The leverage 

requirement and current PLBA are 

based on adjusted total assets, which is 

a relatively stable measure over time. 

Given this calibration, FHFA expects 

the current relationships between 

leverage and risk-based capital at the 

Enterprises will continue for the 

foreseeable future. When leverage 

capital is consistently the binding 

capital constraint, it provides an 

incentive for an institution to increase 

risk taking because taking on more risk 

is not reflected in commensurately 

higher capital requirements, while 


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53232 Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 

3 In a June 2021 Federal Open Market Committee 

press conference, the Federal Reserve Chairman 

stated: ‘‘Our position has been for a long time, and 

it is now, that we’d like the leverage ratio to be a 

backstop to risk-based capital requirements. When 

leverage requirements are binding it does skew 

incentives for firms to substitute lower-risk assets 

for high-risk ones.’’ See https:// 

www.federalreserve.gov/mediacenter/files/FOMC

presconf20210616.pdf. 

greater risk may generate greater returns. 

When leverage capital sufficiently 

exceeds risk-based capital, high risk 

exposures and low risk exposures have 

the same capital requirements, so an 

Enterprise has an incentive to acquire 

higher-risk, higher-yielding mortgages, 

all else equal. 

As of March 31, 2021, Fannie Mae’s 

tier 1 leverage capital requirement plus 

PLBA of 4 percent was the binding 

capital constraint relative to their 

estimated common equity tier 1 (CET1) 

capital requirement plus PCCBA of 3.3 

percent and their estimated tier 1 riskbased capital requirement plus PCCBA 

of 3.8 percent, all relative to adjusted 

total assets. Fannie Mae’s estimated 

adjusted total capital requirement plus 

PCCBA of 4.5 percent (relative to 

adjusted total assets) was their only riskbased capital requirement that exceeded 

their leverage capital requirement plus 

PLBA. At Freddie Mac, the leverage 

capital requirement plus PLBA was the 

binding capital constraint relative to 

every risk-based capital metric. Freddie 

Mac’s estimated CET1 capital 

requirement plus PCCBA of 2.8 percent, 

estimated tier 1 risk-based capital 

requirement plus PCCBA of 3.2 percent, 

and estimated adjusted total capital 

requirement plus PCCBA of 3.8 percent, 

all relative to adjusted total assets, were 

each smaller than their tier 1 leverage 

capital requirement plus PLBA of 4 

percent. 

For the Enterprises combined, the tier 

1 leverage capital requirement plus 

PLBA was approximately 12 percent 

larger than the combined tier 1 riskbased capital requirement plus PCCBA 

(relative to adjusted total assets) as of 

March 31, 2021. This excess of total 

leverage capital over tier 1 risk-based 

capital has grown from 10 percent when 

FHFA calibrated the ERCF near the end 

of 2019—a 20 percent increase in only 

two years. The leverage requirement and 

PLBA are met with tier 1 capital, while 

the tier 1 risk-based capital requirement 

and PCCBA are met with tier 1 capital 

and CET1 capital respectively, which 

allows for the most direct comparison of 

leverage capital to risk-based capital. In 

addition, CET1 capital and tier 1 capital 

represent the highest quality and 

second-highest quality forms of capital, 

respectively, so examining the binding 

nature of the tier 1 leverage requirement 

relative to the tier 1 risk-based capital 

requirement is prudent when 

considering the safety and soundness of 

the Enterprises. 

Rationale for Revisiting the PLBA 

The primary purpose of the ERCF’s 

leverage requirement and PLBA is to 

serve as a credible backstop to the riskbased capital requirements and riskbased capital buffers. This is consistent 

with the stated purpose of the SLR and 

eSLR in the U.S. banking framework.3

FHFA is proposing a recalibration of the 

PLBA because a leverage ratio that 

exceeds risk-based capital requirements 

throughout the economic cycle could 

lead to undesirable outcomes at the 

Enterprises, including promoting risktaking and creating disincentives for 

CRT and other forms of risk transfer. 

Evolutions in the international and U.S. 

banking frameworks and public 

comments on FHFA’s 2020 re-proposed 

capital rule support the proposed PLBA 

recalibration. 

Financial regulators and policymakers 

have consistently investigated ways to 

lower the quantity of leverage required 

for banks, with a specific focus on the 

SLR and eSLR. In the U.S., banking 

regulators require global systemically 

important banks (GSIBs) to hold tier 1 

capital in excess of 5 percent of total onand-off balance sheet assets (measured 

using total leverage exposure, which is 

comparable to adjusted total assets at 

the Enterprises) consisting of a 3 percent 

minimum SLR and a 2 percent leverage 

buffer (the eSLR). Internationally, Basel 

III standards require systemically 

important banks to hold a tier 1 capital 

leverage ratio buffer in excess of a 3 


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Figure 1: Estimated Enterprise Capital Requirements and Buffers relative to 

Adjusted Total Assets, as of March 31, 2021 

5.0% 

4.5% 

4.0% 

3.5% 

3.0% 

2.5% 

2.0% 

1.5% 

1.0% 

0.5% 

0.0% 

4.5% 

3.8% 

3.3% 1.8% 

1.8% 

1.8% 

Fannie Mae Fannie Mae Fannie Mae 

CET1, PCCBA Tier 1, PCCBA Adj. Total, 

PCCBA 

l\!il Capital Requirement 

4.0% 3.8% 4.0% 

3.2% 

1.5% 2.8% 1.5% 1.5% 

1.5% 

Fannie Mae Freddie Mac Freddie Mac Freddie Mac Freddie Mac 

Leverage, CET1, PCCBA Tier 1, PCCBA Adj. Total, Leverage, 

PLBA PCCBA PLBA 

D Buffer • Requirement plus Buffer 
Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 53233 

4https://www.federalreserve.gov/newsevents/ 

pressreleases/bcreg20180411a.htm. 

5https://www.treasury.gov/press-center/news/ 

Pages/Summary-of-Recommendations-forRegulatory-Reform.aspx. 

6Public Law 115–174, 132 Stat. 1296 (2018). 

7https://www.govinfo.gov/content/pkg/FR-2015- 

07-24/pdf/2015-18124.pdf. 8https://www.federalreserve.gov/newsevents/ 

pressreleases/bcreg20210319a.htm. 

9 Id. 

10 In May 2021, the Board’s Vice Chair for 

Supervision testified to the U.S. House Financial 

Services Committee: ‘‘Among other measures, we 

are reviewing the design and calibration of the 

supplementary leverage ratio. . .’’. See https:// 

www.federalreserve.gov/newsevents/testimony/ 

quarles20210519a.htm. 

percent leverage requirement equal to 

50 percent of a GSIB’s higher lossabsorbency risk-based requirements. 

This dynamic leverage buffer tailors 

leverage requirements to business 

activities and risk profiles, aiming to 

retain a meaningful calibration of 

leverage ratio standards while not 

discouraging firms from participating in 

low-risk activities. The higher lossabsorbency risk-based requirements is a 

measure similar to the U.S. banking 

framework’s GSIB surcharge, which 

varies in size depending on a bank’s 

systemic importance, as measured using 

a bank’s size, interconnectedness, crossjurisdictional activity, substitutability, 

complexity, and use of short-term 

wholesale funding. In April 2018, the 

Federal Reserve and the Office of the 

Comptroller of the Currency (OCC) 

released a similar proposal that would 

tailor the eSLR for GSIBs by modifying 

the fixed 2 percent eSLR buffer to equal 

one half of each firm’s GSIB capital 

surcharge.4 This proposal would have a 

significant impact on the leverage ratios 

of U.S. GSIBs, decreasing the fixed 2 

percent eSLR to, on a median basis, 

approximately 1.25 percent. 

In addition, there have been various 

proposals in recent years from the U.S. 

Department of the Treasury and the U.S. 

Congress for a more targeted approach 

to removing certain items from total 

leverage exposure to address the 

negative externalities the SLR and eSLR 

requirements may have on market 

liquidity and low-risk assets. One such 

proposal included adjustments to the 

calibration of the eSLR and the leverage 

exposure calculation to exclude from 

the denominator of total leverage 

exposure cash on deposit with central 

banks, U.S. Treasury securities, and 

initial margin for centrally cleared 

derivatives.5 The Economic Growth, 

Regulatory Relief, and Consumer 

Protection Act of 2018 6 adopted part of 

the Treasury’s recommendation by 

relaxing the leverage ratio for ‘‘custodial 

banks’’ by removing funds held at 

central banks from the leverage ratio’s 

denominator. Furthermore, as FHFA did 

in the ERCF, there is precedent for bank 

regulators tailoring the leverage ratio to 

conform to an institution’s unique 

circumstances. As an example, in 2015, 

the Federal Reserve reduced the eSLR 

requirement for GE Capital from 5 

percent to 4 percent when it was 

designated a nonbank systemically 

important financial institution (SIFI) by 

the Financial Stability Oversight 

Council (FSOC).7

The regulatory focus on reevaluating 

bank leverage ratio requirements has 

sharpened further during the COVID–19 

pandemic. In March 2020, to stabilize 

dislocations in the market for U.S. 

Treasuries as a result of the pandemic, 

the Federal Reserve temporarily 

modified the SLR to exclude U.S. 

Treasury securities and central bank 

reserves from the leverage calculation. 

In March 2021, the Federal Reserve 

allowed this temporary relief to expire 

as the strains in the Treasury market 

resulting from COVID–19 had eased, but 

acknowledged it ‘‘may need to address 

the current design and calibration of the 

SLR over time to prevent strains from 

developing that could both constrain 

economic growth and undermine 

financial stability.’’ 8 After allowing the 

temporary relief to expire, the leverage 

ratio became the binding capital 

constraint for JPMorgan Chase & Co., the 

largest GSIB. The Federal Reserve also 

stated that ‘‘to ensure that the SLR— 

which was established in 2014 as an 

additional capital requirement—remains 

effective in an environment of higher 

reserves, the Board will soon be inviting 

public comment on several potential 

SLR modifications.’’ 9 Further, members 

of the Federal Reserve’s Board of 

Governors recently confirmed that the 

Board is looking to make changes to the 

leverage framework.10

The current circumstances in which 

tier 1 leverage capital requirements are 

binding for both Fannie Mae and 

Freddie Mac may lead to perverse 

incentives that have the Enterprises take 

on more risk than is prudent. By treating 

all risk similarly, a binding leverage 

ratio driven by the PLBA may 

incentivize risk-taking because the 

capital requirement would be the same 

for high-risk and low-risk loans. In 

addition, the Enterprises would have no 

capital incentive to transfer risk to 

achieve a risk-based capital requirement 

lower than their leverage requirement. 

However, when risk-based capital 

requirements are higher than leverage 

capital requirements, CRT represents a 

viable way to both lower risk at the 

Enterprises and to shrink the gap 

between capital requirements and 

available capital, promoting safety and 

soundness. These were pressing issues 

to commenters when FHFA re-proposed 

its Enterprise capital rule in 2020. 

Prior to finalizing the ERCF, FHFA 

received a significant number of public 

comments on FHFA’s proposed PLBA. 

Some commenters recommended a 

leverage buffer smaller than was 

proposed (both with and without 

corresponding recommendations for the 

leverage requirement). Most 

commenters focused on the size of the 

combined leverage requirement and 

PLBA as a single 4 percent leverage 

ratio. Most of those commenters 

recommended a combined leverage ratio 

smaller than 4 percent. Some suggested 

that 4 percent overstates potential risk 

in the Enterprises’ books because 

FHFA’s ERCF calibration was based on 

historical losses without adjusting for 

prevailing portfolio composition. That 

is, given that the Enterprises are no 

longer permitted to acquire many of the 

loans that precipitated the 2008 

financial crisis, such as Alt-A loans and 

option ARMs, a leverage ratio 

corresponding to the Enterprises’ 

current acquisition profile should not be 

calibrated to losses involving such 

loans. Relatedly, commenters suggested 

that concerns the Enterprises may again 

loosen underwriting standards have 

been addressed in several ways, 

including through post-crisis statutory 

and regulatory changes such as the 

Qualified Mortgage and Ability-toRepay rule, which would require a 

statutory change and/or a notice of 

proposed rulemaking followed by a 

period of public comment in order to 

modify. In addition, commenters argued 

that these concerns were further 

addressed through post-crisis 

improvements in risk management and 

improved loss-mitigation capabilities, 

incorporation of automated tools into 

the underwriting process to verify the 

accuracy of data and detect loan 

manufacturing defects, tightened 

counterparty risk management, and 

improvements in fraud prevention. 

Commenters also suggested that the 

Enterprises’ recent Dodd-Frank Act 

Stress Tests (DFAST) results do not 

support a 4 percent leverage ratio. 

Commenters’ analysis at the time 

indicated that 4 percent leverage would 

be between four and thirteen times 

DFAST losses, depending on which 

scenario was being compared. 

Commenters suggested this multiple 

was excessive. In addition, some 

commenters viewed the PLBA as being 

duplicative of other ERCF adjustments 

and buffers that also were designed to 

mitigate model and related risk. Finally, 


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53234 Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 

11Credit Risk Transfer Progress Report 4Q20, 

https://www.fhfa.gov/AboutUs/Reports/ 

ReportDocuments/CRT-Progress-Report-4Q20.pdf. 

as stated above, many commenters 

stated that a binding leverage ratio 

would be a disincentive for CRT and 

encourage the Enterprises to take on 

more risk. 

B. CRT 

Background 

The Enterprises’ core businesses 

reflect the acquisition of mortgages from 

financial institutions and the bundling 

of those mortgages into collateral for 

MBS. The Enterprises sell to investors 

part of the cash flows that stem from the 

mortgages underlying the MBS. The 

Enterprises guarantee the principal and 

interest payments to investors and 

collect a guarantee fee from their sellers. 

Mortgage exposures typically carry 

both interest rate and credit risk. In 

general, the Enterprises transfer 

mortgage interest rate risk and retain 

and manage mortgage credit risk. The 

interest rate risk on securitized 

mortgages is transferred to investors 

through MBS sales. The Enterprises’ 

principal and interest guarantee helps to 

create a liquid and efficient MBS 

market. It also limits the credit risk 

assumed by MBS investors, except for 

an investor’s counterparty exposure to 

the Enterprises. Credit risk can be 

broadly separated into expected losses 

and unexpected losses, as determined 

by a credit model. The Enterprises rely 

on guarantee fees to cover expected 

losses and, absent CRT, equity capital to 

cover unexpected losses. 

In its role as conservator, FHFA 

established a goal of reducing taxpayer 

risk exposure to the credit guarantees 

extended by the Enterprises. To 

accomplish this objective, FHFA used 

its conservatorship strategic plans and 

scorecards to encourage the Enterprises 

to transfer credit risk to the private 

sector. In 2012, FHFA’s Strategic Plan 

for Enterprise Conservatorships 

proposed the use of loss sharing 

agreements to reduce the credit risk 

incurred by the Enterprises. The 2013 

Conservatorship Scorecard required 

each Enterprise to ‘‘demonstrate the 

viability of multiple types of [credit] 

risk transfer transactions’’ on singlefamily loans. The Enterprises first 

implemented their CRT programs that 

same year and have since transferred to 

private investors a substantial amount of 

the credit risk of new acquisitions the 

Enterprises assume for loans in targeted 

loan categories. The programs have 

become a core part of the Enterprises’ 

single-family credit guarantee business 

and include or have included CRTs via 

capital markets issuances (both 

corporate debt and bankruptcy remote 

trust structures), insurance/reinsurance 

transactions, senior/subordinate 

transactions, and a variety of lender 

collateralized recourse transactions. 

The 2014 Strategic Plan for the 

Conservatorships of Fannie Mae and 

Freddie Mac emphasized the 

desirability of greater use of CRT in the 

future. Additionally, the 2014 and 2015 

Conservatorship Scorecards set more 

ambitious CRT performance goals for 

each Enterprise. Since that time, the 

Conservatorship Scorecards have 

included various goals to ensure the 

continued use of CRT as a means of 

reducing risk exposure to taxpayers. For 

example, the 2016 through 2019 

Conservatorship Scorecards established 

an objective for the Enterprises to 

transfer a meaningful portion of credit 

risk on at least 90 percent of the unpaid 

principal balance (UPB) of their 

acquired single-family mortgage loans 

targeted for credit risk transfer. Targeted 

loans include fixed-rate, non-HARP 

loans with terms over 20 years and loanto-value (LTV) ratios above 60 percent. 

Such loans represent a substantial 

amount of the credit risk associated 

with all new loan acquisitions. 

From the beginning of the Enterprises’ 

single-family CRT programs in 2013 

through the end of 2020, Fannie Mae 

and Freddie Mac have transferred a 

portion of credit risk on approximately 

$4.1 trillion of UPB, with a combined 

risk-in-force (RIF) of about $137 billion, 

or 3.3 percent of UPB.11

The Enterprises’ CRT programs have 

evolved over time in response to 

changing macroeconomic conditions, 

loan acquisition risk profiles, and views 

of expected and unexpected losses. 

However, across the different types of 

CRT vehicles, the basic transaction is 

the same: An Enterprise pays private 

market participants to assume credit 

risk in a severe stress scenario on 

mortgages the Enterprise guarantees, 

where the severe stress scenario is 

generally comparable to the 2008 global 

financial crisis. Further, to ensure 

alignment of interests with investors, 

the Enterprises retain at least 5 percent 

of the risk exposure sold in their CRT 

transactions. This is referred to as 

vertical risk retention. 

The Enterprises have developed their 

various CRT products in order to meet 

certain program goals established by 

FHFA in 2012. Among these goals is 

that CRT transactions should be 

economically sensible, repeatable, 

scalable, and structured to not disrupt 

the efficient operation of the ‘‘To Be 

Announced’’ (TBA) market (which 

provides the market with benefits 

including allowing borrowers to lock in 

rates in advance of closing). The 

widespread use of TBA trading has 

contributed significantly to the liquidity 

and efficiency of the secondary market 

for single-class MBS. A misconception 

is that ‘‘economically sensible’’ implies 

low-cost on an absolute basis. However, 

the costs of CRT should be evaluated 

relative to the cost of equity capital 

needed to self-insure the risk. To be 

economically sensible, an Enterprise 

should consider executing CRT 

transactions when the cost to the 

Enterprise for transferring the credit risk 

does not meaningfully exceed the cost 

to the Enterprise of self-insuring the 

credit risk being transferred. Market 

conditions in addition to a transaction’s 

cost and structure ultimately determine 

a CRT’s relative profitability, but if CRT 

premium payments are low relative to 

the capital reduction provided by the 

CRT, then the Enterprise has the 

opportunity to execute economically 

sensible CRT transactions, and CRT may 

provide taxpayer protection at a lower 

cost than equity capital. 

A further goal was to develop 

different types of products to provide 

for the broadest possible access to 

investors with the expectation that at 

least some of those investors would 

remain in the market through all phases 

of a housing price cycle. Since the 

inception of the programs in 2013, the 

types of single-family CRT transactions 

have included structured capital 

markets issuances known as Structured 

Agency Credit Risk (STACR) for Freddie 

Mac and Connecticut Avenue Securities 

(CAS) for Fannie Mae, insurance/ 

reinsurance transactions known as 

Agency Credit Insurance Structure 

(ACIS) for Freddie Mac and Credit 

Insurance Risk Transfer (CIRT) for 

Fannie Mae, front-end lender risk 

sharing transactions, and senior/ 

subordinate transactions. 

Most of the RIF has come from capital 

markets issuances (STACR and CAS). 

These securities were initially issued as 

direct debt obligations of each 

Enterprise; however, in 2018, both 

Enterprises transitioned their capital 

markets CRT issuances to a Trust 

structure with the notes being issued by 

a bankruptcy remote trust created for 

each individual CAS or STACR 

transaction. The proceeds from the sale 

of the notes are deposited into the 

bankruptcy remote trust and there is no 

direct counterparty exposure to the 

Enterprises for investors. By 

implementing the Trust structure, the 

Enterprises are now able to benefit from 

insurance accounting treatment for their 

capital markets CRT transactions. 


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12https://www.fanniemae.com/media/40576/ 

display. 

Insurance accounting treatment aligns 

the timing of the recognition of credit 

losses with CRT loss recoveries. Under 

the previous corporate debt structure, 

there was a significant timing mismatch 

between the recognition of losses and 

recoveries as the CRT benefit could not 

be recognized until the underlying 

delinquent mortgage loan had 

progressed through the often-lengthy 

disposition process. 

In addition, both Fannie Mae and 

Freddie Mac now engage in CRT 

offerings under which the securities are 

issued by a third-party bankruptcyremote trust that also qualifies as a Real 

Estate Mortgage Investment Conduit 

(REMIC). The transition of the capital 

markets CRT programs to the REMIC 

Trust structure was a collaborative, 

long-term effort between Fannie Mae, 

Freddie Mac, and FHFA. The REMIC 

Trust structure, like the trust structure 

described above, eliminates accounting 

mismatches associated with prior direct 

debt issuance transactions and limits 

investor exposure to Enterprise 

counterparty risk. Additionally, the 

REMIC structure is often more attractive 

to domestic Real Estate Investment 

Trusts (REITs) and foreign investors. 

After exceptionally strong issuance 

volume between 2013 and the first 

quarter of 2020, neither Enterprise 

entered into new CRT transactions in 

the second quarter of 2020 due to the 

adverse market conditions stemming 

from the COVID–19 pandemic. 

However, Freddie Mac returned to the 

CRT capital markets and insurance/ 

reinsurance market during the third 

quarter of 2020, executing nine 

transactions in the second half of the 

year. In contrast, and despite improved 

market conditions, Fannie Mae 

continued to pause issuance of new CRT 

transactions to evaluate the costs and 

benefits of CRT, including the capital 

relief provided by the transactions and 

the market conditions, as well as their 

overall capital requirements, risk 

appetite, and business plan.12 Overall, 

while down from its peak in 2019, total 

CRT volume in 2020 remained strong 

and exceeded 2018 volume despite the 

extreme and unforeseen difficulties 

arising from the COVID–19 pandemic. 

In 2021, both Enterprises are 

considering potential changes to their 

CRT programs to optimize risk transfer 

and capital relief under the ERCF. 

Multifamily CRT 

Even before the formalization of the 

single-family CRT programs, risk 

transfer to the private sector had long 

been an integral part of the multifamily 

business models at the Enterprises. 

Freddie Mac has traditionally focused 

on senior/subordinate structures via 

capital market transactions largely 

through its K-Deal platform. Fannie Mae 

has traditionally focused on pro-rata 

risk sharing directly with lenders 

through its Delegated Underwriting and 

Servicing (DUS) program. As the singlefamily CRT programs evolved and grew, 

the Enterprises worked to expand their 

existing multifamily risk transfer 

models to include structures similar to 

those of the single-family businesses. 

Fannie Mae issued its first 

multifamily reinsurance transaction in 

2016, the Multifamily Credit Insurance 

Risk Transfer (MCIRT), which was 

based on the framework of the existing 

single-family reinsurance (CIRT) 

transactions, where the Enterprise 

purchases insurance coverage 

underwritten by a group of insurers/ 

reinsurers. Fannie Mae uses MCIRT to 

transfer credit risk on multifamily loan 

acquisitions with up to $30 million in 

UPB. Since the first transaction in 2016, 

Fannie Mae’s MCIRT has become 

programmatic with a total of eight 

transactions executed. These 

transactions provide combined RIF of 

$1.9 billion on a total of $81 billion (as 

measured at time of deal inception) of 

Fannie Mae’s multifamily loan 

acquisitions. 

In 2018, Freddie Mac introduced its 

Multifamily Credit Insurance Pool 

(MCIP) program to transfer additional 

credit risk on its multifamily loan 

acquisitions to the reinsurance market. 

In the MCIP structure, as in Fannie 

Mae’s MCIRT program, Freddie Mac 

purchases insurance coverage 

underwritten by a group of insurers/ 

reinsurers that generally provide first 

loss and/or mezzanine loss credit 

protection. These transactions are also 

similar in structure to the single-family 

ACIS transactions. 

In 2019, Fannie Mae expanded its 

multifamily CRT program by executing 

its first Multifamily Connecticut Avenue 

Securities (MCAS) CRT transaction 

which is based on the framework for 

Fannie Mae’s existing single-family CAS 

execution. Fannie Mae uses MCAS to 

transfer credit risk on multifamily loans 

with UPBs greater than $30 million. 

However, this new product allowed 

Fannie Mae to reach a multifamily CRT 

investor base outside of the reinsurance 

industry. Fannie Mae has executed a 

total of two MCAS transactions which 

provide combined RIF of $0.9 billion on 

a total of $29 billion (as measured at 

time of deal inception) of Fannie Mae’s 

multifamily loan acquisitions. 

Freddie Mac’s multifamily capital 

markets CRT program began with the 

issuance of three fixed-rate Multifamily 

Structured Credit Risk (MSCR) notes in 

2016 and 2017 (as a separate offering 

from the K-deal program). These legacy 

MSCR notes use a fixed severity 

structure like early single-family CRTs 

and are unsecured and unguaranteed 

corporate debt obligations that transfer 

to third parties a portion of the credit 

risk of the multifamily loans underlying 

certain consolidated other 

securitizations and other mortgagerelated guarantees. SCR Notes are 

synthetic instruments whose cash flows 

are driven by the performance of a pool 

of multifamily reference obligations, 

instead of actual collateral tied to a trust 

in a typical securitization such as KDeals. In 2021, Freddie Mac’s MSCR 

program transitioned to an actual loss/ 

Trust structure, and coupon payments 

are now floating rate, indexed to the 

Secured Overnight Financing Rate 

(SOFR). These features align with the 

current single-family STACR CRT 

product. 

CRT in the ERCF 

The Enterprises manage mortgage 

credit risk through their underwriting 

systems, guarantee fee revenues, and 

CRT programs. The ERCF reflects the 

Enterprises’ management of mortgage 

credit risk by allowing the Enterprises to 

reduce their credit risk-weighted assets 

for eligible CRT. However, the ERCF’s 

treatment of CRT includes various 

components that limit the amount of 

capital relief provided by CRTs to 

ensure that all exposures retained by an 

Enterprise are meaningfully capitalized. 

Dollar-for-dollar capital relief should 

not be expected given that CRT 

transactions introduce counterparty and 

structural risk, and CRT has not yet 

been tested through a full economic 

cycle. 

Under the ERCF, an Enterprise 

determines the capital treatment for 

eligible CRT by assigning risk weights to 

retained CRT exposures. The rule 

includes: (i) Operational criteria to 

mitigate the risk that the terms or 

structure of the CRT would not be 

effective in transferring credit risk; (ii) a 

tranche-specific prudential risk weight 

floor of 10 percent; and (iii) adjustments 

to reflect loss sharing effectiveness, losstiming effectiveness, and a dynamic 

overall effectiveness adjustment meant 

to capture the differences between CRT 

and regulatory capital. 

The operational criteria, risk weight 

floor, and effectiveness adjustments 

limit capital relief from CRT. The 

operational criteria act as a gateway by 

setting minimum criteria for potential 


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13 85 FR at 39335 (June 30, 2020). 

CRT credit risk capital relief. The 10 

percent risk weight floor adds minimum 

capital requirements to all retained CRT 

exposures, no matter how remote the 

credit risk. The effectiveness 

adjustments reduce the risk-weighted 

assets of transferred CRT tranches, 

thereby reducing the capital relief 

afforded by the CRT. Of these three 

elements included in the ERCF’s CRT 

treatment, the risk weight floor drives 

the majority of the reduction in credit 

risk capital relief due to the relative size 

of the low-risk CRT exposures the 

Enterprises generally retain. For 

example, the stylized CRT transaction in 

FHFA’s 2020 re-proposed capital rule 

showed capital relief of 38 percent due 

to the CRT.13 However, absent the risk 

weight floor on retained exposures, 

capital relief would have been 

approximately 66 percent. 

Rationale for Revisiting the ERCF’s CRT 

Treatment 

CRT is an effective mechanism for 

distributing credit risk across a broad 

mix of investors and has become an 

integral part of the Enterprises’ business 

models. FHFA is proposing 

amendments to the ERCF that would 

revise the CRT securitization framework 

for several reasons. 

First, if an Enterprise retained every 

tranche of a CRT, its post-CRT credit 

risk capital requirement for the CRT 

exposures would be higher than its preCRT credit risk capital requirements for 

the underlying mortgage exposures due 

to the structural and modeling risk of 

the CRT itself. The capital relief 

afforded by the ERCF CRT securitization 

framework more than offsets this socalled securitization penalty, but within 

the securitization framework, potential 

capital relief is limited by adjustments 

that reflect various ways a CRT might be 

less than fully effective at transferring 

risk. Increasing the capital relief for CRT 

by reducing these effectiveness 

adjustments could improve the safety 

and soundness of each Enterprise by 

encouraging the transfer of risk so that 

each Enterprise can fulfill its statutory 

mission to provide stability and ongoing 

assistance to the secondary mortgage 

market across the economic cycle. 

Second, FHFA believes that part of 

the process to responsibly end the 

conservatorships of the Enterprises 

includes the transfer of a portion of the 

Enterprises’ credit risk to private 

markets. Such activity allows the 

Enterprises to maintain their core 

businesses, fulfill their statutory 

missions, and grow organically while 

simultaneously shedding risk that could 

otherwise prevent them from 

accomplishing these goals. It is possible 

that in the absence of risk transfer, 

required capital may increase faster than 

retained earnings and the Enterprises 

may therefore grow farther from 

achieving capital adequacy and exiting 

their conservatorships. To the extent 

that the earnings expenses of CRT are 

smaller than the capital relief provided 

by CRT, executing CRT would help 

alleviate this issue. 

Third, a revised risk-based capital 

treatment for CRT could facilitate 

regulatory capital planning in 

furtherance of the safety and soundness 

of the Enterprises and their 

countercyclical mission. The 

Enterprises’ CRT programs, which 

FHFA has in the past required to cover 

90 percent of the UPB of target loans 

(generally those with an LTV greater 

than 60 percent and a loan term greater 

than 20 years), help facilitate the 

continued acquisition of higher risk 

loans throughout the economic cycle 

due to capital relief afforded to risk 

transfer. In addition, as adopted, the 

ERCF’s CRT framework does little to 

complement the single-family 

countercyclical adjustment. Revised 

CRT incentives could, for example, help 

to align the issuance of CRT with 

changes in the countercyclical 

adjustment. 

Fourth, prior to finalizing the ERCF, 

FHFA received a significant number of 

comments on FHFA’s proposed 

approach to CRT. Many commenters 

expressed the view that CRT is an 

effective means by which to transfer risk 

to private markets, protect taxpayers, 

and stabilize the Enterprises and the 

housing finance market more generally. 

Consequently, most of these 

commenters suggested that the proposed 

treatment of CRTs was too punitive and 

would imprudently discourage CRTs. 

Many commenters criticized the 10 

percent risk weight floor and the overall 

effectiveness adjustment, arguing that 

FHFA’s proposed policy choices would 

unduly decrease the capital relief 

provided by CRT and reduce the 

Enterprises’ incentives to engage in 

CRT. FHFA nevertheless adopted the 

risk weight floor as proposed, citing a 

belief that 10 percent represents an 

appropriate capitalization for the credit 

risk in these retained risks and a 

favorable comparison to the U.S. bank 

regulatory framework. To account for 

the fact that CRT does not provide the 

same loss-absorbing capacity as equity 

financing and to reduce the extent to 

which the proposed 10 percent 

adjustment may lead to more regulatory 

capital than is necessary to ensure safety 

and soundness, FHFA adopted a 

modified overall effectiveness 

adjustment that starts at 10 percent and 

decreases with an exposure’s credit risk. 

FHFA also received comments on the 

interaction of CRTs and the leverage 

ratio requirement. Several commenters 

expressed concern about the potential 

adverse impact of a binding leverage 

requirement on CRTs. Specifically, 

commenters indicated that a binding 

leverage requirement would provide no 

incentive for the Enterprises to lower 

their risk-based capital requirements 

and therefore would disincentivize 

CRTs, which could lead the Enterprises 

to reduce or halt their CRT programs 

and increase the risks held in portfolio. 

III. Proposed Requirements 

A. PLBA 

The proposed rule would amend the 

ERCF by replacing the fixed PLBA equal 

to 1.5 percent of an Enterprise’s 

adjusted total assets with a dynamic 

PLBA equal to 50 percent of the 

Enterprise’s stability capital buffer as 

calculated in accordance with 12 CFR 

1240.400. 

The Enterprise-specific stability 

capital buffer was designed to mitigate 

risk to national housing finance markets 

by requiring a larger Enterprise to 

maintain a larger cushion of highquality capital to reduce the likelihood 

of a large Enterprise’s failure and 

preclude the potential impact a failure 

would have on the national housing 

finance markets. Such a buffer creates 

incentives for each Enterprise to reduce 

its housing finance market stability risk 

by curbing its market share and growth 

in ordinary times, preserving room for a 

larger role during a period of financial 

stress, and may offset the funding 

advantage that an Enterprise might have 

on account of being perceived as ‘‘too 

big to fail.’’ The stability capital buffer 

is based on a market share approach, 

where each Enterprise’s stability capital 

buffer is directly related to its relative 

share of total residential mortgage debt 

outstanding that exceeds a threshold of 

5 percent market share. The stability 

capital buffer, expressed as a percent of 

adjusted total assets, increases by 5 

basis points for each percentage point of 

market share exceeding that threshold. 

The proposed rule would replace the 

fixed 1.5 percent PLBA with a dynamic 

leverage buffer determined annually and 

tied to the stability capital buffer. The 

stability capital buffer is an effective 

proxy for the U.S. banking framework’s 

GSIB capital surcharge and the Basel 

higher loss-absorbency risk-based 

requirement as it is designed to address 

the predominant threat an Enterprise 

poses to national housing markets—its 


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14The stability capital buffer is calculated using 

adjusted total assets as of the most recent December 

31, unless adjusted total assets at that time is greater 

than adjusted total assets as of the prior December 

31, in which case the calculation would use 

adjusted total assets from the prior December 31. 

15 Id. 

size. Thus, in a manner similar to the 

U.S. banking regulators’ proposal to set 

the eSLR buffer to one-half of the GSIB 

surcharge, an Enterprise’s PLBA would 

equal one-half of its stability capital 

buffer under the proposed rule. Under 

the amended rule, as shown in the 

figure below and as of March 31, 2021, 

Fannie Mae’s PLBA would decrease 

from approximately $62 billion, or 1.5 

percent of the prior quarter’s adjusted 

total assets, to approximately $23 

billion, or 0.53 percent of adjusted total 

assets.14 Freddie Mac’s PLBA would 

similarly decrease from $46 billion, or 

1.5 percent of the prior quarter’s 

adjusted total assets, to approximately 

$11 billion, or 0.35 percent of adjusted 

total assets.15

There are several benefits of the 

proposed approach. First, decreasing the 

PLBA to the point where risk-based 

capital is the binding capital constraint 

at the Enterprises would promote safety 

and soundness by lessening the 

likelihood that an Enterprise has an 

incentive to take on more risk in a 

capital optimization strategy. Setting the 

PLBA to 50 percent of the stability 

capital buffer would not guarantee that 

leverage capital is never binding, but it 

would restore leverage capital to a 

position of a credible backstop rather 

than the binding capital constraint for 

the foreseeable future. This would allow 

the other aspects of the ERCF, namely 

the risk-based capital requirements, 

including the single-family 

countercyclical adjustment, to work as 

intended. For example, the single-family 

countercyclical adjustment works by 

increasing risk-based capital 

requirements to largely offset capital 

benefits driven by house price 

appreciation. This effective tool 

alleviates concerns that risk-based 

capital will artificially decline with 

increasing property values, thereby 

lessening the need for a consistently 

binding leverage capital framework. An 

unduly high leverage requirement 

dampens the functionality of the singlefamily countercyclical adjustment. 

The ERCF does not currently contain 

an exposure-level method to mitigate 

the pro-cyclicality of the credit risk 

capital requirements for multifamily 

mortgage exposures. FHFA has, in two 

notices of proposed rulemaking, 

indicated it would like to implement 

such an adjustment, and has twice 

sought recommendations for potential 

approaches. Although FHFA has 

received numerous suggestions for a 

multifamily countercyclical adjustment, 

most have relied on proprietary data or 

indices to some extent. FHFA is again 

expressing its desire to include a 

multifamily countercyclical adjustment 

in the ERCF that is not reliant on 

proprietary information and is seeking 

input on how that adjustment should be 

constructed. 

Question 1: What approach that relies 

only on non-proprietary data or indices 

should FHFA consider to mitigate the 

pro-cyclicality of the credit risk capital 

requirements for multifamily mortgage 

exposures? 

Second, the proposed rule’s PLBA 

will encourage the Enterprises to 

transfer risk rather than to buy and hold 

risk. Leverage capital requirements and 

buffers treat each dollar of exposure 

equally and incentivize risk-taking to 

the point where risk-based capital 

equals leverage capital. At the 

Enterprises, seasoned portfolios 

generally require less capital than new 

acquisitions because risk determinants 

such as the loan-to-value ratio typically 


lotter on DSK11XQN23PROD with PROPOSALS1EP27SE21.002</GPH>

Figure 2: Estimated Enterprise Leverage Capital under the Current ERCF and the 

Proposed Rule, as of March 31, 2021 

4.5% 

4.0% 

3.5% 

3.0% 

2.5% 

2.0% 

1.5% 

1.0% 

0.5% 

0.0% 

I $168b I 

4.0% 

Fannie Mae 

Current PLBA 

I $129b I I $126b I 

4.0% 

3.0% 1.5% 

Fannie Mae Freddie Mac 

Proposed PLBA Current PLBA 

$91b 

2.9% 

Freddie Mac 

Proposed PLBA 

Ill Minimum Leverage Requirement □ PLBA • Total Leverage Capital 
53238 Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 

16See Regulatory Capital Rules: Regulatory 

Capital, Implementation of Basel III, Capital 

Adequacy, Transition Provisions, Prompt Corrective 

Action, Standardized Approach for Risk-weighted 

Assets, Market Discipline and Disclosure 

Requirements, Advanced Approaches Risk-Based 

Capital Rule, and Market Risk Capital Rule, 78 FR 

62018, 62119 (Oct. 11, 2013). 17 12 CFR 1240.41(c)(2). 

improve as mortgage loans age. 

Therefore, higher leverage requirements 

incentivize an Enterprise to acquire 

riskier, higher-yielding exposures and 

then to hold that risk so that risk-based 

capital on the book approximates 

leverage capital on the book. A lower 

PLBA directly encourages a risk transfer 

strategy by lowering the long-run riskbased capital target for an Enterprise’s 

book. Buying and holding risky assets 

would likely no longer be optimal from 

a capital perspective if the risk-based 

capital on an Enterprise’s seasoned 

portfolio exceeded leverage capital. 

Third, a leverage framework with a 

dynamic PLBA that grows and shrinks 

as an Enterprise grows and shrinks, 

respectively, would function as a better 

backstop to a risk-based capital 

framework that includes a systemic risk 

component such as the stability capital 

buffer. In the 2020 ERCF notice of 

proposed rulemaking, FHFA argued that 

a larger Enterprise’s default would pose 

a greater threat to the national housing 

finance markets than a smaller 

Enterprise’s default. As a result, a 

probability of default that might be 

acceptable for a smaller Enterprise 

could be unacceptably high for a larger 

Enterprise, necessitating the need for an 

Enterprise-specific stability capital 

buffer based on size. For similar 

reasons, a smaller leverage buffer may 

not be appropriate for a larger 

institution, and a larger leverage buffer 

may not be appropriate for a smaller 

institution. Therefore, a leverage buffer 

that adjusts with the stability capital 

buffer would help resolve this type of 

inconsistency and allow the leverage 

capital framework to better serve as a 

credible backstop to the risk-based 

capital framework. 

Fourth, a dynamic PLBA that is tied 

to the stability capital buffer would 

further align the ERCF with Basel III 

standards. Internationally, GSIBs are 

required to hold a leverage buffer equal 

to 50 percent of their higher lossabsorbency risk-based requirements—a 

measure akin to the GSIB surcharge in 

the U.S. banking framework. FHFA 

believes that tailoring an Enterprise’s 

leverage ratio to its business activities 

and risk profile, to the extent that these 

characteristics are related to an 

Enterprise’s share of the residential 

mortgage market, will allow for leverage 

to remain a credible backstop to riskbased capital without discouraging the 

Enterprise from participating in low-risk 

activities. 

Question 2: Is the proposed PLBA 

appropriately formulated? What 

adjustments, if any, would you 

recommend? 

Question 3: Is the PLBA necessary for 

the ERCF’s leverage framework to be 

considered a credible backstop to the 

risk-based capital requirements and 

PCCBA? 

Question 4: In light of the proposed 

changes to the PLBA and the CRT 

securitization framework, is the 

prudential risk weight floor of 20 

percent on single-family and 

multifamily mortgage exposures 

appropriately calibrated? What 

adjustments, if any, would you 

recommend? 

B. CRT 

CRT Risk Weight Floor 

The proposed rule would replace the 

prudential floor of 10 percent on the 

risk weight assigned to any retained 

CRT exposure with a prudential floor of 

5 percent on the risk weight assigned to 

any retained CRT exposure. 

The prudential risk weight floor plays 

an important role in the ERCF 

securitization framework. The risk 

weight floor is designed to mitigate 

certain risks and limitations associated 

with underlying historical data and 

models, including that crisis-era losses 

at the Enterprises were mitigated by 

federal government support that may 

not be repeated during the next crisis 

and that potential material risks are not 

assigned a risk-based capital 

requirement. In addition, banking 

agencies believe requiring more capital 

on a transaction-wide basis than would 

be required if the underlying assets had 

not been securitized is important in 

reducing the likelihood of regulatory 

capital arbitrage through 

securitizations.16 CRT may pose similar 

structural risks that merit a departure 

from capital neutrality. Therefore, the 

ERCF’s risk weight floor helps mitigate 

the model risk associated with the 

calibration of the credit risk capital 

requirements of the underlying 

exposures and the model risk posed by 

the calibration of the adjustments for 

loss-timing and counterparty risks. 

In sizing the 10 percent prudential 

risk weight floor, FHFA sought to 

promote consistency with the U.S. 

banking framework and strike an 

appropriate balance between permitting 

CRT while also mitigating the safety and 

soundness, mission, and housing 

stability risk that might be posed by 

some CRT. FHFA continues to believe 

that an Enterprise retains credit risk to 

the extent it retains CRT exposures and 

that such risk should be appropriately 

capitalized. There is the risk that the 

structuring of some CRT is driven by 

regulatory arbitrage, with an Enterprise 

focused on CRT structures that obtain 

capital relief that is disproportionate to 

the modeled credit risk actually 

transferred. There is also the risk that a 

CRT will not perform as expected in 

transferring credit risk to third parties, 

perhaps because a court will not enforce 

the contractual terms of the CRT 

structure as expected. Because CRT 

tranches, even senior CRT tranches, are 

not risk-free, each Enterprise should 

maintain regulatory capital to absorb 

losses on those retained CRT exposures. 

However, FHFA believes that the 

current CRT risk weight floor may not 

achieve the proper balance between 

permitting CRT and safety and 

soundness. 

As currently calibrated, the 10 percent 

floor on the risk weight assigned to a 

retained CRT exposure unduly 

decreases the capital relief provided by 

CRT and reduces an Enterprise’s 

incentives to engage in CRT. This occurs 

in part because the aggregate credit risk 

capital required for a retained CRT 

exposure is often greater than the 

aggregate credit risk capital required for 

the underlying exposures, especially 

when the credit risk capital 

requirements on the underlying whole 

loans and guarantees are low or the CRT 

is seasoned. Decreasing the CRT risk 

weight floor to 5 percent would directly 

lessen this disincentive while still 

ensuring that all retained exposures are 

treated as being not risk-free. 

In addition, the 10 percent risk weight 

floor discourages CRT through its 

duplicative nature. Per the ERCF’s 

operational criteria for CRT, FHFA must 

approve each transaction as being 

effective in transferring the credit risk of 

one or more mortgage exposures to 

another party, taking into account any 

counterparty, recourse, or other risk to 

the Enterprise and any capital, liquidity, 

or other requirements applicable to 

counterparties.17 This regulatory 

approval process mitigates the safety 

and soundness risk posed by CRT 

structures and contractual terms, 

lessening the need for a tranche level 

risk weight floor as high as 10 percent. 

Moreover, the Enterprises are able to 

further lessen the need for a punitive 

CRT risk weight floor with their ability 

to mitigate unknown risks through their 

underwriting standards and servicing 

and loss mitigation programs. The 

standards and programs are flexible, 


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rigorous, and constantly evolving, 

helping minimize losses through the 

entire life cycle of a mortgage loan. 

FHFA continues to believe that CRT 

can play an important role in ensuring 

that each Enterprise operates in a safe 

and sound manner and is positioned to 

fulfill its statutory mission across the 

economic cycle. FHFA also continues to 

believe that an Enterprise does retain 

some credit risk on its CRT and that the 

risk should be appropriately capitalized. 

FHFA believes that a 5 percent CRT risk 

weight floor will enhance the safety and 

soundness of the Enterprises by 

increasing the incentives to undertake 

risk transfer activities while continuing 

to capitalize retained CRT tranches 

against structure, model, unforeseen, 

and other risks. Furthermore, lowering 

the tranche level risk weight floor 

should reduce the extent to which the 

CRT effectiveness adjustments may 

require more regulatory capital for 

retained CRT exposures than is 

necessary to ensure safety and 

soundness, and help ensure that FHFA 

does not unduly discourage CRT on 

mortgage exposures with risk profiles 

similar to those of recent acquisitions by 

the Enterprises. 

Question 5: Is the 5 percent 

prudential floor on the risk weight for 

a retained CRT exposure appropriately 

calibrated? What adjustment, if any, 

would you recommend? 

Overall Effectiveness Adjustment 

The proposed rule would remove the 

requirement that an Enterprise must 

apply an overall effectiveness 

adjustment to its retained CRT 

exposures in accordance with the 

ERCF’s securitization framework in 12 

CFR 1240.44(f) and (i). 

FHFA included an overall 

effectiveness adjustment in the CRT 

securitization framework largely in 

response to comments received on 

FHFA’s 2018 notice of proposed 

rulemaking on Enterprise capital. 

Commenters argued that CRT has less 

loss-absorbing capacity than an 

equivalent amount of equity financing 

due to the upfront and ongoing costs of 

CRT, and that while CRT coverage is 

only on a specified pool, equity 

financing can cross-cover risks 

throughout the balance sheet. 

However, commenters on the 2020 

ERCF notice of proposed rulemaking 

argued that while these considerations 

are reasonable, in the context of the 

totality of the proposed CRT framework 

and a credible leverage ratio 

requirement as a backstop, the overall 

effectiveness adjustment is not needed 

and creates unnecessary disincentives 

for the Enterprises to engage in CRT. In 

addition, commenters stated that the 

CRT tranche risk weight floor covers the 

risk that a CRT will not perform as 

expected in transferring credit risk to 

third parties, which is similar to the risk 

that the overall effectiveness adjustment 

was designed to cover. 

Unlike the counterparty and losstiming effectiveness adjustments in the 

CRT securitization framework, the 

overall effectiveness adjustment does 

not target specific risks. For this reason, 

and given the opinions of commenters 

on the overall effectiveness adjustment, 

FHFA has determined that it is an 

appropriate place to make a refinement 

within the CRT securitization 

framework to further promote the use of 

CRT without increasing safety and 

soundness risks at the Enterprises. 

FHFA is proposing to remove the 

adjustment rather than to reduce it due 

to the lack of empirical evidence 

suggesting that a lower overall 

effectiveness adjustment is less 

duplicative than the adjustment in the 

ERCF final rule published on December 

17, 2020. 

Question 6: Is the removal of the 

overall effectiveness adjustment within 

the CRT securitization framework 

appropriate in light of the proposed 

rule’s 5 percent prudential floor on the 

risk weight for retained CRT exposures? 

Adjustments to CRT Capital Relief 

The two proposed CRT modifications 

would increase the capital relief 

afforded an Enterprise for wellstructured CRT on many common 

mortgage exposures, increasing 

incentives for the Enterprises to engage 

in CRT. For existing CRT, the two 

changes would increase capital relief 

compared to the current ERCF; however, 

the changes may not impact future CRT 

in exactly the same way. Each 

Enterprise has designed its existing CRT 

structures with attachment and 

detachment points, collateralization, 

and other terms based on the current 

ERCF and previous guidance. Each 

Enterprise will likely be able to 

structure the tranches and other aspects 

of its future CRT somewhat differently, 

taking into account modifications in any 

finalized rule amendments. 

Nonetheless, FHFA believes that the 

proposed rule’s modifications would 

reduce the extent to which the CRT 

methodology may require more 

regulatory capital for retained CRT 

exposures than is necessary to ensure 

safety and soundness. FHFA also 

believes that these modifications would 

provide each Enterprise a mechanism 

for flexible and substantial capital relief 

through CRT, and CRT likely will 

remain a valuable tool for managing 

credit risk and that each Enterprise will 

base its CRT decisions on its own risk 

management assessments, not solely on 

the regulatory risk-based capital 

requirements. 

The proposed rule would implement 

a modified ERCF CRT framework 

through which an Enterprise determines 

its credit risk-weighted assets for any 

eligible retained CRT exposures and any 

other credit risk that might be retained 

on its CRT. Under the proposed rule, an 

Enterprise would calculate credit riskweighted assets for retained credit risk 

in a CRT using risk weights and 

exposure amounts for each CRT tranche. 

The exposure amounts of the retained 

CRT exposures for each tranche would 

be increased by adjustments to reflect 

counterparty credit risk and the length 

of CRT coverage (i.e., remaining time 

until maturity). Unlike the current 

ERCF, the proposed framework would 

not include an overall effectiveness 

adjustment. Further, the proposed rule 

would also set a credit risk capital 

requirement floor for retained risk 

through a tranche-level risk weight floor 

of 5 percent rather than 10 percent. 

The two proposed modifications to 

the CRT securitization framework could 

lead to a significant increase in capital 

relief. For Fannie Mae and Freddie Mac 

combined, capital relief from singlefamily CRT would increase by an 

estimated 45 percent, while capital 

relief from multifamily CRT would 

increase by an estimated 33 percent. 

Together, aggregate capital relief on the 

Enterprises’ books of business would 

increase by an estimated 40 percent, 

where the increase is driven primarily 

by the change to the CRT tranche risk 

weight floor as evidenced by the 

example below. These modifications 

could help to ensure that the rule does 

not create undue disincentives to utilize 

CRTs. 

Question 7: Is the proposed approach 

to determining the credit risk capital 

requirement for retained CRT exposures 

appropriately formulated? What 

adjustments, if any, would you 

recommend? 

Question 8: Will the proposed 

amendments to the CRT securitization 

framework provide the Enterprises with 

sufficient incentives to engage in more 

CRT transactions without compromising 

safety and soundness? 

CRT Example 

To provide clarity on how the 

proposed modifications would alter the 

CRT risk weight calculations, we 

provide an example using the same 

stylized CRT that was used as an 

example in the ERCF notice of proposed 


lotter on DSK11XQN23PROD with PROPOSALS1
53240 Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 

rulemaking. Consider the following 

inputs from an illustrative CRT: 

• $1,000 million in unpaid principal 

balance of performing 30-year fixed rate 

single-family mortgage exposures with 

original loan-to-values (OLTVs) greater 

than 60 percent and less than or equal 

to 80 percent; 

• CRT coverage term of 10 years; 

• Three tranches—B, M1, and AH— 

where tranche B attaches at 0% and 

detaches at 0.5%, tranche M1 attaches at 

0.5% and detaches at 4.5%, and tranche 

AH attaches at 4.5% and detaches at 

100%; 

• Tranches B and AH are retained by 

the Enterprise, and ownership of 

tranche M1 is split between capital 

markets (60 percent), a reinsurer (35 

percent), and the Enterprise (5 percent); 

• The aggregate credit risk-weighted 

assets on the single-family mortgage 

exposures underlying the CRT are 

$343.8 million; 

• Aggregate expected losses on the 

single-family mortgage exposures 

underlying the CRT of $2.5 million; and 

• The reinsurer posts $2.8 million in 

collateral, has a counterparty financial 

strength rating of 3, and does not have 

a high level of mortgage concentration 

risk. 

The Enterprises would first calculate 

risk weights for each tranche assuming 

full effectiveness of the CRT in 

transferring credit risk on the 

underlying mortgage exposures. In 

general, tranche risk weights are the 

highest for the riskiest, most junior 

tranches (such as tranche B), and lower 

for the more senior tranches (such as 

tranches M1 and AH). The proposed 

rule would lower risk weights on senior 

tranches compared to the current ERCF. 

For the illustrative CRT, the overall 

risk weights for the proposed rule across 

tranches AH, M1, and B are 5%, 783%, 

and 1,250%, where 5% reflects the 

proposed minimum risk weight. By 

comparison, the overall risk weights 

under the ERCF across tranches AH, 

M1, and B are 10%, 785%, and 1,250%, 

where 10% reflects the minimum risk 

weight. The difference between the M1 

risk weights, 783% for the proposed 

rule and 785% for the ERCF, reflects a 

weighted average risk weight 

calculation for M1 because M1’s 

attachment and detachment points 

straddle stress loss. That is, the 

weighted-average risk weight would be 

the average of 1,250 percent, weighted 

by the portion of the tranche exposed to 

projected stress loss, and the minimum 

risk weight (5 percent for the proposed 

rule and 10 percent for ERCF) weighted 

by the portion of the tranche not 

exposed to projected stress loss. 


lotter on DSK11XQN23PROD with PROPOSALS1EP27SE21.003</GPH>

Figure 3: Single-family CRT Example 

100% 

4.5% 

Ownership: 

Tranche AH: 100% retained (in solid gray). 

Tranche M 1: 60% to capital markets (gray grid 

lines), 35% reinsured (in gray diagonal lines), 

and 5% retained (in solid gray). 

Tranche B: 100% retained (in solid gray). 

Aggregate Expected 

Losses: 0.25% 
Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 53241 

Risk weights from the proposed rule: 

Next, the Enterprise would calculate 

the adjusted exposure amount of its 

retained CRT exposures to reflect the 

effectiveness of the CRT in transferring 

credit risk on the underlying mortgage 

exposures. For the illustrative CRT, 

tranches AH and B are retained by the 

Enterprise, and do not need further 

adjustment. Risk associated with 

tranche M1 is transferred through a 

capital markets transaction and a loss 

sharing agreement. For the proposed 

rule, risk transfer on this tranche is 

subject to the following two 

effectiveness adjustments, which are 

reflected in the Enterprise’s adjusted 

exposure amount: Loss sharing 

effectiveness adjustment (LSEA) and 

loss timing effectiveness adjustment 

(LTEA). The current ERCF includes an 

additional on-the-top overall 

effectiveness adjustment (OEA), which 

acts like a capital relief haircut. 

Both the proposed rule and the 

current ERCF utilize the same 

methodology when accounting for the 

effectiveness of loss sharing on tranche 

M1. In particular, both methods adjust 

the Enterprise’s exposure amount on 

tranche M1 to reflect the retention of 

some of the counterparty credit risk that 

was nominally transferred to the 

counterparty. To do so, the methods 

adjust effectiveness for: (i) 

Uncollateralized unexpected loss 

(UnCollatUL); and (ii) uncollateralized 

risk-in-force above stress loss (SRIF). 

The approaches differ in their 

capitalization of SRIF. The proposed 

rule would capitalize SRIF at a 5% risk 

weight and the current ERCF capitalizes 

SRIF at a 10% risk weight, where the 

difference reflects the different risk 

weight floors. 

For the illustrative CRT, the 

counterparty haircut is 5.2% as per the 

ERCF’s single-family CP haircuts, 

UnCollatUL is 42.5%, and SRIF is 

37.5%. The proposed rule’s LTEA on 

tranche M1 would be 96.5%, which 

when rounded, is the same figure for 

LTEA under the current ERCF. 

LSEA from the proposed rule: 


lotter on DSK11XQN23PROD with PROPOSALS1EP27SE21.004</GPH>

RW%,AH = 5% because KA+ AggEL% ::; 4.5% 

KA+ AggEL% - 0.5% 4.5%- (KA+ AggEL%) 

RW%,Ml = 1250% * 4.5% - 0.5% + 5% * 4.5% - 0.5% 

= 783% because 0.5% <KA+ AggEL% < 4.5% 

RW%,B = 1250% becasue KA+ AggEL% ~ 0.5% 

Risk weights from the ERCF: 

ERCF _RW%,AH = 10% because KA+ AggEL% ::; 4.5% 

KA+ AggEL% - 0.5% 4.5% - (KA+ AggEL%) 

ERCF _RW%,Ml = 1250% * 4.S% _ 0.S% + 10% * 4.S% _ 0.5% 

= 785% because 0.5% <KA+ AggEL% < 4.5% 

ERCF_RW%,B = 1250%becasue KA +AggEL% ~ 0.5% 

where 

RW A$ * 8% $343.8m * 8% 

KA= 100% * AggUPB$ = 100% * $l000m = 2.75% 

EL$ $2.Sm 

AggEL% = 100% * AggUPB$ = 100% * $l000m = 0.25%. 
53242 Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 

Both the proposed rule and the 

current ERCF utilize the same 

methodology when accounting for 

effectiveness from the timing of 

coverage by adjusting the Enterprise’s 

exposure amount for tranche M1 to 

reflect the retention of some loss timing 

risk that was nominally transferred. The 

loss timing factor addresses the 

mismatch between lifetime losses on the 

30-year fixed-rate single-family 

mortgage exposures underlying the CRT 

and the CRT’s coverage. The loss timing 

factor for the illustrative CRT with 10 

years of coverage and backed by 30-year 

fixed-rate single-family whole loans and 

guarantees with OLTVs greater than 60 

percent and less than or equal to 80 

percent is 88 percent for both the capital 

markets transaction and the loss sharing 

agreement. For the illustrative CRT, 

tranche M1’s LTEA is 85.6% and is 

derived by scaling stress loss by the 

88% loss timing factor. 

LTEA from the proposed rule and the 

current ERCF: 

Where 

LTKA,% = max ((2.75% + 0.25%) * 

88%¥0.25%, 0%) = 2.39% 

The current ERCF includes a third 

adjustment, the OEA, that the proposed 

rule omits. 

OEA from the current ERCF: 

ERCF OEA% = 100% * (1.06667¥4.1667 

* KA) = 95.2% 

The next steps convert the 

effectiveness adjustments into 

Enterprise exposures. In particular, the 

adjusted exposure amounts (AEAs) 

combine the effectiveness adjustments, 

aggregate UPB, tranche thickness, and 

an adjustment for expected losses (to 

tranche B in the example). For the 

illustrative CRT, the proposed rule 

would calculate AEAs as follows: 

AEA%,AH = EAE%,AH * AggUPB$ * (D¥A) 

= $1,000m * (100%¥4.5%) = 

$955m 


lotter on DSK11XQN23PROD with PROPOSALS1EP27SE21.005</GPH> EP27SE21.006</GPH>

( 0 (UnCollatUL%,Ml * 1250% +SRIF%,Ml * 5%)) 0 LSEA%,Ml = 1 - 5.21/o * RWc = 96.51/o 

%,Ml 

LSEA from the current ERCF: 

_ ( _ 0 * (UnCollatUL%,Ml * 1250% + SRIF%,Ml * 10%)) ERCF _LSEA%,Ml - 1 5.21/o ERCF RWc 

- %,Ml 

= 96.5% 

where<EXTRACT> 

(KA+ AggEL% -A) UnCollatUL%,Ml = 100% * D -A - Collat%RIF,Ml 

UnCollatUL%,Ml 

( 3% - 0.5% ) $2.Bm 

= lOO% * 4.5% - 0.5% - lOO% * $1,000 * ( 4.5% - 0.5%) * 35% 

= 42.5% 

(( 3% - 0.5% ) $2.Bm ) 

SRI Fo/o,Ml = 100% - 100% * max 4.5% - 0.5% , $1,000 * ( 4.5% - 0.5%) * 35% 

= 37.5% 

LTKA,LS + AggEL% -A 

LTEA%,Ml = ERCF _LTEA%,M1 = 100% * K A EL A A+ gg % -

2.39% + 0.25% - 0.5% = 100% * -------- = 85.6% 

2.75% + 0.25%- 0.5% 
Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 53243 

AEA%,M1 = EAE%,M1 * AggUPB$ * (D¥A) 

= 19.7% * $1,000m * (45%¥0.5%) 

= $7.9m 

where the Enterprise’s adjusted 

exposures (EAEs) for tranches A and B 

are 100% and 

EAE%,M1 = 100% ¥ (60% * 85.6%) ¥ 

(35% * 96.5% * 85.6%) = 19.7%. 

The current ERCF calculates AEAs 

including the OEA, thus increasing the 

Enterprise’s exposure on M1. For 

tranches AH and B, the current ERCF’s 

AEAs are the same as those of the 

proposed rule because the Enterprise 

does not transfer risk on the AH and B 

tranches. 

ERCFlAEA%,M1 = ERCFlEAE%,M1 * 

AggUPB$ * (D ¥ A) = 23.6% * 

$1,000m * (4.5% ¥ 0.5%) = $9.4m 

ERCFlEAE%,M1 = 100% ¥ (60% * 

85.6% * 95.2%) ¥ (35% * 96.5% 

* 85.6% * 95.2%) = 23.6% 

Finally, the risk weights and 

exposures are combined to calculate 

risk-weighted assets. For the illustrative 

CRT, the proposed rule would calculate 

risk-weighted assets (RWA) as follows: 

RWA$,AH = AEA$,AH * RW%,AH = $955m 

* 5% = $47.8m 

RWA = AEA$,M1 * RW%,M1 = $7.9m * 

783% = $61.8m 

RWA = AEA$,B * RW%,B = $2.5m * 

1250% = $31.3m 

with total RWAs on the retained CRT 

exposures at $140.8 million, a decline of 

$202.9 million from the aggregate credit 

risk-weighted assets on the underlying 

single-family mortgage exposures of 

$343.8 million. 

By comparison, the current ERCF’s 

total RWA are higher primarily due to 

its higher risk weight floor on the senior 

AH exposure: 

ERCFlRWA$,AH = ERCFlAEA$,AH * 

ERCFlRW%,AH = $955m * 10% = 

$95.5m 

ERCFlRWA$,M1 = ERCFlAEA$,M1 * 

ERCFlRW%,M1 = $9.4m * 785% = 

$74.1m 

ERCFlRWA$,B = ERCFlAEA$,B * 

ERCFlRW%,B = $2.5m * 1250% = 

$31.3m 

with total RWAs on the retained CRT 

exposures at $200.8 million. 

Overall, for this stylized CRT, the 

proposed rule’s total RWA capital relief 

of $202.9 million is 42 percent higher 

than the $143.0 million in capital relief 

from the current ERCF. 

C. ERCF Technical Corrections 

The proposed rule would make 

technical corrections to the ERCF 

related to definitions, variable names, 

the single-family countercyclical 

adjustment, and CRT formulas that were 

not accurately reflected in the ERCF 

final rule published on December 17, 

2020. These technical corrections would 

revise the ERCF for the following items: 

• In § 1240.2, the definition of 

‘‘Multifamily mortgage exposure’’ 

would be moved from its current 

location to a location that follows 

alphabetical order relative to the other 

definitions within the section. The 

definition of a multifamily mortgage 

exposure would not change. 

• In § 1240.33, the definition of 

‘‘Long-term HPI trend’’ would be 

updated to correct a typographical error 

that resulted in only the coefficient of 

the trendline formula, 0.66112295, 

being published. The corrected 

trendline formula would be 

0.66112295e

0.002619948*t)

. The Enterprises 

use the long-term HPI trend as the basis 

for calculating the single-family 

countercyclical adjustment. As 

published, the trendline would be a 

time-invariant horizontal line rather 

than a time-varying exponential 

function. 

• In § 1240.33, the definition of OLTV 

for single-family mortgage exposures 

would be amended to include the 

parenthetical (original loan-to-value) 

after the acronym to provide additional 

clarity as to the meaning of OLTV. 

Single-family OLTV would continue to 

be based on the lesser of the appraised 

value and the sale price of the property 

securing the single-family mortgage. 

• In § 1240.37, the second paragraph 

(d)(3)(iii) would be redesignated as 

paragraph (d)(3)(iv) to correct a 

typographical error. 

• In § 1240.43(b)(1), the term ‘‘KG’’ 

would be replaced with ‘‘KG’’ to correct 

a typographical error. 

• In § 1240.44, 

Æ In paragraph (b)(9)(i)(C), the term 

‘‘(LTFUPB%)’’ would be replaced with 

the term ‘‘(LTFUPB%)’’ to correct a 

typographical error; 

Æ In paragraph (b)(9)(i)(D), the term 

‘‘LTF%’’ would be replaced with the 

term ‘‘LTF%’’ to correct a typographical 

error; 

Æ In paragraph (b)(9)(ii), the term 

‘‘LTF%’’ would be replaced with the 

term ‘‘LTF%’’ to correct a typographical 

error; 

Æ In paragraph (b)(9)(ii)(B), the term 

‘‘(CRTF15%)’’ would be replaced with 

the term ‘‘(CRTF15%)’’ to correct a 

typographical error; 

Æ In paragraph (b)(9)(ii)(C), the term 

‘‘(CRT80NotF15%)’’ would be replaced 

with the term ‘‘(CRT80NotF15%)’’ to 

correct a typographical error. 

Æ In paragraph (b)(9)(ii)(E)(2)(i), the 

equation would be revised to correct a 

typographical error. The revised 

equation would be: 

LTF% = (CRTLT15 * CRTF15%) + 

(CRTLT80Not15 * CRT80NotF15%) 

+ (CRTLTGT80Not15 * 

(1¥CRT80NotF15% ¥ CRTF15%)); 

Æ In paragraph (b)(9)(ii)(E)(2)(iii), the 

term ‘‘LTF%’’ would be replaced with 

the term ‘‘LTF%,’’ to correct a 

typographical error; 

Æ In paragraph (c) introductory text, 

the term ‘‘RW%’’ would be replaced 

with the term ‘‘RW%’’ to correct a 

typographical error; 

Æ In paragraph (c)(1), the term 

‘‘AggEL%’’ would be replaced with the 

term ‘‘AggEL%’’ to correct a 

typographical error; 

Æ In paragraph (g), the first three 

equations would be combined into one 

equation to correct a typographical error 

that erroneously split the equation into 

three distinct parts. The revised 

equation would be: 


lotter on DSK11XQN23PROD with PROPOSALS1EP27SE21.007</GPH>

= $1,000m * (0.5% - 0%) * 50% = $2.Sm 
53244 Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 

IV. Paperwork Reduction Act 

The Paperwork Reduction Act (PRA) 

(44 U.S.C. 3501 et seq.) requires that 

regulations involving the collection of 

information receive clearance from the 

Office of Management and Budget 

(OMB). The proposed rule contains no 

such collection of information requiring 

OMB approval under the PRA. 

Therefore, no information has been 

submitted to OMB for review. 

V. Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) requires that a 

regulation that has a significant 

economic impact on a substantial 

number of small entities, small 

businesses, or small organizations must 

include an initial regulatory flexibility 

analysis describing the regulation’s 

impact on small entities. FHFA need not 

undertake such an analysis if the agency 

has certified that the regulation will not 

have a significant economic impact on 

a substantial number of small entities. 5 

U.S.C. 605(b). FHFA has considered the 

impact of the proposed rule under the 

Regulatory Flexibility Act. The of FHFA 

certifies that the proposed rule, if 

adopted as a final rule, would not have 

a significant economic impact on a 

substantial number of small entities 

because the proposed rule is applicable 

only to the Enterprises, which are not 

small entities for purposes of the 

Regulatory Flexibility Act. 

Proposed Rule 

List of Subjects for 12 CFR Part 1240 

Capital, Credit, Enterprise, 

Investments, Reporting and 

recordkeeping requirements. 

Authority and Issuance 

For the reasons stated in the 

Preamble, under the authority of 12 

U.S.C. 4511, 4513, 4513b, 4514, 4515– 

17, 4526, 4611–4612, 4631–36, FHFA 

proposes to amend part 1240 of title 12 

of the Code of Federal Regulation as 

follows: 

Chapter XII—Federal Housing Finance 

Agency 

Subchapter C—Enterprises 

PART 1240—CAPITAL ADEQUACY OF 

ENTERPRISES 

■ 1. The authority citation for part 1240 

is revised to read as follows: 

Authority: 12 U.S.C. 4511, 4513, 4513b, 

4514, 4515, 4517, 4526, 4611–4612, 4631–36. 

■ 2. Amend § 1240.2 by removing the 

definition of ‘‘Multifamily mortgage 

exposure’’ and adding the definition of 

‘‘Multifamily mortgage exposure’’ in 

alphabetical order to read as follows: 

§ 1240.2 Definitions. 

* * * * * 

Multifamily mortgage exposure means 

an exposure that is secured by a first or 

subsequent lien on a property with five 

or more residential units. 

* * * * * 

■ 3. Amend § 1240.11 by revising 

paragraph (a)(6) to read as follows: 

§ 1240.11 Capital conservation buffer and 

leverage buffer. 

(a) * * * 

(6) Prescribed leverage buffer amount. 

An Enterprise’s prescribed leverage 

buffer amount is 50 percent of the 

Enterprise’s stability capital buffer 

calculated in accordance with subpart G 

of this part. 

■ 4. Amend § 1240.33(a) by: 

■ a. In the definition of ‘‘Long-term HPI 

trend’’, removing ‘‘0.66112295’’ and 

adding ‘‘0.66112295e0.002619948*t)

’’ in its 

place; and 

■ b. Revising the definition of ‘‘OLTV’’. 

The revision reads as follows: 

§ 1240.33 Single-family mortgage 

exposures. 

(a) * * * 

OLTV (original loan-to-value) means, 

with respect to a single-family mortgage 

exposure, the amount equal to: 

(i) The unpaid principal balance of 

the single-family mortgage exposure at 

origination; divided by 

(ii) The lesser of: 

(A) The appraised value of the 

property securing the single-family 

mortgage exposure; and 

(B) The sale price of the property 

securing the single-family mortgage 

exposure. 

* * * * * 

§ 1240.37 [Amended] 

■ 5. Amend § 1240.37 by redesignating 

the second paragraph (d)(3)(iii) as 

paragraph (d)(3)(iv). 

§ 1240.43 [Amended] 

■ 6. Amend § 1240.43 in paragraph 

(b)(1) by removing the term ‘‘KG’’ and 

adding the term ‘‘KG’’ in its place. 

■ 7. Amend § 1240.44 by: 

■ a. In paragraph (b)(9)(i)(C), removing 

the term ‘‘(LTFUPBE%)’’ and adding the 

term ‘‘(LTFUPB%)’’ in its place; 

■ b. In paragraph (b)(9)(i)(D) 

introductory text, removing the term 

‘‘LTF%’’ and adding the term ‘‘LTF%’’ in 

its place; 

■ c. In paragraph (b)(9)(ii) introductory 

text, removing the term ‘‘LTF%’’ and 

adding the term ‘‘LTF%’’ in its place; 

■ d. In paragraph (b)(9)(ii)(B), removing 

the term ‘‘(CRTF15%)’’ and adding the 

term ‘‘(CRTF15%)’’ in its place; 

■ e. In paragraph (b)(9)(ii)(C), removing 

the term ‘‘(CRT80NotF15%)’’ and 

adding the term ‘‘(CRT80NotF15%)’’ in 

its place; 

■ f. Revising the equation in paragraph 

(b)(9)(ii)(E)(2)(i); 

■ g. In paragraph (b)(9)(ii)(E)(2)(iii) 

introductory text, removing the term 

‘‘LTF%’’ and adding the term ‘‘LTF%,’’ 

in its place; 

■ h. In paragraph (c) introductory text: 

■ i. Removing the term ‘‘RW%’’ and 

adding the term ‘‘RW%’’ in its place; and 

■ ii. Removing ‘‘10 percent’’ and adding 

the term ‘‘5 percent’’ in its place; 

■ i. In paragraph (c)(1), removing the 

term ‘‘AggEL%’’ and adding the term 

‘‘AggEL%’’ in its place; 

■ j. In paragraphs (c)(2) and (c)(3)(ii), 

removing the term ‘‘10 percent’’ and 

adding the term ‘‘5 percent’’ in its place; 

■ k. Revising the first equation in 

paragraph (d); 


lotter on DSK11XQN23PROD with PROPOSALS1EP27SE21.008</GPH>

if (SLS%,Tranche - ELS%,Tranche) > 0 then 

( . ( LTKA,cM+AggEL%-A)) 100% * max 0, mm 1, D _ A - ELS%,Tranche 

LTEA%TrancheCM = (sic ELS ) ' ' J%,Tranche - %,Tranche 

( . ( LTKA,LS + AggEL% -A)) 100% * max 0, mm 1, D _ A - ELS%,Tranche 

LTEA%TrancheLS = (SLS ELS ) · ' %,Tranche - %,Tranche 
Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 53245 

■ l. In paragraph (e), removing the term 

‘‘10 percent’’ and adding the term ‘‘5 

percent’’ in its place; 

■ m. Revising paragraph (f)(2)(i); 

■ n. In paragraph (g), revising the first 

three equations; 

■ o. Revising the first equation in 

paragraph (h); and 

■ p. Removing and reserving paragraph 

(i). 

The revisions read as follows: 

§ 1240.44 Credit risk transfer approach 

(CRTA). 

* * * * * 

(b) * * * 

(9) * * * 

(ii) * * * 

(E) * * * 

(2) * * * 

(i) * * * 

* * * * * 

(d) * * * 

* * * * * 

(f) * * * 

(2) Inputs—(i) Enterprise adjusted 

exposure. The adjusted exposure (EAE) 

of an Enterprise with respect to a 

retained CRT exposure is as follows: 

EAE%,Tranche = 100% ¥ (CM%,Tranche * 

LTEA%,Tranche,CM) ¥(LS%,Tranche * 

LSEA%,Tranche * LTEA%,Tranche,LS), 

Where the loss timing effectiveness 

adjustments (LTEA) for a retained CRT 

exposure are determined under 

paragraph (g) of this section, and the 

loss sharing effectiveness adjustment 

(LSEA) for a retained CRT exposure is 

determined under paragraph (h) of this 

section. 

* * * * * 

(g) * * * 

* * * * * (h) * * * 


lotter on DSK11XQN23PROD with PROPOSALS1EP27SE21.009</GPH> EP27SE21.010</GPH> EP27SE21.011</GPH>

RWo/o, Tranche 

{ 

1,250% if KA+ AggELo/o ~ D 

_ 5% if KA+ AggELo/o ~ A 

- K + A E Lo - A D - K + A E Lo 1250°/. * ( A gg Yo ) + 5o1. * ( ( A gg Yo)) 'f A< K + A EL < D 70 D _ A 70 D _ A i A g g % 

if (SLS%,Tranche - ELS%,Tranche) > 0 then 

LTEA%,Tranche,CM 

100% * max (o, min (1, LTKA,cM + AggEL% -A))- ELS D - A %,Tranche 

(SLS%,Tranche - ELS%,Tranche) 

LTEA%,Tranche,LS 

100% * max (o, min (1, LTKA,Ls + AggEL% -A))- ELS D - A %,Tranche 

(SLS%,Tranche - ELS%,Tranche) 

if (RW%,Tranche - ELS%,Tranche * 1250%) > 0 then 

_ (( _ (UnCollatUL%,Tranche * 1250% +SRIF%,Tranche * 5%)) 0 ) 

LSEA%,Tranche - max 1 HC * ( 0 ) ,O3⁄4i RW%,Tranche - ELS%,Tranche * 1250 3⁄4i 
53246 Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules 

* * * * * 

Sandra L. Thompson, 

Acting Director, Federal Housing Finance 

Agency. 

[FR Doc. 2021–20297 Filed 9–24–21; 8:45 am] 

BILLING CODE 8070–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2021–0832; Project 

Identifier MCAI–2020–01550–T] 

RIN 2120–AA64 

Airworthiness Directives; Bombardier, 

Inc., Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: The FAA proposes to adopt a 

new airworthiness directive (AD) for 

certain Bombardier, Inc., Model BD– 

700–1A10 and BD–700–1A11 airplanes. 

This proposed AD was prompted by 

reports of internal corrosion on the 

inboard flaps found prior to regularly 

scheduled maintenance checks. This 

proposed AD would require revising the 

existing maintenance or inspection 

program, as applicable, to incorporate a 

certain aircraft maintenance manual 

(AMM) task. The FAA is proposing this 

AD to address the unsafe condition on 

these products. 

DATES: The FAA must receive comments 

on this proposed AD by November 12, 

2021. 

ADDRESSES: You may send comments, 

using the procedures found in 14 CFR 

11.43 and 11.45, by any of the following 

methods: 

• Federal eRulemaking Portal: Go to 

https://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building, Ground Floor, Room 

W12–140, 1200 New Jersey Avenue SE, 

Washington, DC 20590. 

• Hand Delivery: Deliver to Mail 

address above between 9 a.m. and 5 

p.m., Monday through Friday, except 

Federal holidays. 

For service information identified in 

this NPRM, contact Bombardier, Inc., 

Bombardier, Inc., 200 Coˆte-Vertu Road 

West, Dorval, Que ́bec H4S 2A3, Canada; 

telephone 514–855–2999; email ac.yul@

aero.bombardier.com; internet https://

www.bombardier.com. You may view 

this service information at the FAA, 

Airworthiness Products Section, 

Operational Safety Branch, 2200 South 

216th St., Des Moines, WA. For 

information on the availability of this 

material at the FAA, call 206–231–3195. 

Examining the AD Docket 

You may examine the AD docket at 

https://www.regulations.gov by 

searching for and locating Docket No. 

FAA–2021–0832; or in person at Docket 

Operations between 9 a.m. and 5 p.m., 

Monday through Friday, except Federal 

holidays. The AD docket contains this 

NPRM, any comments received, and 

other information. The street address for 

Docket Operations is listed above. 

Comments will be available in the AD 

docket shortly after receipt. 

FOR FURTHER INFORMATION CONTACT: 

Antariksh Shetty, Aerospace Engineer, 

Airframe and Propulsion Section, FAA, 

New York ACO Branch, 1600 Stewart 

Avenue, Suite 410, Westbury, NY 

11590; telephone 516–228–7300; fax 

516–794–5531; email 9-avs-nyaco-cos@

faa.gov. 

SUPPLEMENTARY INFORMATION: 

Comments Invited 

The FAA invites you to send any 

written relevant data, views, or 

arguments about this proposal. Send 

your comments to an address listed 

under ADDRESSES. Include ‘‘Docket No. 

FAA–2021–0832; Project Identifier 

MCAI–2020–01550–T’’ at the beginning 

of your comments. The most helpful 

comments reference a specific portion of 

the proposal, explain the reason for any 

recommended change, and include 

supporting data. The FAA will consider 

all comments received by the closing 

date and may amend the proposal 

because of those comments. 

Except for Confidential Business 

Information (CBI) as described in the 

following paragraph, and other 

information as described in 14 CFR 

11.35, the FAA will post all comments 

received, without change, to https://

www.regulations.gov, including any 

personal information you provide. The 

agency will also post a report 

summarizing each substantive verbal 

contact received about this proposed 

AD. 

Confidential Business Information 

CBI is commercial or financial 

information that is both customarily and 

actually treated as private by its owner. 

Under the Freedom of Information Act 

(FOIA) (5 U.S.C. 552), CBI is exempt 

from public disclosure. If your 

comments responsive to this NPRM 

contain commercial or financial 

information that is customarily treated 

as private, that you actually treat as 

private, and that is relevant or 

responsive to this NPRM, it is important 

that you clearly designate the submitted 

comments as CBI. Please mark each 

page of your submission containing CBI 

as ‘‘PROPIN.’’ The FAA will treat such 

marked submissions as confidential 

under the FOIA, and they will not be 

placed in the public docket of this 

NPRM. Submissions containing CBI 

should be sent to Antariksh Shetty, 

Aerospace Engineer, Airframe and 

Propulsion Section, FAA, New York 

ACO Branch, 1600 Stewart Avenue, 

Suite 410, Westbury, NY 11590; 

telephone 516–228–7300; fax 516–794– 

5531; email 9-avs-nyaco-cos@faa.gov. 

Any commentary that the FAA receives 

which is not specifically designated as 

CBI will be placed in the public docket 

for this rulemaking. 

Background 

Transport Canada Civil Aviation 

(TCCA), which is the aviation authority 

for Canada, has issued TCCA AD CF– 

2020–49R1, dated May 20, 2021 (TCCA 

AD CF–2020–49R1) (also referred to 

after this as the Mandatory Continuing 

Airworthiness Information, or the 

MCAI), to correct an unsafe condition 

for certain Bombardier, Inc., Model BD– 

700–1A10 and BD–700–1A11 airplanes. 

You may examine the MCAI in the AD 

docket at https://www.regulations.gov 

by searching for and locating Docket No. 

FAA–2021–0832. 

This proposed AD was prompted by 

reports of internal corrosion on the 

inboard flaps found prior to regularly 

scheduled maintenance checks. The 

FAA is proposing this AD to address 

such corrosion, which could result in 

reduced structural integrity, detachment 

of the flap, and consequent reduced 

controllability of the airplane. 

See the MCAI for additional 

background information. 

Related Service Information Under 1 

CFR Part 51 

Bombardier issued the following 

service information. 

• Task 57–51–00–290–801, ‘‘Special 

Detailed Inspection of the Inboard-Flap 

Internal Ribs,’’ of Bombardier Global 

Express Aircraft Maintenance Manual— 

Part Two—Publication No. BD–700 

AMM, Revision 90, dated May 19, 2021. 

• Task 57–51–00–290–801, ‘‘Special 

Detailed Inspection of the Inboard-Flap 

Internal Ribs,’’ of Bombardier Global 

Express XRS Aircraft Maintenance 

Manual—Part Two—Publication No. 

BD–700 XRS AMM, Revision 68, dated 

May 19, 2021. 


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