77602 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

12 CFR Part 43 

[Docket No. OCC–2013–0010] 

RIN 1557–AD40 

FEDERAL RESERVE SYSTEM 

12 CFR Part 244 

[Docket No. R–1411] 

RIN 7100–AD70 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 373 

RIN 3064–AD74 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1234 

RIN 2590–AA43 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 246 

[Release No. 34–73407; File No. S7–14–11] 

RIN 3235–AK96 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 267 

RIN 2501–AD53 

Credit Risk Retention 

AGENCIES: Office of the Comptroller of 

the Currency, Treasury (OCC); Board of 

Governors of the Federal Reserve 

System (Board); Federal Deposit 

Insurance Corporation (FDIC); U.S. 

Securities and Exchange Commission 

(Commission); Federal Housing Finance 

Agency (FHFA); and Department of 

Housing and Urban Development 

(HUD). 

ACTION: Final rule. 

SUMMARY: The OCC, Board, FDIC, 

Commission, FHFA, and HUD (the 

agencies) are adopting a joint final rule 

(the rule, or the final rule) to implement 

the credit risk retention requirements of 

section 15G of the Securities Exchange 

Act of 1934, as added by section 941 of 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the Act or 

Dodd-Frank Act). Section 15G generally 

requires the securitizer of asset-backed 

securities to retain not less than 5 

percent of the credit risk of the assets 

collateralizing the asset-backed 

securities. Section 15G includes a 

variety of exemptions from these 

requirements, including an exemption 

for asset-backed securities that are 

collateralized exclusively by residential 

mortgages that qualify as ‘‘qualified 

residential mortgages,’’ as such term is 

defined by the agencies by rule. 

DATES: Effective date: The final rule is 

effective February 23, 2015. 

Compliance dates: Compliance with 

the rule with respect to asset-backed 

securities collateralized by residential 

mortgages is required beginning 

December 24, 2015. Compliance with 

the rule with regard to all other classes 

of asset-backed securities is required 

beginning December 24, 2016. 

FOR FURTHER INFORMATION CONTACT: 

OCC: Kevin Korzeniewski, Attorney, 

Legislative and Regulatory Activities 

Division, (202) 649–5490, for persons 

who are deaf or hard of hearing, TTY, 

(202) 649–5597, Office of the 

Comptroller of the Currency, 400 7th 

Street SW., Washington, DC 20219. 

Board: April C. Snyder, Senior 

Counsel, (202) 452–3099; Brian P. 

Knestout, Counsel, (202) 452–2249; 

Flora H. Ahn, Counsel, (202) 452–2317; 

David W. Alexander, Senior Attorney, 

(202) 452–2877; or Matt Suntag, 

Attorney, (202) 452–3694, Legal 

Division; Thomas R. Boemio, Manager, 

(202) 452–2982; Donald N. Gabbai, 

Senior Supervisory Financial Analyst, 

(202) 452–3358; or Sean M. Healey, 

Senior Financial Analyst, (202) 912– 

4611, Division of Banking Supervision 

and Regulation; Karen Pence, Adviser, 

Division of Research & Statistics, (202) 

452–2342; or Nikita Pastor, Counsel, 

(202) 452–3667, Division of Consumer 

and Community Affairs, Board of 

Governors of the Federal Reserve 

System, 20th and C Streets NW., 

Washington, DC 20551. 

FDIC: Rae-Ann Miller, Associate 

Director, (202) 898–3898; George 

Alexander, Assistant Director, (202) 

898–3718; Kathleen M. Russo, 

Supervisory Counsel, (703) 562–2071; or 

Phillip E. Sloan, Counsel, (703) 562– 

6137, Federal Deposit Insurance 

Corporation, 550 17th Street NW., 

Washington, DC 20429. 

Commission: Arthur Sandel, Special 

Counsel; David Beaning, Special 

Counsel; Lulu Cheng, Special Counsel; 

or Katherine Hsu, Chief, (202) 551– 

3850, in the Office of Structured 

Finance, Division of Corporation 

Finance, U.S. Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–3628. 

FHFA: Ronald P. Sugarman, Principal 

Legislative Analyst, Ron.Sugarman@

fhfa.gov, (202) 649–3208; Phillip 

Millman, Principal Capital Markets 

Specialist, Phillip.Millman@fhfa.gov, 

(202) 649–3080; or Thomas E. Joseph, 

Associate General Counsel, 

Thomas.Joseph@fhfa.gov, (202) 649– 

3076; Federal Housing Finance Agency, 

Constitution Center, 400 7th Street SW., 

Washington, DC 20024. The telephone 

number for the Telecommunications 

Device for the Hearing Impaired is (800) 

877–8339. 

HUD: Michael P. Nixon, Office of 

Housing, Department of Housing and 

Urban Development, 451 7th Street SW., 

Room 10226, Washington, DC 20410; 

telephone number 202–402–5216 (this 

is not a toll-free number). Persons with 

hearing or speech impairments may 

access this number through TTY by 

calling the toll-free Federal Information 

Relay Service at 800–877–8339. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. Background 

B. Overview of the Revised Proposal and 

Public Comment 

C. Overview of the Final Rule 

D. Post-Adoption Interpretation and 

Guidance 

II. General Definitions and Scope 

III. General Risk Retention Requirement 

A. Minimum Risk Retention Requirement 

B. Permissible Forms of Risk Retention— 

Menu of Options 

1. Standard Risk Retention 

2. Master Trusts: Revolving Pool 

Securitizations 

3. Representative Sample 

4. Asset-Backed Commercial Paper 

Conduits 

5. Commercial Mortgage-Backed Securities 

6. Government-Sponsored Enterprises 

7. Open Market Collateralized Loan 

Obligations 

8. Municipal Bond ‘‘Repackaging’’ 

Securitizations 

C. Allocation to the Originator 

D. Hedging, Transfer, and Financing 

Restrictions 

E. Safe Harbor for Certain Foreign-Related 

Securitizations 

F. Sunset on Hedging and Transfer 

Restrictions 

IV. General Exemptions 

A. Exemption for Federally Insured or 

Guaranteed Residential, Multifamily, 

and Health Care Mortgage Loan Assets 

B. Exemption for Securitizations of Assets 

Issued, Insured, or Guaranteed by the 

United States or any Agency of the 

United States and Other Exemptions 

C. Federal Family Education Loan Program 

and Other Student Loan Securitizations 

D. Certain Public Utility Securitizations 

E. Seasoned Loan Securitizations 

F. Federal Deposit Insurance Corporation 

Securitizations 

G. Exemption for Certain Resecuritization 

Transactions 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77603 

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

Section 941 of the Dodd-Frank Act amends the 

Securities Exchange Act of 1934 (the Exchange Act) 

and adds a new section 15G of the Exchange Act. 

15 U.S.C. 78o–11. 

2See 15 U.S.C. 78o–11(b), (c)(1)(A) and 

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

3 15 U.S.C. 1639c. 

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

(B). 

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

6See id. at sections 78o–11(b)(2), (e)(4)(A) and 

(B). 

7See id. at section 78o–11(b)(1). 

8See, e.g. id. at sections 78o–11(b)(1)(E) (relating 

to the risk retention requirements for ABS 

collateralized by commercial mortgages); 

(b)(1)(G)(ii) (relating to additional exemptions for 

assets issued or guaranteed by the United States or 

an agency of the United States); (d) (relating to the 

allocation of risk retention obligations between a 

securitizer and an originator); and (e)(1) (relating to 

additional exemptions, exceptions or adjustments 

for classes of institutions or assets). 

9See id. at section 78o–11(b)(2)(B). 

10Specifically, the agencies codify the rule as 

follows: 12 CFR part 43 (OCC); 12 CFR part 244 

(Regulation RR) (Board); 12 CFR part 373 (FDIC); 17 

CFR part 246 (Commission); 12 CFR part 1234 

(FHFA). As required by section 15G, HUD has 

jointly prescribed the final rule for a securitization 

that is collateralized by any residential mortgage 

asset and for purposes of defining a qualified 

residential mortgage. Because the final rule exempts 

the programs and entities under HUD’s jurisdiction 

Continued 

H. Other Exemptions from Risk Retention 

Requirements 

1. Legacy Loan Securitizations 

2. Corporate Debt Repackagings 

3. Securitizations of Servicer Advance 

Receivables 

V. Reduced Risk Retention Requirements and 

Underwriting Standards for ABS 

Interests Collateralized by Qualifying 

Commercial, Commercial Real Estate, or 

Automobile Loans 

A. Qualifying Commercial Loans 

B. Qualifying Commercial Real Estate 

Loans 

1. Definition of Commercial Real Estate 

Loan 

2. Single Borrower Underwriting Standard 

3. Proposed QCRE Loan Criteria 

4. Ability to Repay Criteria and Term 

5. Loan-to-Value Requirement 

6. Collateral 

7. Risk Management and Monitoring 

C. Qualifying Automobile Loans 

1. Ability to Repay Criteria 

2. Loan Terms 

3. Reviewing Credit History 

4. Down Payment Requirement 

VI. Qualified Residential Mortgages 

A. Background 

B. Overview of the Reproposed Rule 

C. Overview of Public Comments 

1. Comments Received on the Reproposed 

QRM Definition 

2. Comments Received on the Alternative 

Approach to QRM 

D. Summary and Analysis of Final QRM 

Definition 

1. Alignment of QRM with QM 

2. Periodic Review of the QRM Definition 

3. Definition of QRM 

E. Certification and Other QRM Issues 

F. Repurchase of Loans Subsequently 

Determined to be Non-Qualified After 

Closing 

VII. Additional Exemptions 

VIII. Severability 

IX. Plain Language 

X. Administrative Law Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Commission Economic Analysis 

D. OCC Unfunded Mandates Reform Act of 

1995 Determination 

E. FHFA: Considerations of Differences 

between the Federal Home Loan Banks 

and the Enterprises 

I. Introduction 

The agencies are adopting a final rule 

to implement the requirements of 

section 941 of the Dodd–Frank Act.1

Section 15G of the Exchange Act, as 

added by section 941(b) of the DoddFrank Act, generally requires the Board, 

the FDIC, the OCC (collectively, the 

Federal banking agencies), the 

Commission, and, in the case of the 

securitization of any ‘‘residential 

mortgage asset,’’ together with HUD and 

FHFA, to jointly prescribe regulations 

that (i) require a securitizer to retain not 

less than 5 percent of the credit risk of 

any asset that the securitizer, through 

the issuance of an asset-backed security 

(ABS), transfers, sells, or conveys to a 

third party, and (ii) prohibit a 

securitizer from directly or indirectly 

hedging or otherwise transferring the 

credit risk that the securitizer is 

required to retain under section 15G and 

the agencies’ implementing rules.2

Compliance with the final rule with 

respect to securitization transactions 

involving asset-backed securities 

collateralized by residential mortgages 

is required beginning one year after the 

date of publication in the Federal 

Register and with respect to 

securitization transactions involving all 

other classes of asset-backed securities 

is required beginning two years after the 

date of publication in the Federal 

Register. References in this 

Supplemental Information and the rule 

itself to the effective date of the rule (or 

similar references to the date on which 

the rule becomes effective) are to the 

date on which compliance is required. 

Section 15G of the Exchange Act 

exempts certain types of securitization 

transactions from these risk retention 

requirements and authorizes the 

agencies to exempt or establish a lower 

risk retention requirement for other 

types of securitization transactions. For 

example, section 15G specifically 

provides that a securitizer shall not be 

required to retain any part of the credit 

risk for an asset that is transferred, sold, 

or conveyed through the issuance of 

ABS interests by the securitizer, if all of 

the assets that collateralize the ABS 

interests are ‘‘qualified residential 

mortgages’’ (QRMs), as that term is 

jointly defined by the agencies, which 

definition can be ‘‘no broader than’’ the 

definition of a ‘‘qualified mortgage’’ 

(QM) as that term is defined under 

section 129C of the Truth in Lending 

Act (TILA),3 as amended by the DoddFrank Act, and regulations adopted 

thereunder.4 In addition, section 15G 

provides that a securitizer may retain 

less than 5 percent of the credit risk of 

commercial mortgages, commercial 

loans, and automobile loans that are 

transferred, sold, or conveyed through 

the issuance of ABS interests by the 

securitizer if the loans meet 

underwriting standards established by 

the Federal banking agencies.5

Section 15G allocates the authority for 

writing rules to implement its 

provisions among the agencies in 

various ways. As a general matter, the 

agencies collectively are responsible for 

adopting joint rules to implement the 

risk retention requirements of section 

15G for securitizations that are 

collateralized by residential mortgage 

assets and for defining what constitutes 

a QRM for purposes of the exemption 

for QRM-backed ABS interests.6 The 

Federal banking agencies and the 

Commission, however, are responsible 

for adopting joint rules that implement 

section 15G for securitizations 

collateralized by all other types of 

assets,7 and are authorized to adopt 

rules in several specific areas under 

section 15G.8 In addition, the Federal 

banking agencies are jointly responsible 

for establishing, by rule, underwriting 

standards for non-QRM residential 

mortgages, commercial mortgages, 

commercial loans, and automobile loans 

(or any other asset class established by 

the Federal banking agencies and the 

Commission) that would qualify 

sponsors of ABS interests collateralized 

by these types of loans for a risk 

retention requirement of less than 5 

percent.9 Accordingly, when used in 

this final rule, the term ‘‘agencies’’ shall 

be deemed to refer to the appropriate 

agencies that have rulewriting authority 

with respect to the asset class, 

securitization transaction, or other 

matter discussed. 

For ease of reference, the final rule of 

the agencies is referenced using a 

common designation of section 1 to 

section 21 (excluding the title and part 

designations for each agency). With the 

exception of HUD, each agency is 

codifying the rule within its respective 

title of the Code of Federal 

Regulations.10 Section 1 of each 

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77604 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

from the requirements of the final rule, HUD does 

not codify the rule into its title of the Code of 

Federal Regulations. 

11Credit Risk Retention; Proposed Rule, 76 FR 

24090 (April 29, 2011). 

12Credit Risk Retention; Proposed Rule, 78 FR 

57928 (September 20, 2013). 

13 15 U.S.C. 1639c. 

14Securitization may reduce the cost of funding, 

which is accomplished through several different 

mechanisms. For example, firms that specialize in 

originating new loans and that have difficulty 

funding existing loans may use securitization to 

access more-liquid capital markets for funding. In 

addition, securitization can create opportunities for 

more efficient management of the asset–liability 

duration mismatch generally associated with the 

funding of long-term loans, for example, with shortterm bank deposits. Securitization also allows the 

structuring of securities with differing maturity and 

credit risk profiles from a single pool of assets that 

appeal to a broad range of investors. Moreover, 

securitization that involves the transfer of credit 

risk allows financial institutions that primarily 

originate loans to particular classes of borrowers, or 

in particular geographic areas, to limit concentrated 

exposure to these idiosyncratic risks on their 

balance sheets. 

15Report to the Congress on Risk Retention, 

Board of Governors of the Federal Reserve System, 

at 8 (October 2010), available at http://

federalreserve.gov/boarddocs/rptcongress/

securitization/riskretention.pdf (Board Report). 

16See Board Report at 8–9. 

17See S. Rep. No. 111–176, at 128 (2010). 

18See id. 

19See id. 

20See, e.g., Viral V. Acharya, Governments as 

Shadow Banks: The Looming Threat to Financial 

Stability, at 32 (Sept. 2011), available at http://

www.federalreserve.gov/events/conferences/2011/

rsr/papers/Acharya.pdf. 

agency’s rule identifies the entities or 

transactions subject to such agency’s 

rule. 

Consistent with section 15G of the 

Exchange Act, the risk retention 

requirements will become effective, for 

securitization transactions collateralized 

by residential mortgages, one year after 

the date on which the final rule is 

published in the Federal Register, and 

two years after the date on which the 

final rule is published in the Federal 

Register for any other securitization 

transaction. 

In April 2011, the agencies published 

a joint notice of proposed rulemaking 

that proposed to implement section 15G 

of the Exchange Act (the ‘‘original 

proposal’’).11 The agencies invited and 

received comment from the public on 

the original proposed rule. In September 

2013, the agencies published a second 

joint notice of proposed rulemaking (the 

‘‘revised proposal’’ or ‘‘reproposal’’) that 

proposed significant modifications to 

the original proposal and that again 

invited comment from the public.12 As 

described in more detail below, the 

agencies are adopting the revised 

proposal with some changes in response 

to comments received. 

As discussed further below, the final 

rule retains the framework of the revised 

proposal. Unless an exemption under 

the rule applies, sponsors of 

securitizations that issue ABS interests 

must retain risk in accordance with the 

standardized risk retention option (an 

eligible horizontal residual interest (as 

defined in the rule) or an eligible 

vertical interest (as defined in the rule) 

or a combination of both) or in 

accordance with one of the risk 

retention options available for specific 

types of asset classes, such as assetbacked commercial paper (ABCP). The 

final rule includes, with some 

modifications, those exemptions set 

forth in the revised proposal, including 

for QRMs. In addition, in response to 

comments and for the reasons discussed 

in Part VII of this Supplementary 

Information, the agencies are providing 

an additional exemption from risk 

retention for certain types of 

community-focused residential 

mortgages that are not eligible for QRM 

status under the final rule and are 

exempt from the ability-to-pay rules 

under the TILA.13 The agencies are not 

exempting managers of certain 

collateralized loan obligations (CLOs) 

from risk retention, as requested by 

commenters, for the reasons discussed 

in Part III.B.7 of this Supplementary 

Information. 

The agencies have made adjustments 

and modifications to the risk retention 

and underwriting requirements, as 

discussed in further detail below. Of 

particular note, under the final rule, the 

agencies are not adopting the proposed 

requirement that a sponsor holding an 

eligible horizontal residual interest be 

subject to the cash flow restrictions in 

the revised proposal or any similar cash 

flow restrictions. In addition, the 

agencies accepted commenters’ views 

that a fair value calculation was not 

necessary for vertical retention and are 

not requiring the eligible vertical 

interest to be measured using fair value. 

The agencies are also making some 

adjustments to the disclosure 

requirements associated with the fair 

value calculation for an eligible 

horizontal residual interest. The final 

rule also includes a provision that 

requires the agencies to periodically 

review the definition of QRM, the 

exemption for certain communityfocused residential mortgages, and the 

exemption for certain three-to-four unit 

residential mortgage loans and consider 

whether they should be modified, as 

discussed further below in Parts VI and 

VII of this Supplementary Information. 

The final rule also includes several 

adjustments and modifications to the 

proposed risk retention options for 

specific asset classes in order to address 

specific functional concerns and avoid 

unintended consequences. 

A. Background 

As the agencies observed in the 

preambles to the original and revised 

proposals, the securitization markets are 

an important link in the chain of entities 

providing credit to U.S. households and 

businesses, and state and local 

governments.14 When properly 

structured, securitization provides 

economic benefits that can lower the 

cost of credit.15 However, when 

incentives are not properly aligned and 

there is a lack of discipline in the credit 

origination process, securitization can 

result in harmful consequences to 

investors, consumers, financial 

institutions, and the financial system. 

During the financial crisis, 

securitization transactions displayed 

significant vulnerabilities arising from 

inadequate information and incentive 

misalignment among various parties 

involved in the process.16 Investors did 

not have access to the same information 

about the assets collateralizing assetbacked securities as other parties in the 

securitization chain (such as the 

sponsor of the securitization transaction 

or an originator of the securitized 

loans).17 In addition, assets were 

resecuritized into complex instruments, 

which made it difficult for investors to 

discern the true value of, and risks 

associated with, an investment in the 

securitization, as well as exercise their 

rights in the instrument.18 Moreover, 

some lenders loosened their 

underwriting standards, believing that 

the loans could be sold through a 

securitization by a sponsor, and that 

both the lender and sponsor would 

retain little or no continuing exposure to 

the loans.19 Arbitrage between various 

markets and market participants, and in 

particular between the Enterprises and 

the private securitization markets, 

resulted in lower underwriting 

standards which undermined the 

quality of the instruments collateralized 

by such loans and ultimately the health 

of the financial markets and their 

participants.20

Congress intended the risk retention 

requirements mandated by section 15G 

to help address problems in the 

securitization markets by requiring that 

securitizers, as a general matter, retain 

an economic interest in the credit risk 

of the assets they securitize. By 

requiring that a securitizer retain a 

portion of the credit risk of the 

securitized assets, the requirements of 

section 15G provide securitizers an 

incentive to monitor and ensure the 

quality of the securitized assets 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77605 

21See 15 U.S.C. 78o–11(c)(1)(B)(ii), (e)(1)–(2). 

22See, e.g. sections 932, 935, 936, 938, and 943 

of the Dodd-Frank Act (15 U.S.C. 78o–7, 78o–8). 

23See section 945 of the Dodd-Frank Act (15 

U.S.C. 77g). 

24See section 943 of the Dodd-Frank Act (15 

U.S.C. 78o–7). 

25See section 621 of the Dodd-Frank Act (15 

U.S.C. 77z–2a). 

26See section 942(b) of the Dodd-Frank Act (15 

U.S.C. 77g(c)). 

27See, e.g., Mortgage Servicing Rules Under the 

Real Estate Settlement Act (Regulation X); Final 

Rule, 78 FR 10696 (Feb. 14, 2013). 

28See Original Proposal, 76 FR at 24117–24129 

and 24164–24167. 

29See 78 FR 6407 (January 30, 2013), as amended 

by 78 FR 35429 (June 12, 2013), 78 FR 44686 (July 

24, 2013), and 78 FR 60382 (October 1, 2013) 

(collectively, ‘‘Final QM rule’’). 30See Revised Proposal, 78 FR 57928. 

underlying a securitization transaction, 

and, thus, help align the interests of the 

securitizer with the interests of 

investors. Additionally, in 

circumstances where the securitized 

assets collateralizing the ABS interests 

meet underwriting and other standards 

designed to help ensure the securitized 

assets pose low credit risk, the statute 

provides or permits an exemption.21

Accordingly, the credit risk retention 

requirements of section 15G are an 

important part of the legislative and 

regulatory efforts to address weaknesses 

and failures in the securitization process 

and the securitization markets. Section 

15G also complements other parts of the 

Dodd-Frank Act intended to improve 

the securitization markets. Such other 

parts include provisions that strengthen 

the regulation and supervision of 

nationally recognized statistical rating 

organizations (NRSROs) and improve 

the transparency of credit ratings; 22

provide for issuers of registered assetbacked securities offerings to perform a 

review of the securitized assets 

underlying the asset-backed securities 

and disclose the nature of the review; 23

require issuers of asset-backed securities 

to disclose the history of the requests 

they received and repurchases they 

made related to their outstanding assetbacked securities; 24 prevent sponsors 

and certain other securitization 

participants from engaging in material 

conflicts of interest with respect to their 

securitizations; 25 and require issuers of 

asset-backed securities to disclose, for 

each tranche or class of security, 

information regarding the assets 

collateralizing that security, including 

asset-level or loan-level data, if such 

data is necessary for investors to 

independently perform due diligence.26

Additionally, various efforts regarding 

mortgage servicing should also have 

important benefits for the securitization 

markets.27

The original proposal provided 

several options from which sponsors 

could choose to meet section 15G’s risk 

retention requirements, including 

retention of either a 5 percent ‘‘vertical’’ 

interest in each class of ABS interests 

issued in the securitization or a 5 

percent ‘‘horizontal’’ first-loss interest 

in the securitization, and other options 

designed to reflect market practice in 

asset-backed securitization transactions. 

The original proposal also included a 

special ‘‘premium capture’’ mechanism 

designed to prevent a sponsor from 

structuring a securitization transaction 

in a manner that would allow the 

sponsor to offset or minimize its 

retained economic exposure to the 

securitized assets. 

As required by section 15G, the 

original proposal provided a complete 

exemption from the risk retention 

requirements for asset-backed securities 

that are collateralized solely by QRMs 

and established the terms and 

conditions under which a residential 

mortgage would qualify as a QRM.28

The original proposal would generally 

have prohibited QRMs from having 

product features that were observed to 

contribute significantly to the high 

levels of delinquencies and foreclosures 

since 2007 and included underwriting 

standards associated with lower risk of 

default. The original proposal also 

provided that sponsors would not have 

to hold risk retention for securitized 

commercial, commercial real estate, and 

automobile loans that met proposed 

underwriting standards. In the original 

proposal, the agencies specified that 

securitization transactions sponsored by 

the Federal National Mortgage 

Association (Fannie Mae) and the 

Federal Home Loan Mortgage 

Corporation (Freddie Mac) (jointly, the 

Enterprises) would meet risk retention 

requirements for as long as the 

Enterprises operated under the 

conservatorship or receivership of 

FHFA with capital support from the 

United States. 

In response to the original proposal, 

the agencies received comments from 

over 10,500 persons, institutions, or 

groups. A significant number of 

comments supported the proposed 

menu-based approach of providing 

sponsors flexibility to choose from a 

number of permissible forms of risk 

retention, although several requested 

more flexibility in selecting risk 

retention options, including using 

multiple options simultaneously. Many 

commenters expressed significant 

concerns with the proposed standards 

for horizontal risk retention and the 

‘‘premium capture’’ mechanism. Other 

commenters expressed concerns with 

respect to standards in the original 

proposal for specific asset classes and 

underwriting standards for nonresidential asset classes and the 

application of the original proposal to 

managers of certain CLO transactions. A 

majority of commenters opposed the 

agencies’ proposed QRM standard, and 

several asserted that the agencies should 

align the QRM definition with the QM 

definition, then under development by 

the Consumer Financial Protection 

Bureau (CFPB).29

The agencies considered the many 

comments received on the original 

proposal and engaged in additional 

analysis of the securitization and 

lending markets in light of the 

comments. The agencies subsequently 

issued the reproposal in September 

2013, modifying significant aspects of 

the original proposal and again inviting 

public comment on the revised design 

of the risk retention regulatory 

framework to help determine whether 

the revised framework was 

appropriately structured. 

B. Overview of the Revised Proposal and 

Public Comment 

The agencies proposed in 2013 a risk 

retention rule that would have retained 

much of the structure of the original 

proposal, but with more flexibility in 

how risk retention could be held and 

with a broader definition of QRM.30

Among other things, the revised 

proposal provided a variety of options 

for complying with a minimum 5 

percent risk retention requirement, an 

exemption from risk retention for 

residential mortgage loans meeting the 

QRM standard, and exemptions from 

risk retention for auto, commercial real 

estate, and commercial loans that met 

proposed underwriting standards. With 

respect to the standard risk retention 

option, the revised proposal provided 

sponsors with additional flexibility in 

complying with the regulation. The 

revised proposal permitted a sponsor to 

satisfy its obligation by retaining any 

combination of an ‘‘eligible vertical 

interest’’ with a pro rata interest in all 

ABS interests issued and a first-loss 

‘‘eligible horizontal residual interest’’ to 

meet the 5 percent minimum 

requirement. A sponsor using solely the 

vertical interest option would retain a 

single security or a portion of each class 

of ABS interests issued in the 

securitization equal to at least 5 percent 

of all interests, regardless of the nature 

of the interests themselves (for example, 

whether such interests were senior or 

subordinated). The agencies also 

proposed that the eligible horizontal 

residual interest be measured using fair 

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31 15 U.S.C. 1639c. 

32See 78 FR 6407 (January 30, 2013), as amended 

by 78 FR 35429 (June 12, 2013) and 78 FR 44686 

(July 24, 2013). 

value. The agencies proposed a 

mechanism designed to limit payments 

to holders of an eligible horizontal 

residual interest, in order to prevent a 

sponsor from structuring a transaction 

so that the holder of the eligible 

horizontal residual interest could 

receive disproportionate payments with 

respect to its interest. In the revised 

proposal, sponsors were required to 

make a one-time cash flow projection 

based on fair value and certify to 

investors that its cash payment recovery 

percentages were not projected to be 

larger than the recovery percentages for 

all other ABS interests on any future 

payment date. The agencies also invited 

comment on an alternative proposal 

relating to the amount of principal 

payments received by the eligible 

horizontal residual interest. Under that 

alternative, the cumulative amount paid 

to an eligible horizontal residual interest 

on any payment date would not have 

been permitted to exceed a 

proportionate share of the cumulative 

amount paid to all ABS interests in the 

transaction. 

The revised proposal also included 

asset class-specific options for risk 

retention with some modifications from 

the original proposal to better reflect 

existing market practices and 

operations. For example, with respect to 

revolving pool securitizations, the 

agencies removed a restriction from the 

original proposal that prohibited the use 

of the seller’s interest risk retention 

option for master trust securitizations 

collateralized by non-revolving assets. 

With respect to ABCP conduits, the 

agencies made a number of 

modifications intended to allow the 

ABCP option to accommodate certain 

market practices discussed in the 

comments and to permit more flexibility 

on behalf of the originator-sellers and 

their majority-owned affiliates that 

finance through ABCP conduits. 

Similarly, the agencies modified the risk 

retention option designed for 

commercial mortgage-backed securities 

(CMBS) to allow for up to two thirdparty purchasers to retain the required 

risk retention interest, each taking a pari 

passu interest in an eligible horizontal 

residual interest. 

Also responding to commenters’ 

concerns, the revised proposal did not 

include the premium capture cash 

reserve account mechanism and 

‘‘representative sample’’ option 

included in the original proposal. With 

respect to the premium capture cash 

reserve account mechanism, the 

agencies considered that using fair value 

to measure the standard risk retention 

amount would meaningfully mitigate 

the ability of a sponsor to evade the risk 

retention requirement through the use of 

improper deal structures intended to be 

addressed by the premium capture cash 

reserve account. With respect to the 

representative sample option in the 

original proposal, the agencies 

considered the comments received and 

eliminated the option in the revised 

proposal on the basis that such an 

option would be difficult to implement 

in a way that would not result in costs 

that outweighed its benefits. 

The agencies retained, to a significant 

degree, standards for the expiration of 

the hedging and transfer restrictions in 

the regulation. The agencies decided in 

the reproposal to limit the sponsor’s 

ability to have all or a portion of the 

required retention held by its affiliates 

to only a sponsor’s majority-owned 

affiliates rather than all consolidated 

affiliates as would have been allowed in 

the original proposal. The agencies have 

included this approach in the final rule 

because it ensures that any loss suffered 

by the holder of risk retention will be 

suffered by either the sponsor or an 

entity in which the sponsor has a 

substantial economic interest. The 

agencies also largely carried over the 

terms of the original proposal with 

respect to securitizations collateralized 

by qualifying commercial, commercial 

real estate, or automobile loans, 

although modifications were proposed 

to reflect commenter observations and 

concerns, such as permitting junior 

liens to collateralize qualifying 

commercial loans, increasing the 

amortization period on commercial real 

estate loans to 30 years for multifamily 

residential qualified commercial real 

estate (QCRE) loans and 25 years for 

other QCRE loans, and amending the 

amortization standards for qualifying 

automobile loans. 

The agencies also invited comment on 

new exemptions from risk retention for 

certain resecuritizations, seasoned 

loans, and certain types of securitization 

transactions with low credit risk. In 

addition, the agencies proposed a new 

risk retention option for CLOs, similar 

to the allocation to originator concept 

proposed for sponsors generally. 

The agencies proposed to broaden and 

simplify the scope of the definition of a 

QRM in the revised proposal to align the 

definition with the definition of a QM 

under section 129C of the TILA 31 and 

its implementing regulations, as 

adopted by the CFPB.32 As discussed in 

the revised proposal, the agencies 

concluded that a QRM definition that 

was aligned with the QM definition 

would meet the statutory goals and 

directive of section 15G of the Exchange 

Act to limit credit risk and preserve 

access to affordable credit, while at the 

same time facilitating compliance. 

Along with this proposed approach to 

defining QRM, the agencies also invited 

comment on an alternative approach 

that would require that the borrower 

meet certain credit history criteria and 

that the loan be for a principal dwelling, 

meet certain lien requirements, and 

have a certain loan to value ratio. 

The revised proposal included a 

provision excluding certain foreign 

sponsors of ABS interests from the risk 

retention requirements of section 15G of 

the Exchange Act, which did not differ 

materially from the corresponding 

provision in the original proposal. 

In response to the revised proposal, 

the agencies received comments from 

more than 250 persons, institutions, or 

groups, including nearly 150 unique 

comment letters. The agencies received 

comments and observations on many 

aspects of the reproposed rule. 

Numerous commenters supported most 

aspects of the rule, but many suggested 

or asked for further modifications. As 

discussed in further detail below, a 

significant number of commenters 

commented on the agencies’ use of fair 

value to measure risk retention. 

Commenters’ key concerns included the 

timing of any fair value measurement 

and potential alternative methodologies 

to measuring risk retention. Many 

commenters also expressed concern 

about the proposed disclosure 

requirements for fair value, and some 

asked for a ‘‘safe harbor’’ from liability 

with respect to the disclosures. 

As with the original proposal, a 

number of commenters on the revised 

proposal asserted that managers of open 

market CLOs are not ‘‘securitizers’’ 

within the definition in section 15G of 

the Exchange Act and should not be 

required to retain risk. In addition, 

commenters asked for an exemption 

from risk retention for CLOs that would 

meet certain structural criteria and for a 

new option to allow third-party 

investors in CLOs to hold risk retention 

instead of CLO managers. Commenters 

also generally opposed the agencies’ 

proposed alternative for risk retention 

for open market CLOs in which a lead 

arranger in a syndicated loan was 

allowed to satisfy the risk retention 

requirement, asserting that this option 

was inconsistent with current market 

practice and that lead arranger banks 

would be hesitant to retain risk as 

proposed in the revised proposal 

without being allowed to hedge or 

transfer that risk because they would be 

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33 15 U.S.C. 1639c. 

34See Final QM rule. 

concerned about criticism from bank 

regulators. 

The agencies’ proposed definition of a 

QRM was also the subject of significant 

commentary. Overall, commenters 

supported the agencies’ proposal to 

align the QRM definition with the QM 

definition. Several commenters asked 

that the QRM definition accommodate 

the use of blended pools of QRM and 

non-QRM loans. Other commenters 

sought more specific expansions of the 

definition, including an exemption for 

loans originated by community 

development financial institutions and 

other community-focused lenders that 

are exempt from the ability-to-repay 

requirements (and, as a result, do not 

qualify to be QMs under TILA), 

imposition of a less than 5 percent risk 

retention requirement for some loans 

that did not qualify for QM, and the 

inclusion of non-U.S. originated loans. 

Several commenters expressed concern 

with both the alignment of the QRM 

definition with the QM definition as 

well as the alternative, more restrictive, 

definition of QRM for which the 

agencies had invited comment, 

suggesting that the agencies use the 

definition of QRM in the original 

proposal. 

Commenters expressed concerns on 

certain other aspects of the rule. 

Numerous commenters opposed the 

cash flow restrictions on the eligible 

horizontal residual interest option, 

making various assertions on 

impracticalities and impacts on 

different asset classes that could result 

from the restrictions. Commenters also 

expressed concerns about the scope of 

the seller’s interest option for revolving 

pool securitization arrangements and 

whether it would comport with current 

market practices. With respect to CMBS, 

some commenters were concerned that 

the third-party purchaser options were 

too expansive, while other commenters 

asked for further reductions in the 

restrictions on B-piece risk retention. 

Commenters also asked for a number of 

modifications to the proposed 

underwriting standards for qualifying 

commercial, commercial real estate, and 

automobile loans, including an 

exemption for CMBS transactions where 

all the securitized assets are extensions 

of credit to one borrower or its affiliates. 

C. Overview of the Final Rule 

After considering all comments 

received in light of the purpose of the 

statute and concerns from investors and 

individuals seeking credit, and after 

engaging in additional analysis of the 

securitization and lending markets, the 

agencies have adopted the revised 

proposal with some modifications, as 

discussed below. The agencies are 

adopting the final QRM definition, as 

proposed, to mean a QM, as defined in 

section 129C of TILA 33 and its 

implementing regulations, as amended 

from time to time.34 The agencies 

continue to believe that a QRM 

definition that aligns with the definition 

of a QM meets the statutory goals and 

directive of section 15G of the Exchange 

Act to protect investors and enhance 

financial stability, in part by limiting 

credit risk, while also preserving access 

to affordable credit and facilitating 

compliance. As discussed in further 

detail below, the agencies will review 

the definition of QRM periodically— 

beginning not later than four years after 

the effective date of the rule with 

respect to securitizations of residential 

mortgages, and every five years 

thereafter. These timeframes are 

designed to coordinate the agencies’ 

review of the QRM definition with the 

timing of the CFPB’s statutorily 

mandated assessment of QM, as well as 

to better ensure that the QRM definition 

continues to meet the goals and 

directive of section 15G. The final rule 

also provides that any of the agencies 

may request a review of the definition 

of QRM at any time as circumstances 

warrant. 

In addition, the agencies are adopting 

the minimum risk retention requirement 

and risk retention options, with some 

modifications to address specific 

commenter concerns. As discussed in 

more detail below, and consistent with 

the revised proposal, the final rule 

applies a minimum 5 percent base risk 

retention requirement to all 

securitization transactions that are 

within the scope of section 15G of the 

Exchange Act and prohibits the sponsor 

from hedging or otherwise transferring 

its retained interest prior to the 

applicable sunset date. The final rule 

also allows a sponsor to satisfy its risk 

retention obligation by retaining an 

eligible vertical interest, an eligible 

horizontal residual interest, or any 

combination thereof as long as the 

amount of the eligible vertical interest 

and the amount of the eligible 

horizontal residual interest combined is 

no less than 5 percent. The amount of 

the eligible vertical interest is equal to 

the percentage of each class of ABS 

interests issued in the securitization 

transaction held by the sponsor as 

eligible vertical risk retention. The 

amount of eligible horizontal residual 

interest is equal to the fair value of the 

eligible horizontal residual interest 

divided by the fair value of all ABS 

interests issued in the securitization 

transaction. After considering the 

numerous comments received, the 

agencies have concluded that the 

proposed cash flow restriction on the 

eligible horizontal residual interest (as 

well as the alternative described in the 

reproposal) could lead to unintended 

consequences or have a disparate 

impact on some asset classes. The 

agencies have therefore decided not to 

include such restrictions under the final 

rule. 

With respect to the proposed 

disclosure requirements related to the 

fair value calculation of eligible 

horizontal residual interests, the 

agencies continue to believe that it is 

important to the functioning of the final 

rule to ensure that investors and the 

markets, as well as regulators, are 

provided with key information about 

the methodologies and assumptions that 

are used by sponsors under the final 

rule to calculate the amount of their 

eligible horizontal residual interests in 

accordance with fair value standards. 

Because the agencies believe that 

disclosures of the assumptions inherent 

in fair value calculations are necessary 

to enable investors to make informed 

investment decisions, the agencies are 

generally retaining the proposed fair 

value disclosure requirements, with 

some modifications in response to 

commenter concern, as further 

discussed below. 

Furthermore, as discussed in more 

detail below, the agencies are adopting 

the revised proposal’s provisions for 

CMBS third-party purchasers with some 

modifications to respond to specific 

commenter concerns. In addition, the 

agencies are retaining the proposed fiveyear period during which transfer 

among qualified third-party purchasers 

of CMBS eligible horizontal residual 

interests that are retained in satisfaction 

of the final rule will not be permitted. 

The agencies are also adopting the 

proposed underwriting standards for 

commercial, commercial real estate, and 

automobile loans, with some minor 

adjustments to the commercial real 

estate underwriting standards as 

described below. The agencies are also 

adopting the revised proposal’s 

treatment of allocation to originators, 

tender option bonds, and ABCP 

conduits, with some limited 

modifications, as described below. With 

respect to revolving pool 

securitizations—described in the 

reproposal as revolving master trusts— 

the agencies are adopting the reproposal 

with several refinements designed to 

expand availability of the seller’s 

interest option. The final rule also 

contains the various proposed 

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35These items do not include interpretation and 

guidance in staff comment letters and other staff 

guidance directed to specific institutions that is not 

intended to be relied upon by the public generally. 

Nor do they include interpretations and guidance 

contained in administrative or judicial enforcement 

proceedings by the agencies, or in an agency report 

of examination or inspection or similar confidential 

supervisory correspondence. 

36See 17 CFR 229.1100 through 17 CFR 229.1123. 

37See Item 1101 of the Commission’s Regulation 

AB (17 CFR 229.1101) (defining a sponsor as ‘‘a 

person who organizes and initiates an asset-backed 

securities transaction by selling or transferring 

assets, either directly or indirectly, including 

through an affiliate, to the issuing entity.’’). 

38Section 2(a)(4) of Securities Act (15 U.S.C. 

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

include every person who issues or proposes to 

issue any security, except that with respect to 

certificates of deposit, voting-trust certificates, or 

collateral trust certificates, or with respect to 

exemptions for government-related 

transactions and certain 

resecuritizations from the revised 

proposal. 

The agencies also, as proposed, are 

applying risk retention to CLO managers 

as ‘‘securitizers’’ of CLO transactions 

under section 15G of the Exchange Act 

and, as discussed in further detail 

below, are not adopting structural 

exemptions or third-party options as 

suggested by some commenters. After 

carefully considering comments, the 

suggested exemptions and alternatives, 

the purposes of section 15G of the 

Exchange Act, and the features and 

dynamics of CLOs and the leveraged 

loan market, the agencies have 

concluded that risk retention is 

appropriately applied to CLO managers 

and a structural exemption or thirdparty option would likely undermine 

the consistent application of the final 

rule. Furthermore, the agencies are 

retaining in the final rule the proposed 

alternative for open market CLOs 

whereby, for each loan purchased by the 

CLO, risk may be retained by a lead 

arranger. The agencies appreciate that 

this option may not reflect current 

practice, but have concluded that the 

option may provide a sound method for 

meaningful risk retention for the CLO 

market in the future. 

D. Post-Adoption Interpretation and 

Guidance 

The preambles to the original and 

revised proposals described the 

agencies’ intention to jointly approve 

certain types of written interpretations 

concerning the scope of section 15G and 

the final rule issued thereunder. Several 

commenters on the original proposal, 

and some commenters on the 

reproposal, expressed concern about the 

agencies’ process for issuing written 

interpretations jointly and the possible 

uncertainty about the interpretation of 

the rule that may arise due to this 

process. 

The agencies have endeavored to 

provide specificity and clarity in the 

final rule to avoid conflicting 

interpretations or uncertainty. In the 

future, if the agencies determine that 

further guidance would be beneficial for 

market participants, the agencies may 

jointly publish interpretive guidance, as 

the Federal banking agencies have done 

in the past. In addition, the agencies 

note that market participants can, as 

always, seek guidance concerning the 

rule from their primary Federal banking 

regulator or, if such market participant 

is not a depository institution, the 

Commission. In light of the joint nature 

of the agencies’ rule writing authority, 

the agencies continue to view the 

consistent application of the final rule 

as a benefit and intend to consult with 

each other when adopting staff 

interpretations or guidance on the final 

rule that would be shared with the 

public generally in order to attempt to 

achieve full consensus on such 

interpretations and guidance.35 In order 

to facilitate this goal, the Federal 

banking agencies and the Commission 

intend to coordinate as needed to 

discuss pending requests for such 

interpretations and guidance, with the 

participation of HUD and FHFA when 

such agencies are among the appropriate 

agencies for such matters. 

II. General Definitions and Scope 

The original proposal defined several 

terms applicable to the overall rule. The 

original proposal provided that the 

proposed risk retention requirements 

would have applied to sponsors in 

securitizations that involve the issuance 

of ‘‘asset-backed securities’’ and defined 

the terms ‘‘asset-backed security’’ and 

‘‘asset’’ consistent with the definitions 

of those terms in the Exchange Act. The 

original proposal noted that section 15G 

does not appear to distinguish between 

transactions that are registered with the 

Commission under the Securities Act of 

1933 (the Securities Act) and those that 

are exempt from registration under the 

Securities Act. It further noted that the 

proposed definition of asset-backed 

security, which would have been 

broader than that in the Commission’s 

Regulation AB,36 included securities 

that are typically sold in transactions 

that are exempt from registration under 

the Securities Act, such as collateralized 

debt obligations (CDOs) and securities 

issued or guaranteed by an Enterprise. 

As a result, pursuant to the definitions 

in the original proposal, the proposed 

risk retention requirements would have 

applied to securitizers of offerings of 

asset-backed securities regardless of 

whether the offering was registered with 

the Commission under the Securities 

Act. 

Under the original proposal, risk 

retention requirements would have 

applied to the securitizer in each 

‘‘securitization transaction,’’ defined as 

a transaction involving the offer and 

sale of ABS interests by an issuing 

entity. The original proposal also 

explained that the term ‘‘ABS interest’’ 

would refer to all types of interests or 

obligations issued by an issuing entity, 

whether or not in certificated form, 

including a security, obligation, 

beneficial interest, or residual interest, 

but would not include interests, such as 

common or preferred stock, in an 

issuing entity that are issued primarily 

to evidence ownership of the issuing 

entity, and the payments, if any, which 

are not primarily dependent on the cash 

flows of the collateral held by the 

issuing entity. 

Section 15G stipulates that its risk 

retention requirements be applied to a 

‘‘securitizer’’ of an asset-backed security 

and, in turn, that a securitizer is either 

an issuer of an asset-backed security or 

a person who organizes and initiates a 

securitization transaction by selling or 

transferring assets, either directly or 

indirectly, including through an affiliate 

or issuer. The original proposal 

discussed the fact that the second prong 

of this definition is substantially 

identical to the definition of a 

‘‘sponsor’’ of a securitization transaction 

in the Commission’s Regulation AB37

and defined the term ‘‘sponsor’’ in a 

manner consistent with the definition of 

that term in the Commission’s 

Regulation AB. 

As noted in the original proposal, the 

agencies believe that applying the risk 

retention requirement to the sponsor of 

the ABS interests—as provided by 

section 15G—is appropriate in light of 

the active and direct role that a sponsor 

typically has in arranging a 

securitization transaction and selecting 

the assets to be securitized. This role 

best situates the sponsor to monitor and 

control the credit quality of the 

securitized assets. In some cases, the 

transfer of assets by the sponsor will 

take place through a wholly-owned 

subsidiary of the sponsor that is often 

referred to as the ‘‘depositor.’’ As noted 

above, the definition of ‘‘securitizer’’ in 

section 15G(a)(3)(A) includes the 

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

The term ‘‘issuer’’ when used in the 

federal securities laws may have 

different meanings depending on the 

context in which it is used. For 

example, for several purposes under the 

federal securities laws, including the 

Securities Act 38 and the Exchange 

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certificates of interest or shares in an 

unincorporated investment trust not having a board 

of directors (or persons performing similar 

functions), the term issuer means the person or 

persons performing the acts and assuming the 

duties of depositor or manager pursuant to the 

provisions of the trust or other agreement or 

instrument under which the securities are issued. 

39See Exchange Act sec. 3(a)(8) (15 U.S.C. 

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

Act). 

40See, e.g., Securities Act Rule 191 (17 CFR 

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

240.3b–19). 

41For asset-backed securities transactions where 

there is not an intermediate transfer of the assets 

from the sponsor to the issuing entity, the term 

depositor refers to the sponsor. For asset-backed 

securities transactions where the person 

transferring or selling the pool assets is itself a trust 

(such as in an issuance trust structure), the 

depositor of the issuing entity is the depositor of 

that trust. See section 2 of the final rule. Securities 

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

note that the person acting as the depositor in its 

capacity as depositor to the issuing entity is a 

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

own securities in order to make clear—for 

example—that any applicable exemptions from 

Securities Act registration that person may have 

with respect to its own securities are not applicable 

to the asset-backed securities. That distinction does 

not appear relevant here because the risk retention 

rule would not be applicable to an issuance by such 

person of securities that are not asset-backed 

securities. 

42See 15 U.S.C. 78o–11(a)(3)(B) and section 2 of 

the final rule, infra. 

Act 39 (of which section 15G is a part) 

and the rules promulgated under these 

Acts,40 the term ‘‘issuer’’ when used 

with respect to a securitization 

transaction is defined to mean the 

entity—the depositor—that deposits the 

assets that collateralize the asset-backed 

securities with the issuing entity. As 

stated in the original proposal, the 

agencies interpret the reference in 

section 15G(a)(3)(A) to an ‘‘issuer of an 

asset-backed security’’ as referring to the 

‘‘depositor’’ of the securitization 

transaction, consistent with how that 

term has been defined and used under 

the federal securities laws in connection 

with asset-backed securities.41

As noted above, the rule generally 

applies the risk retention requirements 

of section 15G to a sponsor of the 

securitization transaction. In many cases 

the depositor and the sponsor are the 

same legal entity; however, even in 

cases where the depositor and the 

sponsor are not the same legal entity, 

the depositor is a pass-through vehicle 

for the transfer of assets and is either 

controlled or funded by the sponsor. 

Therefore, under the rule, the definition 

of sponsor effectively includes the 

depositor of the securitization 

transaction, and should identify the 

party subject to the risk retention 

requirements for every securitization 

transaction. Therefore, in the agencies’ 

view, applying the risk retention 

requirement to the sponsor, as defined 

in the rule, substantively aligns with the 

definition of ‘‘securitizer’’ in section 

15G of the Exchange Act. 

Other than issues concerning CLOs, 

which are discussed in Part III.B.7; 

issues concerning ABCP, which are 

discussed in Part III.B.4; and issues 

concerning sponsors of municipal bond 

repackagings, which are discussed in 

Part III.B.8 of this Supplementary 

Information, comments with regard to 

the definition of securitizer or sponsor 

were generally limited to requests that 

the final rule provide that certain 

specified persons—such as 

underwriting sales agents—be expressly 

excluded from the definition of 

securitizer or sponsor for the purposes 

of the risk retention requirements. 

In response to comments received 

relating to various transaction parties 

requesting that the agencies either 

designate as sponsors, or clarify would 

meet the requirements of the definition 

of sponsor, the agencies are providing 

some guidance with respect to the 

definition of sponsor. The statute and 

the rule define a securitizer as a person 

who ‘‘organizes and initiates an assetbacked securities transaction by selling 

or transferring assets, either directly or 

indirectly, including through an 

affiliate, to the issuer.’’ 42 The agencies 

believe that the organization and 

initiation criteria in both definitions are 

critical to determining whether a person 

is a securitizer or sponsor. The agencies 

are of the view that, in order to qualify 

as a party that organizes and initiates a 

securitization transaction and, thus, as a 

securitizer or sponsor, the party must 

have actively participated in the 

organization and initiation activities 

that would be expected to impact the 

quality of the securitized assets 

underlying the asset-backed 

securitization transaction, typically 

through underwriting and/or asset 

selection. The agencies believe this 

interpretation of the statutory language 

‘‘organize and initiate’’ is reasonable 

because it further accomplishes the 

statutory goals of risk retention— 

alignment of the incentives of the 

sponsor of the securitization transaction 

with the investors and improvement in 

the underwriting and selection of the 

securitized assets. Without this active 

participation, the holder of retention 

could be merely a speculative investor, 

with no ability to influence 

underwriting or asset selection. In 

addition, the interests of a speculative 

investor may not be aligned with those 

of other investors. For example, another 

asset-backed security issuer would not 

meet the ‘‘organization and initiation’’ 

criteria in the definition of ‘‘sponsor’’ as 

such an entity could not be the party 

that actively makes decisions regarding 

asset selection or underwriting. 

Additionally, the agencies believe that a 

party who does not engage in this type 

of active participation would be a thirdparty holder of risk retention, which 

(with the narrow exception of a 

qualified third-party purchaser in a 

CMBS transaction) is not an acceptable 

holder of retention under the rule 

because the participation of such a party 

does not result in the more direct 

alignment of incentives achieved by 

requiring the party with underwriting or 

asset selection authority to retain risk. 

Thus, for example, an entity that serves 

only as a pass-through conduit for assets 

that are transferred into a securitization 

vehicle, or that only purchases assets at 

the direction of an independent asset or 

investment manager, only pre-approves 

the purchase of assets before selection, 

or only approves the purchase of assets 

after such purchase has been made 

would not qualify as a ‘‘sponsor’’. If 

such a person retained risk, it would be 

an impermissible third-party holder of 

risk retention for purposes of the rule, 

because such activities, in and of 

themselves, do not rise to the level of 

‘‘organization and initiation’’. In 

addition, negotiation of underwriting 

criteria or asset selection criteria or 

merely acting as a ‘‘rubber stamp’’ for 

decisions made by other transaction 

parties does not sufficiently distinguish 

passive investment from the level of 

active participation expected of a 

sponsor or securitizer. 

The original proposal would have 

defined the term ‘‘originator’’ in the 

same manner as section 15G, namely, as 

a person who, through the extension of 

credit or otherwise, creates a financial 

asset that collateralizes an asset-backed 

security, and sells the asset directly or 

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

or depositor). The original proposal 

went on to note that because this 

definition refers to the person that 

‘‘creates’’ a loan or other receivable, 

only the original creditor under a loan 

or receivable—and not a subsequent 

purchaser or transferee—would have 

been an originator of the loan or 

receivable for purposes of section 15G. 

The revised proposal kept the definition 

from the original proposal. 

The original proposal referred to the 

assets underlying a securitization 

transaction as the ‘‘securitized assets,’’ 

meaning assets that are transferred to a 

special purpose vehicle (SPV) that 

issues the ABS interests and that stand 

as collateral for those ABS interests. 

‘‘Collateral’’ was defined as the property 

that provides the cash flow for payment 

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77610 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

43See 12 CFR 1026.43. 

44See 12 CFR 1026.43. 

45This addition to the definition is substantially 

similar to the CFPB’s definition of ‘‘dwelling’’ in 

Regulation Z. See 12 CFR 1026.2(19). 

of the ABS interests issued by the 

issuing entity. Taken together, these 

definitions were meant to include the 

loans, leases, or similar assets that the 

depositor places into the issuing entity 

at the inception of the transaction, 

though it would have also included 

other assets such as pre-funded cash 

reserve accounts. Commenters to the 

original proposal stated that, in addition 

to this property, the issuing entity may 

hold other assets. For example, the 

issuing entity may acquire interest rate 

derivatives to convert floating rate 

interest income to fixed rate, or the 

issuing entity may accrete cash or other 

liquid assets in reserve funds that 

accumulate cash generated by the 

securitized assets. As another example, 

commenters stated that an ABCP 

conduit may hold a liquidity guarantee 

from a bank on some or all of its 

securitized assets. The agencies retained 

these definitions of securitized assets 

and collateral in the revised proposal. 

Some commenters expressed concern 

with respect to the scope of the terms of 

the definitions of asset-backed 

securities, securitization transactions, 

and ABS interests in the original 

proposal and suggested specific 

exemptions or exclusions from their 

application. Similarly, a number of 

commenters requested clarification of 

the scope of the definition of ‘‘ABS 

interest,’’ or suggested narrowing the 

definition, while other commenters 

suggested an expansion of the scope of 

the ‘‘securitization transaction’’ 

definition. Comments with regard to 

definitions of securitizer and sponsor in 

the original proposal were generally 

limited to requests that specified 

persons be expressly excluded from, or 

included in, the definition of securitizer 

or sponsor for the purposes of the risk 

retention requirements. The agencies 

determined to leave the definitions of 

securitizer and sponsor substantially 

unchanged in the revised proposal. 

After consideration of all the comments 

on the original proposal, the agencies 

did not believe that significant changes 

to most definitions applicable 

throughout the proposed rule were 

necessary and, in the revised proposal, 

retained most definitions as originally 

proposed. 

The agencies did add some 

substantive definitions to the revised 

proposal, including proposing a 

definition of ‘‘servicing assets,’’ which 

would be any rights or other assets 

designed to assure the servicing, timely 

payment, or timely distribution of 

proceeds to security holders, or assets 

related or incidental to purchasing or 

otherwise acquiring and holding the 

issuing entity’s securitized assets. The 

agencies noted in the revised proposal 

that such assets may include cash and 

cash equivalents, contract rights, 

derivative agreements of the issuing 

entity used to hedge interest rate and 

foreign currency risks, or the collateral 

underlying the securitized assets. As 

provided in the reproposed rule, 

‘‘servicing assets’’ also include proceeds 

of assets collateralizing the 

securitization transactions, whether in 

the form of voluntary payments from 

obligors on the assets or otherwise (such 

as liquidation proceeds). The agencies 

are adopting this definition 

substantially as reproposed in order to 

ensure that the provisions appropriately 

accommodate the need, in 

administering a securitization 

transaction on an ongoing basis, to hold 

various assets other than the loans or 

similar assets that are transferred into 

the asset pool by the securitization 

depositor. In this way, the definition is 

similar to the definition of ‘‘eligible 

assets’’ in Rule 3a–7 under the 

Investment Company Act of 1940, 

which specifies conditions under which 

the issuer of non-redeemable fixedincome securities collateralized by selfliquidating financial assets will not be 

deemed to be an investment company. 

In light of the agencies’ adoption of 

the QRM definition from the reproposal 

and the exemption for certain three-tofour unit residential mortgages (as 

discussed in section VII below), the 

agencies are modifying the proposed 

definition of ‘‘residential mortgage’’ to 

clarify that all loans secured by 1–4 unit 

residential properties will be 

‘‘residential mortgages’’ for the purposes 

of the final rule and subject to the rule’s 

provisions regarding residential 

mortgages (such as the sunset on 

hedging and transfer restrictions 

specific to residential mortgages) if they 

do not qualify for an exemption. Under 

the final rule, a residential mortgage 

would mean a residential mortgage that 

is a ‘‘covered transaction’’ as defined in 

the CFPB’s Regulation Z; 43 any 

transaction that is specifically exempt 

from the definition of ‘‘covered 

transaction’’ under the CFPB’s 

Regulation Z; 44 and, as a modification 

to the proposed definition, any other 

loan secured by a residential structure 

that contains one to four units, whether 

or not that structure is attached to real 

property, including condominiums, and 

if used as residences, mobile homes and 

trailers.45 Therefore, the term 

‘‘residential mortgage’’ would include 

home equity lines of credit, reverse 

mortgages, mortgages secured by 

interests in timeshare plans, temporary 

loans, and certain community-focused 

residential mortgages further discussed 

in Part VII of this Supplementary 

Information. It would also include 

mortgages secured by 1–4 unit 

residential properties even if the credit 

is deemed for business purposes under 

Regulation Z. 

Many comments on the revised 

proposal were similar to, or repeated, 

the comments on the original proposal. 

Some commenters asked that specific 

definitions be added to the rule, such as 

eligible participation interest, owner’s 

interest, and participant’s interest. With 

respect to the definitions of securitizer 

and sponsor, several commenters on the 

revised proposal requested that the final 

rule expressly exempt, or include, 

certain categories or groups of persons— 

such as underwriting sales agents, 

multiple sponsors of transactions, 

affiliated entities, or, in the case of 

tender-option bonds and ABCP, brokers 

who acquire and securitize assets at the 

direction of a third party. Other 

commenters requested confirmation that 

certain categories of transactions would 

not qualify as a sale or transfer of an 

interest for purposes of the rule. 

Three commenters requested that the 

agencies reconsider their decision to 

treat non-economic residual interests in 

real estate investment conduits 

(REMICS) as ABS interests, noting the 

potential negative tax consequences for 

sponsors of REMICS. Another 

commenter requested that lower-tier 

REMIC interests in tiered structures be 

exempted from treatment as ABS 

interests, and a separate commenter 

requested an express exclusion of 

REMIC residual interests entirely. One 

commenter again asserted that the 

definition of ‘‘securitization 

transaction’’ was overly broad because it 

would include a variety of corporate 

debt repackagings, which the 

commenter asserted should be expressly 

exempt from risk retention. One 

commenter requested clarification that 

issuers of securities collateralized by 

qualifying assets could hold hedging 

agreements, insurance policies, and 

other forms of credit enhancement as 

permitted by the Commission’s 

Regulation AB. One commenter asked 

that the definition of commercial real 

estate be revised to include land loans, 

including loans made to owners of fee 

interests in land leased to third parties 

who own improvements on the land. 

While the final rule generally retains 

the definitions in the revised proposal, 

to address the concerns raised by 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77611 

46Some commenters expressed concern that 

including REMICs in the ABS interest definition 

would create tax liabilities unrelated to the credit 

risk of the underlying collateral and would likely 

reduce the intended impact of the risk retention 

rules since non-economic residual interests usually 

have a negative value. 

47See final rule at sections 3 through 10. Similar 

to the proposal, the final rule, in some instances, 

permits a sponsor to allow another person to retain 

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

third-party purchasers in CMBS transactions, and 

originator-sellers in ABCP conduit securitizations). 

However, in such circumstances, the final rule 

includes limitations and conditions designed to 

ensure that the purposes of section 15G continue to 

be fulfilled. Further, even when another person is 

permitted to retain risk, the sponsor still remains 

responsible under the rule for compliance with the 

risk retention requirements, as discussed below. 

48As required by section 15G, the agencies have 

established automobile, commercial real estate, and 

commercial loan asset classes and related 

underwriting standards designed to ensure a low 

credit risk for assets originated to those standards. 

The agencies provided for zero risk retention for 

loans meeting the prescribed underwriting 

standards. 

commenters with respect to REMICs,46

the agencies have modified the 

definition of ABS interest to exclude (i) 

a non-economic residual interest issued 

by a REMIC and (ii) an uncertificated 

regular interest in a REMIC that is held 

only by another REMIC, where both 

REMICs are part of the same structure 

and a single REMIC issues ABS interests 

to investors. The agencies do not believe 

that significant changes to the general 

definitions are necessary or appropriate 

in light of the purposes of the statute. 

All adjustments to the general 

definitions are discussed below in this 

Supplementary Information in the 

context of relevant risk retention 

options. 

III. General Risk Retention 

Requirement 

A. Minimum Risk Retention 

Requirement 

Section 15G of the Exchange Act 

generally requires that the agencies 

jointly prescribe regulations that require 

a securitizer to retain not less than 5 

percent of the credit risk for any asset 

that the securitizer, through the 

issuance of ABS interests, transfers, 

sells, or conveys to a third party, unless 

an exemption from the risk retention 

requirements for the securities or 

transaction is otherwise available (e.g., 

if the ABS interests are collateralized 

exclusively by QRMs). Consistent with 

the statute, the reproposal generally 

would have required that a sponsor 

retain an economic interest equal to at 

least 5 percent of the aggregate credit 

risk of the assets collateralizing an 

issuance of ABS interests (the base risk 

retention requirement). For 

securitizations where two or more 

entities would each meet the definition 

of sponsor, the reproposal would have 

required that one of the sponsors retain 

the credit risk of the securitized assets 

in accordance with the requirements of 

the rule. Under the reproposal, the base 

risk retention requirement would have 

been available as an option to sponsors 

of all securitization transactions within 

the scope of the rule, regardless of 

whether the sponsor was an insured 

depository institution, a bank holding 

company or subsidiary thereof, a 

registered broker-dealer, or another type 

of entity. 

Some comments addressed the 

proposed minimum risk retention 

requirement. One commenter expressed 

support for the proposed minimum 

requirement of 5 percent risk retention, 

asserting that such a requirement would 

promote higher quality lending, protect 

investor interests, and limit the 

originate-to-distribute business model. 

Other commenters requested a higher 

minimum risk retention requirement 

depending on asset quality. One 

commenter asserted that 5 percent 

should be the minimum and that the 

purpose of risk retention would be 

defeated by applying 5 percent to 

situations in which assets are sold at a 

discount from par. That commenter 

proposed that the requirement should 

be either (i) the greater of 5 percent or 

the expected losses on the assets or (ii) 

the greater of 5 percent or the 

conditional expected losses on the 

assets or asset class under a moderate 

economic stress environment. Another 

commenter stated that some sponsors 

hold less than 5 percent because of the 

high quality of some assets, and 

requiring 5 percent retention could 

potentially double costs in some 

instances. Another commenter asserted 

that retaining 5 percent may not be 

sufficient as many sponsors held more 

than 5 percent credit risk in their 

securitizations before the crisis. That 

same commenter stated that investors 

were likely to insist that originators 

retain some credit risk. One commenter 

proposed a minimum risk retention 

requirement of 20 percent, while 

another commenter requested that 

sponsors be required to hold 100 

percent risk retention for a specified 

period of time. For securitizations 

where multiple entities each meet the 

definition of sponsor, one commenter 

stated that multiple sponsors should be 

permitted to allocate the required 

amount of risk retention among 

themselves, so long as the aggregate 

amount retained satisfies the 

requirements of the risk retention rules. 

Other commenters requested a lower 

minimum for pools that blend assets 

that would be exempt from risk 

retention by meeting the proposed 

underwriting standards with assets not 

meeting the standards, which is 

discussed in further detail in Part V of 

this Supplementary Information. 

After careful consideration of the 

comments received, the agencies are 

adopting the minimum risk retention 

requirement as proposed. Consistent 

with the reproposal and the general 

requirement in section 15G of the 

Exchange Act, the final rule applies a 

minimum 5 percent base risk retention 

requirement to all securitization 

transactions within the scope of section 

15G, unless an exemption under the 

final rule applies.47 The agencies 

believe that this requirement will 

provide sponsors with an incentive to 

monitor and control the underwriting of 

securitized assets and help align the 

interests of the sponsor with those of 

investors in the ABS interests. The 

agencies note that, while Congress 

directed that the rule include a risk 

retention requirement of no less than 5 

percent of the credit risk for any asset, 

parties to a securitization transaction 

may agree that more risk will be 

retained. While some commenters asked 

that the rule calibrate the credit risk on 

an asset class basis (i.e., make a 

determination that the credit risk 

associated with certain asset classes is 

lower than for other asset classes), the 

agencies are declining to do that at this 

time because the data provided by 

commenters do not provide a sufficient 

basis for the calibration of credit risk on 

an asset class basis.48 For securitizations 

where two or more entities would each 

meet the definition of sponsor, the final 

rule requires that one of the sponsors 

complies with the rule, consistent with 

the original and revised proposals. The 

final rule does not prohibit multiple 

sponsors from retaining credit risk as 

long as one of those sponsors complies 

with the requirements of the final rule. 

The agencies are not allowing sponsors 

to divide the required risk retention 

generally because allowing multiple 

sponsors to divide required risk 

retention among themselves would 

dilute the economic risk being retained 

and, as a result, reduce the intended 

alignment of interest between the 

sponsor and the investors. 

The agencies do not believe that it is 

necessary or appropriate to attempt to 

vary the amount of risk retention based 

on the quality of the assets or other 

factors and believe that attempting to do 

so would unnecessarily complicate 

compliance with the rule. As discussed 

below, the agencies are adopting the 

requirement that an eligible horizontal 

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77612 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

49See 15 U.S.C. 78o–11(c)(1)(C)(i); see also S. 

Rep. No. 111–176, at 130 (2010) (‘‘The Committee 

[on Banking, Housing, and Urban Affairs] believes 

that implementation of risk retention obligations 

should recognize the differences in securitization 

practices for various asset classes.’’). 

50See Board Report; see also Macroeconomic 

Effects of Risk Retention Requirements, Chairman of 

the Financial Stability Oversight Counsel (January 

2011), available at http://www.treasury.gov/

initiatives/wsr/Documents/

Section946RiskRetentionStudy(FINAL).pdf. 

residual interest be measured at fair 

value using a fair value methodology 

acceptable under U.S. generally 

accepted accounting principles (GAAP). 

The agencies believe that generally 

requiring that retention be 5 percent of 

the fair value of the ABS interests issued 

in the securitization transaction will 

sufficiently calibrate the actual amount 

of retention to the value of the assets, 

including how that value may be 

affected by expected losses. In addition, 

subject to limited exceptions, such as 

that applicable to transfers of CMBS 

interests among qualified third-party 

purchasers after five years, transfers to 

majority-owned affiliates, and certain 

permitted hedging activities, the final 

rule prohibits the sponsor from hedging 

or otherwise transferring its retained 

interest prior to the applicable sunset 

date, as discussed in Part IV.F of this 

Supplementary Information. 

The agencies note that the base risk 

retention requirement is a regulatory 

minimum and not a limit on what 

investors or other market participants 

may require. The sponsor, originator, or 

other party to a securitization may 

retain additional exposure to the credit 

risk of assets that the sponsor, 

originator, or other party helps 

securitize beyond that required by the 

rule, either on its own initiative or in 

response to the demands or 

requirements of private market 

participants. 

B. Permissible Forms of Risk 

Retention—Menu of Options 

Section 15G of the Exchange Act 

expressly provides the agencies the 

authority to determine the permissible 

forms through which the required 

amount of risk retention must be held.49

Accordingly, the reproposal, like the 

original proposal, would have provided 

sponsors with multiple options to 

satisfy the risk retention requirements of 

section 15G. The flexibility provided in 

the reproposal’s menu of options for 

complying with the risk retention 

requirement was designed to take into 

account the heterogeneity of 

securitization markets and practices and 

to reduce the potential for the proposed 

rules to negatively affect the availability 

and costs of credit to consumers and 

businesses. As proposed, the menu of 

options approach was designed to be 

consistent with the various ways in 

which a sponsor or other entity, in 

historical market practices, may have 

retained exposure to the credit risk of 

securitized assets.50 Historically, 

whether or how a sponsor retained 

exposure to the credit risk of the assets 

it securitized was determined by a 

variety of factors including the rating 

requirements of the NRSROs, investor 

preferences or demands, accounting and 

regulatory capital considerations, and 

whether there was a market for the type 

of interest that might ordinarily be 

retained (at least initially by the 

sponsor). 

Commenters generally supported the 

menu-based approach of providing 

sponsors with the flexibility to choose 

from a number of permissible forms of 

risk retention. While commenters were 

generally supportive of a menu-based 

approach, several commenters requested 

that the final rule provide additional 

options and increased flexibility for 

sponsors to comply with the risk 

retention requirement. In this regard, 

several commenters asserted that the 

final rule should permit third-party 

credit support as additional forms of 

risk retention, including insurance 

policies, guarantees, liquidity facilities, 

and standby letters of credit. One 

commenter stated that such unfunded 

forms of credit support are permitted by 

the European risk retention framework 

and allowing similar options would 

provide greater consistency between the 

U.S. and European rules. This 

commenter further contended that the 

final rule, at a minimum, should permit 

such forms of unfunded risk retention 

for a subset of sponsors, such as 

regulated banks. A few commenters 

requested that overcollateralization be 

permitted as an alternative method of 

risk retention. Further, the agencies 

received several comments requesting 

that the final rule include an option 

allowing retention to be held in the form 

of interests in the securitized assets 

themselves. Along these lines, several 

commenters sought additional 

flexibility under the rule to hold risk 

retention as loan participation interests 

or companion notes instead of an ABS 

interest. One commenter stated that, 

while the use of participations in 

securitization transactions may not 

currently be customary, sponsors may 

find such a structure advantageous in 

connection with the risk retention 

requirements. A few commenters said 

that pari passu participation interests 

and structures using pari passu 

companion notes have been used in 

certain types of CMBS transactions. 

Other commenters requested that the 

final rule allow for subordinated 

participation interests. These 

commenters said pari passu 

participations should qualify as vertical 

risk retention and subordinate 

participation interests should qualify as 

horizontal risk retention. The main 

reason cited by these commenters for 

expanding the forms of risk retention 

recognized under the rule to include 

this form of retention, other than future 

flexibility as to form, was the possibility 

that the sponsor could hold the same 

economic exposure it would have as an 

ABS interest form of risk retention, 

while at the same time incurring lower 

regulatory capital charges for that 

exposure by holding it as a loan, and 

avoiding consolidation of the structure 

onto its balance sheet. Another 

commenter suggested that the 

availability of a participation option 

may be important for commercial banks 

because of their existing infrastructure 

to share risk on a pari passu basis. 

One commenter stated that the final 

rule should provide more flexibility by 

allowing sponsors to satisfy their risk 

retention requirement through a 

combination of means and that the rule 

should not mandate forms of risk 

retention for specific types of asset 

classes or specific types of transactions. 

The agencies have carefully 

considered the comments and are 

adopting the proposed menu of options 

approach to risk retention largely as 

proposed. The agencies continue to 

believe that providing options for risk 

retention is appropriate in order to 

accommodate the variety of 

securitization structures that will be 

subject to the final rule and that the 

menu of options, as proposed, provides 

sufficient flexibility for sponsors to 

satisfy their risk retention obligations. 

After carefully considering the 

comments requesting loan interests, 

such as loan participations, as an 

option, the agencies have decided not to 

expand the recognized legal forms of 

risk retention under the rule beyond 

ABS interests by including pari passu 

participation interests, subordinated 

participation interests, pari passu 

companion notes, or subordinated 

companion notes. The agencies are 

permitting specialized forms of 

participations for two particular asset 

classes as discussed below in 

connection with CLO securitizations 

and tender option bonds, subject to 

several requirements under the rule. 

However, the agencies believe that the 

rule already provides sufficient 

flexibility as to the economic forms of 

risk retention and an additional form of 

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51The agencies are using the term ‘‘face value’’ 

to mean the outstanding principal balance of a loan 

or other receivable or an ABS interest and, with 

respect to an asset that does not have a stated 

principal balance, it means an equivalent value 

measurement, such as securitization value. 

52The agencies have adopted a risk retention 

option for revolving pool securitizations that relies 

heavily on a comparison of the face value of the 

securitized assets and the face value of the ABS 

interests. However, reliance on the seller’s interest 

option is limited to revolving pool securitizations 

that include certain structural features and 

alignment of incentives to address many of the 

concerns the agencies had with respect to the 

reliance on face value to measure required credit 

risk retention. See Part III.B.2 of this Supplementary 

Information. 

53As discussed above, in the original proposal, a 

sponsor using standard risk retention would have 

had to choose between a 5 percent horizontal 

interest, 5 percent vertical interest, or a 

combination of horizontal and vertical interests that 

was approximately half horizontal and half vertical. 

The agencies reproposed standard risk retention 

with a more flexible structure in response to 

concerns raised by commenters on the original 

proposal. See Revised Proposal, 78 FR at 57937. 

54See Revised Proposal, 78 FR at 57937. 55See Revised Proposal, 78 FR 57939. 

risk retention is not necessary. The 

agencies are concerned that offering 

different legal forms, such as 

participation interests or companion 

loans, as a standard option would 

introduce substantial complexity to the 

rule in order to ensure that these forms 

of retention were implemented in a way 

that ensured that the holder had the 

same economic exposure as the holder 

of an ABS interest. In addition, given 

the commenters’ reasons for requesting 

that these options be made available, the 

agencies are concerned that permitting 

these types of interests to be held as 

retention could raise concerns about 

regulatory capital arbitrage. 

The agencies do not believe it would 

be appropriate to allow sponsors to 

satisfy risk retention obligations through 

third-party credit support, such as 

insurance policies, guarantees, liquidity 

facilities, or standby letters of credit. As 

discussed in the reproposal, such forms 

of credit support generally are not 

funded at closing and therefore may not 

be available to absorb losses at the time 

they occur. Except in the case of the 

guarantees from the Enterprises under 

the conditions specified, which include 

the Enterprises’ operating in 

conservatorship or receivership with 

capital support from the United States, 

the agencies continue to believe that 

unfunded forms of risk retention fail to 

provide sufficient alignment of 

incentives between sponsors and 

investors and are not including them as 

eligible forms of risk retention. 

The final rule does not permit 

overcollateralization as a standard 

method of risk retention. While 

overcollateralization may provide credit 

enhancement to a securitization, the 

agencies do not believe that a credit risk 

retention option based solely on a 

comparison of the face value 51 of the 

securitized assets and the face value of 

the ABS interests would provide 

meaningful risk retention consistent 

with the goals and intent of section 15G 

because the face value of both the 

securitized assets and the face value of 

the ABS interests can materially differ 

from their relative value and/or cost to 

the sponsor.52 Moreover, the fair value 

of an eligible horizontal residual interest 

takes into consideration the 

overcollateralization and excess spread 

in a securitization transaction as 

adjusted by expected loss and other 

factors. Further, for the reasons 

discussed in Part III.B.3 of this 

Supplementary Information, the final 

rule does not include a representative 

sample option. 

As in the reproposal, the permitted 

forms of risk retention in the final rule 

are subject to terms and conditions that 

are intended to help ensure that the 

sponsor (or other eligible entity) retains 

an economic exposure equivalent to 5 

percent of the credit risk of the 

securitized assets at a minimum. As 

described below, the final rule includes 

several modifications to the various 

forms of risk retention, as well as the 

terms and conditions that were 

proposed, to help ensure that sponsors 

have a meaningful stake in the overall 

performance and repayment of the 

assets that they securitize. Each of the 

forms of risk retention permitted by the 

final rule and the measures intended to 

ensure that sponsors retain meaningful 

credit risk are described below. 

1. Standard Risk Retention 

a. Structure of Standard Risk Retention 

Option 

Under the revised proposal, standard 

risk retention could have been used by 

a sponsor for any securitization 

transaction.53 Standard risk retention 

could have taken the form of: (i) Vertical 

risk retention; (ii) horizontal risk 

retention; and (iii) any combination of 

vertical and horizontal risk retention.54

Under the reproposal, a sponsor would 

have been permitted to satisfy its risk 

retention obligation by retaining an 

eligible vertical interest, an eligible 

horizontal residual interest, or any 

combination thereof, in a total amount 

equal to no less than 5 percent of the 

fair value of all ABS interests in the 

issuing entity that are issued as part of 

the securitization transaction. 

Through the vertical option, the 

reproposal would have allowed a 

sponsor to satisfy its risk retention 

obligation with respect to a 

securitization transaction by retaining at 

least 5 percent of the fair value of each 

class of ABS interests issued as part of 

the securitization transaction. This 

would provide the sponsor with an 

interest in the entire securitization 

transaction. As an alternative, the 

reproposal would have allowed a 

sponsor to satisfy its risk retention 

requirement under the vertical option 

by retaining a single vertical security. 

As discussed in the reproposal, a single 

vertical security would be an ABS 

interest entitling the holder to a 

specified percentage (e.g., 5 percent) of 

the principal and interest paid on each 

class of ABS interests in the issuing 

entity (other than such single vertical 

security) that result in the security 

representing the same percentage of fair 

value of each class of ABS interests. 

Under the reproposal, a sponsor also 

would have been permitted to satisfy its 

risk retention obligation by retaining an 

eligible horizontal residual interest in 

the issuing entity in an amount equal to 

no less than 5 percent of the fair value 

of all ABS interests in the issuing entity 

that are issued as part of the 

securitization transaction. In lieu of 

holding all or part of its risk retention 

in the form of an eligible horizontal 

residual interest, the reproposal would 

have allowed a sponsor to cause to be 

established and funded, in cash, a 

reserve account at closing (eligible 

horizontal cash reserve account) in an 

amount equal to the same dollar amount 

(or corresponding amount in the foreign 

currency in which the ABS interests are 

issued, as applicable) as would be 

required if the sponsor held an eligible 

horizontal residual interest.55

As reproposed, an interest would 

have qualified as an eligible horizontal 

residual interest only if it was an 

interest in a single class or multiple 

classes in the issuing entity with respect 

to which, on any payment date on 

which the issuing entity would have 

insufficient funds to satisfy its 

obligation to pay all contractual interest 

or principal due, any resulting shortfall 

would reduce amounts paid to the 

eligible horizontal residual interest prior 

to any reduction in the amounts paid to 

any other ABS interest until the amount 

of such ABS interest is reduced to zero. 

The eligible horizontal residual interest 

would have been required to have the 

most subordinated claim to payments of 

both principal and interest by the 

issuing entity. 

Many commenters generally 

supported the reproposal to allow a 

sponsor to meet its risk retention 

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77614 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

56 In response to a similar comment, the agencies 

confirm that a structure under which the interest is 

at the bottom of the priority of payments provisions, 

or last in line for payment, would satisfy this 

requirement whether or not the interest is ‘‘legally’’ 

subordinated. 

57For example, a sponsor electing to hold risk 

retention in the form of a combined horizontal and 

vertical interest could determine the minimum 

amount required to be retained pursuant to the rule 

by determining the percentage of fair value 

represented by the sponsor’s eligible horizontal 

residual interest, and then supplementing that 

amount with a vertical interest of a sufficient 

percentage so that the sum of the two percentage 

numbers equals five. To illustrate: If a sponsor 

holds an eligible horizontal residual interest with 

a fair value of 3.25 percent of the fair value of all 

the ABS interests in the issuing entity, the sponsor 

must also hold (at a minimum) a vertical interest 

equal to 1.75 percent of each class of ABS interests 

in the issuing entity. Alternatively, the sponsor may 

retain a single vertical security representing 1.75 

obligation by retaining an eligible 

vertical residual interest, an eligible 

horizontal residual interest, or any 

combination of such interests. Such 

commenters generally approved of the 

flexibility that the reproposal would 

provide to sponsors in structuring their 

risk retention. Further, one commenter 

expressed support for the single vertical 

security option, asserting that it would 

simplify compliance and monitoring 

obligations of the sponsor. One 

commenter, however, expressed 

concern that the definition of single 

vertical security could be read as though 

the security could have different 

percentage interests in each class and 

requested that the definition be 

amended to clarify that the specified 

percentages must result in the fair value 

of each interest in each such class being 

identical. 

The agencies received several 

comments regarding the proposed 

method by which a sponsor may satisfy 

its risk retention requirement by holding 

an eligible horizontal residual interest. 

One commenter sought clarification as 

to whether advance rates and 

overcollateralization, equipment 

residual values, reserve accounts and 

third-party credit enhancement would 

constitute eligible horizontal residual 

interests. Another commenter sought 

clarification as to whether the eligible 

horizontal residual interest would be 

required to have the most subordinated 

claim to principal collections.56 Further, 

one commenter expressed concern that 

the eligible horizontal residual interest 

option would create a conflict of interest 

between the sponsor and the holders of 

the other classes of securities, to the 

extent that the servicer would have 

control over decisions that could 

optimize the value of the interest at the 

expense of other tranches. 

Regarding the horizontal cash reserve 

account, one commenter requested that 

the final rule permit a broader range of 

investments to align with market 

practice regarding standard investments 

used for funds held in collection, 

reserve and spread accounts. Another 

commenter requested that the final rule 

permit funds from eligible horizontal 

cash reserve accounts to be used to pay 

critical expenses, so long as such 

expense payments are made for 

specified priorities and are disclosed to 

investors. The commenter further 

proposed that no disclosure or 

calculations should be required for such 

payments that are senior to amounts 

owed to holders of third-party ABS 

interests or that are made to transaction 

parties unaffiliated with the securitizer. 

The agencies invited comment on 

whether the rule should require a 

minimum proportion of risk retention 

held by a sponsor under the standard 

risk retention option to be composed of 

a vertical component or a horizontal 

component. Further, the agencies 

invited comment on whether a sponsor 

should be required to hold a higher 

percentage of risk retention if the 

sponsor retains only an eligible vertical 

interest or very little horizontal interest. 

The agencies did not receive any 

comments in favor of these options. One 

commenter expressed opposition to any 

requirement for a minimum vertical or 

horizontal component, claiming that 

such a requirement would increase 

compliance costs and increase the risk 

that sponsors would, as a result of 

accounting standards, have to 

consolidate securitization entities into 

their financial statements. In addition, 

two commenters expressed opposition 

to any higher risk retention requirement 

for sponsors retaining only a vertical 

interest. 

Several commenters expressed 

opinions on the effect that the proposed 

standard risk retention option would 

have on decisions by sponsors regarding 

whether they are obligated by 

accounting standards to consolidate a 

securitization vehicle into their 

financial statements. Two commenters 

asserted that, because of the flexibility 

of the proposed standard risk retention 

option, in and of itself, the option 

would not cause a sponsor to have to 

consolidate its securitization vehicles. 

One of these commenters observed that 

case-by-case analyses would be required 

and that the likelihood of consolidation 

would increase as a sponsor retains a 

greater portion of its required interest as 

a horizontal interest. Another 

commenter asserted that, if potential 

investors require the sponsor to hold a 

horizontal rather than a vertical interest, 

or a combination, the consolidation risk 

will increase. This same commenter 

stated that forthcoming updated 

guidance from the Financial Accounting 

Standards Board may modify the way 

sponsors analyze their consolidation 

requirements. One commenter asserted 

that consolidation concerns may cause 

broker-dealers to limit their secondary 

market support, with respect to certain 

affiliate transactions, for the duration of 

the risk retention period and that such 

decisions may have an effect on 

secondary market liquidity. As a way of 

reducing consolidation risk, one 

commenter stated that securitization 

agreements should be required to give 

securitization trusts the right to claim 

5 percent of losses from securitizers as 

they occur. Such losses, the commenter 

asserted, should be held as contingent 

liabilities on securitizers’ balance 

sheets, against which reserves would 

need to be held. 

The agencies have carefully 

considered comments on the reproposed 

structure of the standard risk retention 

option and, for the reasons discussed 

below and in the reproposal, have 

decided to adopt the approach as set 

forth in the revised proposal with some 

modifications. However, in the final 

rule the agencies are adopting several 

changes to the manner in which risk 

retention must be measured and are 

eliminating the restrictions on cash flow 

to the eligible horizontal residual 

interest. These changes are discussed in 

Part III.B.1 of this Supplementary 

Information. 

Consistent with the reproposal, the 

final rule allows a sponsor to satisfy its 

risk retention obligation by retaining an 

eligible vertical interest, an eligible 

horizontal residual interest, or any 

combination thereof, as long as the 

percentage of the eligible vertical 

interest claimed as retention under the 

rule, when added to the percentage of 

the fair value of the eligible horizontal 

residual interest claimed as retention for 

purposes of the rule equals no less than 

five. The final rule does not mandate a 

minimum or specific percentage of 

horizontal or vertical interest that 

sponsors must hold when they choose 

to satisfy their risk retention obligation 

by holding a combination of vertical and 

horizontal interests, nor does the final 

rule require sponsors to hold a higher 

percentage of risk retention if the 

sponsor retains only an eligible vertical 

interest. The agencies added language to 

the final rule clarifying that the requisite 

percentage of eligible vertical interest, 

eligible horizontal residual interest, or 

combination thereof retained by the 

sponsor must be determined as of the 

closing date of the securitization 

transaction.57

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percent of the cash flows paid on each class of ABS 

interests in the issuing entity (other than the single 

vertical security itself). The rule does not prohibit 

the sponsor from retaining additional amounts of 

horizontal interests, vertical interests, or both. 

58See section 2 of the final rule (definition of 

‘‘eligible horizontal residual interest’’). 

The final rule allows a sponsor to 

satisfy its risk retention obligation under 

the vertical option by retaining a portion 

of each class of the ABS interests issued 

in the transaction or a single vertical 

security which represents an interest in 

each class of the ABS interests issued in 

the securitization. The rule specifies the 

minimum retention to be held by a 

sponsor. As such, the fact that 

provisions such as the definition of 

eligible vertical interest and single 

vertical security require the sponsor to 

hold the same proportion of or interest 

in each class of ABS interests does not 

preclude the sponsor from holding 

different proportions of or in each class. 

However, it does preclude the sponsor 

from claiming risk retention credit 

under the rule for any proportional 

interest in a class that is not the same 

across all classes. For example, a 

sponsor which holds a vertical interest 

of 5 percent of the most junior class and 

3 percent of all other classes issued by 

the entity can only claim credit for a 

3 percent vertical interest. 

A sponsor choosing to satisfy its 

retention obligation solely through the 

retention of an interest in each class of 

ABS interest issued will be required to 

retain at least 5 percent of each class of 

ABS interests issued as part of the 

securitization transaction. A sponsor 

using this approach will be required to 

retain at least 5 percent of each class of 

ABS interests issued in the 

securitization transaction regardless of 

the nature of the class of ABS interests 

(e.g., senior or subordinated) and 

regardless of whether the class of 

interests has a face or par value, was 

issued in certificated form, or was sold 

to unaffiliated investors. For example, if 

four classes of ABS interests are issued 

by an issuing entity as part of a 

securitization—a senior-rated class, a 

subordinated class, an interest-only 

class, and a residual interest—a sponsor 

using this approach with respect to the 

transaction will have to retain at least 

5 percent of each such class or interest. 

If a class of interests has no face value, 

the sponsor will have to hold an interest 

in 5 percent of the cash flows paid on 

that class. 

If a sponsor opts to satisfy its risk 

retention requirement solely by 

retaining a single vertical security, that 

ABS interest must entitle the holder to 

5 percent of the cash flows paid on each 

class of ABS interests in the issuing 

entity (other than such single vertical 

security). This will provide sponsors an 

option that is simpler than carrying 

multiple securities representing a 

percentage share of every series, 

tranche, and class issued by the issuing 

entity, each of which might need to be 

valued by the sponsor on its financial 

statements every financial reporting 

period. The single vertical security 

option will provide the sponsor with the 

same principal and interest payments 

(and losses) as a 5 percent ownership of 

each series, class, or tranche of the 

securitization, in the form of one 

security to be held on the sponsor’s 

books. 

Also consistent with the revised 

proposal, the final rule allows a sponsor 

to satisfy its risk retention obligation 

exclusively through the horizontal 

option by retaining a first loss eligible 

horizontal residual interest in the 

issuing entity in an amount equal to no 

less than 5 percent of the fair value of 

all ABS interests in the issuing entity 

that are issued as part of the 

securitization transaction. The eligible 

horizontal residual interest may consist 

of either a single class or multiple 

classes in the issuing entity, provided 

that each interest qualifies, individually 

or in the aggregate, as an eligible 

horizontal residual interest.58 In the 

case of multiple classes, this 

requirement will mean that the classes 

must be in consecutive order based on 

subordination level. For example, if 

there are three levels of subordinated 

classes and the two most subordinated 

classes have a combined fair value equal 

to 5 percent of all ABS interests, the 

sponsor will be required to retain these 

two most subordinated classes if it is 

going to satisfy its risk retention 

obligation by holding only eligible 

horizontal residual interests. 

In lieu of holding all or part of its risk 

retention in the form of an eligible 

horizontal residual interest, the final 

rule will allow a sponsor to cause to be 

established and funded, in cash, an 

eligible horizontal cash reserve account, 

at closing, in an amount equal to the 

same dollar amount (or corresponding 

amount in the foreign currency in which 

the ABS interests are issued, as 

applicable) as would be required if the 

sponsor held an eligible horizontal 

residual interest. As described in the 

reproposal, the eligible horizontal cash 

reserve account will have to be held by 

a trustee (or person performing 

functions similar to a trustee) for the 

benefit of the issuing entity. Consistent 

with the reproposal, the final rule 

includes several important restrictions 

and limitations on the eligible 

horizontal cash reserve account to 

ensure that a sponsor that establishes an 

eligible horizontal cash reserve account 

will be exposed to the same amount and 

type of credit risk on the securitized 

assets as would be the case if the 

sponsor held an eligible horizontal 

residual interest. The intention of these 

restrictions is to ensure amounts in the 

account would be available to absorb 

losses to the same extent as an eligible 

horizontal residual interest. Therefore, 

investments of funds in the account and 

uses of the account are limited. The 

agencies are not following commenters’ 

suggestion to broaden the range of 

permissible investments of funds in the 

horizontal cash reserve account because 

that could undermine the capacity of 

the account to absorb losses as they 

occur to the same extent as an eligible 

horizontal residual interest. Any use of 

funds other than loss coverage could 

result in fewer funds to absorb losses 

later. The types of permissible 

investments likewise are restricted to 

cash and cash equivalents in order to 

ensure that the account will not incur 

investment losses and reduce the 

capacity of the account to absorb losses 

of the securitization transaction. The 

agencies view ‘‘cash equivalents’’ to 

mean high-quality, highly-liquid shortterm investments the maturity of which 

corresponds to the securitization’s 

expected maturity or potential need for 

funds and that are denominated in a 

currency that corresponds to either the 

securitized assets or the ABS interests. 

Depending on the specific funding 

needs of a particular securitization, 

‘‘cash equivalents’’ might include 

deposits insured by the FDIC, 

certificates of deposit issued by a 

regulated U.S. financial institution, 

obligations backed by the full faith and 

credit of the United States, investments 

in registered money market funds, and 

commercial paper. For securitization 

transactions whose securitized assets or 

ABS interests are denominated in a 

foreign currency, cash equivalents 

would include cash equivalents 

denominated in the foreign currency. 

The agencies believe that the permitted 

investment options provide sufficient 

flexibility to sponsors that choose to 

create an eligible horizontal cash reserve 

account, while ensuring that such 

sponsors will be exposed to the same 

amount and type of credit risk as would 

be the case if the sponsor held an 

eligible horizontal residual interest. 

In response to commenter concerns, 

the agencies believe that it would not 

violate the requirements of the eligible 

horizontal cash reserve account if as a 

result of a shortfall in the available cash 

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59Cf. Financial Accounting Standards Board, 

Accounting Standards Codification Topic 820—Fair 

Value Measurement. 

flow, critical expenses of the trust 

unrelated to credit risk, such as 

litigation expenses or trustee or servicer 

expenses, are paid from an eligible 

horizontal cash reserve account, so long 

as such payments, in the absence of 

available funds in the eligible horizontal 

cash reserve account, would be paid 

prior to any payments to holders of ABS 

interests and such payments are made to 

parties that are not affiliated with the 

sponsor. 

The agencies believe the standard risk 

retention option, as adopted, provides 

sponsors with flexibility in choosing 

how to structure their retention of credit 

risk in a manner that is compatible with 

current practices in the securitization 

markets. For example, in securitization 

transactions where the sponsor would 

typically retain less than 5 percent of an 

eligible horizontal residual interest, the 

standard risk retention option will 

permit the sponsor to hold the balance 

of the risk retention as a vertical 

interest. Each sponsor will have to 

separately analyze whether the 

particular option the sponsor selects 

under the rule requires the sponsor to 

consolidate the assets and liabilities of 

a securitization vehicle onto its own 

balance sheet for accounting purposes. 

The rule itself does not provide 

guidance on performing the 

consolidation analysis, either in support 

of deconsolidation or in requirement of 

consolidation. 

b. Risk Retention Measurement and 

Disclosures 

As explained in the revised proposal, 

to provide greater clarity for the 

measurement of risk retention and to 

help prevent sponsors from structuring 

around their risk retention requirement 

by negating or reducing the economic 

exposure they are required to maintain, 

the agencies proposed to require 

sponsors to measure their risk retention 

requirement using fair valuation 

methodologies acceptable under 

GAAP.59

Several commenters supported the 

proposed requirement that sponsors 

measure their risk retention requirement 

using fair value. These commenters 

expressed the view that the use of fair 

value would be a more prudent 

approach than using face value and 

would be consistent with market 

practice. Other commenters, however, 

expressed general concern with the 

proposed method by which sponsors 

would be required to measure their risk 

retention. One commenter asserted that 

using fair value instead of face value 

would require sponsors to hold higher 

risk retention levels and attract 

additional investor capital, leading to 

higher borrowing costs. Two 

commenters explained that many 

sponsors who consolidate their issuing 

entities or keep their securitizations on 

their balance sheets do not currently 

utilize fair value calculations, and that 

requiring such sponsors to measure 

their risk retention with fair value 

would create significant burden and 

expense. 

Commenters expressed several 

specific accounting concerns regarding 

the use of fair value to measure risk 

retention. Two commenters asserted 

that calculation of fair value under 

GAAP is not designed to provide a 

definitive value, but a range of values. 

In this regard, they expressed concerns 

about how the requirements could be 

met if a sponsor calculates multiple 

possible fair values. One commenter 

asserted that requiring sponsors to 

determine fair value in accordance with 

GAAP would be burdensome for 

securitization transactions where the 

sponsor (or other retaining entity) is 

established outside the United States, 

giving rise to additional work and costs. 

For such transactions, the commenter 

urged the agencies to allow sponsors to 

measure fair value using local (nonU.S.) GAAP or International Financial 

Reporting Standards (IFRS). One 

commenter asserted that GAAP does not 

prescribe use of a single valuation 

technique, but allows entities to use 

various techniques, including market, 

income and cost approaches. The 

commenter stated, however, that the 

reproposal implied that sponsors would 

be limited to specific valuation 

techniques and requested that the final 

rule clarify that sponsors are not so 

restricted. The commenter also asserted 

that the reproposal equated intrinsic 

value with fair value, which are distinct 

standards of value. In this regard, the 

commenter stated that reference to 

intrinsic value should either be 

excluded from the final rule or the 

agencies should clarify that intrinsic 

and fair value are two separate concepts. 

The agencies invited comment in the 

reproposal on whether accountants 

would be asked to perform agreed upon 

procedures reports related to 

measurement of the fair value of 

sponsors’ retained ABS interests. One 

commenter responded that such 

requests would be unlikely and 

requested that the agencies not mandate 

agreed upon procedures in the final 

rule. 

One commenter stated that sponsors 

should be permitted to measure their 

risk retention requirement by using 

either fair value or securitization value 

(the value specified in the operative 

documents for the securitization 

transaction, subject to certain 

limitations) methodology. The 

commenter stated that securitization 

value is familiar to sponsors and 

investors, and permitting its use would 

accommodate a range of current 

industry practices. The commenter also 

stated that securitization value would be 

easier to compute than fair value. 

One commenter asserted that any 

required risk retention amount for ABCP 

conduits should be calculated by 

reference to the principal balance, and 

not the fair value, of the ABS interests 

and asserted that using fair value will be 

difficult, expensive and unnecessary, 

especially given the revolving nature of 

the asset pool. Commenters also 

requested clarification as to whether, 

when they are calculating the fair value 

with respect to revolving pool of assets, 

they can make static pool assumptions. 

Having considered the comments 

described above, the agencies are 

adopting a fair value framework 

substantially similar to the reproposal 

for calculating eligible horizontal 

residual interests in the final rule. As 

discussed in the reproposal, this 

measurement uses methods consistent 

with valuation methodologies familiar 

to market participants and provides a 

consistent framework for calculating 

residual risk retention across different 

securitization transactions. It also takes 

into account various economic factors 

that may affect the securitization 

transaction, which should aid investors 

in assessing the degree to which a 

sponsor is exposed to the risk of the 

securitized assets. As discussed below, 

in response to commenters the agencies 

are not adopting the proposed fair value 

measurement requirement for eligible 

vertical interests because such 

measurement is not necessary to ensure 

that the sponsor has retained 5 percent 

of the credit risk of the ABS interests 

issued. 

Consistent with the reproposal, the 

agencies are not modifying the final rule 

to allow for calculation of fair value 

using the fair value measurement 

framework under local GAAP or IFRS 

for securitization transactions where the 

sponsor is established outside the 

United States. The agencies believe that, 

as of the time the final rule is adopted, 

these alternative valuation frameworks 

and GAAP have common requirements 

for measuring fair value, which should 

minimize the burden to sponsors 

established outside the United States of 

measuring fair value using the GAAP 

framework. The agencies believe that 

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60The agencies expect that a sponsor will include 

disclosure about the cut-off date as an aspect of the 

fair valuation methodology it used. 

61The sponsor may include adjustments to the 

balance of ABS interests that are expected to occur 

in the ordinary course of events, such as scheduled 

principal reductions and planned issuances 

expected to occur after the pending offering of ABS 

interests. 

62The 135-day period provides sponsors with 

approximately 45 days after the end of any quarter 

in which to provide the required information to 

investors if the issuing entity makes distributions to 

investors no more frequently than quarterly. This 

period parallels timeframes for prospectus and 

static pool information under Regulation AB. See 

Items 1104 and 1105 of Regulation AB. 

the benefits of being able to easily 

compare the fair value of risk retention 

in two separate issuances of ABS 

interests regardless of where the 

sponsors are established outweigh any 

minimal burden imposed by the 

requirement to use GAAP fair value. 

In response to commenters’ concerns 

about the burden of repeatedly 

calculating fair value for a constantly 

changing pool of securitized assets, the 

agencies believe that no change to the 

reproposed rule is required. Under the 

final rule, only those securitization 

transactions in which the issuing entity 

issues ABS interests more than once 

need to calculate the fair value of the 

eligible horizontal residual interest 

multiple times. The final rule provides 

specific risk retention options for most 

sponsors of securitizations that issue 

multiple series of ABS interests, 

including revolving pool securitizations, 

tender option bond programs and ABCP 

conduits. The agencies also note that 

those securitization structures which 

issue ABS interests on a frequent basis, 

primarily ABCP conduits and tender 

option bond programs, typically issue 

short-term securities for which the fair 

value calculation should be less 

complex. The agencies are clarifying 

that, to the extent that a sponsor uses a 

valuation methodology that calculates 

fair value based on the pool of 

securitized assets as of a certain date, 

the sponsor of a securitization of a 

revolving or dynamic pool of securitized 

assets would be able to calculate the fair 

value of the ABS interests using data 

with respect to the securitized assets as 

of a cut-off date or similar date, as 

described below, which the agencies 

believe should alleviate some of the 

concerns expressed by commenters 

about the burden of repeatedly 

calculating the fair value of the ABS 

interests issued. The agencies believe 

that this approach appropriately 

balances commenters’ concerns with the 

agencies’ policy goals of providing 

appropriate transparency into a 

sponsor’s calculation of the fair value of 

ABS interests under the final rule. 

Additionally, the agencies have 

concerns that the alternative suggested 

by commenters of calculating fair value 

no more than once per month would 

create unintended consequences. For 

instance, the calculation of fair value of 

ABS interests up to a month before the 

issuance of those ABS interests or up to 

a month after the issuance of those ABS 

interests could result in disclosure to 

investors based on unreliable 

assumptions about pricing and the 

expected volume of ABS interests to be 

issued and possibly the issuance of ABS 

interests in violation of the sponsor’s 

risk retention requirements. 

Under the final rule, to the extent a 

sponsor uses a valuation methodology 

that calculates fair value based on the 

pool of securitized assets as of a certain 

date, a sponsor would be permitted to 

use a cut-off date for establishing the 

composition and characteristics of the 

pool of securitized assets collateralizing 

the asset-backed securities (or similar 

date) that is not more than 60 days prior 

to the date of first use of the fair value 

calculation with investors, except in the 

case of a securitization transaction that 

makes distributions to investors on a 

quarterly or less frequent basis, in 

which case the sponsor may use a cutoff date or similar date not more than 

135 days prior to the date of first use of 

the fair value calculation with 

investors.60 The final rule requires that 

disclosures to investors be based on 

information about the asset pool (such 

as the characteristics of and 

assumptions regarding the pool that will 

be used to determine fair value) as of the 

cut-off date or similar date specified by 

the sponsor. The actual balance of the 

securitized assets (and the calculation of 

fair value) may include anticipated 

additions to and removals of assets that 

the sponsor will make between the cutoff date or similar date and the closing 

date. For purposes of the fair value 

calculation, the ABS interests must 

include all ABS interests issued prior to, 

and expected to be issued in, the 

pending offering of ABS interests.61 The 

agencies believe this will accommodate 

the reporting described by commenters 

and the evaluation of pool assets 

suggested by commenters with respect 

to fair value calculations. The agencies 

recognize that not all securitization 

transactions update information about 

securitized assets on a monthly basis. 

The final rule permits sponsors to rely 

on information about the securitized 

assets based on a date not more than 135 

days prior to the date of first use with 

investors for subsequent issuances of 

ABS interests by the same issuing entity 

with the same sponsor for which the 

securitization transaction distributes 

amounts to investors on a quarterly or 

less frequent basis.62

As discussed in the reproposal, fair 

value is a measurement framework that 

requires an extensive use of judgment 

for certain types of financial 

instruments, for which significant 

unobservable inputs are necessary to 

determine their fair value. To provide 

transparency to investors, regulators and 

others on how the sponsor calculates 

fair value in order to determine its 

eligible horizontal residual interest, and 

to ensure that this calculation 

adequately reflects the amount of a 

sponsor’s economic ‘‘skin in the game,’’ 

the agencies proposed to require 

disclosure of the sponsor’s fair value 

methodology and all significant inputs 

used to measure its eligible horizontal 

residual interest. Under the reproposal, 

sponsors that elected to utilize the 

horizontal risk retention option would 

have been required to disclose the 

reference data set or other historical 

information used to develop the key 

inputs and assumptions intended to 

meaningfully inform third parties of the 

reasonableness of the key cash flow 

assumptions underlying the measure of 

fair value. Such key assumptions could 

include default, prepayment, and 

recovery. As discussed in the 

reproposal, the agencies believed that 

these valuation inputs would help 

investors assess whether the fair value 

measure used by the sponsor to 

determine the amount of its risk 

retention is comparable to investors’ 

expectations. 

Specifically, with respect to eligible 

horizontal residual interests, the 

reproposal would have required that 

sponsors provide (or cause to be 

provided) to potential investors a 

reasonable time prior to the sale of ABS 

interests in the issuing entity and, upon 

request, to the Commission and its 

appropriate Federal banking agency (if 

any) disclosure of: 

• The fair value (expressed as a 

percentage of the fair value of all ABS 

interests issued in the securitization 

transaction and dollar amount (or 

corresponding amount in the foreign 

currency in which the ABS interests are 

issued, as applicable)) of the eligible 

horizontal residual interest that would 

be retained (or was retained) by the 

sponsor at closing, and the fair value 

(expressed as a percentage of the fair 

value of all ABS interests issued in the 

securitization transaction and dollar 

amount (or corresponding amount in the 

foreign currency in which the ABS 

interests are issued, as applicable)) of 

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77618 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

the eligible horizontal residual interest 

required to be retained by the sponsor 

in connection with the securitization 

transaction; 

• A description of the material terms 

of the eligible horizontal residual 

interest to be retained by the sponsor; 

• A description of the methodology 

used to calculate the fair value of all 

classes of ABS interests; 

• The key inputs and assumptions 

used in measuring the total fair value of 

all classes of ABS interests and the fair 

value of the eligible horizontal residual 

interest retained by the sponsor 

(including the range of information 

considered in arriving at such key 

inputs and assumptions and an 

indication of the weight ascribed 

thereto) and the sponsor’s technique(s) 

to derive the key inputs; and 

• The historical data that would 

enable investors and other stakeholders 

to assess the reasonableness of the key 

cash flow assumptions underlying the 

fair value of the eligible horizontal 

residual interest. Examples of key cash 

flow assumptions may include default, 

prepayment, and recovery. 

The agencies received significant 

comment on the proposed disclosure 

requirements with respect to the eligible 

horizontal residual interest, particularly 

regarding the proposed timing of 

disclosures and fair value calculations. 

Commenters expressed a number of 

concerns regarding the pre-sale 

disclosure requirement. Several 

commenters stated that there is an 

inherent conflict between the proposed 

requirement that fair value disclosures 

be made a reasonable time prior to the 

sale of ABS interests and the 

requirement that fair value be 

determined as of the day on which the 

price of the ABS interests to be sold to 

third parties is determined. Further, 

several commenters asserted that the 

most objective and accurate way to 

calculate fair value is to base the 

valuation on an observable market price, 

but this option is unavailable to 

sponsors in advance of pricing. In order 

to comply with the pre-sale disclosure 

requirement, they contended that 

sponsors would be required to make 

material assumptions, based on less 

reliable secondary sources, regarding 

interest, default, recovery and 

prepayment rates, as well as timing of 

reinvestments for revolving pools. Doing 

so, they asserted, would often result in 

differences between the pre-sale and 

final fair value and would confuse 

investors. 

One commenter raised a concern 

about the proposed requirement that fair 

value be calculated as of the day on 

which the price of ABS interests sold to 

third-party investors is determined. The 

commenter, asserting that pricing for 

different classes in single-securitization 

transactions often occurs on different 

days, urged the agencies to clarify that 

the determination of fair value should 

be done for all classes of asset-backed 

securities at a single time after a 

specified percentage threshold of classes 

of asset-backed securities have priced. 

As a proposed solution to the timing 

concerns summarized above, two 

commenters recommended that the final 

rule should require fair value 

determinations to be made after pricing 

but before closing of the transaction. 

The commenters stated that this would 

allow sponsors to more accurately 

determine fair value based on pricing of 

the securitization transaction. The 

commenters further stated that sponsors 

could still be required to disclose the 

expected form of risk retention prior to 

sale, but they should only be required 

to determine the fair value of those 

interests shortly after pricing. 

In addition to timing concerns, many 

commenters expressed concerns about 

the proposed requirement that sponsors 

disclose the key inputs and assumptions 

used in measuring fair value and the 

sponsor’s technique(s) used to derive 

the key inputs. Two commenters 

specifically stated that requiring such 

disclosures may mislead investors by 

making such inputs and assumptions 

seem authoritative. Further, several 

commenters asserted that the proposal 

would require sponsors to disclose 

information that is proprietary, highly 

confidential and commercially 

sensitive. Such information, they 

contended, could be used by third 

parties to the competitive disadvantage 

of the sponsor. One commenter raised 

specific concerns regarding the 

disclosure of reference data sets, noting 

that disclosure of such information 

could allow the reverse-engineering of 

proprietary models. 

While two commenters expressed 

support for the reproposal’s 

requirements that sponsors disclose the 

various components that were used to 

make fair value determinations, many 

others requested significant 

modifications to the disclosure 

requirements. Several commenters 

asserted that the rule should only 

require a simple disclosure to the effect 

that risk retention has been measured as 

required by the final rule. Several 

commenters stated that sponsors should 

only be required to make disclosures to 

the Commission and banking agencies, 

rather than to investors. Two such 

commenters proposed that issuers 

should be required to retain the 

documentation about assumptions and 

methodology used in calculating their 

risk retention obligations for a specified 

period of time and make such 

information available for inspection by 

the Commission and banking agencies, 

if requested. Further, one commenter 

proposed that sponsors should only be 

required to provide the agencies with a 

post-securitization fair value report 

within a reasonable time after the issue 

date. 

Significant concern was raised 

regarding potential liability and 

litigation that commenters stated may 

result when fair value projections, 

assumptions and calculations disclosed 

to investors turn out to be incorrect. A 

few commenters expressed the view that 

liability risk would be particularly high 

from incorrect loss projections. Several 

commenters asserted that litigation risks 

may undermine the horizontal option by 

convincing many sponsors to rely 

instead on the vertical option. Another 

commenter asserted such concerns may 

convince sponsors to hold risk retention 

closer to the 5 percent minimum than 

they otherwise would because it is 

easier to demonstrate that a projected 5 

percent risk retention would be 

accomplished than it would be for a 

larger percentage. Several commenters 

urged the agencies to provide a safe 

harbor from liability for all fair value 

calculations, which would protect 

sponsors as long as the methodology 

and assumptions used to make such 

calculations are reasonable and made in 

good faith. 

Two commenters proposed that for 

simple structures, sponsors should not 

be required to make fair value 

determinations or related disclosures, 

nor should the cash flow restriction (as 

described below) apply. The 

commenters requested that such relief 

be provided to structures with the 

following characteristics: (1) The 

principal amount of the ABS interests 

sold to third parties is less than 95 

percent of the principal amount of the 

securitized assets (and, in the case of 

pre-funded transactions, any cash held 

in a pre-funded account); (2) the 

weighted average interest rate (for 

leases, the implicit interest rate used to 

calculate the lease payments) on the 

securitized assets (or the discount rate 

in the case of a securitization value 

calculation) is not expected to be less 

than the time-weighted average interest 

rate on the ABS interests sold to third 

parties (for revolving and pre-funded 

transactions, this condition would be 

satisfied upon the completion of each 

addition of additional assets); (3) all of 

the ABS interests sold to third parties 

are traditional interest-bearing debt 

securities; and (4) the residual interest 

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63The agencies expect that the range of bona fide 

estimates or specified prices, tranche sizes or rates 

of interest should be reasonably narrow, reflecting 

then current market conditions and the relationship 

between the sponsor’s range of bona fide estimates 

or specified prices, tranche sizes or rates of interest 

and the historical data or other information used to 

derive the range of bona fide estimates or specified 

prices, tranche sizes or rates of interest. The 

agencies also expect that in most instances the 

range of assumed sale prices and tranche sizes will 

correspond closely to any pricing guidance 

provided to potential purchasers prior to sale. 

retained by the sponsor or other holder 

of a retained interest otherwise meets 

the requirements of an eligible 

horizontal residual interest. 

The agencies have carefully 

considered the concerns of commenters 

with respect to the proposed disclosure 

requirements related to the fair value 

calculation of eligible horizontal 

residual interests. The agencies 

continue to believe that it is important 

to the functioning of the final rule to 

ensure that investors and the markets, as 

well as regulators, are provided with 

key information about the methodology 

and assumptions used by sponsors 

under the final rule to calculate the 

amount of their eligible horizontal 

residual interests using the fair value 

measurement framework under GAAP. 

As the agencies have previously 

observed, fair value is a measurement 

framework that for certain types of 

instruments requires an extensive use of 

judgment. In situations where 

significant unobservable inputs are used 

to determine fair value, disclosures of 

those assumptions are necessary to 

enable investors to effectively evaluate 

the fair value calculation. Therefore, the 

agencies are generally retaining the 

proposed fair value disclosure 

requirements with some modifications 

in response to commenter concerns, as 

further discussed below. 

The agencies have considered the 

concerns raised by commenters about 

the potential conflict between pre-sale 

disclosure and timing of the fair value 

measurement. The agencies believe that 

it is important that investors be 

provided with information that would 

allow them to better evaluate how 

sponsors will measure the fair value of 

the eligible horizontal residual interest 

to be retained and that such information 

be provided prior to the investor’s 

investment decision. The final rule 

continues to require certain fair value 

disclosures to be provided to investors 

a reasonable period of time prior to the 

sale of an asset-backed security. 

Nonetheless, the agencies recognize that 

any valuation information given prior to 

sale may often be preliminary. 

Therefore, the agencies have revised the 

final rule to address these concerns. The 

final rule allows sponsors, for 

disclosures provided prior to sale, to 

disclose the sponsor’s determination of 

a range of fair values for the eligible 

horizontal residual interest that the 

sponsor expects to retain at the close of 

the securitization transaction. Under the 

final rule, a sponsor may provide a 

range of fair values for the eligible 

horizontal residual interest only if the 

specific prices, sizes or rates of interest 

of each tranche of the securitization are 

not available. Additionally, this range of 

fair values must be based on a range of 

bona fide estimates or specified prices, 

sizes, or rates of interest of each tranche 

of the securitization. The agencies note 

that in practice this will allow the 

sponsor to provide fair value disclosures 

based on the pricing guidance 

traditionally provided to investors prior 

to sale.63 The sponsor must also disclose 

the method by which it determined any 

range of bona fide estimates or specified 

prices, tranche sizes or rates of interest. 

The final rule also requires the 

sponsor to provide to investors a 

reasonable time after the closing of the 

securitization transaction the actual fair 

value measurement of the ABS interests 

and the eligible horizontal residual 

interest that the sponsor is required to 

retain, expressed as a dollar amount and 

percentage. This post-closing disclosure 

must be based on actual sale prices and 

finalized tranche sizes and 

corresponding interest rates at the 

closing of the securitization transaction. 

The agencies continue to believe that 

the fair value of the eligible horizontal 

residual interest held by the sponsor as 

calculated post-closing must not be less 

than the amount required under the rule 

to be held by the sponsor. Although 

commenters expressed some concern 

about possible adjustments to the 

transaction occurring prior to closing 

that may impact the fair value of the 

eligible horizontal residual interest, the 

agencies expect that, if necessary, as 

part of the pricing process, the sponsor 

will make adjustments to tranche sizes, 

increase the percentage of vertical 

interest retained by the sponsor, or 

otherwise take actions to ensure that the 

actual fair value of the eligible 

horizontal residual interest held by the 

sponsor satisfies the sponsor’s risk 

retention obligations. 

The sponsor also must disclose at that 

time any material differences between 

the inputs and assumptions that had 

been disclosed by the sponsor to 

potential investors prior to sale (as 

required by the final rule) and the actual 

methodology, inputs, and assumptions 

used by the sponsor to measure fair 

value for purposes of the final rule. The 

agencies believe that this bifurcated 

approach to the timing of disclosures, as 

well as clarification that the pre-closing 

disclosures are based on a sponsor’s 

range of bona fide estimates or specified 

prices, tranche sizes or rates of interest 

with relation to the fair value 

measurement of the ABS interests, 

should effectively balance the benefits 

investors and others receive from the 

disclosures against the concerns of 

sponsors. 

The final rule generally retains the 

proposed requirement that the sponsor 

disclose a description of the 

methodology it uses to measure the fair 

value of the ABS interests and its 

eligible horizontal residual interest. For 

example, under the final rule sponsors 

are required to disclose the valuation 

methodology the sponsor used to 

determine fair value, such as discounted 

cash flow analysis, comparable market 

data, vendor pricing, or internal-model 

based analysis. 

As discussed above, a number of 

commenters expressed concern about 

heightened legal risk and other risks due 

to the proposed requirement to disclose 

quantitative information about key 

inputs and assumptions, and various 

commenters requested that the agencies 

not require these disclosures to be 

provided to investors. The agencies 

continue to believe that disclosure of 

descriptive information with respect to 

key inputs and assumptions used in fair 

value measurement is important for 

helping investors to assess whether the 

fair value measure used by the sponsor 

to determine its eligible horizontal 

residual interest is comparable to 

market expectations. However, in 

response to commenter concerns, the 

agencies are modifying these 

requirements to take into account the 

preliminary and estimated nature of 

pricing information that may need to be 

used to calculate fair value prior to the 

sale of an asset-backed security. 

The agencies believe that the 

disclosure required by the accounting 

standards that gives investors and others 

an understanding of how companies 

measure fair value is also pertinent to 

investors’ and regulators’ understanding 

how sponsors calculate the fair value of 

their eligible horizontal residual 

interests under the rule. Therefore, the 

final rule requires that the sponsor 

disclose, at a minimum, a description of 

all the inputs and assumptions it uses 

to calculate the fair value of the ABS 

interests and its eligible horizontal 

residual interest, including, as 

applicable and relevant to the 

calculation, disclosures on discount 

rates, loss given default (recovery rates), 

prepayment rates, default rates, the lag 

time between default and recovery, and 

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77620 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

the basis of forward interest rates used. 

The agencies have not prescribed the 

exact format of the description of key 

inputs and assumptions that sponsors 

are required to provide under the final 

rule. The agencies expect that the format 

of the required description will be 

tailored to the key inputs and 

assumptions and the reference data sets 

or other historical information 

underlying those key inputs and 

assumptions being described. The 

agencies believe that the descriptions 

may be disclosed in quantitative or 

narrative form or in a graphical or 

tabular format, as appropriate. 

The sponsor is required to provide 

descriptions of all inputs and 

assumptions that either could have a 

material impact on the fair value 

calculation or would be material to a 

prospective investor’s ability to evaluate 

the sponsor’s fair value calculations. 

The required description of the material 

terms of the eligible horizontal residual 

interest to be retained by the sponsor 

should include a description of the rate 

of interest and other payment terms, 

including contractually pre-determined 

events that would reasonably be likely 

to result in a materially disproportionate 

payment of principal to the holder of 

the residual interest, as well as any 

reductions in overcollateralization. To 

the extent the required disclosure 

includes a description of a curve or 

curves in connection with the sponsor’s 

fair value calculations, the sponsor must 

disclose a description of the 

methodology that was used to derive 

each curve and a description of any 

aspects or features of each curve that 

could materially impact the fair value 

calculation or the ability of a 

prospective investor to evaluate the 

sponsor’s fair value calculation. The 

agencies expect that a description of the 

material aspects of a curve would 

include any aspects of the curve that 

could be reasonably expected to have a 

material impact on the timing and 

amounts of distributions expected to be 

paid to the holder of the eligible 

horizontal residual interest (or released 

from the eligible horizontal cash reserve 

account). 

For example, if the sponsor uses 

curves with respect to certain key inputs 

and assumptions in the fair value 

calculations, the agencies expect that 

the description of those key inputs and 

assumptions would not assume straight 

lines (e.g., zero-loss assumptions). As a 

further example, if the sponsor uses a 

prepayment curve to calculate the fair 

value of the ABS interests and its 

eligible horizontal residual interest for a 

residential mortgage securitization 

transaction, the disclosure might 

indicate that estimated annual 

prepayments are expected to range from 

X percent to Y percent, notably 

increasing after 36 months of 

amortization and peaking after 84 

months of amortization. Furthermore, to 

the extent the inputs and assumptions 

are observable and based on market 

prices or other public information, the 

sponsor should disclose those inputs 

and assumptions or their source in order 

to fulfill its requirement under the final 

rule. 

The post-closing fair value disclosure, 

which is required a reasonable time 

after the closing, obligates the sponsor 

to disclose any material differences 

between the range of bona fide estimates 

or specified prices, tranche sizes or rates 

of interests disclosed previously, as the 

case may be, and the actual prices, 

tranche sizes or rates of interest used by 

the sponsor in its calculation of the fair 

value under the rule for the ABS 

interests sold at closing. This permits 

sponsors to use the actual pricing of the 

ABS interests as the basis for their final 

disclosure requirement, which 

addresses certain of the concerns raised 

by commenters discussed above. 

The agencies believe that the 

revisions made to the rule appropriately 

balance the agencies’ concerns that fair 

value disclosure requirements 

adequately allow an investor to analyze 

the amount of a sponsor’s economic 

‘‘skin in the game’’ with commenters’ 

concerns about the level of detail 

required by the fair value disclosure 

requirements. 

The agencies observe that financial 

companies commonly provide company 

or portfolio-level disclosure in their 

financial statements about estimated 

ranges (and weighted averages) for 

certain inputs, such as interest rates and 

prepayment rates. Furthermore, 

sponsors of recent publicly-offered 

securitization transactions have 

disclosed modeling assumptions for 

prepayment rates based on the 

characteristics of securitized loans. The 

agencies believe that the disclosures 

required under the final rule are similar 

in nature, albeit more detailed, than 

these public disclosures already being 

made for financial reporting and similar 

purposes. The agencies understand that 

some types of inputs and assumptions 

have generally not been publicly 

disclosed, and that most sponsors have 

disclosed certain inputs at the balance 

sheet or portfolio level for different 

types of assets, with varying degrees of 

granularity that have generally not 

included disclosures for individual 

transactions. However, the agencies 

observe that some of the concerns that 

commenters have raised about potential 

liability for disclosure of inputs and 

assumptions at the transactional level 

could also be pertinent at the portfolio 

level if the inputs and assumptions were 

later proved incorrect. Furthermore, the 

agencies believe that the modifications 

to the disclosure requirement that 

permit the sponsor to disclose a range 

of fair values based on assumptions 

about pricing, appropriately balances 

commenters’ concerns with the 

agencies’ policy goals of providing 

appropriate transparency into a 

sponsor’s calculation of the fair value of 

ABS interests and eligible horizontal 

residual interest under the final rule. In 

response to commenters’ concerns about 

the proposed requirement to disclose 

the reference data set or other historical 

information used to develop the key 

inputs and assumptions used in the fair 

value measurement of the ABS interests, 

the agencies have modified significantly 

that requirement in the final rule. The 

agencies understand there may be 

significant legal concerns with 

disclosing this data, including the 

proprietary nature and value of the data 

and contractual restrictions with respect 

to disclosure when the data is provided 

by third parties. The agencies believe 

that investors may in many cases 

independently obtain representative 

data sets for evaluating the ABS 

interests offered for purposes of 

evaluating the sponsor’s fair value 

measurement, including the disclosures 

on the sponsor’s inputs and 

assumptions required by the final rule 

and described above. 

The final rule requires that the 

sponsor provide a summary description 

of the reference data set or other 

historical information used to develop 

the key inputs and assumptions used in 

the sponsor’s calculation of the fair 

value of the ABS interests, including 

loss given default and default rates. This 

disclosure should meaningfully inform 

third parties of the reasonableness of the 

key cash flow assumptions underlying 

the sponsor’s measurement of fair value. 

Relevant information may include the 

number of data points, the time period 

covered by the data set, the identity of 

the party that collected the data, the 

purpose for which the data was 

collected and, if the data is publicly 

available, how the data may be 

accessed. The agencies believe that this 

represents an appropriate balance 

between the information required for an 

investor to evaluate the sponsor’s fair 

value disclosure and commenter’s 

concerns about the disclosure of the 

reference data set or other historical 

information. In response to commenters’ 

requests that the agencies provide a safe 

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64See 15 U.S.C. 77z–2. 

65See, e.g., Polin v. Conductron Corp., 552 F.2d 

797, 806 n.28 (8th Cir. 1977); Luce v. Edelstein, 802 

F.2d 49, 56 (2d Cir. 1986); In re Donald J. Trump 

Casino Sec. Litig., 7 F.3d 357, 364 (3d Cir. 1993); 

P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92, 

96–97 (2d Cir. 2004); and Iowa Pub. Emps.’ Ret. Sys. 

v. MF Global Ltd., 620 F.3d 137, 141–142 (2d Cir. 

2010). 

66See, e.g., Rule 408 under the Securities Act; 

Sections 11, 12(a)(2) and 17(a) of the Securities Act; 

Section 10(b) of the Exchange Act; Rule 10b–5 

under the Exchange Act; and Rule 12b–20 under the 

Exchange Act. 67See supra note 52. 

harbor from liability for all fair value 

calculations, as long as the methodology 

and assumptions used to make such 

calculations are reasonable and made in 

good faith, the agencies do not believe 

a new safe harbor is necessary. The final 

rule does not alter any existing antifraud 

liability provisions of the Federal 

securities laws. Furthermore, sponsors 

may provide additional disclosure to 

take advantage of the existing safe 

harbor for forward-looking statements 

under section 27A of the Securities 

Act,64 if applicable, and the ‘‘bespeaks 

caution’’ defense developed through 

case law.65

To this end, the sponsor should 

consider carefully the disclosure 

requirements under the Federal 

securities laws. The sponsor should be 

cognizant of surrounding disclosure and 

should determine if the disclosure of 

such fair value methodology and related 

assumptions requires additional 

statements or information.66

To the extent the assumptions made 

in connection with the methodology 

used to measure fair value are not 

entirely consistent with other disclosure 

regarding the securitization structure 

and the transaction parties, the sponsor 

may need to include additional 

statements or information that reduce 

the potential confusion among 

investors. Alternatively, to the extent 

allowed under the fair value 

measurement framework under GAAP, a 

sponsor could use a methodology and 

assumptions that are more consistent 

with the sponsor’s other disclosures 

regarding the securitization structure 

and the transaction parties. 

The agencies did not provide an 

option for ‘‘simple structures’’ based on 

the face value of the securitized assets 

and the face value of the ABS interests. 

The agencies believe that the face value 

of both the securitized assets and the 

face value of the ABS interests do not 

necessarily reflect the actual value of 

the securitized assets or the ABS 

interests, respectively. For certain assets 

such as leases, the ‘‘face value’’ of the 

underlying assets is a number calculated 

solely for purposes of the securitization 

transaction and the calculation involves 

many of the inputs and assumptions 

discussed above in relation to fair value. 

The face value of certain ABS interests 

such as the CMBS B-piece does not 

reflect the substantial discount to face 

value at which such ABS interests are 

often sold to investors. As the face value 

of both the securitized assets and the 

face value of the ABS interests can 

materially differ from their relative 

value and cost to the sponsor, the 

agencies do not believe that a credit risk 

retention option based solely on a 

comparison of the face value of the 

underlying assets and the face value of 

the ABS interests would provide 

meaningful risk retention consistent 

with the goals and intent of section 

15G.67

In addition to the measurement and 

disclosure requirements applicable to 

eligible horizontal residual interests, the 

reproposal would have required 

sponsors holding their risk retention 

through eligible vertical interests to 

measure such interests using fair value 

and to comply with certain disclosure 

requirements. With respect to the 

vertical option, the reproposal would 

have required that sponsors provide (or 

cause to be provided) to potential 

investors a reasonable time prior to the 

sale of ABS interests in the issuing 

entity and, upon request, to the 

Commission and its appropriate Federal 

banking agency (if any) disclosure of: 

• Whether any retained vertical 

interest is retained as a single vertical 

security or as separate proportional 

interests in each ABS interest; 

• Each class of ABS interests in the 

issuing entity underlying the single 

vertical security at the closing of the 

securitization transaction and the 

percentage of each class of ABS interests 

in the issuing entity that the sponsor 

would have been required to retain if 

the sponsor held the eligible vertical 

interest as a separate proportional 

interest in each class of ABS interest in 

the issuing entity; 

• The fair value (expressed as a 

percentage of the fair value of all ABS 

interests issued in the securitization 

transaction and dollar amount (or 

corresponding amount in the foreign 

currency in which the ABS interests are 

issued, as applicable)) of any single 

vertical security or separate 

proportional interests that would be (or 

was retained) by the sponsor at closing, 

and the fair value (expressed as a 

percentage of the fair value of all ABS 

interests issued in the securitization 

transaction and dollar amount (or 

corresponding amount in the foreign 

currency in which the ABS interests are 

issued, as applicable)) of the single 

vertical security or separate 

proportional interests required to be 

retained by the sponsor in connection 

with the securitization transaction; 

• A description of the methodology 

used to calculate the fair value of all 

classes of ABS interests; and 

• The key inputs and assumptions 

used in measuring the total fair value of 

all classes of ABS interests (including 

the range of information considered in 

arriving at such key inputs and 

assumptions and an indication of the 

weight ascribed thereto) and the 

sponsor’s technique(s) to derive the key 

inputs. 

Several commenters asserted that the 

final rule should not require sponsors to 

measure and disclose the fair value of 

eligible vertical interests, so long as the 

underlying ABS interests have either a 

principal or notional balance. The 

commenters stated that a 5 percent 

interest in the cash flow of each class 

would always be equivalent to 5 percent 

of each class. In this regard, the 

commenters stated that requiring fair 

value measurement and disclosures for 

the vertical option would be 

unnecessary for ensuring compliance 

with the rule. 

The agencies agree that calculation of 

fair value for eligible vertical interests is 

unnecessary. The agencies note that 

only those sponsors that rely 

exclusively on an eligible vertical 

interest to meet their risk retention 

requirements would not have to 

calculate the fair value of the ABS 

interests and make the related 

disclosures. A sponsor that wishes to 

receive credit for any residual interest 

that meets the requirements of an 

eligible horizontal residual interest 

(other than any portion of the residual 

retained as part of an eligible vertical 

interest) would be required to calculate 

the fair value of the ABS interests and 

make the related disclosures. 

c. Restriction on Projected Cash Flows 

to Eligible Horizontal Residual Interest 

The reproposal would have placed 

limits on projected payments to holders 

of the eligible horizontal residual 

interest. Specifically, the reproposal 

included a restriction on projected cash 

flows to be paid to the eligible 

horizontal residual interest that would 

have limited how quickly the sponsor 

would have been able to recover the fair 

value amount of the eligible horizontal 

residual interest in the form of cash 

payments from the securitization (or, if 

an eligible horizontal cash reserve 

account were established, released to 

the sponsor or other holder of such 

account). The sponsor would have been 

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68Revised Proposal, 78 FR at 57938. 

69See Revised Proposal, 78 FR at 57941. 

prohibited from structuring a deal 

where it was projected to receive such 

amounts at a faster rate than the rate at 

which principal was projected to be 

paid to investors on all ABS interests in 

the securitization. The restriction was 

designed with an intention of enabling 

sponsors to satisfy their risk retention 

requirements with the retention of an 

eligible horizontal residual interest in a 

variety of ABS structures, including 

those structures that do not distinguish 

between principal and interest 

payments and between principal losses 

and other losses. The restriction was 

discussed in detail in the reproposal.68

The agencies invited comment in the 

reproposal on whether an alternative 

provision should be adopted relating to 

the amount of principal payments that 

could be received by the eligible 

horizontal residual interest. Under this 

alternative, on any payment date, in 

accordance with the transaction’s 

governing documents, the cumulative 

amount paid to an eligible horizontal 

residual interest would not be permitted 

to exceed a proportionate share of the 

cumulative amount paid to all holders 

of ABS interests in the transaction. The 

proportionate share would equal the 

percentage, as measured on the date of 

issuance, of the fair value of all of the 

ABS interests issued in the transaction 

that is represented by the fair value of 

the eligible horizontal residual 

interest.69

The agencies received a significant 

number of comments regarding the 

proposed cash flow restrictions as well 

as the alternative approach on which 

they invited comment. Several 

commenters requested that the proposed 

cash flow restriction to the eligible 

horizontal residual interest and related 

certification be eliminated, either 

entirely or for specific asset classes, 

while one commenter proposed that the 

restriction be eliminated at sunset. 

Several commenters suggested that 

the proposed restriction on cash flow 

distributions would be incompatible 

with a variety of securitization 

structures, such as those organized to 

have increasing overcollateralization 

over time, large amounts of excess 

spread at closing, or bullet maturities. 

Commenters stated that the reproposal’s 

failure to distinguish between payments 

of interest and principal on the eligible 

horizontal residual interest would be 

particularly problematic for many 

transactions. Such structures 

highlighted by commenters included 

CMBS, where monthly cash flow comes 

predominantly from interest payments 

for much of the life of the securitization, 

with the result that these existing 

structures would not meet the test and 

would not have an economically 

attractive eligible horizontal residual 

interest (or B-piece) if they did meet the 

test. Several commenters also stated that 

the proposed cash flow restriction 

would be problematic for CLOs and 

other structures that use principal 

proceeds to reinvest in additional assets, 

but continue to pay interest, for 

significant reinvestment periods. One 

such commenter suggested that the final 

rule should specify that the use of 

proceeds to acquire new assets and 

reinvest does not constitute a payment 

with respect to the eligible horizontal 

residual interest. 

Commenters raised a number of 

specific concerns regarding the 

calculations and projections that would 

be required by the proposed cash flow 

restriction. One commenter stated that 

the calculations that sponsors would be 

required to compare in order to 

determine whether restrictions are 

required would be too different to make 

effective comparison possible. Several 

commenters asserted that the 

calculations, disclosures, and 

certifications required by the proposed 

cash flow restriction were incompatible 

with revolving structures, since the 

asset pools of revolving structures 

change over time and the time at which 

the amortization period will commence 

is not always known at the closing date. 

These commenters suggested an 

alternative certification and calculation 

method for revolving structures. 

Another commenter suggested that 

when the ABS interest is a variable 

funding note that may have periodic 

increases and decreases in principal 

amount, the date of any increase or 

decrease should be treated as a new 

issue date for purposes of calculating 

the proposed cash flow restriction. 

A few commenters asserted that the 

proposed cash flow restriction would 

significantly change the nature of the 

residual structure, since, for many 

structures, it would eliminate or 

severely restrict the payment of interest 

or yield to holders of the eligible 

horizontal residual interest. One 

commenter stated that if the holder of 

an eligible horizontal residual interest is 

not able to receive a return 

commensurate with the risk of the 

interest, the fair value of the interest 

will decrease, requiring that it represent 

a significantly greater portion of the 

capital structure of the securitization in 

order to reach 5 percent of the fair value 

of all ABS interests issued. Another 

commenter asserted that the proposed 

cash flow restriction would discourage 

sponsors from structuring offerings of 

ABS interests with excess spread 

exceeding 5 percent of the fair value of 

the transaction because the restriction 

would effectively prevent sponsors from 

reducing such excess spread to 5 

percent during the life of the 

transaction. 

The certifications and disclosures to 

investors that would have been required 

by the proposed cash flow restriction 

were also a focus of concern for 

commenters. Several commenters 

expressed concern about potential 

liability that could result from the 

proposed requirement that sponsors 

certify to investors that they had 

performed the required calculations and 

to certify their expectations regarding 

the cash flow to the eligible horizontal 

residual interest as compared to more 

senior ABS interests. Commenters stated 

that sponsors could be subject to 

liability, if their projections and 

assumptions differed from actual 

results. One commenter specifically 

contended that the difficulty in 

accurately modeling prepayment risks 

heightens the risk of liability. Two 

commenters suggested that a safe harbor 

should be granted to protect sponsors 

from such liability risk. One such 

commenter requested limiting the safe 

harbor to sponsors who utilize 

reasonable methodologies in making the 

required calculations. A different 

commenter suggested that, rather than 

requiring the sponsor to make the 

certifications to investors, the sponsor 

should only have to maintain a record 

of the closing date calculations, 

including the methodology and material 

assumptions underlying them, and 

make those records available to the 

Commission and banking agencies upon 

request for five years. One commenter 

suggested that the proposed certification 

to investors should be replaced with a 

requirement that the sponsor disclose to 

investors, in the offering documents, 

that it has performed and met the cash 

flow restriction test. 

The agencies also received comments 

regarding the proposed requirement that 

sponsors would have to disclose their 

past performance in respect to the cash 

flow calculations. One commenter 

raised concern that requiring such 

disclosures could create potential 

liability issues concerning false 

disclosures. Two commenters suggested 

a modification to the proposed 

requirement such that the sponsor 

would have to disclose the number of 

payment dates on which the actual 

payments made to the sponsor under 

the eligible horizontal residual interest 

exceeded the amounts projected to be 

paid to the sponsor on such payment 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77623 

dates. These commenters asserted that 

the focus of this disclosure should be on 

the cumulative amount of payments 

made to the holder of the eligible 

horizontal residual interests, rather than 

the cash flow projected to be paid to the 

sponsor on the payment dates. 

Several commenters offered qualified 

support for the alternative proposal on 

which the agencies invited comment. 

Such support was largely based on the 

fact that the alternative proposal would 

have required the comparison of all 

forms of payment to both the eligible 

horizontal residual interest and the 

investor interests, while the proposed 

cash flow restriction would have 

required the comparison of all forms of 

payment to the eligible horizontal 

residual interest and only principal 

payments to the investor interests. Two 

commenters asserted that, without a 

detailed proposal, it is difficult to 

determine what type of cash flow 

comparisons the agencies intended to 

cover with the alternative proposal and 

that they would not support any 

proposal that does not allow for market 

rates of return to be paid to the eligible 

horizontal residual interest. One 

commenter would support the 

alternative proposal if it were modified 

to clarify that a residual interest, in 

order to be considered an eligible 

horizontal residual interest, be limited 

in the amount of principal repayments 

it may receive, such that the cumulative 

amount of payments applied to reduce 

its principal or notional balance as of 

any payment date is proportionate to (or 

less than) the cumulative amount of 

payments applied to reduce the 

principal or notional balance of all ABS 

interests in the transaction as of such 

payment date. One commenter 

requested a modified version of the 

alternative proposal that the commenter 

said would be more appropriate for 

CMBS transactions. The commenter 

asserted that, since CMBS bonds 

associated with the horizontal risk 

retention interest are sold at a discount, 

the alternative proposal should allow 

the percentage of cash flow paid to the 

horizontal risk retention holder to be 

based on the face value, rather than the 

fair value, of their purchased interest. 

Commenters also offered various 

alternative proposals to the proposed 

cash flow restriction. One commenter 

requested that a sponsor be considered 

to have met its risk retention obligation 

if it satisfies one of the following tests 

on the closing date based on projections 

or assumptions of timely payment: (1) 

The projected fair value of the amount 

retained as of each payment date will 

not be less than the required 5 percent; 

(2) the level of overcollateralization 

calculated based on the amortizing 

balance of the ABS interests as of each 

payment date, is not projected to 

decline below 5 percent over the life of 

the transaction; or (3) the projected 

principal payments to be paid to the 

eligible horizontal residual interest, as 

of each payment date, will not exceed 

its pro rata share of all payments made 

to ABS interest holders on such 

payment date. One commenter 

suggested that the test should be limited 

to a projection that the retained risk will 

be equal to at least 5 percent of the sum 

of the projected aggregate fair value of 

all ABS interests in the issuing entity, 

other than the eligible horizontal 

residual interest, and the projected fair 

value of the eligible horizontal residual 

interest. 

After careful consideration of the 

comments, the agencies agree that the 

restrictions on projected cash flow to 

the eligible horizontal residual interest 

included in the proposed rule would 

not operate without significant risk of 

unintended consequences. Furthermore, 

the agencies have not identified a cash 

flow restriction mechanism that would 

function effectively across asset classes 

without having an unduly restrictive 

impact on particular asset classes. While 

the agencies could consider different 

tests for different classes, the agencies 

believe that would lead to a more 

complicated rule that could be difficult 

to administer and that would likely 

engender more opportunity to 

undermine the impact of the final rule 

on the alignment of interests between 

the sponsor and investors. Additionally, 

the agencies believe that alternatives 

suggested by commenters that proposed 

to restrict cash flows based on a 

comparison of projections of the face 

value of securitized assets and the face 

value of outstanding ABS interests 

(which do not capture expected credit 

losses, among other things) and 

alternatives that focused only on 

repayment of principal either would be 

easily evaded or would not effectively 

further the statutory goals and directive 

of section 15G of the Exchange Act to 

limit credit risk and promote sound 

underwriting. Accordingly, the agencies 

are not including in the final rule the 

proposed cash flow restriction, the 

alternative described in the reproposal, 

or the alternatives suggested by 

commenters. 

The agencies are concerned that risk 

retention may become less meaningful 

when a sponsor quickly recovers the 

value of risk retention through 

distributions. However, the agencies 

note that the final rule requires 

disclosure regarding the material terms 

of the risk retention interest, and the 

timing of cash flows and determination 

of fair value, which is designed to 

facilitate investor determination of 

whether the risk retention interest to be 

held by the sponsor remains meaningful 

over time. In addition, while the rule 

requires that the sponsor measure an 

eligible horizontal residual interest only 

as of the closing of a transaction (and, 

under certain circumstances, if 

additional ABS interests are issued 

thereafter), the rule also restricts the 

ability of a sponsor to transfer or hedge 

any interest in the credit risk of the 

securitized assets it is required to retain 

until the expiration of specified periods. 

Therefore, the rule is designed so that 

the sponsor remains exposed to the 

credit risk of securitized assets, up to 

the amount required to be retained. If 

the agencies observe that either the 

assumptions and methodologies used to 

calculate the fair value of horizontal risk 

retention or the structuring of 

securitization transactions—including 

structuring of payments to the residual 

interest—tends to undermine the ability 

of the risk retention to align the interests 

of sponsor and investors, the agencies 

will consider whether modifications to 

the rule should be made to address 

these issues. 

2. Master Trusts: Revolving Pool 

Securitizations 

a. Overview of the Reproposal and 

Public Comments 

Many securitization sponsors face a 

mismatch between the maturities of the 

assets they seek to securitize and the 

maturities of bonds sought by investors 

in the market. In order to obtain best 

execution for a securitization of those 

assets—or in other cases, in order to 

obtain any investor interest in the 

market of any kind—the sponsor must 

use a structure that transforms the 

available cash flow from the assets into 

debt with a maturity and repayment 

type (amortizing or bullet) sought by 

investors. Furthermore, if the sponsor’s 

business generates an ongoing stream of 

assets to be securitized under these 

circumstances, especially (but not 

always) if the assets are receivables 

generated from revolving credit lines, 

the sponsor faces unique challenges in 

structuring its securitization. 

One solution to these issues, which 

has evolved over the last 25 years, is a 

type of revolving pool securitization 

commonly known as a ‘‘master trust’’ 

securitization. Master trusts generally 

issue multiple series of asset-backed 

securities over time, collateralized by a 

common pool of securitized assets. The 

transaction documentation requires the 

sponsor to maintain the collateral 

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77624 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

70 Instead of adding assets, the sponsor might also 

avail itself of options described in the transaction 

documents to reduce or repay outstanding investor 

ABS interests. 

71The level of securitized assets in the pool might 

also fall if securitized assets are repaid according 

to their terms and the master trust does not use the 

repaid principal to acquire replacement securitized 

assets from the sponsor. 

72A 5 percent pari passu seller’s interest is 

commonly required in credit card master trusts. 

balance at an amount that is at all times 

sufficient to back the aggregate amount 

of outstanding investor ABS interests 

with a specified amount of collateral 

above that amount. The amount of 

outstanding investor ABS interests 

changes over time as new series are 

issued or existing series are paid down. 

Moreover, as each series is issued, it 

begins with a revolving period (typically 

for some number of years), during 

which the holders of investor ABS 

interests receive only interest, and cash 

from borrower principal repayments on 

the securitized assets are used to buy 

additional assets for the pool from the 

sponsor. This provides the sponsor with 

ongoing funding for its operations, and 

maintains the level of securitized assets 

over time. Then, at a date specified 

under the terms of the series, the 

revolving phase for the series comes to 

an end, and cash from borrower 

principal repayments on securitized 

assets is used to repay investors and 

retire that series of investor ABS 

interests. 

Separately from the issue of credit 

enhancement for the investor ABS 

interests, which is discussed below, 

investors are concerned that the total 

amount and quality of securitized assets 

does not decline unacceptably during 

the revolving period of the series. If that 

were to happen, the master trust could 

face difficulties repaying investors 

months or years later when the series 

matures. To protect against this, the 

sponsor is typically required, at various 

intervals, to measure the amount by 

which the aggregate principal balance of 

the securitized assets exceeds the 

aggregate principal balance of the 

outstanding investor ABS interests. If 

this ‘‘cushion’’ of securitized assets falls 

below a target level, the sponsor has a 

specified cure period in which it may 

add more assets to restore the pool to its 

required target size.70 Credit quality 

problems with the securitized assets 

would lead to elevated charge-offs of 

securitized assets, which in turn could 

cause the pool to fall below the target 

level.71

If the sponsor cannot restore the pool 

balance to its required target level 

within the cure period, the master trust 

commences an ‘‘early amortization 

mode.’’ Once that occurs, the sponsor 

may no longer use borrower payments 

on the securitized assets to purchase 

additional loans to transfer to the 

securitization, and interest and 

principal payments on the securitized 

assets are used to begin paying down 

outstanding investor ABS interests as 

rapidly as practicable. The 

consequences to the sponsor are 

significant, since early amortization of 

the master trust means the sponsor will 

no longer have access to securitized 

funding through the master trust for 

future securitized assets generated in 

connection with the sponsor’s 

operations. 

The agencies’ reproposal would have 

recognized the ‘‘seller’s interest’’ 

retained by a master trust sponsor as an 

acceptable form of risk retention to meet 

the sponsor’s obligations under the rule. 

In many master trusts, the ‘‘seller’s 

interest’’ is the amount by which the 

outstanding principal balance (or 

equivalent measurement) of the assets 

held by the master trust exceeds the 

outstanding principal balance of the 

outstanding ABS interests and is 

required by the series transaction 

documents to be maintained at or above 

a specified percentage of the aggregate 

outstanding investor ABS interests, 

measured monthly (e.g., the seller’s 

interest in the principal balance of pool 

collateral is required to equal at least 5 

percent of the principal balance of all 

outstanding investor ABS interests). The 

seller’s interest is not attached to 

specific pool collateral; it is an 

undivided interest in the entire pool 

akin to a participation interest, 

representing the sponsor’s entitlement 

to a percentage of the total principal and 

interest or finance charge payments 

received on the pooled securitized 

assets for every payment period 

(typically monthly). Investors in the 

various series of ABS interests issued by 

the master trust have claims on the 

remaining principal and interest or 

finance charge payments, as the source 

of repayment for the ABS interests they 

purchased from the master trust. The 

seller’s interest in these structures is 

generally pari passu with the investor 

ABS interests, resulting in the sponsor 

incurring a pro rata share of credit 

losses on securitized assets, in a 

percentage amount equal to the 

percentage amount of the seller’s 

interest as calculated under the terms of 

the transaction documents.72

The agencies’ reproposal would have 

treated a pari passu seller’s interest as 

a separate form of risk retention. The 

reproposal would have allowed this 

option to be used only by issuing 

entities organized as master trusts, 

established to issue on multiple 

issuance dates one or more series of 

ABS interests, all of which are 

collateralized by a common pool of 

assets that will change in composition 

over time. The reproposal would have 

required distributions to the sponsor on 

the seller’s interest to be pari passu with 

each series of investor ABS interests, 

prior to an early amortization event as 

defined in the transaction documents. 

The sponsor would have been required 

to meet the 5 percent threshold for its 

seller’s interest at the closing of each 

issuance of ABS interests by the master 

trust, and at each seller’s interest 

measurement date specified in the 

transaction documents, but no less often 

than monthly. The reproposal would 

have required the seller’s interest to be 

retained by the sponsor or by a whollyowned affiliate of the sponsor. 

For so-called ‘‘legacy master trusts’’— 

which hold revolving pools of collateral 

and issue a certificate that entitles the 

holder to distributions on that collateral 

to another one of the sponsor’s master 

trusts, which in turn securitizes those 

distributions into investor ABS 

interests—the reproposal would have 

allowed the seller’s interest with respect 

to the legacy trust assets to be held by 

the sponsor at the level of either trust, 

in proportion to their differing asset 

pools. The agencies also proposed to 

allow an offset against the required 

seller’s interest, on a dollar-for-dollar 

basis, for so-called ‘‘excess funding 

accounts.’’ These accounts receive 

distributions that would otherwise be 

paid to the holder of the seller’s interest 

if the sponsor fails to meet the 

minimum seller’s interest requirement. 

In the event of an early amortization of 

the master trust, funds from the excess 

funding account would be used to make 

distributions to outstanding investor 

ABS interests, in the same manner as 

distributions on pool collateral during 

early amortization. 

In the reproposal, the agencies also 

observed that some of the master trusts 

in the market are not structured to 

include a pari passu seller’s interest of 

a sufficient size to meet the proposed 

rule’s 5 percent trust-wide requirement. 

In an effort to accommodate sponsors of 

these trusts, the reproposal would have 

allowed the sponsor to reduce its 5 

percent pari passu seller’s interest 

requirement by whatever corresponding 

percentage of horizontal ABS interest 

the sponsor held in the structure. The 

reproposal would have given the 

sponsor credit for an eligible horizontal 

residual interest under section 4 for 

these purposes, as well as an alternative 

form of horizontal risk retention based 

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73One group of commenters said the typical pari 

passu seller’s interest in a floorplan securitization 

was zero percent, and they were aware of no 

floorplan securitization with one higher than 2 

percent. These commenters said that a subordinated 

seller’s interest was, like a pari passu seller’s 

interest, typically calculated as a set percentage of 

additional assets required to be held in the 

collateral pool, over and above an amount equal to 

the total amount of outstanding investor ABS 

interests (though this percentage is often 

determined on a series-by-series basis rather than a 

trust-wide basis). Principal and interest payments 

made with respect to this subordinated seller’s 

interest are distributed to the sponsor, after they are 

first applied to cover any charge-offs of securitized 

assets that would otherwise reduce the principal 

amount of outstanding investor ABS interests. The 

sponsor’s share of principal and interest 

distributions is also available to cover shortfalls in 

payments of principal and interest due to investors. 

74Commenters representing automobile, 

equipment, and dealer floorplan manufacturers 

were among those advocating for a simplified risk 

retention alternative, without fair value 

requirements and cash flow restrictions, for 

‘‘simple’’ securitization structures that issue only 

‘‘traditional’’ interest bearing asset-backed 

securities with 5 to 10 percent overcollateralization 

on a face value basis and weighted average interest 

rates on the issued asset-backed securities in line 

with that of the securitized assets. The agencies 

note that the elimination of the cash flow 

restrictions from section 4 of the rule, accompanied 

by the treatment of subordinated seller’s interests 

adopted in the final rule, should significantly 

address the source of commenters’ concerns in this 

regard. 

75The agencies note that the elimination of the 

cash flow restrictions from section 4 of the rule 

addresses commenters’ concerns in this regard. 

on excess spread (described below). The 

sponsor would have been required to 

determine the percentages of horizontal 

retention on a fair value basis, 

consistent with the reproposal’s 

treatment of other subordinated forms of 

risk retention. Furthermore, any gap 

between the amount of trust-wide pari 

passu seller’s interest held by the 

sponsor and the 5 percent minimum 

requirement would have been required 

to be offset with an equivalent fair value 

percentage of the permitted horizontal 

interests for every outstanding series 

issued by the master trust. 

Another alternative form of horizontal 

risk retention that would have been 

recognized by the reproposal was 

designed to allow sponsors to receive 

risk retention credit for excess spread, 

which constitutes a significant portion 

of the credit enhancement in master 

trusts collateralized by credit card 

receivables. These master trusts are 

structured with two separate cash 

waterfalls, one for principal repayments 

collected from borrowers and one for 

interest and fees (finance charges) 

collected from borrowers. Interest and 

fees collected from borrowers each 

payment period are used to cover the 

master trust’s expenses and to pay 

interest due on outstanding investor 

ABS interests for the period, and the 

remaining interest and fee collections 

are then made available to cover 

principal charge-offs on securitized 

assets. The sponsor is then entitled to 

collect whatever interest and fee 

collections remain. Absent application 

of the excess interest and fee collections 

to cover principal charge-offs, the 

principal charge-offs would result in the 

balance of outstanding investor ABS 

interests being reduced. Accordingly, 

the reproposal would have recognized 

the sponsor’s interest in the residual 

interest and fees (excess spread) as a 

subordinated form of horizontal risk 

retention, if it was structured in the 

manner described in this paragraph, so 

long as the master trust continued to 

revolve, and the sponsor determined 

and disclosed the fair value of the 

residual interest and fees on the same 

monthly basis as its pari passu seller’s 

interest. 

The reproposal also included 

provisions clarifying that a master trust 

entering early amortization and winding 

down would not, as a result, violate the 

rule’s requirement that the seller’s 

interest be pari passu. During early 

amortization, distributions on this form 

of seller’s interest typically become 

subordinated to investor interests, to 

allow for the repayment of the 

outstanding investor ABS interests more 

rapidly. 

The agencies received extensive 

comments on the overall design and the 

details of the reproposal’s option for 

master trusts. Commenters stated that 

the agencies needed to make numerous 

revisions to the mechanics of the 

reproposal for master trusts or the 

seller’s interest option would not be 

useable by most revolving pool 

securitization structures in the market. 

Moreover, commenters stated that most 

revolving pool securitizations in the 

market would be left with no 

mechanism for horizontal risk retention 

under the rule whatsoever, because the 

requirements in section 4 of the 

reproposed rule for an eligible 

horizontal residual interest conflicted 

with key provisions of those revolving 

pool securitizations. Commenters 

pointed out that revolving pool 

securitization structures have evolved 

beyond credit cards and automobile 

dealer floorplan financing, to 

encompass numerous specialized asset 

classes important to the U.S. economy. 

Examples they cited included a wide 

variety of floorplan and trade receivable 

financing for commercial manufacturing 

firms, other non-revolving short-term 

assets such as insurance premium loans 

and servicer advance receivables, a 

broad variety of equipment leasing 

programs, and home equity line 

receivables. Commenters identified two 

overarching concerns with the 

reproposal, and also made numerous, 

more detailed recommendations for 

revisions to the mechanics of the rule. 

The first area of overarching concern 

for commenters centered on the 

agencies’ proposed treatment of 

subordinated forms of risk retention in 

the master trust context. In the 

reproposal, the agencies noted the 

existence of subordinated forms of 

seller’s interests in the market. The 

agencies invited comment on whether 

subordinated seller’s interests should be 

given risk retention credit under the 

rule, but also pointed out that the 

agencies were inclined to require it to be 

measured on a fair value basis, 

consistent with the treatment of other 

forms of subordinated risk retention 

under the reproposal. Commenters said 

many revolving pool securitizations in 

the market relied on subordinated 

seller’s interests as the principal source 

of credit enhancement and, therefore, it 

was critical for the agencies to include 

it in the rule.73 Commenters also said 

that monthly calculations of fair value, 

as suggested by the agencies in the 

reproposal, would be immensely 

burdensome. Commenters said this 

burden was especially unwarranted in 

the case of revolving pool 

securitizations, which do not monetize 

excess spread and, therefore, do not 

present the risks of evasion through deal 

structures that motivated the agencies’ 

restrictions on other forms of horizontal 

risk retention. Commenters also said 

that the agencies’ concerns about 

sponsor manipulation and evasion were 

misplaced, because revolving pool 

securitization sponsors rely on the 

funding they thereby obtain as a 

principal source of ongoing funding for 

their business operations. Commenters 

said this creates an alignment of 

interests between sponsors and 

investors that is the opposite of the 

originate-to-distribute model.74

The other areas of concern for 

commenters were differences between 

the reproposal’s requirements for the 

eligible horizontal residual interest and 

the terms of existing revolving pool 

securitizations in the market. First, 

commenters said the cash flow recovery 

percentage calculations were 

structurally incompatible with revolving 

pool securitizations.75 Second, 

commenters expressed heightened 

concerns about their potential liability 

for disclosing predictions and 

assumptions about the future 

performance of a revolving pool 

securitization, in connection with 

making the fair value determination 

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77626 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

76Commenters also expressed concern as to how 

the agencies could define the difference between 

premium bonds and bonds that price above par due 

to investor enthusiasm for a particular bond. 

77Moreover, some revolving pool securitizations 

allocate principal during an accumulation phase 

pursuant to a formula that captures all available 

principal collections from the assets that are not 

otherwise needed for other principal accumulation 

accounts and acquisition of new pool collateral. 

78Commenters said that the measurement 

referred to by the agencies in the reproposal, for 

purposes of determining whether the sponsor must 

add more assets to the collateral pool, generally 

takes place monthly. However, the seller’s interest 

is measured more frequently (as often as daily) for 

other purposes, such as verifying whether cash may 

be released to the sponsor. 

required by the rule. Third, commenters 

asserted that the requirement for the 

eligible horizontal residual interest to be 

the most subordinated claim to 

payments of both principal and interest 

could not be achieved when the sponsor 

is also entitled to collect residual 

interest and fees, because there are 

separate interest and principal 

waterfalls and the subordinated junior 

bond in the series held by the sponsor 

(whether or not it is certificated or 

rated) is usually structured to be paid 

interest before the allocation of interest 

and fee collections to cover charge-offs 

otherwise allocable to senior bonds (and 

in some cases, charge-offs allocable to 

the junior interests held by the sponsor 

as well). 

Commenters said that sponsors sought 

the ability to continue incorporating 

subordinated seller’s interest or residual 

ABS interest in excess interest and fees 

into their deal structures and 

simultaneously retain a junior bond, 

while still having the flexibility to 

choose which combination of those 

interests the sponsor would use to 

comply with the risk retention 

requirements. Commenters placed 

particular importance on retaining the 

flexibility to do this without being 

required to engage in fair value 

determinations for the interests the 

sponsor does not count for purposes of 

regulatory compliance. 

In addition, commenters expressed 

concerns about paragraphs (2) and (3) of 

the eligible horizontal residual interest 

definition in connection with the serieslevel allocations and delinked structures 

used in revolving pool securitizations. 

Commenters also asked the agencies 

to modify the rule’s subordination 

requirements to allow a subordinated 

tranche held as an eligible horizontal 

residual interest to be repaid prior to 

later-maturing senior tranches, noting 

that, in delinked structures, a 

subordinated tranche which enhances 

one or more senior tranches may mature 

before the senior tranche. In these 

circumstances, commenters said the 

securitization transaction documents 

contain terms requiring the 

subordinated tranche to be replaced to 

the extent the remaining senior tranches 

still require credit enhancement under 

the terms of the transaction documents. 

In addition to these concerns, 

commenters requested numerous 

changes they said were necessary to 

recognize the risk retention existing in 

revolving pool securitizations in the 

current market. 

Commenters said many revolving 

securitization structures that are 

commonly referred to as ‘‘master trusts’’ 

do not, in fact, use issuing entities 

organized in the form of a trust, and 

their organizational documents do not 

necessarily state that they are 

established to issue multiple series. 

Commenters also expressed concern 

about whether sponsors universally 

hold their seller’s interests in the form 

of an ‘‘ABS interest’’ as defined in the 

reproposed rule. 

Commenters requested clarification as 

to whether the requirement that the 

master trust be collateralized by a 

common pool of securitized assets 

means that every series must be secured 

by every asset held by the issuing entity. 

Commenters explained that some 

revolving pool securitizations may use 

collateral groupings, and further that 

principal accumulation and interest 

reserve accounts may be held only for 

the benefit of an identified series. 

Commenters also requested clarification 

as to whether the common pool 

requirement prevents the issuing entity 

from holding assets that are not eligible 

to support issuance of additional ABS 

interests to investors (such as excess 

concentration receivables), but are 

nonetheless pledged as collateral to the 

structure, with proceeds from these 

ineligible assets being allocated to the 

sponsor, sometimes with varying 

extents of subordination to one or more 

series of outstanding investor ABS 

interests. 

In the reproposal, the agencies invited 

comment on whether, if a sponsor is 

relying on the seller’s interest as its 

required credit risk retention under the 

rule, the final rule should preclude the 

master trust from monetizing excess 

spread, in exchange for allowing the 

seller’s interest to be calculated on the 

basis of the principal balance of 

outstanding investor ABS interests 

instead of the fair value of outstanding 

investor ABS interests. Commenters 

questioned the agencies’ rationale for 

this restriction, asserting that revolving 

pool securitizations that generate excess 

spread do not monetize it through the 

issuance of interest-only securities or 

premium bonds. Commenters said 

revolving pool securitizations do exactly 

the opposite, making excess spread 

available to cover losses that would 

otherwise reduce the principal 

repayments to outstanding investor ABS 

interests.76

Commenters questioned why the 

reproposal would, as a general rule, 

permit a majority-owned affiliate of a 

securitizer to hold the securitizer’s risk 

retention interest required by the rule, 

but in the case of revolving pool 

securitizations would only permit the 

seller’s interest or special horizontal 

interest to be held by the securitizer or 

a wholly-owned affiliate of the 

securitizer. 

Commenters also requested that the 

agencies revise the rule to permit risk 

retention in legacy master trusts to be 

held at the legacy master trust level, not 

only for seller’s interests, as the agencies 

proposed, but also for horizontal forms 

of risk retention permitted under the 

rule. 

Commenters requested that the 

agencies make changes to the details of 

the definition of seller’s interest 

concerning the requirement that the 

sponsor’s distributions on the seller’s 

interest be pari passu prior to an early 

amortization event. Commenters 

pointed out that principal distributions 

on the seller’s interest are subordinated 

to a series of outstanding investor ABS 

interests in a controlled accumulation 

phase or amortization, because the 

transaction documents typically fix the 

proportions for allocation of principal 

distributions to the series at the start of 

the accumulation phase or amortization 

period.77

With respect to the reproposal’s 

requirement for master trusts to measure 

the seller’s interest on the measurement 

date specified in the transaction 

documents, no less than monthly, 

commenters requested two changes. 

First, commenters stated that some 

revolving pool securitizations require 

measurements of the seller’s interest on 

a more frequent basis, and that they 

should not be required to measure the 

seller’s interest for regulatory 

compliance purposes more often than 

monthly (and at the closing of each 

issuance of ABS interests).78 Second, 

commenters requested the agencies to 

recognize the cure period afforded them 

under their transaction documents. 

Commenters also requested changes to 

the specifics of the disclosure 

requirements with respect to the cut-off 

dates for disclosing the amount of 

seller’s interest retained by the sponsor. 

Commenters also requested changes 

to the details of the reproposed rule’s 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77627 

treatment of excess funding accounts 

and the provisions on early 

amortization, to better reflect the way 

early amortization triggers are currently 

structured. 

Commenters supported the 

reproposal’s inclusion of residual 

interest and fees as a recognized form of 

risk retention for revolving pool 

securitizations. They recognized the 

rationale for requiring sponsors using 

the option to measure it on a fair value 

basis, but expressed concern that the 

burdens of performing the valuation 

monthly would be so substantial as to 

dissuade all but a few revolving pool 

securitizations from using the option. 

Commenters also requested some 

changes and clarifications to the 

mechanics of the rule language in the 

reproposal, to accommodate established 

structures being used in the market. 

They also requested that the agencies 

eliminate the requirement for separate 

interest and principal waterfalls. 

Commenters supported the 

reproposal’s inclusion of provisions 

allowing revolving pool securitizations 

to offset and reduce their 5 percent 

seller’s interest with corresponding 

amounts of horizontal interests. They 

objected to the agencies’ requirement 

that the offsetting amount be held with 

respect to every series in the trust, and 

requested that the agencies permit the 

offset to be determined on a weighted 

average basis across all series of 

outstanding investor ABS interests. 

Commenters also requested that, if a 

sponsor held the horizontal interest 

jointly with an investor, the sponsor be 

allowed to take credit for its 

proportional holding in that horizontal 

interest. 

Commenters agreed with the agencies 

that it is not practicable to create a 

grandfathered status for seller’s interest, 

since it represents the sponsor’s 

undivided interest in, and exposure to, 

the common pool of securitized assets 

in the trust, on a trust-wide basis. 

Commenters suggested that a revolving 

pool securitization relying on horizontal 

interests to offset any portion of the 

seller’s interest should be allowed to do 

so on a grandfathered basis, whereby the 

sponsor would only be required to hold 

that horizontal element with respect to 

series issued after the applicable 

effective date of the rule. 

Commenters also described a type of 

revolving pool securitization that 

securitizes mortgage servicer advance 

receivables, in which the seller’s 

interest is fully subordinated to all 

expenses and investor obligations. 

These commenters requested inclusion 

of these subordinated interests as part of 

the master trust option, and inclusion of 

certain series-specific interest reserve 

accounts as an offset to the minimum 

seller’s interest. 

b. Description of the Final Rule 

The agencies are revising the master 

trust option in the final rule in order to 

make the option available to more 

commercial firms that currently rely on 

revolving pool securitizations as an 

important component of their funding 

base. These revisions recognize and 

accommodate the meaningful exposure 

to credit risk currently held by sponsors 

of these vehicles, in light of the 

heightened alignment of incentives 

between sponsors and investors that 

attaches to their revolving nature. The 

agencies are also making a number of 

other refinements in the final rule in 

order to align it more closely with the 

mechanics of revolving pool 

securitizations as they are structured in 

the market today. 

The pari passu seller’s interest option 

proposed by the agencies represents a 

special form of over-collateralization for 

the ABS interests issued by a revolving 

pool securitization. Under the final rule, 

sponsors must maintain the size of the 

seller’s interest position, which they 

most commonly do through the ongoing 

addition of assets to the pool or 

repayment of investor ABS interests, if 

the existing pool is diminished by 

charge-offs exceeding expected loss 

rates. 

The agencies are also adopting an 

additional change requested by 

commenters to accommodate other 

revolving pool securitizations that are 

common in the market and rely on overcollateralization in a different manner, 

which varies between asset classes. 

Commenters described two different 

structures, one of which the agencies are 

persuaded should be recognized as an 

eligible form of risk retention under the 

final rule. This form was described by 

commenters as a common feature of 

some asset classes, such as equipment 

leasing and floorplan financing. In these 

revolving pool securitizations, the 

sponsor is obligated, as is the case in the 

pari passu seller’s interest structure, to 

maintain an undivided interest in the 

securitized assets in the collateral pool, 

in an amount equal to a specified 

percentage of the trust’s outstanding 

investor ABS interests. Whereas the pari 

passu seller’s interest is a trust-level 

interest equal to a minimum percentage 

of the revolving pool securitization’s 

combined outstanding investor ABS 

interests, the minimum percentage in 

these structures may be tied to the 

outstanding investor ABS interests in 

each separate series. While the 

sponsor’s right to receive distributions 

on the seller’s interest included in the 

reproposal was required to be pari 

passu, the sponsor’s right to receive its 

share of distributions on its 

subordinated seller’s interest may be 

subordinated to varying extents to the 

series’ share of credit losses. 

Importantly, notwithstanding these 

differences with the pari passu seller’s 

interest, the sponsor of this form of 

revolving pool securitization is still 

required under the transaction 

documents to maintain the specified 

minimum percentage amount of 

securitized assets in the pool if the 

securitization is to continue revolving, 

through the ongoing addition of extra 

securitized assets to the pool if 

necessary. The agencies believe this 

requirement to maintain the specified 

minimum percentage amount creates 

incentives for the sponsor to monitor 

the quality of the securitized assets 

added to the pool in both structures. If 

the sponsor replaces depleted pool 

collateral with poorly underwritten 

assets, those assets will, in turn, 

underperform, and the sponsor will be 

obligated to add even more assets. If this 

cycle is perpetuated and the specified 

minimum percentage amount is 

breached, the deal will enter early 

amortization, and the sponsor’s access 

to future funding from the structure will 

be terminated. In consideration of this, 

the agencies have made modifications 

so that the final rule recognizes this 

subordinated form of seller’s interest as 

an eligible form of risk retention for 

revolving pool securitizations, because 

the agencies believe this form aligns the 

interests of sponsors and investors in a 

manner similar to other forms of risk 

retention recognized pursuant to the 

final rule. 

The second form of revolving pool 

securitization described by commenters 

as used in some asset classes, such as 

equipment leasing and floorplan 

financing, represents various types of 

excess securitized assets. The 

transaction documents for revolving 

pool securitizations typically impose 

eligibility requirements on the 

securitized assets that are allowed to be 

included as collateral for purposes of 

calculating the total amount of 

outstanding investor ABS interests that 

may be issued by the revolving trust. 

According to commenters, these 

eligibility requirements include 

concentration limits on securitized 

assets with common characteristics, 

such as those originating from a 

particular manufacturer or dealer or a 

particular geographic area. The sponsor 

places assets in the revolving pool 

securitization that do not meet these 

requirements (excess concentration 

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77628 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

79As discussed above, the definition of seller’s 

interest has also been revised to allow, prior to early 

amortization, subordinated distributions. 

80One group of commenters recommended that 

the agencies simply modify the seller’s interest 

definition to exclude assets within the revolving 

pool securitization that secure less than all of the 

ABS interests. The agencies are implementing this 

approach in a more targeted way by identifying the 

particular categories of assets to be excluded. 

81Revised Proposal, 78 FR at 57943, n.52. 

82Commenters stated that the reproposal’s 

definition of eligible horizontal residual interest 

refers to loss allocations occurring on ABS interest 

payment dates, whereas revolving pool 

securitizations allocate losses periodically, in 

advance of ABS interest payment dates. 

receivables), but these ineligible assets 

are not included when calculating the 

total amount of outstanding investor 

ABS interests the revolving pool 

securitization may issue. Commenters 

asserted that these ineligible assets are 

often subject to the pledge of collateral 

to the ABS investors, but distributions 

on these assets are typically allocated to 

the sponsor. Depending on the terms of 

the securitization, the sponsor’s claim to 

the cash flow from these excess assets 

may be partially or fully subordinated to 

investor interests, and these 

subordination features may be at the 

trust level, at the series level, or some 

combination of both. 

The agencies are not persuaded that 

the sponsor’s interest in these 

receivables should be included as 

eligible risk retention. By their terms, 

these are assets that are not 

representative of the assets that stand as 

the principal repayment source for 

investor ABS issued by the revolving 

pool securitization. 

To accommodate revolving pool 

securitizations with subordinated 

seller’s interest, the agencies have 

revised the distribution language in the 

definition of seller’s interest to include 

seller’s interests that are pari passu with 

each series of investor ABS interests, or 

partially or fully subordinated to one or 

more series in identical or varying 

amounts with respect to the allocation 

of all distributions and losses on the 

securitized assets. This language retains 

the vertical nature of the proposed 

seller’s interest, since the sponsor must 

receive at least its pro rata share of 

losses on securitized assets through the 

pari passu aspect of the distribution. 

The sponsor is also free to use its pari 

passu share of distributions from 

securitized assets to provide loss 

protection to outstanding investor ABS 

interests, thereby subordinating its 

interest. The final rule provides that 

these levels of subordination may be 

varied, thereby affording the sponsor 

flexibility with regard to the extent of 

this subordination. For example, the 

sponsor may provide varying levels of 

subordination to different series, or 

provide different levels of subordination 

depending on the occurrence of triggers 

specified in the transaction documents. 

Commenters stated that structures 

with pari passu seller’s interest also 

often include elements of conditional 

subordination that are included to 

accommodate investor or rating agency 

concerns that vary from transaction to 

transaction. These are also permitted 

pursuant to the final rule. The agencies 

believe this flexibility is necessary to 

accommodate the kinds of variations in 

current market practice from deal to 

deal that commenters described in their 

comment letters. Nevertheless, the 

flexibility afforded under the rule does 

not permit the sponsor to participate in 

distributions to any extent greater than 

pari passu. Therefore, the seller’s 

interest may not be senior to any series 

of investor ABS interests with respect to 

allocation of distributions pursuant to 

the seller’s interest. 

Commenters asserted that revolving 

pool securitizations typically provide 

different distribution regimes for seller’s 

interests if the securitization moves into 

early amortization. The reproposed rule 

contained language reflecting this, 

relieving the seller’s interest from the 

pari passu distribution requirement 

only after an ‘‘early amortization event.’’ 

In response to these comments, the 

agencies have removed the technical 

reference to a triggering event and 

substituted functional language 

describing a revolving pool 

securitization in early amortization, as 

specified in the securitization 

transaction documents.79

In addition, the agencies have 

modified slightly the operational 

portion of the final rule text allowing 

retention of a seller’s interest to satisfy 

a sponsor’s risk retention obligation. 

Whereas the reproposal obligated the 

sponsor to ‘‘retain a seller’s interest of 

not less than 5 percent,’’ the final rule 

requires the sponsor to ‘‘maintain a 

seller’s interest of not less than 

5 percent’’ (emphasis added). The 

agencies believe that the sponsor’s 

obligation to replenish the seller’s 

interest underlies the alignment of 

interests unique to the revolving pool 

securitization structure. Commenters 

indicated that there are some forms of 

subordinated seller’s interest that the 

sponsor is not required to replenish. 

These do not qualify for the seller’s 

interest option under the final rule. 

The definition of seller’s interest in 

the final rule provides that ineligible 

assets—specifically, assets which are 

not eligible under the terms of the 

securitization transaction to be included 

when making periodic determinations 

whether the revolving pool 

securitization holds aggregate 

securitized assets in the required 

specified proportions to aggregate 

outstanding investor ABS interests 

issued by the revolving pool 

securitization (e.g., excess concentration 

receivables)—are not to be considered a 

component of the seller’s interest.80 By 

the terms of the transaction documents, 

these are assets that are typically not 

representative of the assets that stand as 

the principal repayment source for 

investor ABS interests issued by the 

revolving pool securitization, and the 

agencies are declining to grant 

commenter’s request that they be 

recognized as a form of risk retention 

comparable to the forms of seller’s 

interest recognized under the rule. The 

agencies have also clarified the 

proposed exclusion from seller’s interest 

of assets that have been allocated as 

collateral only for a specific series. As 

the agencies discussed in the 

reproposal, this exclusion was designed 

to accommodate limited forms of 

exclusion in connection with 

administering the trust, accumulating 

principal, and reserving interest.81 To 

reflect this condition within the rule 

text itself, the agencies have revised the 

exclusion so it applies only to servicing 

assets. 

To address certain comments about 

the application of the definition of 

eligible horizontal residual interest to 

revolving pool securitizations, the 

agencies have modified paragraph (2) of 

the definition of eligible horizontal 

residual interest to refer to allocation 

dates as well as payment dates.82 The 

agencies also confirm that, in applying 

the eligible horizontal residual interest 

definition to a revolving securitization 

with multiple series, the requirements 

in paragraphs (2) and (3) specifying 

priority of payment with respect to 

amounts due to other interest holders 

and requiring subordination are to be 

applied with respect to the series 

supported by the particular eligible 

horizontal residual interest (including, 

where applicable, certain delinked 

structures), and should only be 

construed to refer to all outstanding 

investor ABS interests if the eligible 

horizontal residual interest is, in fact, 

structured to function as an 

enhancement to all outstanding investor 

ABS interests issued by that revolving 

pool securitization. To accommodate 

delinked structures, commenters 

requested that the agencies allow 

replacement of a subordinate tranche 

before maturity of the senior tranches it 

supports. The agencies are not adopting 

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83The agencies are also concerned that the 

approach suggested by commenters is inconsistent 

with the rule’s approach to the timing of the fair 

value determination for retained eligible horizontal 

residual interests under the standard risk retention 

option, under which the fair value ratio of residual 

to ABS interests issued is measured at the time of 

issuance. Although sponsors noted that the terms of 

a delinked revolving pool securitization transaction 

include requirements for minimum levels of 

subordination to be maintained in connection with 

the maturity and replacement of subordinated 

interests, these measures do not necessarily ensure 

equivalent fair value for a replacement 

subordination interest. Commenters did not suggest 

any alternatives to address this area of concern. 

84The agencies made this change, and eliminated 

language in the definition requiring the issuing 

entity to be a ‘‘master trust,’’ in response to 

comments indicating sponsors sometimes organize 

the issuing entity as a different type of legal entity. 

85Although ‘‘series’’ could be considered a term 

of art in securitization, it is not a defined term in 

the rule. The rule text in this regard refers to ‘‘more 

than one series, class, subclass, or tranche.’’ Section 

5(a) of the final rule. The agencies believe the text 

is sufficiently flexible to accommodate, regardless 

of transaction labels used, the concept of a discrete 

issuance of ABS interests of a certain maturity, 

albeit one with a renewable or renegotiated 

maturity, as well as delinked structures. However, 

in the same vein, the rule’s reference to a class, 

subclass, or tranche, which are terms commonly 

used to describe subsets within a series, is not an 

invitation to sponsors to assert that subdivisions of 

an issuance qualify as multiple issuances for these 

purposes. 

86The agencies also recognize that the extent to 

which the sponsoring organization utilizes investor 

funding to fund the securitized assets may vary 

according to business need, as well as the 

availability of alternate sources of funds at more 

favorable rates. 

87 In referring to maturities in this aspect of the 

discussion, the agencies do not focus on legal 

maturity, or to effective maturity or duration, as 

those terms are used in finance, but to the actual 

lifespan of the assets and interests. For example, in 

many revolving pool securitizations, such as credit 

card, automobile floor plan, construction loan, and 

trade receivable deals, the maturity of the 

securitized assets is so short that the structure is 

used to lengthen the maturity of the asset-backed 

securities to attract investors. In other revolving 

pool securitizations, such as UK residential 

mortgage deals, the structure is used to create 

shorter maturity bullet asset-backed securities to 

attract investors. 

this requested modification. The 

agencies note that, to serve as risk 

retention pursuant to the rule, the 

sponsor must retain an eligible 

horizontal retention interest for the life 

of the securitization it supports, and the 

agencies believe sponsors can readily 

structure their retained residual 

interests to achieve this outcome.83

The risk retention options described 

in section 5 of the final rule are 

available only to a specific category of 

securitization vehicles, originally 

defined as ‘‘revolving master trusts’’ but 

now defined as ‘‘revolving pool 

securitizations.’’ 84 The option is not 

available to an issuing entity that issues 

series of ABS interests at different times 

collateralized by segregated 

independent pools of securitized assets 

within the issuing entity such as a series 

trust, or an issuing entity that issues 

shorter-term ABS interests collateralized 

by a static pool of securitized assets, or 

an issuing entity with a predetermined 

re-investment period that precedes an 

ultimate amortization period. 

Commenters expressed concern that 

language in the revolving pool 

securitization definition requiring the 

issuing entity to be ‘‘established to issue 

on multiple issuance dates one or more 

series’’ would require them to reconstitute their issuing entities. The 

agencies note that the rule does not 

require specific statements of intention 

to issue multiple series in the issuing 

entity’s organizational documents. That 

being said, the agencies believe that the 

ability to issue more than one series of 

ABS interests is one of the defining 

characteristics of the structure.85 In light 

of this, the agencies are replacing the 

‘‘one or more’’ language with rule text 

requiring the issuing entity to be 

established to issue ‘‘more than one’’ 

series. While the rule requires no 

specialized documentation of this 

intention to be made in connection with 

the issuing entity’s legal organization, 

the sponsor must be able to establish 

that, under the constituent legal powers 

of the entity pursuant to applicable law, 

the issuing entity has the authority to 

issue more than one series. The agencies 

also recognize that a business 

organization might establish a revolving 

pool securitization vehicle and, after 

issuing one series, changes in 

circumstances could prevent the 

sponsor from seeking to issue any 

additional series, with the structure 

ceasing to revolve and amortizing out. 

The agencies typically would not 

dispute this issuing entity’s eligibility 

under section 5 of the rule in hindsight, 

absent facts and circumstances 

indicating the sponsor sought to use the 

structure to improperly avoid the 

standard risk retention obligations of 

section 4 of the rule. A business 

organization that did so more than once 

would face a heightened burden to 

establish that its reliance on section 5 of 

the rule was not a violation of its 

obligations under the rule. 

The final rule retains the reproposal’s 

requirement that the issuing entity’s 

ABS interests are collateralized by a 

common pool of securitized assets that 

will change in composition over time. 

This is another defining characteristic of 

a revolving pool securitization eligible 

to use section 5 of the rule. Under these 

structures, principal collections on the 

securitized assets (net of funds required 

to amortize the principal of outstanding 

investor ABS interests or to accumulate 

such funds) are used to purchase 

additional assets to collateralize existing 

and future investor ABS interests in the 

securitization on a revolving basis, with 

no predetermined end date.86 Revolving 

pool securitizations allow sponsors to 

restructure the cash flows on the 

securitized assets not only for credit 

enhancement, but for mismatches 

between the maturities of the 

securitized assets and the maturities of 

ABS interests that are sought by the 

market on attractive terms.87

Commenters requested further 

clarification about the common pool 

requirement. One concern centered on 

the presence of ineligible assets, 

including so-called ‘‘excess 

concentration’’ receivables. The 

agencies observe that, on the one hand, 

these ineligible assets are part of the 

asset pool, and proceeds from them may 

even be used to cover losses that would 

otherwise be allocated to investors. On 

the other hand, the bulk, or in many 

cases all, of the proceeds from the 

ineligible assets are directed to the 

sponsor, and the receivables are not 

eligible to be included when 

determining the revolving pool’s limit 

on outstanding investor ABS interests. 

The agencies do not consider these 

arrangements to violate the common 

pool requirement, though as noted 

above the final rule does not permit 

these assets to be included when 

calculating the size of the seller’s 

interest. 

Notwithstanding the agencies’ 

willingness to accommodate these 

ineligible assets that are allocated to the 

sponsor, if a revolving pool 

securitization designated a collateral 

group as the securitized assets for a 

specific series, the arrangement would 

not meet the common pool requirement. 

In this vein, commenters requested 

clarification as to whether a revolving 

pool securitization with collateral 

groups meets the common pool 

requirement. Commenters did not 

provide details about these grouping 

practices, and the agencies believe the 

use of collateral groups may not satisfy 

the common pool requirement. If the 

arrangement were analogous to a 

construct with multiple revolving pool 

securitizations being operated out of a 

single issuing entity, and the sponsor 

could demonstrate that each group 

would comply with the rule’s 

requirements on an independent basis, 

the arrangement could meet the 

common pool standard. On the other 

hand, if the arrangement is analogous to 

a revolving pool securitization in one 

group and a series trust in another 

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77630 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

88The use by a revolving pool securitization of 

excess cash flows resulting from allocations of 

distributions to one series of ABS interests as credit 

enhancement to cover shortfalls in periodic interest 

obligations, periodic losses, and similar exposures 

experienced by other specified series of ABS 

interests (but not all other series of ABS interests) 

does not violate the common pool requirement. The 

agencies do not believe this sharing of allocations 

of distributions among ‘‘groups’’ of outstanding 

series raises the same concerns as separate groups 

of collateral. Similarly, principal accumulation 

formulas would not violate the common pool 

requirement. As discussed above, some revolving 

pool securitizations allocate principal collections 

from pool assets during an accumulation phase 

pursuant to a formula that captures all available 

principal collections from pool assets that are not 

otherwise needed for other principal accumulation 

accounts and acquisition of new pool collateral. 

89Revised Proposal, 78 FR at 57944. 

90There are several circumstances in which a 

sponsor might retain additional ABS interests. 

Investors may not be inclined to purchase investor 

ABS interests unless the sponsor holds a greater 

interest in the securitization transaction. The 

sponsor’s cost of funds to place a subordinated 

tranche of a series may be greater than the sponsor’s 

cost to fund that tranche through other means, or 

the sponsor’s overall cost of funds may be lower 

than the funding that can be obtained by issuance 

of a new series. If the ABS interest is being retained 

by the sponsor as part of its required risk retention 

pursuant to the rule, the interest is subject to 

hedging and transfer restrictions of section 12 of the 

rule. 

91An ABS interest retained in this manner and 

that is not being used to satisfy the minimum risk 

retention requirements under the rule, and that is 

excluded from the denominator, is not subject to 

the restrictions of the final rule that apply to ABS 

interests retained to meet the risk retention 

obligations under the final rule. For instance, the 

sponsor would be permitted to hedge the risks 

related to holding such an interest. 

group, the arrangement would be 

extremely unlikely to satisfy the 

common pool standard. If distributions 

and losses from any ‘‘group’’ are 

designated to a single outstanding 

series, the arrangement would not meet 

the common pool standard.88 To 

accommodate the possibility of a 

multiple group arrangement, the 

agencies have modified the rule text of 

the common pool requirement slightly 

to eliminate the requirement that the 

common pool collateralize ‘‘all’’ series 

issued by the revolving pool 

securitization, as well as a similar 

requirement in the definition of seller’s 

interest. Nevertheless, a sponsor that 

relies on section 5 of the rule for a 

multiple group arrangement bears 

ultimate responsibility to demonstrate 

full compliance with the rule’s common 

pool requirement. 

As discussed above, the reproposal 

also noted that revolving pool 

securitizations do not monetize excess 

spread, and the agencies invited 

comment as to whether the rule should 

be modified to expressly prohibit 

structures that rely on the seller’s 

interest option from issuing senior 

interest-only bonds or premium 

bonds.89 In light of commenters’ 

concerns about the feasibility of 

incorporating this restriction into a 

regulatory requirement and attendant 

grandfathering issues with respect to 

structures that have classes of bonds 

previously issued with idiosyncratic 

interest rates, the agencies are taking a 

different approach. The agencies have 

added to the definition of a revolving 

pool securitization the requirement that 

the sponsor does not monetize excess 

spread from its securitized assets. The 

ability of a sponsor to meet this 

standard with respect to its outstanding 

investor ABS interests depends on the 

facts and circumstances of the issuance, 

including whether the revolving pool 

securitization issues ABS interests that 

price materially above par in light of all 

the features of the ABS interests and 

market conditions, or the revolving pool 

securitization issues ABS interests that 

pay investors interest on notional 

principal absent issuance of a 

corresponding issuance of principalonly bonds to support the revolving 

pool securitization. 

Consistent with the reproposal, the 

final rule requires the seller’s interest to 

be not less than 5 percent of the 

aggregate unpaid principal balance of all 

outstanding investor ABS interests in 

the issuing entity. The phrase ‘‘all 

outstanding investor ABS interests 

issued’’ refers to ABS interests issued to 

persons other than the sponsor and 

wholly-owned affiliates of the sponsor. 

Although the reproposal suggested that 

ABS interests held by the sponsor 

would still be treated as outstanding 

investor ABS interests if those assetbacked securities were ‘‘issued under a 

series,’’ the agencies are simplifying the 

final rule to eliminate this distinction, 

which could raise associated 

interpretive issues as to whether certain 

retained interests met that description. 

Accordingly, in determining the 5 

percent ratio, a sponsor is not required 

to include in the denominator the 

amount of ABS interests that are held by 

the sponsor or its wholly-owned 

affiliates, but only if the sponsor (or its 

wholly-owned affiliates) retains them 

for the life of the ABS interests. This 

treatment applies for ABS interests held 

by the sponsor and its wholly-owned 

affiliates for purposes of complying with 

the risk retention rule, or held for other 

reasons.90 In order to maintain 

consistency with a sponsor’s disclosures 

as to the manner of its compliance with 

the seller’s interest requirement, which 

are communicated to investors in 

connection with the issuance of a series 

of ABS interests, the sponsor must make 

a threshold determination as to whether 

it intends to retain excluded ABS 

interests for their life and disclose this 

election to investors. If a sponsor wishes 

to retain the flexibility to transfer an 

ABS interest in the future, the sponsor 

must, from the time of the issuance of 

the ABS interest onward, include such 

ABS interest in the denominator.91

The agencies have also added 

language clarifying that, if the 

transaction documents set minimum 

required seller’s interest as a proportion 

of the unpaid principal balance of the 

outstanding investor ABS interests in 

one or more identified series, rather 

than all outstanding investor ABS 

interests of the revolving pool 

securitization as a whole, seller’s 

interest may be measured on that basis. 

However, the percentage of each series’ 

specific seller’s interest must (when 

combined with the percentage of 

securitization-wide seller’s interest, if 

any) equal at least 5 percent other than 

for any series issued prior to the 

applicable effective date. For example, 

the final rule does not permit a sponsor 

to include in the numerator of the 

seller’s interest ratio a reserve account 

that only covers shortfalls of principal 

and interest payments to holders of a 

specific series of investor ABS interests. 

The final rule requires the 5 percent 

minimum seller’s interest test to be 

determined and satisfied at the closing 

of each issuance of ABS interests to 

investors by the issuing entity, and at 

least monthly. The agencies have made 

several adjustments to the measurement 

details, in response to comments. 

Sponsors must measure the seller’s 

interest at a seller’s interest 

measurement date specified in the 

transaction documents at least monthly. 

If the seller’s interest does not meet the 

minimum percentage requirement on 

any measurement date and the 

transaction documents specify a cure 

period, the minimum percentage 

requirement must be satisfied within the 

cure period, but no later than one month 

after the original measurement date. 

For purposes of determining the size 

of the seller’s interest at the closing of 

each issuance of ABS interests to 

investors, the final rule permits the 

sponsor to use a specified ‘‘as of’’ date 

or cut-off date for data in establishing 

the outstanding value of the revolving 

pool securitization’s securitized assets 

and an ‘‘as-of’’ date or cut-off date for 

data in establishing the value of the 

revolving pool securitization’s 

outstanding ABS interests. The agencies 

expect that sponsors of revolving pool 

securitizations will, as a practical 

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92See supra note 62. 

93 In providing the sponsor this operational 

flexibility, the final rule does not allow the sponsor 

to adjust the asset total for changes other than 

additions or removals of assets made by the sponsor 

itself. Accordingly, the rule does not permit the 

sponsor to adjust the asset total to take into account 

seasonal changes in borrowers’ revolving credit 

drawdown rates, expected changes in borrower 

repayment rates, or other estimated factors. 

94The terms of the securitization documents must 

prevent funds in the accumulation account from 

being applied for any purpose other than the 

repayment of the unpaid principal of outstanding 

investor ABS, and the funds in the account may 

only be invested in the types of assets permitted for 

a horizontal cash reserve account pursuant to 

section 4 of the rule. 

95The reproposal indicated that the legacy trust 

must hold at least that proportion of seller’s 

interest, but also suggested the sponsor would be 

permitted to hold a greater proportion of seller’s 

interest at the legacy trust. The final rule clarifies 

that the proportion must be the same. 

96Commenters described a common test requiring 

the principal balance of the securitized assets to be 

not less than the sum of the numerators used for 

each series’ calculation of its seller’s interest ratio 

to allocate principal collections to the investor ABS 

interests. 

97As in the reproposal, the account must, in the 

event of early amortization, pay out to outstanding 

investor ABS interest holders in the same manner 

as distributions on the securitized assets. 

matter, continue their past practice of 

using cut-off dates or similar dates as 

the basis for disclosures about the 

amount of securitized assets held by the 

issuing entity, and similarly using 

investor reporting or distribution dates 

as the basis for disclosures about the 

amount of outstanding investor ABS 

interests. The final rule accommodates 

this, both for disclosure purposes and 

for determining compliance with the 

regulatory minimum seller’s interest 

requirement. The sponsor is required to 

describe its use of specified dates for 

these purposes in connection with the 

associated investor disclosures for the 

issuance of ABS interests by the 

revolving pool securitization. In 

addition, in the interests of ensuring 

sponsors use up-to-date information, the 

rule requires the specified dates to be no 

more than 60 days prior to the date of 

first use with investors. To 

accommodate revolving pool 

securitizations that only make investor 

distributions quarterly (or less 

frequently), rather than monthly, the 

final rule permits the specified dates to 

be up to 135 days prior to the date of 

first use with investors.92

In addition, the final rule’s disclosure 

requirements require the sponsor to 

provide pre-sale descriptions of the 

percentage of seller’s interest the 

sponsor expects to retain at closing. To 

accommodate this, the final rule permits 

sponsors to describe adjustments to 

their specified-date data reflecting 

increases or decreases for additions or 

removals of assets the sponsor expects 

to make before the closing date.93 The 

sponsor, in describing the amount of 

additional investor ABS interest that are 

expected to be added by the 

securitization transaction, may also 

describe other adjustments to the 

issuing entity’s outstanding investor 

ABS interest data resulting from 

expected increases and decreases of 

those interests under the control of the 

sponsor, such as additional issuances, 

or scheduled principal payments on 

outstanding investor ABS interests that 

the sponsor expects will be made before 

the closing date. If the amount of seller’s 

interest the sponsor determines that it 

retains at the closing of the 

securitization transaction is materially 

different from the amount described in 

the pre-closing disclosures, the sponsor 

must disclose the amount as of closing, 

within a reasonable time after the 

closing. 

Consistent with the reproposal, the 

seller’s interest amount is the unpaid 

principal balance of the seller’s interest 

in the common pool of receivables or 

loans. The minimum required seller’s 

interest cannot be less than 5 percent of 

the aggregate unpaid principal balance 

of all outstanding investor ABS interests 

issued by the issuing entity. The 

agencies have added language clarifying 

the measurement of this ratio. 

Consistent with the definition of seller’s 

interest, the final rule also clarifies that 

the sponsor may not include in the 

numerator of the seller’s interest ratio 

ineligible assets, or those servicing 

assets allocated as collateral for a 

particular series. The agencies have also 

added language permitting the sponsor 

to take a deduction from the 

denominator (the principal of 

outstanding investor ABS interests) 

equal to the amount of funds held in a 

segregated principal accumulation 

account for the repayment of 

outstanding investor ABS interests, 

subject to certain conditions specified in 

the rule.94 For securitized assets without 

a principal or stated balance, such as 

royalty payments or leases, the amount 

of the securitized assets is the value of 

the collateral as determined under the 

transaction documents for purposes of 

measuring the seller’s interest required 

for the revolving pool securitization. 

The requirements from the reproposal 

are unchanged with respect to the 

holding of the seller’s interests. The rule 

permits wholly-owned affiliates of the 

sponsor to retain the seller’s interest 

(and the horizontal interests described 

in section 5 of the rule, described 

below). The agencies decline to permit 

holding by majority-owned affiliates, as 

requested by commenters. The agencies 

are affording the treatment provided to 

seller’s interest in section 5 of the rule 

because of the special alignment of 

incentives created by the sponsor’s 

interest in maintaining access to 

continued funding through the 

revolving pool securitization, and the 

agencies seek to maintain this alignment 

through this stricter holding 

requirement under the final rule. The 

final rule includes changes to the other 

affiliate-holding provisions within 

section 5 to maintain consistency with 

this approach. The final rule also 

clarifies the provisions allowing seller’s 

interest for ‘‘legacy trust’’ assets to be 

held at either the legacy trust level or 

the issuing entity level. The final rule, 

like the reproposal, limits the amount of 

seller’s interest that may be held at the 

legacy trust level to its proportional 

share of the combined securitized assets 

of the two trusts. The text has been 

clarified to indicate that this 

proportional share is determined based 

on the principal balance of the 

securitized assets in each trust. The 

final rule also clarifies that the 

proportion of seller’s interest held at the 

legacy trust level must be equal to this 

proportion.95 Commenters requested the 

agencies permit legacy trusts to retain 

horizontal forms of risk retention at 

either level, but the comments did not 

provide details of these structures. 

Without more details about the 

structures commenters seek to 

accommodate, the agencies have not 

made changes to section 5 of the rule in 

this regard. 

The agencies made changes requested 

by commenters to allow for dollar-fordollar offset from the 5 percent seller’s 

interest requirement for funds 

maintained in a segregated excess 

funding account that is funded from 

distributions otherwise payable to the 

holder of the seller’s interest. The 

agencies expanded the funding trigger 

requirements for the account to include 

the sponsor’s failure to meet the 

minimum seller’s interest requirement, 

and the failure to meet other minimum 

securitized asset balance tests under the 

transaction documents.96 The agencies 

agree with the commenters that losses 

would not be allocated to an excess 

funding account, and have removed a 

pari passu requirement on the priority 

of such distributions to the account.97 In 

order to expand the issuing entity’s 

flexibility slightly to hold the account in 

a form other than cash deposits, the 

agencies have also decided to add 

language permitting investments in the 

same assets permitted for a horizontal 

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98Specifically, section 5(f) of the rule provides 

that the seller’s interest requirement would be 

reduced by the subordinated portion of risk 

retention support for all series of ABS interests 

issued by the revolving pool securitization after the 

applicable effective date of the rule. 

99To reduce burden further, the rule permits the 

periodic determinations of this residual interest’s 

fair value percentage to be made without redetermining the fair value of the outstanding 

investor ABS interests in the denominator. The 

sponsor may, at its option, carry forward the fair 

values of the outstanding investor ABS interests 

from the determinations made for the closings of 

the transactions in which those outstanding 

investor ABS interests were issued (which are likely 

to be based on observable market data at that time). 

Only the fair value of the residual ABS interest in 

the numerator of the ratio needs to be determined 

every period. The agencies recognize that, for 

revolving pool securitizations with one or more 

amortizing series, this approach may result in a 

larger denominator and thus a larger residual ABS 

interest in excess interest and fees. The final rule 

permits a sponsor to elect to make monthly 

redeterminations of the fair value of such 

amortizing series in connection with their periodic 

determinations. 

100One group of commenters also said the 

obligation to pay default-rate interest is typically 

subordinated to payment of the contract-rate 

interest and coverage for allocated charge-offs. The 

agencies regard this as desirable in that it uses 

available excess spread first to protect investors 

from losses. At any rate, the arrangement described 

by commenters in this regard means that the 

sponsor only claims excess interest and fee 

collections remaining after covering both types of 

‘‘interest,’’ which is in compliance with the rule 

text. 

101Commenters requested the agencies eliminate 

the separate waterfall requirement from the option, 

citing concern that single-waterfall revolving pool 

securitizations could not utilize the structure. 

Commenters did not elaborate on how the residual 

ABS interest in excess interest and fees would be 

separately identified or valued in such an approach. 

Since the separate waterfall requirement is a central 

element of the option, the agencies have retained 

it. 

cash reserve account pursuant to section 

4 of the rule. 

The final rule retains the reproposal’s 

provisions allowing the sponsor to 

reduce its seller’s interest to a 

percentage lower than 5 percent to the 

extent that, for all series of investor ABS 

interests issued by the revolving pool 

securitization, the sponsor retains, at a 

minimum, a corresponding fair value 

percentage of subordinated risk 

retention. This treatment is available 

with respect to the same two forms of 

subordinated risk retention the agencies 

included in the reproposal. As 

discussed in more detail below, the 

agencies have revised the requirements 

of each type slightly, in light of sponsor 

comments stating that existing 

structures would not be able to comply 

with the reproposed rule. An example of 

the reduction in seller’s interest 

permitted by the final rule is as follows: 

a revolving pool securitization sponsor 

holds a seller’s interest in the issuing 

entity’s common collateral pool equal to 

2 percent of the aggregate balance of 

outstanding investor ABS interests 

issued by the securitization. The 

securitization has two outstanding 

series; for one series the sponsor retains 

a residual interest in excess interest and 

fees with a fair value of 5 percent of the 

fair value of outstanding investor ABS 

interests in that series, and for the other, 

the sponsor retains a horizontal interest 

with a fair value of 3 percent of the fair 

value of outstanding investor ABS 

interests in that series. This revolving 

pool securitization holds adequate risk 

retention to comply with section 5 of 

the rule. So long as the structure in this 

example only holds 2 percent seller’s 

interest, every future series issued to 

investors will be required to be 

supported by at least a 3 percent fair 

value subordinated interest. 

For revolving pool securitizations 

relying on both seller’s interest and 

subordinated risk retention, commenters 

requested the agencies grandfather all 

series issued prior to the applicable 

effective date of the rule with respect to 

the subordinated portion of risk 

retention. For example, for a revolving 

pool securitization in which the sponsor 

holds 2 percent seller’s interest, these 

commenters urged the agencies to 

permit the structure to come into 

compliance with the rule by continuing 

to maintain the 2 percent seller’s 

interest and supplement it with at least 

a 3 percent horizontal interest to 

support each series issued to investors 

after the applicable effective date of the 

rule. Commenters said that, unless the 

agencies permit this grandfathering 

approach, a revolving pool 

securitization with less than 5 percent 

seller’s interest would have no option 

other than to increase its seller’s interest 

to 5 percent. Commenters asserted it 

was not feasible to grandfather existing 

series issued before the applicable 

effective date of the rule with respect to 

a seller’s interest, since a seller’s interest 

is an interest in the securitization’s 

entire collateral pool, and this factor 

raises serious obstacles to implementing 

it on a series-by-series basis. The 

agencies agree that the grandfathering 

approach requested by commenters 

should achieve meaningful risk 

retention in ABS interests issued in a 

revolving pool securitization after the 

applicable effective date of the rule, and 

the approach is reflected in the final 

rule text.98

In the reproposal, the agencies sought 

to give revolving pool securitizations 

the above-described offset credit against 

a seller’s interest for two different forms 

of horizontal risk retention. The first 

form was based on the sponsor’s interest 

in excess interest and fees, as described 

above, made available to the sponsor 

periodically after covering the trust’s 

expenses, interest due on more senior 

ABS interests in the series for that 

payment date, and charge-offs for that 

period that would otherwise be 

allocated to more senior ABS interests. 

Some revolving pool securitizations 

allocate each series its ratable share of 

interest and fee collections from the 

pool collateral and apply the interest 

and fee collections only within each 

series, while others permit sharing of 

excess interest and fee collections to 

cover shortfalls in another series after 

application of its share of interest and 

fee collections. The agencies proposed 

to allow sponsors to use the fair value 

of this residual ABS interest in excess 

interest and fees, as a percentage of the 

fair value of outstanding investor ABS 

interests, to reduce their 5 percent 

minimum seller’s interest. As discussed 

above, commenters said they 

anticipated the burden of calculating the 

fair value of these excess interest and 

fees on a monthly basis would be so 

high that few, if any, sponsors would 

avail themselves of the option. The 

agencies note that this is a residual 

interest comprised of a stream of future 

cash flows, and no commenter 

suggested any other reasonable 

methodology to assign a value to it for 

purposes of determining the required 

amount of risk retention. To address this 

burden, the final rule does not require 

the sponsor to disclose its fair value 

determination to investors monthly. The 

sponsor also must continue to calculate 

the fair value of the residual ABS 

interest in excess interest and fees at the 

same time the sponsor calculates the 

seller’s interest, to verify that it 

continues to hold at least the minimum 

required amount of risk retention.99

The agencies have made two 

clarifying changes to the text of the final 

rule. First, at the request of commenters, 

the agencies have eliminated the 

requirement that the sponsor’s residual 

claim to the interest and fee cash flows 

for any interest payment period be 

subordinated to all accrued and payable 

principal due on the payment date to 

more senior ABS interests in the series 

for that period. Commenters asserted 

this requirement was correct for interest 

due (as the rule provides), but not for 

principal.100 The agencies have 

eliminated the ‘‘and principal’’ language 

contained in the interest subordination 

paragraph, and have also eliminated the 

requirement that the residual have the 

most subordinated claim to any part of 

the series’ share of principal repayment 

cash flows.101 In addition, the agencies 

have clarified that, in applying interest 

and fees to reduce the series’ share of 

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102This eliminates possible incentives for 

sponsors to attempt to cluster charge-offs into 

particular periods. 

103Commenters also said the cash flow 

restrictions in section 4 were not workable for 

revolving pool securitizations. As discussed 

elsewhere in this Supplementary Information, these 

restrictions are not included in the final rule. 

104As an example, a sponsor could rely on a pari 

passu seller’s interest and supplement it with the 

fair value of principal payments on an offset EHRI, 

at the same time the sponsor retained a residual 

interest in excess spread but did not rely on that 

interest for purposes of satisfying its risk retention 

requirements. Or for a revolving pool securitization 

of assets that do not generate significant excess 

spread, the sponsor might rely on a subordinated 

seller’s interest and supplement it with the fair 

value of interest payments on an offset EHRI, since 

its residual interest in excess interest and fee 

collections would provide a lesser contribution to 

satisfying the sponsor’s risk retention obligations. 

losses for the applicable period, these 

losses must include charge-offs that 

were not covered by available interest 

and fees in previous periods. The 

agencies believe this clarification is 

appropriate to prevent sponsors from 

receiving payments of excess spread on 

a period-by-period basis for pools that 

have suffered un-covered losses on 

securitized assets in previous 

periods.102

The second form of subordinated risk 

retention the agencies would have 

recognized in the reproposal for 

purposes of reducing the required 

amount of seller’s interest would have 

been an eligible horizontal residual 

interest the sponsor simultaneously 

held in the securitization’s outstanding 

series of ABS interests. The reproposal 

required these interests to meet all the 

requirements for the standard form of 

eligible horizontal residual interest 

pursuant to section 4 of the reproposed 

rule. Commenters asserted that 

revolving pool securitizations that retain 

a residual ABS interest in excess 

interest and fees could not 

simultaneously satisfy the requirement 

pursuant to section 4 that the eligible 

horizontal residual interest have the 

most subordinated claim to interest and 

principal. Commenters said a residual 

ABS interest in excess interest and fees 

is typically structured first to apply a 

series’ share of excess interest and fees 

each period to cover the series’ share of 

trust expenses and the interest due to 

each tranche of ABS interests in the 

series; second to apply remaining excess 

interest and fees to cover charge-offs 

allocated to more senior ABS interests 

in the series; and third to make the 

remainder available to the sponsor (net 

of portions shared with other series, in 

some structures). Commenters said that 

this subordinated interest is typically 

structured to pay interest to the holder 

before excess interest and fee collections 

are applied to cover the series’ share of 

charge-offs. Accordingly, this residual 

interest would not have the most 

subordinated claim to interest.103 The 

agencies note that, now that the final 

rule recognizes subordinated forms of 

seller’s interest, the residual interest 

may not be the most subordinated claim 

to principal distributions to the sponsor 

from the seller’s interest, depending on 

the particulars of the transaction. 

In order to permit sponsors to offset 

their seller’s interest with either of the 

two forms of horizontal risk retention 

included in the reproposal, the agencies 

have modified the subordination 

requirements that would be required for 

eligible horizontal residual interest, to 

accommodate the issues described in 

the preceding paragraph. The final rule 

provides that a sponsor may take the 

seller’s interest offset for ABS interests 

that would meet the definition of 

eligible horizontal residual interest in 

section 2 of the rule but for the 

sponsor’s simultaneous holding of 

subordinated seller’s interests, residual 

ABS interest in excess interest and fees, 

or a combination thereof. In connection 

with this approach, the sponsor’s fair 

value determination for this horizontal 

residual interest must not incorporate 

any value attributable to the sponsor’s 

holdings of subordinated seller’s 

interest or residual ABS interest in 

excess interest and fees. 

Under the final rule, if the sponsor is 

also taking risk retention credit for its 

residual ABS interest in excess interest 

and fees, the sponsor may not include 

any of the interest payments to itself on 

this offset eligible horizontal residual 

interest (‘‘offset EHRI’’) in determining 

the fair value of the offset EHRI. 

Similarly, if the sponsor is taking risk 

retention credit for subordinated seller’s 

interest that is used to reduce chargeoffs that would otherwise be allocated to 

reduce the principal of the offset EHRI, 

the sponsor may not include any 

principal payments on the offset EHRI 

in determining the fair value of the 

offset EHRI. The agencies believe this 

bright-line rule provides an appropriate 

compromise between flexibility for 

sponsors and clarity for investors and 

regulators as to the nature of the risk 

retention interests upon which a 

sponsor relies to comply with the final 

rule. 

Under the final rule, if the sponsor 

seeks to rely on offset EHRI as part of 

its risk retention interest for purpose of 

compliance with the rule, any 

subordinated seller’s interest or residual 

ABS interest in excess interest and fees 

retained by the sponsor must also 

comply with the applicable 

requirements of section 5 of the rule. 

This is true even if the sponsor is not 

asserting reliance on these subordinated 

seller’s interests or residual ABS 

interests in excess interest and fees as 

part of its retained risk retention 

interests to comply with the rule. 

Commenters said that sponsors sought 

the ability to continue incorporating 

subordinated seller’s interest or residual 

ABS interest in excess interest and fees 

into their deal structures and 

simultaneously retain a junior bond, 

while still having the flexibility to 

choose which combination of those 

interests the sponsor would use to 

comply with the risk retention 

requirements. Commenters placed 

particular importance on retaining the 

flexibility to do this without being 

required to engage in fair value 

determinations for the interests the 

sponsor does not count for purposes of 

regulatory compliance. Taken together, 

the agencies believe that these rules for 

offset EHRI provide an appropriate 

framework to accommodate that 

flexibility.104

The final rule requires the sponsor to 

make the percentage fair value 

determination for offset EHRI, and to 

make investor disclosures, at the same 

time and in the same manner as is 

required for the standard form of 

eligible horizontal residual interest 

pursuant to section 4 of the rule. 

Consistent with the treatment of the 

standard form of eligible horizontal 

residual interest pursuant to section 4 of 

the rule, the sponsor is only required to 

perform the fair value determination for 

offset EHRI with respect to the initial 

issuance of the ABS interests supported 

by the offset eligible horizontal residual 

interest. The final rule similarly requires 

a sponsor using a residual ABS interest 

in excess interest and fees to disclose 

the fair value of the interest in the same 

manner as required for eligible 

horizontal residual interests pursuant to 

section 4. To accommodate the 

fluctuating nature of securitized assets 

and outstanding investor ABS interests 

present in revolving pool 

securitizations, the final rule’s valuation 

and disclosure provisions for offset 

EHRI and residual ABS interests in 

excess interest and fees allow the use of 

specific dates for data on securitized 

assets and outstanding investor ABS 

interests, and adjustments to these 

amounts in connection with pre-sale 

disclosures. These provisions are the 

same as those governing the 

determination of minimum seller’s 

interest, as described above. 

Consistent with the agencies’ 

reproposal, the final rule also makes 

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105Even if the pool consists of receivables created 

by revolving accounts, successful underwriting of 

revolving account credits is an ongoing process for 

the life of the credit line. 

106The agencies have modified the rule text to 

clarify that holding by an affiliate for these 

purposes means holding by a wholly-owned 

affiliate. This is consistent with the other affiliation 

requirements of section 5 of the rule. 

107Commenters also expressed the view that the 

reproposal did not provide sponsors with the 

flexibility to offset their minimum seller’s interest 

percentage with a form of horizontal risk retention 

that supported more than one outstanding series. In 

this regard, the agencies note that the final rule 

requires the sponsor to satisfy the minimum floor 

for every series issued after the applicable effective 

date of the rule, but that it does not require them 

to hold that risk retention in each series. The rule 

does not prevent sponsors from incorporating 

residual ABS interest in excess interest and fees or 

offset EHRI that are structured to support more than 

one series, or structured to support delinked 

structures, so long as the sponsor demonstrates the 

structure satisfies the rule’s requirements as to the 

terms of those horizontal interests. 

108The agencies have also eliminated the 

paragraph limiting the provision to pools of 

revolving assets. The language was included in the 

reproposal based on concerns about potential 

evasive structures, but the agencies have now 

directly addressed that issue in the discussion of 

revolving pool securitizations that amortize without 

issuing a second series of investor ABS interests 

collateralized by the common pool of assets. 

109See Original Proposal, 76 FR at 24104. 

clear that there is no sunset date for 

revolving pool securitization risk 

retention interests. The basis for the 

agencies’ decision to propose a sunset 

date for risk retention was that sound 

underwriting is less likely to be 

effectively promoted by risk retention 

after a certain period of time has passed 

and a peak number of delinquencies for 

an asset class has occurred. In the case 

of a revolving pool securitization, this 

rationale does not apply, since the 

sponsor continually transfers additional 

assets into the common pool of 

collateral.105 For a seller’s interest, the 

rule text continues to specify that the 

seller’s interest must be measured and 

satisfied at least monthly until no ABS 

interest in the issuing entity is held by 

any person which is not a whollyowned affiliate of the sponsor.106 For 

other forms of risk retention employed 

by a revolving pool securitization 

sponsor, the applicable provision on 

sunset is in section 12(f) of the rule. 

Notably, this provision only lifts the 

transfer and hedging restrictions of 

section 12 of the rule at ‘‘the latest of’’ 

amortization of the securitized assets to 

33 percent of the original balance, 

amortization of the principal amount of 

the ABS interests to 33 percent of their 

original balance, or two years after 

closing. Since the common pool of 

securitized assets continually revolves 

and the ABS interests typically are not 

paid principal until maturity, neither 

the securitized assets nor the ABS 

interests amortize down to 33 percent of 

the original unpaid balance (absent an 

early amortization). 

Commenters requested several 

additional changes concerning the rules 

for holding and measuring a seller’s 

interest. One commenter requested the 

agencies strike the element of the 

definition of seller’s interest that 

describes it as an ABS interest. The 

commenter requested the agencies allow 

sponsors to hold anything that was the 

economic equivalent of the seller’s 

interest, regardless of form. The 

agencies are not making this change 

because they believe the rule’s 

definition of ‘‘ABS interest’’ provides 

sufficient flexibility, balanced against 

the agencies’ interest in certainty and 

clarity regarding how a sponsor 

achieves compliance with the rule. With 

respect to the form requirements for an 

ABS interest, the definition applies to 

any type of interest, whether certificated 

or uncertificated, and includes 

beneficial interests and residual 

interests. This provides flexibility for 

sponsors and imposes no specific 

requirements as to form or 

documentation, but at the same time 

maintains a basic requirement for the 

sponsor to be able to demonstrate that 

the legal source of its entitlement to 

payments from, and its obligation to 

share losses of, the securitized assets are 

consistent with the rule’s requirements 

for a risk retention interest. 

Another group of commenters 

requested the agencies modify the 

holding requirements for sponsors 

reducing their 5 percent seller’s interest 

requirement with offsetting horizontal 

interests. As described above, the 

sponsor must demonstrate that it holds 

the offset percentage as a minimum 

percentage for every series of 

outstanding investor ABS interests.107

Commenters requested the agencies 

permit sponsors to determine they 

satisfied the requirement on a weighted 

average basis taken across all 

outstanding series. The agencies decline 

to incorporate this approach because it 

would result in at least some series of 

outstanding investor ABS interests with 

less than 5 percent risk retention. 

Commenters also requested sponsors be 

permitted to take partial risk retention 

credit for horizontal interests the 

sponsor holds jointly with another 

party, on a pro rata basis. The agencies 

note this is not permitted for the 

standard form of eligible horizontal 

residual interest, and commenters did 

not provide sufficient justification for 

treating offset EHRI any differently. 

The agencies revised the disclosure 

requirements of section 5 of the rule in 

a manner consistent with the agencies’ 

revisions to the disclosure requirements 

throughout the rule, with appropriate 

variations for valuation of seller’s 

interest and offsetting subordinated 

interests as described above. 

The reproposal also included 

provisions clarifying that a master trust 

entering early amortization and winding 

down would not, as a result, violate the 

rule’s requirement that the seller’s 

interest be pari passu. Commenters 

requested changes to the details of these 

provisions, to reflect more accurately 

the way early amortization triggers are 

actually structured. In response to 

commenter concerns, the agencies have 

revised the rule text to apply when the 

securitization has entered early 

amortization, rather than focusing on 

the technical trigger events that result in 

an early amortization commencing.108

Nevertheless, the agencies also believe 

that the revisions permitting 

subordination of the seller’s interest 

make this portion of the final rule less 

significant than it was when the 

agencies would have required the 

seller’s interest to be pari passu. 

For servicing advance receivables, the 

agencies note that the final rule permits 

sponsors of revolving pool 

securitizations to rely on subordinated 

forms of seller’s interest to meet their 

risk retention requirements, which 

largely addresses the source of the 

commenters’ concerns. 

3. Representative Sample 

a. Overview of Reproposal and Public 

Comment 

The original proposal would have 

allowed a sponsor to satisfy its risk 

retention requirement for a 

securitization transaction by retaining 

ownership of a randomly selected 

representative sample of assets. To 

ensure that the sponsor retained 

exposure to substantially the same type 

of credit risk as investors in the 

securitized transaction, the sponsor 

electing to use the representatives 

sample option would have been 

required to construct a ‘‘designated 

pool’’ of assets consisting of at least 

1,000 separate assets from which the 

securitized assets and the assets 

comprising the representative sample 

would be drawn. The original proposal 

also would have required a number of 

other measures in calculating the 

representative sample to ensure the 

integrity of the process of selection, 

including a requirement to obtain a 

report regarding agreed-upon 

procedures from an independent public 

accounting firm.109

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77635 

110See 12 CFR 360.6. 

Many commenters opposed the 

representative sample in the original 

proposal, noting that it would be 

impractical to implement this option for 

a variety of reasons, including that it 

would be unworkable with respect to 

various asset classes, would be subject 

to manipulation, and was too 

burdensome with respect to its 

disclosure requirements. Due to these 

concerns and a conclusion that the 

representative sample option would 

likely be too difficult to implement, the 

agencies did not include a 

representative sample option in the 

reproposed rule. Instead, the agencies 

invited comment on whether a 

representative sample option should be 

included as a form of risk retention, 

and, if so, how should such an option 

be constructed, and what benefits such 

an option might provide. 

The agencies received several 

responses to this request for comment. 

While some commenters were 

supportive of the reproposal’s 

elimination of the representative sample 

option, many commenters urged the 

agencies to reconsider including the 

option in a simplified form. Several 

commenters recommended a simplified 

version of a representative sample 

option similar to the representative 

sample option included in the FDIC’s 

safe harbor for securitizations, which 

(prior to the applicable effective date of 

the final rule) requires that the retained 

sample be representative of the 

securitized asset pool, but does not 

specify the requirements for establishing 

that the sample is representative and, 

accordingly, does not itemize specific 

items, such as servicing, accountant 

reports or other requirements.110

Commenters asserted that the 

representative sample option is one of 

the two permitted forms of risk 

retention under the existing FDIC safe 

harbor and that the approach has been 

working effectively for several banks 

that issue asset-backed securities. One 

commenter stated that its sponsor 

members would strongly prefer to have 

a representative sample method as an 

alternative option, even if the final rule 

is more burdensome than they would 

prefer. 

Commenters indicated that the 

representative sample is one of the 

alternative methods of risk retention 

permitted under Article 122a of the 

European Union’s Capital Markets 

Directive, and that if the representative 

sample is not included it may place U.S. 

issuers at a competitive disadvantage 

against asset-backed securities issuers 

from outside the United States, and 

could make it more difficult for global 

offerings of asset-backed securities 

originated outside the United States to 

be sold to investors in the United States. 

Many commenters indicated that a 

revised representative sample option 

would be particularly useful for 

automobile loan and lease 

securitizations. Commenters also stated 

that the option would be useful more 

generally for large pools of consumer or 

retail assets, such as student loans, and 

for sponsors that do not securitize all of 

their assets. In order to facilitate use by 

sponsors for these types of 

securitizations, commenters generally 

agreed that the agencies should revise 

the option so that (i) a sponsor selects 

a designated pool of assets for 

securitization (ii) then uses a random 

selection process to select a ‘sample’ of 

assets with an aggregate unpaid 

principal balance equal to 5 percent of 

the pool and (iii) that the pool should 

be sufficiently large to ensure that the 

sample is representative of the assets in 

the pool. To accomplish (iii), 

commenters suggested that a pool size 

of 5,500 or 6,000 loans would be 

sufficient to achieve a high confidence 

level that the sample shares significant 

asset characteristics with the securitized 

pool. 

A commenter suggested that 

additional criteria could be added such 

as documentation of material asset 

characteristics and a description of the 

policies and procedures that the sponsor 

used to ensure that the sample 

identification process complies with the 

risk retention requirement. The 

commenter also recommended that 

documentation identifying the 

representative sample be maintained for 

the same duration required for a vertical 

risk retention interest and that the assets 

be excluded from the securitization pool 

and from any other securitization for 

such time period. Other commenters 

favored simpler disclosures, such as a 

statement that the composition of the 

sample was prepared in accordance 

with the rule’s requirements, and a 

description of the method used to 

randomly select assets. 

A few commenters suggested that 

additional criteria could be added 

specifically to address smaller pool 

sizes, such as the criteria above, or a 

‘resampling’ requirement if the sample 

is not sufficiently similar to the 

securitized pool. Other commenters 

expressed the view that a sponsor 

should not be required to ‘rework’ the 

pool based on a post hoc examination of 

the performance of the sample pool 

compared to the securitized pool. 

b. Response to Comments and Final 

Rule 

Having considered the comments, the 

agencies have concluded that adopting 

the recommendations made by 

commenters would be insufficient to 

address concerns about the practicality 

of obtaining an adequate and truly 

representative sample, while providing 

sufficient flexibility for use of the option 

in more than extremely limited 

scenarios. Furthermore, the agencies 

concur with commenters’ views that, at 

a minimum, a large number of loans 

would be required depending on the 

variability of asset characteristics in 

order to ensure an adequate sample, 

which greatly reduces the number of 

asset classes that would be able to 

utilize the option. 

The agencies do not believe that 

adopting the disclosure, servicing, and 

independent review requirements as 

recommended by commenters would be 

sufficiently robust to ensure the 

effectiveness of the representative 

sample option and to minimize the 

ability of sponsors to ‘‘cherry pick’’ 

assets favorable to them, which would 

result in the risk retention sample 

having a better risk profile than the 

assets collateralizing the ABS issued to 

investors. In addition, unless large pools 

of loans are already largely 

homogeneous, a random sample will not 

necessarily be a representative sample. 

The agencies do not believe that 

effective pool consistency standards 

would be any less burdensome or 

objectionable than the sample validation 

standards. Even if an approach that met 

the requirements of section 15G of the 

Exchange Act could be developed, the 

agencies acknowledge that the costs of 

such requirements could be overly 

burdensome for sponsors. Furthermore, 

in light of the revisions that have been 

made to other aspects of the rule, the 

agencies believe that the final rule’s risk 

retention options should provide a 

workable risk retention option for 

various asset classes including auto 

loan, auto lease, and student loan 

securitizations. The agencies believe 

these additional risk retention options 

will be more cost effective than the 

representative sample option in the 

original proposal and will more 

effectively align the interests of 

sponsors and investors. Therefore, the 

final rule does not include a 

representative sample option. 

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77636 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

111See section 9 of the Original Proposal. 

112 Daniel M. Covitz, Nellie Liang, and Gustavo A. 

Suarez, ‘‘The Evolution of a Financial Crisis: Panic 

in the Asset-Backed Commercial Paper Market,’’ 

Finance and Economics Discussion Series 2009–36 

(Washington: Board of Governors of the Federal 

Reserve System, August 2009). 

113Such ABCP conduits purchase securities in 

the secondary market and typically either lack such 

liquidity facilities or have liquidity coverage that is 

more limited than those of the ABCP conduits 

eligible to rely on this option for purposes of the 

proposed rule. 

114See Revised Proposal, 78 FR at 57949; Original 

Proposal, 76 FR at 24107. 

4. Asset-Backed Commercial Paper 

Conduits 

a. Overview of the Reproposal and 

Public Comments 

As explained in the original proposal 

and reproposal, ABCP is a type of 

liability that is typically issued to 

investors by a special purpose vehicle 

(commonly referred to as a ‘‘conduit’’) 

sponsored by a financial institution or 

other sponsor. The commercial paper 

issued by the ABCP conduit is 

collateralized by a pool of asset-backed 

securities, which may change over the 

life of the entity. Depending on the type 

of ABCP conduit, the securitized assets 

collateralizing the ABS interests that 

support the ABCP may consist of a wide 

range of assets including securitized 

automobile loans, commercial loans, 

trade receivables, credit card 

receivables, student loans, and other 

loans. Historically, these programs came 

about as a way for banks to extend 

commercial firms credit at a lower cost 

than bank-funded working capital lines 

or trade receivable financing. Like other 

types of commercial paper, the term of 

ABCP typically is short, and the 

liabilities are ‘‘rolled,’’ or refinanced, at 

regular intervals. Thus, ABCP conduits 

generally fund longer-term assets with 

shorter-term liabilities.111 During the 

financial crisis, however, ABCP 

conduits experienced acute distress, 

which revealed significant structural 

weaknesses in certain ABCP conduit 

structures, particularly those ABCP 

conduits that did not have 100 percent 

liquidity commitments, and exposed 

investors and the financial system to 

significant risks.112

In a typical ABCP conduit, the 

sponsor approves the originators whose 

loans or receivables will collateralize 

the ABS interests that support the ABCP 

issued by the conduit. Banks can use 

ABCP conduits that they sponsor to 

meet the borrowing needs of a bank 

customer and offer that customer a more 

attractive cost of funds than a 

commercial loan or a traditional debt or 

equity financing. In such a transaction, 

the customer (an ‘‘originator-seller’’) 

may sell loans or receivables to an 

intermediate, bankruptcy remote SPV. 

The credit risk of the loans or 

receivables transferred to the 

intermediate SPV then typically is 

separated into two classes—a senior 

ABS interest that is acquired by the 

ABCP conduit and a residual ABS 

interest that absorbs first losses on the 

loans or receivables and that is retained 

by the originator-seller. The residual 

ABS interest retained by the originatorseller typically is sized with the 

intention that it be sufficiently large to 

absorb all losses on the securitized 

assets. 

In this structure, the ABCP conduit, in 

turn, issues short-term ABCP that is 

collateralized by the senior ABS 

interests purchased from one or more 

intermediate SPVs (which are supported 

by the subordination provided by the 

residual ABS interests retained by the 

originator-sellers). The sponsor of this 

type of ABCP conduit, which is usually 

a bank or other regulated financial 

institution or an affiliate or subsidiary of 

a bank or other regulated financial 

institution, also typically provides (or 

arranges for another regulated financial 

institution or group of financial 

institution to provide) 100 percent 

liquidity coverage on the ABCP issued 

by the conduit. This liquidity coverage 

typically requires the support provider 

to provide funding to, or purchase assets 

or ABCP from, the ABCP conduit in the 

event that the conduit lacks the funds 

necessary to repay maturing ABCP 

issued by the conduit. 

The agencies’ original proposal 

included an ABCP option that 

incorporated several conditions 

designed to ensure that the ABCP option 

would have been available only to the 

type of single-seller or multi-seller 

ABCP conduits described above. The 

proposed ABCP option would only have 

been available to ABCP conduits that 

issued ABCP with a maximum maturity 

at the time of issuance of nine months. 

Under the original proposal, a sponsor 

of an ABCP conduit program would 

have been eligible for the proposed 

ABCP option if a ‘‘regulated liquidity 

provider’’ (defined in the rule generally 

to mean banks and certain bank 

affiliates) provided 100 percent liquidity 

support to the ABCP conduit and the 

originator-sellers retained a 5 percent 

horizontal residual interest in each 

intermediate special purpose vehicle 

containing the assets they finance 

through the ABCP conduit. Under the 

original proposal, this risk retention 

option would have been available to 

ABCP conduits collateralized by ABS 

interests that were issued or initially 

sold by intermediate SPVs that sold 

ABS interests exclusively to ABCP 

conduits and would not have been 

available to ABCP conduits that 

purchased securities in the secondary 

market or operated securities arbitrage 

programs.113

In the reproposal, the agencies 

maintained an option tailored for ABCP 

securitization transactions that retained 

the basic structure of the original 

proposal with modifications based in 

part on comments. The modifications 

were intended to accommodate certain 

market practices referred to by 

commenters, while maintaining a 

meaningful risk retention requirement. 

The reproposal would have permitted 

the sponsor of an eligible ABCP conduit 

to satisfy its risk retention requirement 

if, for each ABS interest the ABCP 

conduit acquired from an intermediate 

SPV, the intermediate SPV’s sponsor 

(the ‘originator-seller’ with respect to 

the ABCP conduit) retained an exposure 

to the assets collateralizing the 

intermediate SPV in the appropriate 

form and amount under the rule, 

provided that all other conditions to this 

option were satisfied. The agencies 

reaffirmed the view expressed in the 

original proposal that such an approach 

is appropriate in light of the 

considerations set forth in section 

15G(d)(2) of the Exchange Act.114

In response to comments, the 

reproposal would have included 

additional flexibility not present in the 

original proposal to permit affiliated 

groups of originator-sellers to finance 

credits through a single intermediate 

SPV. Under the reproposal, both an 

originator-seller and a ‘‘majority-owned 

originator-seller affiliate’’ (majorityowned OS affiliate) could have sold or 

transferred assets that these entities had 

originated to an intermediate SPV. A 

majority-owned OS affiliate was defined 

as an entity that, directly or indirectly, 

majority controls, is majority controlled 

by, or is under common majority control 

with, an originator-seller. For purposes 

of this definition, majority control 

would have meant ownership of more 

than 50 percent of the equity of an 

entity or ownership of any other 

controlling financial interest in the 

entity, as determined under GAAP. 

However, consistent with the original 

proposal, intermediate SPVs would not 

be permitted to acquire assets from nonaffiliates. 

The reproposal required the ABCP 

conduit sponsor to: (i) Approve each 

originator-seller and majority-owned OS 

affiliate permitted to sell or transfer 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77637 

115As indicated in the comments on the original 

proposal, there are instances where, for legal or 

other purposes, there is a need for multiple 

intermediate SPVs. 

116See section 2 of the Revised Proposal 

(definition of ‘‘affiliate’’). 

117See section 2 of the Revised Proposal 

(definition of ‘‘Intermediate SPV’’). 

118The reproposal required each intermediate 

SPV in structures with one or more multiple 

intermediate SPVs that do not issue asset-backed 

securities collateralized solely by ABS interests to 

be a pass-through entity that either transfers assets 

to another SPV in anticipation of securitization 

(e.g., a depositor) or transfer ABS interests to the 

ABCP conduit or another intermediate SPV. 

119As explained in the reproposal, the agencies 

believe that some originator-sellers operate a 

revolving master trust to finance extensions of 

credit the originator-seller creates in connection 

with its business operations. The master trust 

sometimes issues a series of asset-backed securities 

collateralized by an interest in those credits directly 

to investors through a private placement transaction 

or registered offering, and other times issues an 

interest to an eligible ABCP conduit. The reproposal 

was designed to accommodate such practices. 

120The purpose of this clarification was to allow 

originator-sellers certain additional flexibility in 

structuring their participation in eligible ABCP 

conduits, while retaining the core principle that the 

assets being financed have been originated by the 

originator-seller or a majority-controlled OS 

affiliate, not purchased in the secondary market and 

aggregated. 

121The definition of ‘‘servicing assets’’ is 

discussed in Part II.B of this Supplementary 

Information. The agencies are allowing an ABCP 

conduit to hold servicing assets. 

122 In response to commenters on the original 

proposal who requested that the agencies replace 

the monitoring obligation with a contractual 

obligation of an originator-seller to maintain 

compliance, the agencies noted their belief that the 

sponsor of an ABCP conduit is in the best position 

to monitor compliance by originator-sellers and 

majority-owned OS affiliates. 

assets, directly or indirectly, to an 

intermediate SPV from which an 

eligible ABCP conduit acquires ABS 

interests; (ii) approve each intermediate 

SPV from which an eligible ABCP 

conduit is permitted to acquire ABS 

interests; (iii) establish criteria 

governing the ABS interests, and the 

assets underlying the ABS interests, 

acquired by the ABCP conduit; (iv) 

administer the ABCP conduit by 

monitoring the ABS interests acquired 

by the ABCP conduit and the assets 

supporting those ABS interests, 

arranging for debt placement, compiling 

monthly reports, and ensuring 

compliance with the ABCP conduit 

documents and with the ABCP 

conduit’s credit and investment policy; 

and (v) maintain and adhere to policies 

and procedures for ensuring that the 

requirements described above have been 

met. 

The reproposal also permitted there to 

be one or more intermediate SPVs 

between an originator-seller and/or any 

majority-owned OS affiliate and the 

intermediate SPV that issues ABS 

interests purchased by the ABCP 

conduit.115 The reproposal redefined 

‘‘intermediate SPV’’ as a direct or 

indirect wholly-owned affiliate 116 of the 

originator-seller that is bankruptcy 

remote or otherwise isolated for 

insolvency purposes from the eligible 

ABCP conduit, the originator-seller, and 

any majority-owned OS affiliate that, 

directly or indirectly, sells or transfers 

assets to such intermediate SPV.117

Consequently, an intermediate SPV was 

permitted to acquire assets originated by 

the originator-seller or one or more of its 

majority-owned OS affiliates, or it could 

also have acquired assets from another 

intermediate SPV or asset-backed 

securities from another intermediate 

SPV collateralized solely by securitized 

assets originated by the originator-seller 

or one or more of its majority-owned OS 

affiliate and servicing assets.118 ABS 

interests collateralized by assets not 

originated by the originator-seller or by 

a majority-owned OS affiliate would 

have been ineligible as collateral for the 

ABCP conduit. 

The reproposal also would have 

relaxed activity restrictions on 

intermediate SPVs, by permitting an 

intermediate SPV to sell asset-backed 

securities that it issues to third parties 

other than ABCP conduits.119

The reproposal would have clarified 

and expanded (as compared to the 

original proposal) the types of collateral 

that an eligible ABCP conduit could 

acquire from an originator-seller and its 

majority-owned affiliates.120 Under the 

revised reproposal definition of 

‘‘eligible ABCP conduit’’, an ABCP 

conduit could acquire any of the 

following types of assets: (1) ABS 

interests collateralized by securitized 

assets originated by an originator-seller 

or one or more majority-owned OS 

affiliates of the originator-seller and 

servicing assets; (2) special units of 

beneficial interest or similar interests in 

a trust or special purpose vehicle that 

retains legal title to leased property 

underlying leases that are transferred to 

an intermediate SPV in connection with 

a securitization collateralized solely by 

such leases originated by an originatorseller or one or more majority-owned 

OS affiliates and servicing assets; and 

(3) interests in a revolving master trust 

collateralized solely by assets originated 

by an originator-seller or one or more 

majority-owned OS affiliates and 

servicing assets.121 Under the proposal, 

the ABCP option would have been 

available only for ABCP conduits that 

were bankruptcy remote or otherwise 

isolated from insolvency of the sponsor 

and from any intermediate SPV. Assets 

other than the ABS interests and 

servicing assets, such as loans or 

receivables purchased directly by an 

ABCP conduit or loans or receivables 

acquired by an originator-seller, its 

majority-owned OS affiliates or an 

intermediate SPV in the secondary 

market, would have been expressly 

disqualified. 

The reproposal also would have 

expanded the risk retention options 

available to an originator-seller, in its 

capacity as sponsor of the underlying 

ABS interests issued by the intermediate 

SPV, by allowing an eligible ABCP 

conduit to purchase interests for which 

the originator-seller or a majority-owned 

OS affiliate retained risk using the 

standard risk retention or seller’s 

interest options. 

The reproposal also would have 

required a regulated liquidity provider 

to enter into a legally binding 

commitment to provide 100 percent 

liquidity coverage of all the ABCP 

issued by the issuing entity and would 

have clarified that 100 percent liquidity 

coverage means that, in the event that 

the ABCP conduit is unable for any 

reason to repay maturing ABCP issued 

by the issuing entity, the total amount 

for which the liquidity provider may be 

obligated is equal to 100 percent of the 

amount of ABCP outstanding plus 

accrued and unpaid interest. In 

response to commenters on the original 

proposal, the reproposal clarified that 

the required liquidity coverage would 

not be subject to credit performance of 

the ABS interests held by the ABCP 

conduit or reduced by the amount of 

credit support provided to the ABCP 

conduit and that liquidity coverage that 

only funds performing assets will not 

meet the requirements of the ABCP 

option. 

Consistent with the original proposal, 

under the reproposal the sponsor of an 

eligible ABCP conduit would have 

retained responsibility for ensuring 

compliance with the requirements of the 

ABCP option.122

With respect to disclosures, the 

reproposal did not include a 

requirement that the sponsor of the 

ABCP conduit disclose the names of the 

originator-sellers who sponsored the 

ABS interests held by the ABCP conduit 

and instead included a requirement that 

an ABCP conduit sponsor promptly 

notify investors, the Commission, and 

its appropriate Federal banking agency, 

if any, in writing of (1) the name and 

form of organization of any originatorseller that fails to maintain its risk 

retention as required and the amount of 

asset-backed securities issued by an 

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77638 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

123See Revised Proposal, 78 FR at 57948. 

124The European Union credit risk retention 

regime consists of Articles 405–410 of the Capital 

Requirements Regulation developed by the 

European Banking Authority, and is available at 

https://www.eba.europa.eu/regulation-and-policy/

single-rulebook/interactive-single-rulebook/-/

interactive-single-rulebook/toc/504. 

125The agencies do not believe there is sufficient 

basis to distinguish an ABCP conduit collateralized 

by repurchase agreements from other issuances of 

ABS interests. As a result, the sponsor of an ABCP 

conduit collateralized by repurchase agreements 

would be required to satisfy the requirements of the 

final rule. 

seller and held by the ABCP conduit; (2) 

the name and form of organization of 

any originator-seller or majority-owned 

OS affiliate that hedges, directly or 

indirectly through an intermediate SPV, 

its risk retention in violation of its risk 

retention requirements and the amount 

of asset-backed securities issued by an 

intermediate SPV of such originatorseller or majority-owned OS affiliate 

and held by the ABCP conduit; and (3) 

and any remedial actions taken by the 

ABCP conduit sponsor or other party 

with respect to such asset-backed 

securities. Consistent with the original 

proposal, the reproposal would have 

required the sponsor of an ABCP 

conduit to provide to each purchaser of 

ABCP information regarding the 

regulated liquidity provider, a 

description of the liquidity coverage, 

and notice of any failure to fund. The 

reproposal also retained the requirement 

that a sponsor provide information 

regarding the collateral underlying ABS 

interests held by the ABCP conduit and 

entities holding risk retention, as well as 

a description of the risk retention 

interests. The reproposal also retained 

the requirement that a sponsor provide 

to the appropriate Federal regulators, 

upon request, all of the information 

required to be provided to investors, as 

well as the name and form of 

organization of each originator-seller or 

majority-owned OS affiliate retaining an 

interest in the underlying securitization 

transactions.123

Finally, under the reproposal, the 

sponsor of an ABCP conduit would have 

been required to take other appropriate 

steps upon learning of a violation by an 

originator-seller or majority-owned OS 

affiliate of its risk retention obligations, 

and listed, as examples of steps that 

may be taken, curing any breach of the 

requirements, or removing from the 

eligible ABCP conduit any asset-backed 

security that does not comply with the 

applicable requirements. 

Many commenters expressed general 

support for the revisions made to the 

ABCP option and stated that the 

reproposal provided significantly more 

flexibility than the original proposal. 

However, commenters also indicated 

that additional revisions would be 

necessary in order to ensure that the 

ABCP option is available to the types of 

ABCP programs predominantly 

available in the current market. 

Many commenters requested that the 

agencies permit additional forms of risk 

retention within the ABCP option. 

Commenters encouraged the agencies to 

recognize standby letters of credit, 

guarantees, liquidity facilities, 

unfunded liquidity, asset purchase 

agreements, repurchase agreements, and 

other similar support arrangements and 

credit enhancements to satisfy the risk 

retention requirement. Commenters 

expressed the view that allowing such 

additional forms of risk retention would 

reduce the inconsistency between the 

European Union risk retention regime 

and the U.S. proposal, thus improving 

the possibility of cross border 

offerings.124 Commenters asserted that 

these ABCP conduit features serve the 

purpose of credit risk retention by 

allocating credit risk between asset 

originators and ABCP conduit sponsors, 

and aligning incentives between ABCP 

conduit sponsors and investors. For 

example, one commenter asserted that 

under existing market practice, 

transferors of assets into ABCP conduits 

routinely retain credit risk in the 

financed assets in an amount equal to 

not less than 5 percent of the related 

subordinated ABCP notes, so that there 

is no need for the rule to impose 

duplicative risk retention requirements 

on ABCP conduit managers. 

Another commenter asserted that the 

reproposed rule would increase the 

costs of ABCP conduits and 

substantially reduce the market for 

ABCP financing, and that the rules were 

not necessary to promote high-quality 

underwriting of ABCP, which the 

commenter asserted is already present 

in the multi-seller ABCP conduits 

operating in the current markets. This 

commenter proposed that sponsors of 

ABCP collateralized by originator-seller 

asset pools that are underwritten to high 

credit quality standards should be 

permitted to fund 5 percent risk 

retention either through a cash reserve 

or through a cash substitute (e.g., 

irrevocable unconditional letter of credit 

or credit facility) and should be 

permitted to rely on committed liquidity 

facilities that are limited to financing 

only performing assets. 

One commenter expressed the view 

that the risk retention requirement 

should not apply to ABCP conduits 

collateralized by repurchase agreements 

because the repurchase agreements 

provide liquidity. One commenter 

stated that some conduits do not apply 

asset collections to the payment of 

ABCP issued by such conduits but 

instead, in the ordinary course, pay 

their maturing notes directly from funds 

provided by their liquidity support 

providers. This commenter stated that, 

although the agencies have to date 

declined to recognize unfunded loan 

commitments to ABCP conduits as valid 

risk retention, a repurchase 

counterparty is contractually obligated 

from the outset to repurchase the assets 

from the ABCP conduit, and therefore 

retains credit risk throughout the term 

of the transaction.125

Many commenters requested a full 

exemption from risk retention under 

section 15G of the Exchange Act for 

ABCP conduits with certain features or 

structures. For example, one commenter 

asserted that fully-supported banksponsored conduits should be exempt 

from risk retention, regardless of 

whether the conduit satisfied other 

criteria set forth in the rule, because 100 

percent of the credit risk is retained by 

the bank sponsor, and the only risk to 

investors would be the risk of the 

sponsoring institution itself. 

Some commenters asserted that 

arrangers and managers of ABCP 

conduits are not ‘‘sponsors,’’ and 

claimed that there is no valid basis for 

imposing risk retention requirements on 

these parties. One commenter asked for 

clarification as to who will be deemed 

a sponsor of ABCP issued by an ABCP 

conduit. One of these commenters 

disagreed with the agencies’ position 

that in selecting the assets, one can be 

characterized as ‘‘transferring’’ those 

assets to the issuer. This commenter 

expressed the view that the word 

‘‘transfer,’’ as used in section 15G and 

in the reproposal, cannot reasonably be 

interpreted to include a conduit 

manager’s selection of the assets that its 

conduit will purchase. This commenter 

cited to case law that the term ‘‘transfer’’ 

should be defined by reference to its 

‘‘commonly accepted meaning’’; and a 

conduit manager does not itself sell, 

assign or deliver any assets to the 

conduit, so that it has not engaged in a 

‘‘transfer.’’ 

Several commenters expressed the 

view that the proposed nine-month 

restriction on the maximum maturity at 

issuance for ABCP would be 

unnecessarily restrictive. Commenters 

asserted that while historical 

commercial paper maturities may have 

been shorter, many aspects of the 

international liquidity standards for 

banking organizations established by the 

Basel Committee on Banking 

Supervision’s ‘‘Basel liquidity 

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126See 17 CFR 270.2a7. 

standards,’’ including the liquidity 

coverage ratio and the proposed net 

stable funding ratio may combine to 

push average maturities out further. To 

address these concerns, commenters 

suggested that the maximum maturity 

for ABCP held by an eligible ABCP 

conduit be extended to 397 days, which 

is the maximum remaining maturity for 

securities that are eligible for purchase 

by money market mutual funds 

pursuant to Rule 2a–7 under the 

Investment Company Act of 1940, as 

amended.126

The agencies received several 

comments regarding the definition of 

‘‘eligible ABCP conduit.’’ Several 

commenters expressed concern that 

limitations on assets that may be 

acquired by ABCP conduits were too 

restrictive. Commenters stated that 

many ABCP conduits hold assets that 

are not asset-backed securities, such as 

loans or receivables purchased directly 

from originators under a deferred 

purchase price note, which the 

commenters asserted is a customary 

structure by which conduits now 

finance originator-seller’s assets, not the 

originator-seller securitization structure 

required by the reproposal. Commenters 

also expressed concern that ABCP 

conduits often hold asset-backed 

securities that are acquired from various 

sources, including other ABCP conduits 

and in the secondary market. One 

commenter asserted that there is no 

need to limit permitted investments of 

fully supported conduits, because 

investors in ABCP issued by fullysupported conduits base their 

investment decisions on the liquidity 

provider’s financial strength and 

reputation (rather than relying on asset 

quality). A few commenters requested 

that the ABCP option be modified to 

permit originator-sellers to convey to 

intermediate SPVs, in addition to assets 

originated by them, assets acquired in 

business combinations and asset 

purchases. 

Another commenter asserted that the 

proposed limitation on eligible 

collateral would not permit conduits to 

acquire assets through an assignment 

from another ABCP conduit. One 

commenter requested that the final rules 

permit transfers between conduits with 

a common liquidity provider and 

transfers of positions between one 

funding agent/liquidity provider/

conduit group and another such group. 

Several commenters expressed 

concern regarding the proposed 

definition of 100 percent liquidity 

coverage, noting that a significant 

percentage of existing conduits are 

partially-supported or do not have 100 

percent liquidity coverage as defined by 

the proposal. Most of these commenters 

suggested that the definition of 100 

percent liquidity coverage be revised to 

include coverage in a structure under 

which the liquidity provider’s funding 

obligation is reduced by non-performing 

or defaulted assets, if the conduit 

includes some form of credit 

enhancement equal to at least 5 percent 

of the outstanding ABCP. One 

commenter requested that the agencies 

align the 100 percent liquidity coverage 

requirement with the regulatory capital 

treatment applicable to unfunded credit 

enhancements under the Basel 

regulatory capital framework for 

banking organizations, which generally 

calculates a banking organization’s 

exposure to an eligible ABCP liquidity 

facility based on the maximum potential 

amount that the banking organization 

could be required to fund given the 

ABCP program’s current underlying 

assets (calculated without regard to the 

current credit quality of those assets). 

Several commenters interpreted the 

reproposal’s requirement that an eligible 

ABCP conduit obtain from a regulated 

liquidity provider a legally binding 

commitment to provide 100 percent 

liquidity coverage to all the ABCP 

issued by the ABCP conduit as limiting 

an ABCP conduit to one regulated 

liquidity provider. Commenters 

opposed the requirement in the 

definition of ‘‘eligible ABCP conduit’’ 

that requires liquidity support from a 

single liquidity provider. One of these 

commenters suggested that, although 

most fully-supported multi-seller 

conduits currently have 100 percent 

liquidity support from an affiliate of the 

conduit manager, the final rule permit 

conduits to have multiple liquidity 

providers. 

Other commenters stated that 

syndication of backstop liquidity is 

market practice, and that there is no 

reason to limit the number of liquidity 

providers. One commenter 

recommended that the agencies revise 

the definition of ‘‘eligible ABCP 

conduit’’ to clarify that eligible liquidity 

facilities may include facilities entered 

into by an affiliate of a regulated 

liquidity provider, if the regulated 

liquidity provider unconditionally 

guarantees its affiliate’s obligations. 

Commenters generally supported the 

proposed definition of majority-owned 

OS affiliate. One commenter observed 

that the rule text in the reproposal only 

referred to the originator-seller as the 

risk retainer, but does not mention its 

majority-controlled affiliates. This 

commenter requested that the final rules 

conform to the preamble of the original 

proposal by stating that majoritycontrolled originator-seller affiliates 

(including an SPV) can satisfy the 

originator-seller’s risk retention 

requirements. 

The agencies received several 

comments on the proposed definition of 

intermediate SPV. One commenter 

stated that in certain circumstances an 

intermediate SPV is not a direct or 

indirect wholly owned affiliate of the 

originator-seller but instead is an 

‘‘orphan’’ SPV that is owned by a 

corporate service provider or a 

charitable trust. 

One commenter stated that it was not 

clear under the reproposal whether an 

ABCP conduit sponsor would no longer 

be able to rely on the option if a single 

asset held by its conduit does not 

comply with the rule. This commenter 

requested that the rule prescribe cure 

periods (of not less than 30 days) and 

threshold amounts (1 percent of the 

conduit’s assets), so that the conduit 

will not be forced to unwind based on 

a single noncompliant asset. 

Commenters raised several concerns 

with respect to the reproposal’s 

disclosure requirements for the ABCP 

option. One commenter indicated that 

the asset disclosures in ABCP programs 

are collectively negotiated and agreedupon by ABCP investors and conduit 

arrangers, and the reproposal’s 

calculation and reporting requirements 

would deter borrowers from financing 

assets through ABCP conduits. 

One commenter indicated that the 

scope of the proposed disclosure 

requirements set forth in section 4(c) of 

the reproposal is unclear, and the 

proposed requirement to disclose fair 

value calculations and supporting 

information would not be feasible. This 

commenter said that because the 

conduits typically treat their extensions 

of credit as loans for accounting 

purposes, and do not periodically 

revalue the assets, a requirement to 

disclose fair value would not conform to 

existing accounting practices. This 

commenter stated that many ABCP 

financings are revolving transactions in 

which the principal balance of the 

outstanding notes may change every 

business day. This commenter also 

asserted that, because investors in fully 

supported conduits do not rely on the 

market value of the assets in their 

investment decisions, there would be no 

need to require fully supported conduits 

to provide asset-level disclosures. The 

commenter also asserted that to the 

extent a conduit finances assets for 

many different originator-sellers, the 

volume and frequency of disclosures 

under this requirement would be 

substantial and unreasonable. This 

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127See infra footnote 130. 

128An originator-seller will be subject to the same 

requirements and have the same benefits under the 

risk retention rule as any other sponsor that retains 

risk, including restrictions on transferring or 

hedging the retained interest to a third party as 

applied to sponsors. See section 5(b)(1) of the final 

rule (intermediate SPV’s originator-seller to retain 

an economic interest in the credit risk of the 

securitized assets in the amount and manner 

required under section 4 or 5 of the rule). For 

example, an originator-seller retaining risk in its 

intermediate SPV in the same amount and manner 

required under section 4 of the rule, as an eligible 

horizontal residual interest, would be permitted to 

transfer that interest to a majority-owned affiliate as 

permitted under section 3 of the rule, subject to the 

additional restrictions of section 12 of the rule, but 

an originator-seller retaining risk in its intermediate 

SPV in the same amount and manner permitted 

under section 5 of the rule, as a revolving pool 

securitization seller’s interest, could only transfer it 

to a wholly-owned affiliate, as required by section 

5(e)(1) of the rule. See infra note 130 for a 

discussion of the definition of the term ‘‘originatorseller.’’ 129See 15 U.S.C. 78o–11(a)(3)(B). 

commenter expressed the view that the 

agencies should not impose 

unnecessarily broad disclosure 

requirements that would result in a 

narrowing of the short-term financing 

options available to businesses. Another 

commenter said that the requirement to 

report the fair value of each of the 

conduit’s interests is unduly 

burdensome to a sponsor, given the 

dynamic nature of a conduit’s assets. 

This commenter proposed that a 

sponsor be required to report only 

certain items. 

Some commenters stated that 

investors in ABCP fully supported by 

liquidity facilities do not want or need 

disclosure from conduit managers of an 

originator-seller’s failure to comply with 

risk retention requirements. One of 

these commenters stated that the 

disclosure requirement would 

discourage originators from financing 

assets through ABCP conduits. This 

commenter stated that since the 

reproposal did not generally require 

sponsors of an ABS interests to notify 

investors of the failure to comply with 

risk retention requirements, and it was 

not clear why this obligation was 

imposed solely for fully-supported 

ABCP conduits. 

One commenter asserted that a 

sponsor should not be required to 

develop separate policies or procedures 

to actively monitor each originatorseller; instead a sponsor should be 

allowed to rely on an originator-seller’s 

representations and warranties in 

satisfying its compliance and 

monitoring requirements. This 

commenter also proposed that a sponsor 

be required to notify only regulators 

upon the actual discovery or knowledge 

of an originator-seller’s failure to 

comply. 

One commenter asserted that 

investors have generally not requested 

any significant changes to ABCP 

disclosure requirements in recent years, 

and that reports currently being made 

contain sufficient information for ABCP 

investors to monitor their investments, 

especially since the most important 

economic factors will continue to be the 

performance of the assets themselves, 

the 100 percent liquidity coverage, and 

(in the case of partially supported ABCP 

conduits) the sponsor’s 5 percent or 

more credit enhancement—but not 

continued risk retention on the part of 

the originator-sellers. 

Some commenters requested a 

complete exemption from the credit risk 

retention requirements for conduits 

with underlying assets that were 

originated before the applicable 

effective date of the rule that may be 

securitized through an ABCP conduit. 

One commenter claimed that it would 

be impractical to impose credit risk 

retention on an originator-seller that has 

already entered into a financing 

transaction with a conduit, because the 

conduits would not be able to timely 

renegotiate terms. 

b. Overview of the Final Rule 

The final rule includes a specific 

option for ABCP securitization 

transactions that retains the basic 

structure of the reproposed ABCP 

option, with modifications intended to 

address issues raised by commenters. As 

with the reproposal, the final rule 

provides that an eligible ABCP conduit 

sponsor will satisfy the base risk 

retention requirement if, for each ABS 

interest the ABCP conduit acquires from 

an intermediate SPV, the intermediate 

SPV’s originator-seller 127 retains an 

economic interest in the credit risk of 

the assets collateralizing the ABS 

interest acquired by the eligible ABCP 

conduit using either standard risk 

retention or the revolving pool 

securitization risk retention option (as 

revised in the final rule).128 As noted in 

the reproposal, the use of the ABCP 

option by the sponsor of an eligible 

ABCP conduit does not relieve the 

originator-seller from its independent 

obligation to comply with its own risk 

retention obligations as a sponsor of an 

ABS interest under the revised proposal, 

if any. The originator-seller will be the 

sponsor of the asset-backed securities 

issued by an intermediate SPV and will 

therefore be required under the final 

rule to hold an economic interest in the 

credit risk of the assets collateralizing 

the asset-backed securities issued by the 

intermediate SPV. 

Under the final rule, a sponsor of an 

ABCP conduit is not limited to using the 

ABCP option to satisfy its risk retention 

requirements. An ABCP conduit 

sponsor may rely on any of the risk 

retention options described in section 4 

of the rule, provided it meets the criteria 

for such option. Consistent with the 

reproposal, standby letters of credit, 

guarantees, repurchase agreements, 

asset purchase agreements, and other 

unfunded forms of credit enhancement 

cannot be used to satisfy the risk 

retention requirement. 

In response to comments questioning 

the application of the rule’s 

requirements to an ABCP conduit 

arranger or manager, the agencies are 

affirming their view that an arranger or 

manager of an ABCP conduit is a 

sponsor or ‘‘securitizer’’ under section 

15G of the Exchange Act. The agencies 

believe this is consistent with part (B) 

of the definition of securitizer which 

includes ‘‘a person who organizes and 

initiates an asset-backed securities 

transaction by selling or transferring 

assets, either directly or indirectly, 

including through an affiliate, to the 

issuer.’’ 129 The arranger or manager of 

an ABCP conduit typically organizes 

and initiates the transaction as it selects 

and approves the originators whose 

loans or receivables will collateralize 

the ABS interests that support the ABCP 

issued by the conduit. It also indirectly 

transfers the securitized assets to the 

ABCP issuing entity by selecting and 

directing the ABCP issuing entity to 

purchase ABS interests collateralized by 

the securitized assets. The agencies 

believe that reading the definition of 

securitizer to include a typical arranger 

or manager of an ABCP conduit is 

consistent with the purposes of the 

statute and principles of statutory 

interpretation. Furthermore, the 

agencies believe that the narrow reading 

of ‘‘securitizer’’ supported by 

commenters is not consistent with 

Section 15G and could lead to results 

that would appear contrary to 

Congressional intent by opening the 

statute to easy evasion. 

A more detailed discussion of the 

agencies’ interpretation of the term 

‘‘securitizer,’’ including analysis of the 

statutory text and legislative history can 

be found in Part III.B.7 of this 

Supplementary Information. 

The agencies have revised the 

definition of ‘‘eligible ABCP conduit’’ in 

the final rule to accommodate certain 

business combinations and to clarify the 

requirements for the types of assets that 

can be acquired by an eligible ABCP 

conduit. Other elements of the 

definition, such as the requirement that 

an ABCP conduit must be bankruptcy 

remote or otherwise isolated for 

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130 In order to provide clarity in maintaining the 

distinction between originator-sellers and majorityowned originator-seller affiliates, the agencies have 

included a provision in the definition of 

‘‘originator-seller’’ indicating that the majorityowned originator-seller affiliate may not be a 

sponsor of the originator-seller’s intermediate SPV. 

131 In response to commenters on the reproposal, 

the agencies acknowledge that liquidity coverage 

that does not require the regulated liquidity 

provider to pay in the event of a bankruptcy of the 

ABCP conduit would meet the requirements of the 

ABCP option adopted in the final rule. 

insolvency purposes from the sponsor of 

the ABCP conduit and from any 

intermediate SPV, and that an eligible 

liquidity provider enter into a legally 

binding commitment to provide 100 

percent liquidity coverage to all the 

ABCP issued by the ABCP conduit 

remain unchanged from the reproposal. 

The final rule definition of eligible 

ABCP conduit requires that the ABS 

interests acquired by the ABCP conduit 

are: (i) ABS interests collateralized 

solely by assets originated by an 

originator-seller and by servicing assets; 

(ii) special units of beneficial interest (or 

similar ABS interests) in a trust or 

special purpose vehicle that retains 

legal title to leased property underlying 

leases originated by an originator-seller 

that were transferred to an intermediate 

SPV in connection with a securitization 

collateralized solely by such leases and 

by servicing assets; (iii) ABS interests in 

a revolving pool securitization 

collateralized solely by assets originated 

by an originator-seller and by servicing 

assets; or (iv) ABS interests that are 

collateralized, in whole or in part, by 

assets acquired by an originator-seller in 

a business combination that qualifies for 

business combination accounting under 

GAAP, and, if collateralized in part, the 

remainder of such assets meet the 

criteria in items (i) through (iii). The 

ABS interests must be acquired by the 

ABCP conduit in an initial issuance by 

or on behalf of an intermediate SPV: (1) 

Directly from the intermediate SPV, (2) 

from an underwriter of the ABS 

interests issued by the intermediate 

SPV, or (3) from another person who 

acquired the ABS interests directly from 

the intermediate SPV. Finally, the rule 

requires that an eligible ABCP conduit 

is collateralized solely by ABS interests 

acquired from intermediate SPVs and 

servicing assets. 

The agencies continue to believe that 

a limitation on the types of assets that 

may be acquired by an eligible ABCP 

conduit is appropriate. Although some 

commenters suggested eligible ABCP 

conduits should be permitted to 

purchase assets directly from originatorsellers under arrangements such as 

deferred purchase price notes, which 

commenters argued impose continuing 

risk of loss on originator-sellers that 

would be comparable to risk retention, 

the agencies are not incorporating this 

approach. The agencies believe such an 

approach would add complexity to the 

rule, and that requiring originatorsellers to retain risk in the same way as 

the rule requires for other securitizers 

provides investors and regulators with 

better clarity and transparency as to the 

nature of the originator-seller’s retention 

of risk in the transaction. 

The agencies disagree with 

commenter assertions that, in the 

context of ABCP conduits, loans or 

receivables originated before the 

applicable effective date of the rule 

should not be subject to risk retention. 

Section 15G of the Exchange Act applies 

to any issuance of asset-backed 

securities after the effective date of the 

rules, regardless of the date the assets in 

the securitization were originated. The 

agencies note, however, that loans or 

receivables meeting the seasoned loan 

exemption in section 19 of the rule 

would not be subject to risk retention 

requirements, and an originator-seller 

that sponsors a securitization of 

seasoned loans would not need to retain 

risk with respect to a securitization of 

such assets under the ABCP option. 

With respect to ABS interests, the 

agencies believe that in certain 

circumstances described by 

commenters, acquisition of ABS 

interests from sources other than an 

intermediate SPV or originator-seller 

may be accomplished in a manner 

consistent with the purposes of section 

15G of the Exchange Act. The overview 

of the final rule discusses two revisions 

to collateral criteria for eligible ABCP 

conduits: one that would permit limited 

transfers between certain ABCP 

conduits, and another that would permit 

securitization of assets acquired as the 

result of certain business combinations. 

The agencies are adopting as 

reproposed the requirements that an 

ABCP conduit sponsor (i) approve each 

originator-seller permitted to sell or 

transfer assets, directly or indirectly, to 

an intermediate SPV from which an 

eligible ABCP conduit acquires ABS 

interests; (ii) approve each intermediate 

SPV from which an eligible ABCP 

conduit is permitted to acquire ABS 

interests; (iii) establish criteria 

governing the ABS interests, and the 

assets underlying the ABS interests, 

acquired by the ABCP conduit; (iv) 

administer the ABCP conduit by 

monitoring the ABS interests acquired 

by the ABCP conduit and the assets 

supporting those ABS interests, 

arranging for debt placement, compiling 

monthly reports, and ensuring 

compliance with the ABCP conduit 

documents and with the ABCP 

conduit’s credit and investment policy; 

and (v) maintain and adhere to policies 

and procedures for ensuring that the 

requirements described above have been 

met. 

The final rule retains the concept that 

a majority-owned affiliate of an 

originator-seller may contribute assets it 

originates to the originator-seller’s 

intermediate SPV. To simplify the rule 

text for most purposes, the final rule 

consolidates the reproposal’s definition 

of ‘‘majority-owned OS affiliate’’ into 

the definition of originator-seller 

itself.130 In response to comments, the 

agencies seek to clarify that the 

originator-seller is the sponsor of a 

securitization transaction in which an 

intermediate SPV of such-originatorseller issues ABS interests that are 

acquired by an eligible ABCP conduit, 

and that the originator-seller may 

allocate risk retention to its majority 

owned-affiliates (or wholly-owned 

affiliates) as permitted in accordance 

with the sections 3, 4, and 5 of the rule, 

as applicable. The sponsor of an ABCP 

conduit must fulfill the compliance 

requirements of the ABCP option with 

respect to the originator-seller that is the 

sponsor of the intermediate SPV. 

The agencies have carefully 

considered commenters’ 

recommendations regarding the 

definition of 100 percent liquidity 

coverage and are adopting the rule as 

proposed. The agencies understand the 

concern raised by commenters that a 

significant number of existing partiallysupported conduits will likely not be 

able to use the ABCP option to satisfy 

the risk retention requirement, because 

they are covered by a liquidity facility 

that adjusts the funding obligation of the 

liquidity provider according to the 

performance of the assets collateralizing 

the ABS interests held by the ABCP 

conduit.131 However, the agencies 

observe that a liquidity facility of the 

type described by commenters, that 

reduces the obligation of the liquidity 

provider to provide funding based on a 

formula that takes into consideration the 

amount of non-performing assets could 

serve to insulate the liquidity provider 

from the credit risk of non-performing 

assets in the securitization transaction. 

The ABCP option is designed to 

accommodate conduits that expose the 

liquidity provider to the full credit risk 

of the assets in the securitization, with 

the expectation that exposure to the 

credit risk of such assets will provide 

the liquidity providers with incentive to 

undertake robust credit underwriting 

and monitoring. 

The final rule adopts as proposed the 

requirement that a regulated liquidity 

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provider enter into a legally binding 

commitment to provide 100 percent 

liquidity coverage (in the form of a 

lending facility, an asset purchase 

agreement, a repurchase agreement, or 

other similar arrangement) to all the 

ABCP issued by the ABCP conduit by 

lending to, purchasing ABCP issued by, 

or purchasing assets from, the ABCP 

conduit in the event that funds are 

required to repay maturing ABCP issued 

by the ABCP conduit. 

While the final rule continues to 

require that there be only one registered 

liquidity provider with responsibility to 

make payment in respect of the 

commercial paper notes, the regulated 

liquidity provider is not prohibited from 

hedging its liquidity obligation or from 

backstopping the obligation by entering 

into sub-participations or other 

arrangements in respect of this 

commitment, so long as one regulated 

liquidity provider remains directly 

responsible to all holders of ABCP 

issued by the conduit. To the extent that 

the regulated liquidity provider that 

provides liquidity support to the ABCP 

conduit is exposed to the credit risk of 

the assets covered by such liquidity 

support, the agencies believe the 

incentives that encourage robust 

underwriting remain appropriately 

aligned. 

The agencies continue to believe that 

unfunded risk retention is not 

consistent with the regulatory goal of 

meaningful risk retention. As such, the 

requirement in the ABCP credit risk 

retention option for 100 percent nonasset tested liquidity is not a substitute 

for risk retention by the ABCP sponsor, 

but rather a recognition of an integral 

part of the overall ABCP conduit 

securitization structure. As the liquidity 

support is not an ABS interest retained 

to satisfy a risk retention requirement 

under the rule, the liquidity provider is 

not subject to the prohibitions on 

transfer and hedging in section 12 of the 

rule with respect to the liquidity 

support. 

The agencies were persuaded by 

commenters views regarding the 

likelihood that many conduits will need 

to issue ABCP with a longer maturity in 

the future in order to accommodate the 

needs of regulated institutions that are 

subject to new liquidity requirements 

under the Basel liquidity standards. 

Accordingly, the final rule extends the 

nine month maximum maturity and 

defines ABCP as asset-backed 

commercial paper that has a maturity at 

the time of issuance not exceeding 397 

days, exclusive of grace periods, or any 

renewal thereof the maturity of which is 

likewise limited. 

The agencies did not receive any 

comments regarding the reproposal’s 

definition of ABCP conduit. 

Accordingly, as with the reproposal, the 

final rule defines an ABCP conduit as an 

issuing entity with respect to ABCP. 

In response to comments, the final 

rule permits eligible ABCP conduits to 

acquire ABS interests from other eligible 

ABCP conduits with the same regulated 

liquidity provider. Under the final rule, 

an eligible ABCP conduit may acquire 

an ABS interest from another eligible 

ABCP conduit if: (i) The sponsors of 

both eligible ABCP conduits are in 

compliance with section 6 of the rule; 

and (ii) the same regulated liquidity 

provider has entered into one or more 

legally binding commitments to provide 

100 percent liquidity coverage to all of 

the ABCP issued by both eligible ABCP 

conduits. 

However, because the agencies 

continue to be concerned about asset 

aggregators that acquire loans and 

receivables from multiple sources in the 

market, place them in an intermediate 

SPV, and issue interests to ABCP 

conduits the agencies have declined to 

extend the ABCP option to ABCP 

conduits that purchase ABS interests 

other than in an initial issuance by or 

on behalf of an originator-seller’s 

intermediate SPV. 

In order to accommodate certain 

market practices, as referred to in the 

comments to the reproposal, the 

agencies are revising the definition of 

‘‘intermediate SPV’’ in the final rule. 

The final rule revises this provision to 

include a special purpose vehicle, often 

referred to as an ‘‘orphan SPV,’’ that has 

nominal equity owned by a trust or 

corporate service provider that 

specializes in providing independent 

ownership of special purpose vehicles, 

and such trust or corporate service 

provider is not affiliated with any other 

transaction parties. For purposes of the 

final rule, ‘‘owned by a trust’’ includes 

‘‘held by a trustee in trust’’ and ‘‘issued 

to a trustee.’’ In addition, the corporate 

service provider will not be affiliated 

solely because it provides professional 

directors or administrative services to 

the orphan SPV or the trust. Finally, the 

nominal equity in the orphan SPV will 

not be entitled to a share of the profits 

and losses or any other economic 

indicia of ownership. 

Consistent with the reproposal, the 

final rule allows an intermediate SPV to 

sell ABS interests that it issues to third 

parties other than ABCP conduits. 

However, the agencies emphasize that, 

except as otherwise provided for loans 

or receivables acquired as part of certain 

business combinations, the ABS 

interests acquired by the conduit cannot 

not be collateralized by securitized 

assets otherwise purchased or acquired 

by the intermediate SPV’s originatorseller, the originator-seller’s majorityowned affiliates, or by the intermediate 

SPV from unaffiliated originators or 

sellers. Commenters requested the 

addition of a cure period, expressing 

concern as to whether a conduit would 

be considered to be in violation of the 

rule any time one of its originator-sellers 

failed to comply, and the agencies have 

addressed this issue. The final rule 

includes the reproposal’s provisions 

obligating the sponsor to monitor 

originator-sellers’ compliance, notify 

investors of any failure of compliance 

by an originator-seller, and take 

appropriate steps to cure the breach. A 

sponsor of an eligible ABCP conduit 

that notifies investors and takes 

appropriate steps in accordance with 

the terms of the rule will be in 

compliance with its obligations under 

the rule, and, accordingly, no ‘‘cure 

period’’ is necessary. Although 

commenters objected to the requirement 

to identify originator-sellers by name in 

these circumstances, the agencies 

believe it is an important part of 

incentivizing the originator-seller and 

ABCP conduit sponsor to comply with 

the requirements of the ABCP option. 

The final rule requires an ABCP 

conduit sponsor to provide, or cause to 

be provided, certain disclosures to 

ABCP investors. In response to 

commenters’ concerns, the disclosure 

requirement requires that the 

information about the underlying ABS 

interests be updated at least monthly, 

rather than updated in connection with 

each issuance of ABCP. The final rule 

requires that disclosures be provided 

before or contemporaneously with the 

first sale of ABCP to the investor and 

must be provided on at least a monthly 

basis to all conduit investors. In order 

to implement this requirement, the 

agencies have required that the 

disclosures to investors must be based 

on information as of a date not more 

than 60 days prior to the date of first use 

with investors in order to accommodate 

variations in reporting timelines and 

incorporation of information received 

from originator-sellers. 

The agencies are persuaded by 

commenters who expressed concern 

that the reproposal’s disclosure 

requirements for the details of each 

originator-seller’s risk retention interest, 

together with the same information as 

the originator-seller would be required 

to provide direct investors pursuant to 

the rule, provides more information 

than necessary. Accordingly, the final 

rule revises this disclosure to simplify it 

significantly. The disclosure must 

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132 15 U.S.C. 78o–11(c)(1)(E). 

133Such third-party purchasers are commonly 

referred to in the CMBS market as ‘‘B-piece buyers’’ 

and the eligible horizontal residual interest is 

commonly referred to as the ‘‘B-piece.’’ 

contain the following information as of 

a date not more than 60 days prior to the 

date of first use with investors: 

(i) The name and form of organization 

of the regulated liquidity provider that 

provides liquidity coverage to the 

eligible ABCP conduit, including a 

description of the material terms of such 

liquidity coverage, and notice of any 

failure to fund; 

(ii) The asset class or brief description 

of the underlying securitized assets; 

(iii) The standard industrial category 

code (SIC Code) for the originator-seller 

that will retain (or has retained) 

pursuant to this section an interest in 

the securitization transaction; and 

(iv) A description of the percentage 

amount of risk retention by the 

originator-seller, and whether it is in the 

form of an eligible horizontal residual 

interest, vertical interest, or revolving 

pool securitization seller’s interest, as 

applicable, pursuant to the rule. 

The final rule also requires that an 

ABCP sponsor provide, or cause to be 

provided, upon request, to the 

Commission and its appropriate Federal 

banking agency, if any, in writing, all of 

the information required to be provided 

to investors, and the name and form of 

organization of each originator-seller 

that will retain (or has retained) a rulecompliant interest in the securitization 

transaction. As investors in ABCP 

initially will have significantly less 

information about the risk retention 

held by the originator-sellers that 

sponsor ABS interests collateralizing the 

ABCP than investors in other forms of 

ABS interests, the requirement that 

sponsors disclose a breach by an 

originator-seller will provide them with 

relevant information about the 

originator-seller upon the occurrence of 

a breach. 

5. Commercial Mortgage-Backed 

Securities 

a. Overview of the Reproposal and 

Public Comments 

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

Act 132 provides that, with respect to 

CMBS, the regulations prescribed by the 

agencies may provide for retention of 

the first-loss position by a third-party 

purchaser that specifically negotiates for 

the purchase of such first-loss position, 

holds adequate financial resources to 

back losses, provides due diligence on 

all individual assets in the pool before 

the issuance of the asset-backed 

securities, and meets the same standards 

for risk retention as the Federal banking 

agencies and the Commission require of 

the securitizer. In light of this provision 

and the historical market practice of 

third-party purchasers acquiring firstloss positions in CMBS transactions, the 

agencies proposed to permit a sponsor 

of ABS interests that is collateralized by 

commercial real estate loans to meet its 

risk retention requirements if thirdparty purchasers acquired eligible 

horizontal residual interests in the 

issuing entity.133 The reproposal would 

have permitted one or two third-party 

purchasers to satisfy the risk retention 

requirement, so long as their eligible 

horizontal residual interests were pari 

passu with each other, so that neither 

third-party purchaser’s losses were 

subordinate to the other’s losses. The 

eligible horizontal residual interest held 

by the third-party purchasers would 

have been permitted to be used to 

satisfy the risk retention requirements 

either by itself as the sole credit risk 

retained, or in combination with a 

vertical interest held by the sponsor. 

The CMBS risk retention option in the 

reproposal would have been available 

only for securitization transactions 

collateralized solely by commercial real 

estate loans and servicing assets. In 

addition, the following eight 

requirements would have been required 

to be met: 

(1) Each third-party purchaser retains 

an eligible horizontal residual interest 

in the securitization in the same form, 

amount, and manner as would have 

been required of the sponsor under the 

horizontal risk retention option; 

(2) Each third-party purchaser pays 

for the first-loss subordinated interest in 

cash at the closing of the securitization; 

(3) No third-party purchaser obtains 

financing, directly or indirectly, from 

any other person party to the 

securitization transaction (including, 

but not limited to, the sponsor, 

depositor, or an unaffiliated servicer), 

other than a person that is a party solely 

by reason of being an investor; 

(4) Each third-party purchaser 

performs a review of the credit risk of 

each asset in the pool prior to the sale 

of the asset-backed securities; 

(5) Except for an affiliation with the 

special servicer in the securitization 

transaction or an originator of less than 

10 percent of the unpaid principal 

balance of the securitized assets, no 

third-party purchaser can be affiliated 

with any other party to the 

securitization transaction (other than 

investors); 

(6) The transaction documents 

provide for the appointment of an 

operating advisor (Operating Advisor), 

subject to certain terms and conditions; 

(7) The sponsor provides, or causes to 

be provided, to potential purchasers 

certain information concerning the 

third-party purchasers and other 

information concerning the transaction; 

and 

(8) Any third-party purchaser 

acquiring an eligible horizontal residual 

interest under the CMBS option 

complies with the hedging, transfer and 

other restrictions applicable to such 

interest under the reproposed rule as if 

such third-party purchaser was a 

sponsor who had acquired the interest 

under the horizontal risk retention 

option. 

Generally, commenters supported the 

CMBS risk retention option described in 

the reproposal. One commenter 

cautioned against further modifications 

to the proposed CMBS option, 

expressing its view that CMBS 

underwriting standards were beginning 

to deteriorate. 

Another commenter, however, 

pointed out that risk retention is better 

implemented where the sponsor retains 

some ‘‘skin in the game.’’ This 

commenter suggested that the rule 

require the sharing of risk retention 

between the sponsor and the third-party 

purchasers. This commenter suggested 

that third-party purchasers not be 

allowed to hold more than 2.5 percent 

of the risk retention requirements, and 

that they be required to hold the firstloss position for more than 5 years 

before being allowed to transfer the 

position even to another qualified thirdparty purchaser (barring an earlier 

sunset). Another commenter requested 

clarification as to whether multiple 

sponsors can divide a vertical interest 

among themselves, on a pro rata basis, 

based on their contribution to the 

transaction, with no minimum retention 

for any one sponsor. Another 

commenter requested clarification as to 

whether a sponsor holding an eligible 

vertical interest in a CMBS transaction 

would need to retain a portion of the 

eligible horizontal residual interest as 

part of that vertical interest, expressing 

the preference of its CMBS sponsor 

members that the eligible horizontal 

residual interest not be included as part 

of the eligible vertical interest. 

After considering these comments, the 

agencies do not believe it is necessary 

to require that the sponsor retain or 

share with third-party purchasers the 

credit risk in CMBS transactions 

because third-party purchasers, under 

the framework of the final rule, must 

hold the risk and independently review 

each securitized asset. The agencies 

observe that under the final rule, the 

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134See section 7(c) of the final rule. 

135 If there is no third-party purchaser and the 

sponsor holds all of the required retention in the 

form of a vertical interest, the sponsor must hold 

5 percent of each tranche including the most 

subordinated tranche in the structure. 

sponsor remains responsible for 

compliance with the CMBS option and 

risk retention and must monitor a thirdparty purchaser’s compliance with the 

CMBS option.134 The agencies also do 

not believe it is necessary to limit the 

amount of risk retention held by the 

third-party purchaser in an L-shaped 

structure. This approach provides 

parties to CMBS transactions with 

flexibility to choose how to structure 

their retention of credit risk in a manner 

compatible with the practices of the 

CMBS market. Further, consistent with 

the reproposal, the agencies continue to 

believe that the interests of the thirdparty purchaser and other investors are 

aligned through other provisions of the 

proposed CMBS option, such as the 

Operating Advisor provisions and the 

sponsor’s disclosure requirements 

discussed below. The agencies also do 

not believe it is necessary to extend the 

five-year holding period after which the 

third-party purchaser may transfer the 

eligible horizontal residual interest to 

another third-party purchaser. As stated 

in the reproposal, the agencies selected 

five years as a holding period that was 

sufficiently long to enable underwriting 

defects to manifest themselves. The 

agencies did not receive sufficient data 

or information demonstrating that a 

longer holding period was warranted. 

Additionally, the agencies have 

determined that it would unduly dilute 

the credit risk being retained in the 

CMBS transaction if multiple sponsors 

were allowed to divide the vertical 

interest. Consistent with the standard 

risk retention option generally where 

multiple sponsors are not permitted to 

divide the requisite 5 percent credit 

retention among themselves, in a CMBS 

transaction with multiple sponsors, if 

any portion of the required 5 percent 

retention is to be held by a sponsor (i.e., 

if any portion of the eligible horizontal 

residual interest is not sold to a 

qualified third-party purchaser or an 

eligible vertical interest is being used to 

meet the 5 percent retention 

requirement), that portion of the 5 

percent required retention must be held 

by a single sponsor (and its majorityowned affiliates). 

As the agencies stated in the 

reproposal, the eligible horizontal 

residual interest held by the third-party 

purchasers can be used to satisfy the 

risk retention requirements in 

combination with a vertical interest 

held by a sponsor. Consistent with this 

approach, where the eligible horizontal 

residual interest is held by a third-party 

purchaser, and the sponsor holds a 

vertical interest, the sponsor must, as 

part of that vertical interest, also retain 

a portion of the eligible horizontal 

residual interest, as the vertical interest 

must constitute 5 percent of the cash 

flows of each tranche, including the 

eligible horizontal residual interest.135

The agencies also received many 

comments with respect to the more 

specific aspects of the CMBS option in 

the reproposal. These comments and the 

final rule for these aspects of the CMBS 

option are discussed below. 

b. Third-Party Purchasers 

i. Number of Third-Party Purchasers and 

Retention of Eligible Horizontal 

Residual Interest 

While commenters generally 

supported allowing up to two thirdparty purchasers to hold risk retention, 

one commenter recommended 

expanding the number of third-party 

purchasers to allow participation by 

more than two B-piece investors. 

Several commenters recommended 

allowing the third-party purchasers to 

hold the interests in a seniorsubordinated structure, rather than pari 

passu, provided that the holder of the 

subordinated interest retains at least 

half of the requisite eligible horizontal 

residual interest, and that both thirdparty purchasers independently satisfy 

all of the requirements and obligations 

imposed on third-party purchasers. 

These commenters suggested that a 

senior-subordinated structure would 

better allow the market to appropriately 

and efficiently price the interests in a 

manner that is commensurate with the 

risk of loss of each interest, and to 

address the different risk tolerance 

levels of each third-party purchaser. 

One of these commenters asserted that 

the pari passu requirement would 

reduce the capacity of third-party 

purchasers to invest in the eligible 

horizontal residual interest. However, 

two commenters strongly opposed 

allowing third-party purchasers to 

satisfy the risk retention requirements 

through a senior-subordinated structure, 

commenting that such a change would 

significantly dilute and render 

ineffective the risk retention 

requirements. 

As stated in the reproposal, the 

agencies provided additional flexibility 

for the CMBS option by allowing up to 

two third-party purchasers to satisfy the 

risk retention requirement. The agencies 

do not believe it would be appropriate 

to allow more than two third-party 

purchasers in a single transaction, 

because it could dilute the incentives 

generated by the risk retention 

requirement to monitor the credit 

quality of the commercial mortgages in 

the pool. Similarly, the agencies agree 

that allowing the third-party purchasers 

to satisfy the risk retention requirement 

through a senior-subordinated structure 

would significantly dilute the 

effectiveness of the risk retention 

requirements. Accordingly, the agencies 

therefore are adopting as proposed the 

pari passu requirement with respect to 

the retained interests held by third-party 

purchasers in a CMBS transaction. 

ii. Third-Party Purchaser Qualifying 

Criteria 

The agencies did not propose any 

qualifying criteria for third-party 

purchasers in the original proposal or 

the reproposal. 

In response, one commenter requested 

that third-party purchasers be 

‘‘qualified’’ based on predetermined 

criteria of experience, financial analysis 

capability, capability to direct the 

special servicer, and capability to 

sustain losses. Another commenter 

requested that if a third-party 

purchaser’s affiliate contributes more 

than 10 percent of the securitized assets 

to a CMBS transaction, that third-party 

purchaser should be precluded from 

holding the eligible horizontal residual 

interest. 

Another commenter stated its belief 

that it is common for several funds 

within a fund complex that are managed 

by the same or affiliated investment 

adviser to purchase eligible horizontal 

residual interests in the same CMBS 

transaction and, to be consistent with 

practice, the definition of third-party 

purchaser should be expanded to 

include multiple funds that are 

managed by the same or affiliated 

investment advisers. 

Consistent with the reproposal, the 

agencies are not adopting specific 

qualifying criteria for third-party 

purchasers. The agencies believe that 

investors in the business of purchasing 

first-loss positions or ‘‘B-piece’’ interests 

in CMBS transactions have the requisite 

experience and capabilities to make an 

informed decision regarding their 

purchases. B-piece interests are not 

offered or sold through registered 

offerings—typically a B-piece interest 

will be sold in reliance on Securities 

Act Rule 144A, which requires 

purchasers to be qualified institutional 

buyers. The agencies observed that Bpiece CMBS investors are typically real 

estate specialists who use their 

knowledge about the underlying assets 

and mortgages in the pools to conduct 

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extensive due diligence on new deals. 

The agencies also observed that the Bpiece market has very few participants. 

According to Commercial Mortgage 

Alert data, in 2009–2013, there were 38 

different B-piece buyers with nine of 

them participating in 70 percent of 

CMBS deals. Furthermore, as discussed 

below, the agencies believe that the 

reproposed rule’s disclosure 

requirements with respect to the 

identity and CMBS investment 

experience of third-party purchasers are 

sufficient to allow investors in a CMBS 

transaction to assess the investment 

experience and other qualifications of 

third-party purchasers and other 

material information necessary to make 

an informed investment decision. If, in 

the future, the agencies observe adverse 

changes in the experience and 

capabilities of third-party purchasers in 

CMBS transactions, the agencies may 

consider whether modifications to the 

rule should be made to address these 

issues. 

Also consistent with the reproposal, 

the final rule retains the requirement 

that third-party purchasers be 

independent from originators of more 

than 10 percent of the securitized assets. 

The agencies believe that the 

independence requirement will help 

ensure a new review by the third-party 

purchaser of the underwriting of the 

securitized loans and do not believe that 

the requirement will adversely affect the 

number of third-party purchasers 

willing to assume the risk retention 

obligations in CMBS transactions. Last, 

the agencies are not expanding the 

definition of third-party purchaser to 

include multiple funds that are 

managed by the same or affiliated 

investment adviser. The agencies 

introduced the concept of a ‘‘majorityowned affiliate’’ in the reproposal, 

which would permit risk retention to be 

retained by a third-party purchaser or its 

majority-owned affiliate. The final rule 

retains the reproposal’s provisions 

allowing sponsors and third-party 

purchasers to transfer retained risk to 

their majority-owned affiliates. The final 

rule does not allow sponsors or thirdparty purchasers to transfer retained risk 

to parties other than majority-owned 

affiliates, as the agencies believe the 

rule being adopted today already 

includes flexibility with respect to risk 

retention held by an entity that is a 

majority-owned affiliate of a third-party 

purchaser, and that further expansion of 

the definition of third-party purchaser is 

not necessary and would dilute the risk 

required to be retained by a sponsor or 

third-party purchaser. 

c. Operating Advisor 

i. Applicability of the Operating Advisor 

Requirement 

The reproposal included a 

requirement that all CMBS transactions 

that use the third-party purchaser 

option to satisfy the risk retention 

requirement must appoint an Operating 

Advisor that is not affiliated with other 

parties to the securitization transaction. 

The reproposal would have prohibited 

the Operating Advisor from having, 

directly or indirectly, any financial 

interest in the securitization transaction, 

other than fees from its role as 

Operating Advisor, and would have 

required the Operating Advisor to act in 

the best interest of, and for the benefit 

of, investors as a collective whole. 

Multiple commenters expressed 

support for the Operating Advisor 

requirement, noting that it was a helpful 

governance mechanism and reflective of 

current market practice. One of these 

commenters advocated expanding the 

Operating Advisor requirement to all 

CMBS transactions, and not simply 

those relying on the CMBS option. 

Another commenter recommended that 

the Operating Advisor be prohibited 

from having any direct or indirect 

financial interest in, or financial 

relationship with, the special servicer. 

After considering the comments 

received, the agencies have decided not 

to expand the Operating Advisor 

requirement to CMBS transactions that 

do not rely on the third-party purchaser 

CMBS option. As stated in the 

reproposal, the agencies believe that 

there is generally a strong connection 

between third-party purchasers and the 

special exercise of the servicing rights in 

CMBS transactions. In CMBS 

transactions where credit risk is being 

retained by a third-party purchaser, the 

agencies believe there is a particular 

need to provide a check on third-party 

purchasers by limiting their ability to 

manipulate cash flows through the 

exercise of the special servicing rights. 

The agencies are providing this check 

by requiring an Operating Advisor in 

CMBS transaction where the third-party 

purchaser is holding the risk retention. 

The agencies note that the requirement 

that there be an Operating Advisor for 

any transaction relying on the CMBS 

option means that the Operating 

Advisor must be in place at any time 

that a third-party purchaser holds any 

portion of the required risk retention. 

Accordingly, whether the B-piece is 

initially sold to a third-party purchaser 

or sold to a third-party purchaser after 

the initial five year holding period 

expires, the transaction must have an 

Operating Advisor in place at all times 

that a third-party purchaser holds any 

portion of the required risk retention. 

Consistent with the reproposal, the 

agencies are adopting the requirement 

that the Operating Advisor be a party 

that is not affiliated with other parties 

to the securitization transaction, and 

does not have, directly or indirectly, any 

financial interest in the securitization 

transaction other than fees from its role 

as Operating Advisor. The agencies 

continue to believe that this 

requirement sufficiently establishes the 

independence of the Operating Advisor 

and protects investors’ interests. 

ii. Qualifications of the Operating 

Advisor 

The agencies included in the 

reproposal certain general qualifications 

for the Operating Advisor. The 

reproposal would have required 

underlying transaction documents in a 

CMBS transaction to provide standards 

with respect to the Operating Advisor’s 

experience, expertise and financial 

strength to fulfill its duties and 

obligations under the applicable 

transaction documents over the life of 

the securitization transaction. 

One commenter cautioned against the 

requirement that qualification standards 

for the Operating Advisor be specified 

in the transaction documents. This 

commenter asserted that the 

requirements must ensure that a 

sufficient number of qualified and 

independent Operating Advisors will be 

available to fill the role. Additionally, 

this commenter encouraged the agencies 

to clarify the mechanism by which the 

acceptability of the Operating Advisor 

may be determined. 

The agencies do not believe that the 

rule should mandate the mechanism by 

which the acceptability of the Operating 

Advisor is determined, but that the 

CMBS transaction parties should have 

the flexibility to establish the 

appropriate standards for the Operating 

Advisor in each transaction. As a result, 

the agencies are adopting the 

qualification requirements as proposed. 

iii. Role of the Operating Advisor 

Under the reproposal, once the 

eligible horizontal residual interest held 

by third-party purchasers reaches a 

principal balance of 25 percent or less 

of its initial principal balance, the 

special servicers would have been 

required to consult with the 

independent Operating Advisor in 

connection with, and prior to, any major 

investing decisions related to the 

servicing of the securitized assets. The 

reproposal would have required that the 

Operating Advisor be provided with 

adequate and timely access to 

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information and reports necessary to 

fulfill its duties under the transaction 

documents. It also would have required 

that the Operating Advisor be 

responsible for reviewing the actions of 

the special servicer, reviewing all 

reports made by the special servicer to 

the issuing entity, reviewing for 

accuracy and consistency in 

calculations made by the special 

servicer in accordance with the 

transaction documents, and issuing a 

report to investors and the issuing entity 

on the special servicer’s performance. 

One commenter supported this 

requirement, but requested that the 

agencies clarify the scope of the 

decisions on which the special servicer 

was to consult with the Operating 

Advisor’s review, and the scope of the 

reports to be provided to the Operating 

Advisor. Several commenters requested 

that the agencies clarify that the 

calculation of the principal balance 

could take into account appraisal 

reductions and realized losses, in order 

to be consistent with current market 

practice. Another commenter 

questioned the usefulness of the 

consultation requirement, noting that 

there is no meaningful connection 

between the 25 percent threshold and 

the goal of risk retention. This 

commenter proposed either eliminating 

this requirement or limiting the 

consultation right to the period from the 

closing of the transaction until the 

holder of risk retention loses control 

over the special servicing rights. 

Another commenter believed that the 25 

percent threshold should be reduced to 

10 percent. 

After considering the comments 

received, the agencies are adopting the 

proposed consultation requirement, 

with some modifications in response to 

comments. For purposes of determining 

the principal balance, the agencies are 

clarifying in the final rule that the 

calculation should be performed in a 

manner that is consistent with the 

calculation as permitted under the 

transaction documents, and take into 

account any realized losses and 

appraisal reduction amounts to the 

extent permitted under the terms and 

conditions of the transaction 

documents. In terms of the scope of 

reports made by the special servicer to 

the issuing entity that the Operating 

Advisor must review, the agencies are 

clarifying in the final rule that the 

Operating Advisor shall have adequate 

and timely access to all reports 

delivered to all classes of bondholders 

as well as the holders of the eligible 

horizontal residual interest. Finally, the 

agencies believe that section 7(b)(6)(iv) 

of the final rule sufficiently describes 

the types of decisions that are subject to 

consultation—specifically, any material 

decision in connection with the 

servicing of the securitized assets which 

includes, without limitation, any 

material modification or waiver of any 

provision of a loan agreement, any 

foreclosure or similar conversion of the 

ownership of a property, or any 

acquisition of a property. 

iv. Special Servicer Removal Provisions 

The reproposal would have required 

that the Operating Advisor have the 

authority to recommend the removal 

and replacement of the special servicer. 

Under the reproposal, the removal of the 

special servicer would have required the 

affirmative vote of a majority of the 

outstanding principal balance of all ABS 

interests voting on the matter, and 

required a quorum of 5 percent of the 

outstanding principal balance of all ABS 

interests. 

The agencies received many 

comments with respect to the Operating 

Advisor’s ability to remove the special 

servicer. Commenters generally 

supported retaining the Operating 

Advisor’s ability to recommend the 

replacement of the special servicer, 

especially when the special servicer had 

not acted in the best interest of all 

investors. However, commenters 

differed on their views of the 

appropriate voting quorum 

requirements. 

One commenter believed that the 

special servicer removal provisions 

should mirror current CMBS 

transactions, which typically provide 

that (i) the Operating Advisor may 

recommend to remove the special 

servicer only after the most senior 

tranche of the B-piece has been reduced 

to less than 25 percent of its initial 

principal balance, and (ii) removal can 

only take place if more than 50 percent 

of the aggregate outstanding principal 

balance of all classes affirmatively vote 

for such removal. 

One commenter recommended 

providing Operating Advisors with a 

safe harbor from liability, except in the 

case of gross negligence, fraud or willful 

misconduct, for recommending 

replacement of the special servicer. This 

commenter also recommended requiring 

the maintenance of an investor registry, 

so that investors can be easily contacted 

if the Operating Advisor makes a 

replacement recommendation that 

requires a vote. 

Commenters submitted a wide range 

of comments on the quorum 

requirement for removal of the special 

servicer. Two commenters asserted that 

the quorum requirement would be more 

appropriately specified by the 

underlying transaction documents, 

rather than in the final rule, in order to 

accommodate any future changes in the 

market. One commenter favored a 

requirement that in order to reach a 

quorum, no fewer than three 

unaffiliated investors participate in the 

vote. Another commenter recommended 

two options: (i) Increasing the quorum 

to 15 percent and requiring the 

participation of three unaffiliated 

investors, or (ii) increasing the quorum 

to 20 percent with no minimum 

unaffiliated investor-voting 

requirement. This commenter opposed a 

more substantive increase to the quorum 

requirement, asserting that it would be 

nearly impossible for interest holders to 

remove the special servicer. Both of 

these commenters recommended adding 

a provision that specified that the thirdparty purchaser may not unilaterally reappoint the original special servicer or 

its affiliate following a removal and 

replacement process. 

One commenter highlighted a split in 

views among those parties who 

contributed to its comments. Some 

favored increasing the voting quorum 

requirement to two-thirds of all 

investors eligible to vote (before the 

eligible horizontal residual interest has 

been reduced below 25 percent), and to 

one-third of all investors eligible to vote 

(after the eligible horizontal residual 

interest has been reduced below 25 

percent). Others supported a quorum 

requirement of at least 20 percent, with 

at least three independent investors 

participating in the vote. 

After considering the comments 

received, the agencies have decided to 

permit CMBS transaction parties to 

specify in the underlying transaction 

documents the quorum required for a 

vote to remove the special servicer. 

However, the transaction documents 

may not specify a quorum of more than 

the holders of 20 percent of the 

outstanding principal balance of all ABS 

interests in the issuing entity, with such 

quorum including at least three ABS 

interest holders that are not affiliated 

with each other. The agencies believe 

that this balanced approach provides 

CMBS transaction parties with the 

flexibility to establish the quorum 

required to remove the special servicer 

in the applicable transaction 

documents, as is commonly done, while 

addressing commenter concerns that a 

quorum requirement of more than 20 

percent may make is difficult for 

interest holders to remove the special 

servicer. 

The agencies do not believe that it 

would be appropriate to include a safe 

harbor for the Operating Advisor or a 

requirement that there be an investor 

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registry requirement in the final rule 

since the agencies believe the Operating 

Advisor’s indemnification rights and the 

trustee’s investor communication 

provisions should be set forth in, and 

governed by, the transaction documents. 

Finally, the agencies agree with 

comments requesting that the thirdparty purchaser should not have the 

unilateral ability to reappoint the 

original special servicer or its affiliate. 

The rule requires the replacement of the 

special servicer following the 

recommendation of the Operating 

Advisor and an affirmative vote of the 

requisite number of ABS holders. The 

agencies believe that the independence 

of the Operating Advisor as otherwise 

required by the final rule sufficiently 

ensures that the recommendation of the 

replacement special servicer will be 

made independent of third-party 

purchasers, and that the voting and 

enhanced quorum requirements being 

adopted today provide additional 

assurance in this regard. The quorum 

and voting requirements effectively 

require that the third-party purchasers 

not have the unilateral ability to reappoint the original special servicer or 

its affiliate. 

d. Disclosures 

The reproposal would have required 

the sponsor to provide, or cause to be 

provided, to potential purchasers and 

federal regulators certain information 

concerning the third-party purchasers 

and other information concerning the 

CMBS transaction, such as each thirdparty purchaser’s name and form of 

organization, experience investing in 

CMBS, and any other information about 

the third-party purchaser deemed 

material to investors in light of the 

particular securitization transaction. 

Additionally, it would have required 

a sponsor to disclose to investors the 

amount of the eligible horizontal 

residual interest that each third-party 

purchaser will retain (or has retained) in 

the transaction (expressed as a 

percentage of the fair value of all ABS 

interests issued in the securitization 

transaction and the dollar amount of the 

fair value of such ABS interests); the 

purchase price paid for such interest; 

the material terms of such interest; the 

amount of the interest that the sponsor 

would have been required to retain if 

the sponsor had retained an interest in 

the transaction; the material 

assumptions and methodology used in 

determining the aggregate amount of 

ABS interests of the issuing entity; the 

representations and warranties 

concerning the securitized assets; a 

schedule of exceptions to these 

representations and warranties; and 

information about the factors that were 

used to make the determination that 

such exceptions should be included in 

the pool even though they did not meet 

the representations and warranties. 

In addition, the reproposal would 

have required that certain material 

information with respect to the 

Operating Advisor be disclosed in the 

applicable transaction documents, 

including, without limitation, the name 

and form of organization of the 

Operating Advisor, the qualification 

standards applicable to the Operating 

Advisor, how the Operating Advisor 

satisfies these qualification standards, 

and the terms of the Operating Advisor’s 

compensation. 

The reproposal also would have 

required the sponsor to maintain and 

adhere to policies and procedures to 

actively monitor the third-party 

purchaser’s compliance with the CMBS 

option, and to notify investors if the 

sponsor learns that a third-party 

purchaser no longer complies with such 

requirements. 

The agencies received a few 

comments regarding the disclosure 

requirements under the CMBS risk 

retention option. Two commenters 

opposed the disclosure of the purchase 

price paid by third-party purchasers for 

the eligible horizontal residual interest. 

These commenters pointed out that 

such information has traditionally been 

viewed by all market participants as 

highly confidential and proprietary, and 

that the disclosure requirement would 

deter B-piece buyers from retaining risk. 

One of these commenters suggested that 

the issuer or third-party purchaser could 

instead provide the purchase price to 

the appropriate regulatory agency on a 

confidential basis, or disclose only that 

it has fulfilled the risk retention 

requirement. 

The investment grade investor 

members of an industry association 

requested that two additional 

disclosures be required with respect to 

the Operating Advisor: (1) Any material 

conflict of interest or potential conflict 

of interest of the Operating Advisor; and 

(2) additional information regarding the 

formula for calculating the Operating 

Advisor’s compensation. 

The agencies are adopting the 

disclosure requirements for the CMBS 

option, with some modifications in 

response to comments. As stated in the 

reproposal, the agencies believe that the 

importance of the disclosures to 

investors with respect to third-party 

purchasers outweighs potential issues 

associated with the sponsor or thirdparty purchaser making such 

information available. The agencies 

believe that the disclosure requirements 

with respect to the identity and 

experience of third-party purchasers in 

the CMBS transaction that are being 

adopted today will alert investors in the 

transaction as to the experience of thirdparty purchasers and other material 

information necessary to make an 

informed investment decision. In this 

regard, the rule retains the requirement 

that the price at which the B-piece is 

sold be disclosed. Disclosure of the 

price of the B-piece is consistent with 

other fair value disclosures. The 

agencies believe these disclosures are 

necessary to allow other investors to 

assess the risk being retained, and that 

the ability of investors to assess the 

value of the retained risk outweighs the 

preferences of some B-piece buyers to 

keep the price confidential. 

With respect to requests that the rule 

require the disclosure of the method of 

calculating the Operating Advisor’s 

compensation, the agencies believe the 

requirement to disclose the terms of the 

Operating Advisor’s compensation 

already encompasses disclosure as to 

how such compensation is calculated. 

Therefore, the agencies believe that no 

change to the reproposed rule is 

required in this respect. 

With respect to the request that the 

rule require disclosure of any material 

conflicts of interest involving the 

Operating Advisor, the agencies agree 

that disclosure of any material or 

potential material conflicts of interest of 

the Operating Advisor with respect to 

the securitization transaction should be 

disclosed. Such disclosure will allow 

transaction parties to better ensure that 

the Operating Advisor will act 

independently. Accordingly, the 

agencies have added this disclosure 

requirement to the final rule. 

e. Transfer of B-Piece 

As discussed above, consistent with 

the reproposal, the rule allows a sponsor 

of a CMBS transaction to meet its risk 

retention requirement where a thirdparty purchaser acquires the B-piece, 

and all other criteria and conditions for 

this CMBS option as described are met. 

The reproposal would have permitted, 

as an exception to the transfer and 

hedging restrictions in that reproposed 

rule and section 15G of the Exchange 

Act, the transfer of the retained interest 

by any initial third-party purchaser to 

another third-party purchaser at any 

time after five years after the date of the 

closing of the securitization transaction, 

provided that the transferee satisfies 

each of the conditions applicable to the 

initial third-party purchaser under the 

CMBS option in connection with such 

purchase. Conditions that an initial 

third-party purchaser was required to 

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77648 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

136Section 12(f)(1) of the reproposal sets forth the 

hedging and transfer restriction period that would 

be generally applicable to risk retention, which is 

the latest of (i) the date on which the total unpaid 

principal balance of the securitized assets that 

collateralize the securitization transaction has been 

reduced to 33 percent of the total unpaid principal 

balance of the securitized assets as of the closing 

of the securitization transaction; (ii) the date on 

which the total unpaid principal obligations under 

the ABS interests issued in the securitization 

transaction has been reduced to 33 percent of the 

total unpaid principal obligations of the ABS 

interests at closing of the securitization transaction; 

or (iii) two years after the date of the closing of the 

securitization transaction. 

satisfy at or prior to the closing of the 

securitization transaction would be 

required to be satisfied by the transferee 

at or prior to the time of the transfer to 

the transferee. The reproposed rule also 

would have permitted transfers by any 

such subsequent third-party purchaser 

to any other purchaser satisfying the 

criteria applicable to initial third-party 

purchasers. In addition, if the sponsor 

retained the B-piece at closing, the 

reproposed rule would have permitted 

the sponsor to transfer such interest to 

a purchaser satisfying the criteria 

applicable to subsequent third-party 

purchasers after a five-year period 

following the closing of the 

securitization transaction has expired. 

The reproposed rule also would have 

required that any transferring thirdparty purchaser provide the sponsor 

with complete identifying information 

as to the transferee third-party 

purchaser. 

Comments on the proposed rule 

included objections that the five-year 

holding period was too long and that a 

sponsor that retained the B-piece at 

closing should not be required to hold 

the position for five years before transfer 

to a qualifying third-party purchaser. 

Concern was also expressed that 

imposing the five-year holding period, 

in tandem with the limitation that there 

can be no more than two third parties 

sharing the B-piece on a pari passu basis 

only, could decrease the liquidity of the 

B-piece and, therefore, disrupt the 

CMBS market. 

Many commenters stated that the fiveyear transfer restriction period should 

be reduced, because it would 

significantly impair the liquidity of 

CMBS and render the B-piece interests 

much less desirable. However, these 

commenters differed on their suggested 

alternative approaches. One commenter 

recommended a tiered approach by 

requiring a third-party purchaser to 

retain its interest for one year, allowing 

such third-party purchaser to transfer its 

interest to a ‘‘qualified transferee’’ who 

meets the same criteria as the thirdparty purchaser for the following four 

years, and having no transfer or hedging 

restrictions after that time. Another 

commenter asserted that there should be 

no minimum holding requirement as 

long as the third-party purchaser 

transfers the interest to a subsequent 

third-party purchaser meeting the same 

qualification requirements as the initial 

third-party purchaser. Another 

commenter recommended reducing the 

transfer restriction period to three years 

because performance and other pool 

data are readily available from multiple 

sources, and investors would have the 

opportunity to determine loan 

performance and to identify loans that 

are not performing as expected. 

One commenter suggested reducing 

the 5 percent risk retention requirement 

if a five-year holding period is imposed, 

or allowing the third-party purchaser to 

transfer to a qualified transferee who 

meets the same criteria as the thirdparty purchaser, a qualified institutional 

buyer under Rule 144A under the 

Securities Act, or an institutional 

accredited investor under Rule 501 

under the Securities Act. Another 

commenter recommended allowing 

sponsors to transfer the retained interest 

to a qualified third-party purchaser 

within 90 days after the date of closing 

of the transaction. One commenter also 

pointed out the five-year period 

applicable to holders of eligible 

horizontal residual interests and 

contained in section 7 of the reproposal 

is inconsistent with, and suggested that 

it be harmonized with, the general 

transfer restriction period that is 

contained in section 12 of the 

reproposal 136 and that it should apply 

to vertical risk retention in a CMBS 

transaction, and that both holding 

periods should be reduced to three 

years. Several commenters suggested 

that, if a sponsor holds the B-piece, it 

should not be subject to the five-year 

holding period or should be allowed to 

transfer the B-piece within some short 

period after the transaction closing. One 

commenter requested that the final rule 

state that a sponsor’s risk retention 

obligation be terminated with respect to 

a CMBS transaction once all of the loans 

have been defeased. 

The final rule, as it relates to the 

rights to transfer the B-piece, is 

substantially the same as the reproposal, 

in which the agencies attempted to 

balance two overriding goals: (1) Not 

disrupting the existing CMBS thirdparty purchaser structure and (2) 

ensuring that risk retention promotes 

good underwriting. In formulating the 

reproposal, the agencies reasoned that, 

after a five-year period, the quality of 

the underwriting would be sufficiently 

evident that the initial third-party 

purchaser or, if there was no initial 

third-party purchaser, the sponsor, 

would suffer the consequences of poor 

underwriting in the form of a reduced 

sales price for such interest. The 

agencies also believe that the initial 

holder of the B-piece, whether a thirdparty purchaser or the sponsor, would 

need to assume that holding the B-piece 

for a five-year period would result in 

such holder bearing the consequences of 

poor underwriting. Thus, by permitting 

transfer after the five year-period, the 

agencies do not believe that they are 

creating a structure which would result 

in the initial holder being less 

demanding of the underwriting than if 

it was required to retain the B-piece 

until expiration of the full sunset period 

applicable to CMBS securitizations. In 

connection with this, the agencies view 

the requirement (among other 

conditions) that a subsequent purchaser, 

like the initial third-party purchaser, 

conduct an independent review of the 

credit risk of each securitized asset to be 

important, as this requirement will 

emphasize to the initial B-piece holder 

that the performance of the securitized 

assets will be scrutinized by any 

potential purchaser, thus exposing the 

initial purchaser to the full risks of poor 

underwriting. 

The only change in the final rule from 

the reproposal is that it allows the risk 

retention obligation to terminate once 

all of the loans in a CMBS transaction 

are fully defeased. A loan is deemed to 

be defeased if cash or cash equivalents 

have been pledged to the issuing entity 

as collateral for the loan and are in such 

amounts and payable at such times as 

necessary to timely generate cash 

sufficient to make all remaining debt 

service payments due on such loan and 

the issuing entity has an obligation to 

release its lien on the loan. Once the 

collateral securing a loan is replaced 

with cash or cash equivalent 

instruments in the full amount 

remaining due on the loan, thereby 

defeasing the loan, any risk associated 

with poor underwriting is eliminated 

and there is no need to require risk 

retention to continue to be held. 

The standards for the agencies to 

provide exemptions to the risk 

requirements and prohibition on 

hedging are outlined in section 15G. 

The exemption allowing for a transfer of 

the B-piece by one qualified third-party 

purchaser to another qualified thirdparty purchaser after five years meets 

these requirements. The agencies 

decided that unless there was a holding 

period that was sufficiently long enough 

to enable underwriting defects to 

manifest themselves, the original thirdparty purchaser might not be 

incentivized to insist on effective 

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137While more than one commenter suggested 

that a sponsor who retains the B-piece be allowed 

to transfer the B-piece within the five year-period, 

the agencies do not agree that the sponsor should 

be treated differently from a third-party purchaser 

in this regard. The obligation to hold the B-piece 

for the five year-period is designed to, and will 

help, ensure high quality underwriting regardless of 

whether it is held by the sponsor or a third party. 

138See Original Proposal, 76 FR at 24111–24112; 

Revised Proposal, 78 FR at 57959–57961. 

139Under each PSPA as amended, Treasury 

purchased senior preferred stock of each Enterprise. 

In exchange for this cash contribution, the 

liquidation preference of the senior preferred stock 

that Treasury purchased from the Enterprise under 

the respective PSPA increases in an equivalent 

amount. The senior preferred stock of each 

Enterprise purchased by Treasury is senior to all 

other preferred stock, common stock or other 

capital stock issued by the Enterprise. 

Treasury’s commitment to each Enterprise is the 

greater of: (1) $200 billion; or (2) $200 billion plus 

the cumulative amount of the Enterprise’s net worth 

deficit as of the end of any calendar quarter in 2010, 

2011 and 2012, less any positive net worth as of 

December 31, 2012. Under amendments to each 

PSPA signed in August 2012, the fixed-rate 

quarterly dividend that each Enterprise had been 

required to pay to Treasury was replaced, beginning 

on January 1, 2013, with a variable dividend based 

on each Enterprise’s net worth, helping to ensure 

the continued adequacy of the financial 

commitment made under the PSPA and eliminating 

the need for an Enterprise to borrow additional 

amounts to pay quarterly dividends to Treasury. 

The PSPAs also require the Enterprises to reduce 

their retained mortgage portfolios over time. 

140See Revised Proposal, 78 FR at 57960. 

141By its terms, a PSPA with an Enterprise may 

not be assigned, transferred, inure to the benefit of, 

any limited-life, regulated entity established with 

respect to the Enterprise without the prior written 

consent of Treasury. 

underwriting of the securitized assets. 

The agencies believe that under 15 

U.S.C. 78o–11(e)(2), a five-year retention 

duration helps ensure high-quality 

underwriting standards for the 

securitizers and originators of assets that 

are securitized or available for 

securitization by forcing sponsors or 

initial third-party purchasers to bear the 

risk of losses related to underwriting 

deficiencies. Furthermore, the agencies 

believe that this exemption meets the 

statute’s requirement that the exemption 

encourage appropriate risk management 

practices by the securitizers and 

originators of assets, improve the access 

of consumers and businesses to credit 

on reasonable terms, or otherwise is in 

the public interest and for the protection 

of investors. The approach of requiring 

the third-party purchaser to hold for at 

least five years accommodates 

continuing participation of B-piece 

buyers in the market, in a way that 

requires meaningful risk retention as an 

incentive to good risk management 

practices by securitizers in selecting 

assets and addresses specific concerns 

about maintaining consumers’ and 

businesses’ access to commercial 

mortgage credit.137

6. Government-Sponsored Enterprises 

a. Overview of the Reproposal and 

Public Comment 

The reproposal provided in section 8 

that the full guarantee (for timely 

payment of principal and interest) by 

the Enterprises while they operate 

under the conservatorship or 

receivership of FHFA with capital 

support from the United States would 

have satisfied the risk retention 

requirements of section 15G of the 

Exchange Act with respect to the 

mortgage-backed securities issued by 

the Enterprises. Similarly, an equivalent 

guarantee provided by a limited-life 

regulated entity that succeeds to the 

charter of an Enterprise, and that is 

operating under the authority and 

oversight of FHFA under section 1367(i) 

of the Federal Housing Enterprises 

Financial Safety and Soundness Act of 

1992, would have satisfied the risk 

retention requirements, provided that 

the entity is operating with capital 

support from the United States. The 

reproposal also provided that the 

hedging and finance provisions would 

not have applied to an Enterprise while 

operating under conservatorship or 

receivership with capital support from 

the United States, or to a limited-life 

regulated entity that succeeded to the 

charter of an Enterprise and is operating 

under the authority and oversight of 

FHFA with capital support from the 

United States. Under the reproposal, a 

sponsor (that is, an Enterprise) utilizing 

this option would have been required to 

provide to investors, in written form 

under the caption ‘‘Credit Risk 

Retention’’ and, upon request, to FHFA 

and the Commission, a description of 

the manner in which it met the credit 

risk retention requirements. 

As the agencies emphasized, if either 

an Enterprise or a successor limited-life 

regulated entity began to operate other 

than as described, the Enterprise or 

successor entity would no longer be able 

to avail itself of the credit risk retention 

option provided by section 8 of the 

reproposal and would have become 

subject to the related requirements and 

prohibitions set forth elsewhere in the 

reproposal. The reproposal did not alter 

the approach to the risk retention 

requirements for the Enterprises in the 

original proposal. 

In explaining their reasons for this 

approach, the agencies observed that 

because the Enterprises fully guarantee 

the timely payment of principal and 

interest on the mortgage-backed 

securities they issue, the Enterprises 

were exposed to the entire credit risk of 

the mortgages that collateralize those 

securities.138 The agencies also 

highlighted that the Enterprises had 

been operating under the 

conservatorship of FHFA since 

September 6, 2008, and that as 

conservator, FHFA had assumed all 

powers formerly held by each 

Enterprise’s officers, directors, and 

shareholders and was directing its 

efforts as conservator toward 

minimizing losses, limiting risk 

exposure, and ensuring that the 

Enterprises priced their services to 

adequately address their costs and risk. 

Finally, the agencies described how 

each Enterprise, concurrent with being 

placed in conservatorship, entered into 

a Senior Preferred Stock Purchase 

Agreement (PSPA) with the United 

States Department of the Treasury 

(Treasury) and that the PSPAs provided 

capital support to the relevant 

Enterprise if the Enterprise’s liabilities 

exceeded its assets under GAAP.139

The agencies received only a few 

comments on proposed section 8, and 

those commenters generally supported 

allowing the Enterprises’ guarantee to be 

an acceptable form of risk retention in 

accordance with the conditions 

proposed. As a consequence the 

agencies have decided to adopt section 

8 without any change. 

While the agencies understand the 

issues involved with the Enterprises’ 

participation in the mortgage market, 

the agencies continue to believe that it 

is appropriate, from a public policy 

perspective, to recognize the guarantee 

of the Enterprises as fulfilling their risk 

retention requirement under section 

15G of the Exchange Act, while in 

conservatorship or receivership with the 

capital support of the United States.140

The authority and oversight of the 

FHFA over the operations of the 

Enterprises or any successor limited-life 

regulated entity during a 

conservatorship or receivership, the full 

guarantee provided by these entities on 

the timely payment of principal and 

interest on the mortgage-backed 

securities that they issue, and the 

capital support provided by Treasury 

under the PSPAs 141 provide a 

reasonable basis consistent with the 

goals and intent of section 15G for 

recognizing the Enterprise guarantee as 

meeting the Enterprises’ risk retention 

requirement. 

For similar reasons, the agencies 

believe that final rule’s restrictions and 

prohibitions on hedging and transfers of 

retained interests should not apply to an 

Enterprise or any successor limited-life 

regulated entity, as long as the 

Enterprise (or limited-life successor 

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142Typically, insurers would pay the first losses 

on a pool of loans, up to 1 or 2 percent of the 

aggregate unpaid principal balance of the pool. 

143See, e.g., FHFA 2012 Report at 7–11; FHFA 

2013 Report at 7–11. 

144See Original Proposal, 76 FR at 24112; Revised 

Proposal 78 FR at 57961. 

145Board of Governors of the Federal Reserve 

System, Report to the Congress on Risk Retention 

22 (Oct. 2010). 

146 In many cases, a portion of the manager’s fees 

are subordinated or contingent upon asset 

performance. 

147 15 U.S.C. 78o–11(e). 

148 Monetary Policy Report, Board of Governors of 

the Federal Reserve System, at 23 (July 2014). 

149 Id. at 22; Semiannual Risk Perspective: Spring 

2014, Office of the Comptroller of the Currency, at 

29 (June 2014). 

150 Monetary Policy Report, at 1–2, 22. 

151 Id.; Semiannual Risk Perspective: Spring 2014, 

at 5. 

152Shared National Credits Program: 2013 

Review, Board of Governors of the Federal Reserve 

System, Federal Deposit Insurance Corporation, 

Office of the Comptroller of the Currency, at 3 

(September 2013) (‘‘A focused review of leveraged 

loans found material widespread weakness in 

underwriting practices, including excessive 

entity) is operating consistent with the 

conditions set out in the rule. In the 

past, the Enterprises have sometimes 

acquired pool insurance to cover a 

percentage of losses on the mortgage 

loans comprising the pool.142 FHFA also 

has made risk-sharing through a variety 

of alternative mechanisms a major goal 

of its Strategic Plan for the Enterprise 

Conservatorships.143 Because each 

Enterprise, while in conservatorship or 

receivership and operating with capital 

support from the United States, will 

need to fully guarantee, and hold the 

credit risk on, the mortgage-backed 

securities that it issues for the 

provisions of section 8 of the rule to 

apply, the prohibition on hedging the 

credit risk that a retaining sponsor is 

otherwise required to retain would have 

limited the ability of the Enterprises to 

acquire such pool insurance in the 

future or take other reasonable actions 

to limit losses that would otherwise 

arise from the Enterprises’ full exposure 

to the credit risk of the securities that 

they issue. 

If any of the conditions in the rule 

cease to apply, an Enterprise or any 

successor organization will no longer be 

able to rely on its guarantee to meet the 

risk retention requirement under section 

15G of the Exchange Act and will need 

to retain risk in accordance with one of 

the other applicable sections of this risk 

retention rule. Because section 8 of the 

rule applies only so long as the relevant 

Enterprise operates under the authority 

and control of FHFA and with capital 

support from the United States, the 

agencies continue to believe that the 

rule’s approach with regard to the 

Enterprises’ compliance with the risk 

retention requirement of section 15G of 

the Exchange Act is consistent with the 

maintenance of quality underwriting 

standards, in the public interest, and 

consistent with the protection of 

investors.144

The agencies recognize ongoing 

activity related to reform of the 

Enterprises, and expect to revisit and, if 

appropriate, modify this and other 

provisions after the future of the 

Enterprises and of the statutory and 

regulatory framework for the Enterprises 

becomes clearer. The agencies will 

continue to consider the impact of 

potential arbitrage between various 

markets and market participants, and in 

particular between the Enterprises and 

the private securitization markets, and 

whether adjustments should be made to 

enhance investor protection and 

financial stability. 

7. Open Market Collateralized Loan 

Obligations 

a. Background 

A CLO is an asset-backed security that 

is typically collateralized by portions of 

tranches of senior, secured commercial 

loans or similar obligations of borrowers 

who are of lower credit quality or that 

do not have a third-party evaluation of 

the likelihood of timely payment of 

interest and repayment of principal. As 

discussed in the reproposal, 

commenters distinguished between two 

general types of CLOs: open market 

CLOs and balance sheet CLOs. As 

described by commenters, a balance 

sheet CLO securitizes loans already held 

by a single institution or its affiliates in 

portfolio (including assets originated by 

the institution or its affiliate) and an 

open market CLO securitizes assets 

purchased on the secondary market, in 

accordance with investment guidelines. 

CLOs are organized and initiated by a 

CLO manager usually when the CLO 

manager partners with a structuring 

bank that assists in financing asset 

purchases that occur before the legal 

formation of the CLO.145 After the terms 

of a CLO transaction, including 

investment guidelines, are agreed upon 

with key investors, the CLO manager 

will usually have sole discretion under 

the governing documents to select 

portions of tranches of syndicated 

commercial loans on the primary or 

secondary market to be acquired by the 

CLO in compliance with the investment 

guidelines. An SPV (issuing entity) is 

formed to issue the asset-backed 

securities collateralized by commercial 

loans that the CLO manager has selected 

and directed the CLO issuing entity to 

purchase. The CLO manager retains the 

obligation to actively manage the asset 

portfolio, in accordance with the 

investment guidelines, and earns 

management fees and performance 

fees 146 for management services 

provided. 

CLOs are a type of CDO. Both are 

organized and initiated by an asset 

manager that also actively manages the 

assets for a period of time after closing 

in compliance with investment 

guidelines. Typically, both CLOs and 

CDOs are characterized by relatively 

simple sequential pay capital structures 

and significant participation by key 

investors in the negotiation of 

investment guidelines. 

As discussed in the reproposal and 

below, the agencies believe that the risk 

retention rules apply to CLOs because 

CLO managers clearly fall within the 

statutory definition of ‘‘securitizer’’ set 

forth in Exchange Act section 15G. 

Moreover, the agencies believe it is 

consistent with the purpose of section 

15G of the Exchange Act and principles 

of statutory interpretation to apply the 

risk retention rules to CLOs. There is no 

indication that Congress sought to 

exclude any specific type of 

securitization structure from the 

requirements of section 15G. Other than 

mandating specific types of exemptions 

based on underwriting quality and for 

securitizations involving certain public 

entities,147 Congress directed the 

agencies to apply risk retention 

generally with respect to all assetbacked securities. Subject only to 

specific limitations, authority to 

determine other exemptions was left to 

the implementing agencies. 

Moreover, contrary to commenters’ 

suggestions, as discussed below, 

developments in the CLO and leveraged 

loan market suggest that CLOs present 

many of the same incentive alignment 

and systemic risk concerns that the risk 

retention requirements of section 15G 

were intended to address. CLO issuance 

has been increasing in recent years.148

Paralleling this increase has been rapid 

growth in the issuance of leveraged 

loans,149 which are the primary assets 

purchased by most CLOs. Heightened 

activity in the leveraged loan market has 

been driven by search for yield and a 

corresponding increase in risk appetite 

by investors.150 The agencies note that 

there is evidence that this increased 

activity in the leveraged loan market has 

coincided with widespread loosening of 

underwriting standards.151 In fact, a 

recent review of a sample of leveraged 

loans by the Federal banking agencies 

found that forty-two percent of 

leveraged loans examined were 

criticized by examiners.152 The agencies 

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leverage, inability to amortize debt over a 

reasonable period, and lack of meaningful financial 

covenants.’’). 153See, e.g., Semiannual Risk Perspective: Spring 

2014, at 8. 154See ‘‘Interagency Guidance on Leveraged 

Lending,’’ Final Supervisory Guidance, 78 FR 

17766 (March 22, 2013), at http://www.gpo.gov/

fdsys/pkg/FR-2013-03-22/pdf/2013-06567.pdf 

(Leveraged Lending Guidance). 

155See Original Proposal, 76 FR at 24098 n. 42. 156See 2013 Reproposal, 78 FR at 57962. 

believe that increases in the origination 

and pooling of poorly underwritten 

leveraged loans could expose the 

financial system to risks.153 The Federal 

banking agencies have been monitoring 

this market closely and have responded 

to concerns by issuing updated 

leveraged lending supervisory guidance, 

which outlines principles related to safe 

and sound leveraged lending activities, 

including expectations that banks and 

thrifts exercise prudent underwriting 

standards when originating leveraged 

loans, regardless of intent to hold or 

distribute them.154 As discussed in 

more detail below, these developments 

in the leveraged loan and CLO market 

represent similar dynamics to issues in 

the originate-to-distribute model that 

were a major factor in the recent 

financial crisis and that section 15G was 

intended to address. 

For these reasons, and others 

discussed below, the agencies believe it 

is appropriate to apply risk retention 

rules to open market CLOs as well as 

balance sheet CLOs. 

b. Overview of Original Proposal and 

Reproposal 

In the original proposal, the agencies 

observed that a CLO manager generally 

acts as the sponsor by selecting the 

commercial loans to be purchased by 

the CLO issuing entity and managing 

the securitized assets once deposited in 

the CLO structure.155 Accordingly, the 

original proposal would have required 

the CLO manager to satisfy the 

minimum risk retention requirement for 

each CLO securitization transaction that 

it managed by holding a sufficient 

amount of standard risk retention. The 

original proposal did not include a form 

of risk retention designed specifically 

for CLO securitizations. 

As discussed in the reproposal, many 

commenters on the original proposal 

raised concerns regarding the impact of 

the proposal on open market CLOs. 

Some commenters asserted that most 

asset management firms currently 

serving as open market CLO managers 

do not have the balance sheet capacity 

to fund 5 percent horizontal or vertical 

slices of the CLO. They asserted that 

imposing standard risk retention 

requirements on these managers could 

cause independent CLO managers to 

exit the market or be acquired by larger 

firms. According to these commenters, 

the resulting erosion in market 

competition could increase the cost of 

credit for large companies that are of 

lower credit quality or that do not have 

a third-party evaluation of the 

likelihood of timely payment of interest 

and repayment of principal and that are 

represented in CLO portfolios above the 

level that otherwise would be consistent 

with the credit quality of these 

companies. 

Certain commenters also asserted that 

open market CLO managers are not 

‘‘securitizers’’ under section 15G of the 

Exchange Act and, therefore, the 

agencies do not have the statutory 

authority to subject them to risk 

retention requirements. These 

commenters asserted that CLO managers 

are not ‘‘securitizers’’ as defined in 

section 15G of the Exchange Act 

because they do not own, sell, or 

transfer the loans that comprised the 

CLO’s collateral pool, but only direct 

which assets would be purchased by the 

CLO issuing entity. 

In the reproposal, the agencies 

discussed these comments and 

explained that the definition of 

‘‘securitizer’’ under section 15G of the 

Exchange Act applied to open market 

CLO managers.156 To help address 

concerns raised by commenters to the 

initial proposal, the agencies proposed 

an alternative method for risk retention 

compliance for CLOs that the agencies 

believed would be consistent with the 

purposes of risk retention. This alternate 

approach would be available under the 

reproposal to an open market CLO, the 

assets of which consist primarily of 

portions of senior, secured syndicated 

loans acquired by the issuing entity 

directly from sellers in open market 

transactions and servicing assets, and 

that holds less than 50 percent of its 

assets by aggregate outstanding 

principal amount in loans syndicated by 

lead arrangers that are affiliates of the 

CLO or CLO manager or originated by 

originators that are affiliates of the CLO 

or CLO manager (lead arranger option). 

Under the reproposal, as an 

alternative to the standard options for 

vertical or horizontal risk retention, the 

sponsor of an open market CLO could 

avail itself of the lead arranger option 

only if, among other requirements: (1) 

The CLO did not hold or acquire any 

assets other than CLO-eligible loan 

tranches (discussed below) and 

servicing assets (as defined in the 

reproposed rule); (2) the CLO did not 

invest in ABS interests or credit 

derivatives (other than permitted hedges 

of interest rate or currency risk); and (3) 

all purchases of assets by the CLO 

issuing entity (directly or through a 

warehouse facility used to accumulate 

the loans prior to the issuance of the 

CLO’s liabilities) were made in open 

market transactions on an arm’s length 

basis. In addition, to be eligible for the 

option, the governing documents of the 

open market CLO would have to 

require, at all times, that the assets of 

the open market CLO consist only of 

CLO-eligible loan tranches and servicing 

assets. 

Under the reproposal’s lead arranger 

option, a term loan of a syndicated 

credit facility to a commercial borrower 

would have qualified as a CLO-eligible 

loan tranche if the firm serving as lead 

arranger for the term loan tranche were 

to retain at least 5 percent of the face 

amount of the term loan tranche. The 

lead arranger would have been required 

to retain this portion of the loan tranche 

until the repayment, maturity, 

involuntary and unscheduled 

acceleration, payment default, or 

bankruptcy default of the loan tranche. 

This requirement would have applied 

regardless of whether the loan tranche 

was purchased on the primary or 

secondary market, or was held at any 

particular time by an open market CLO, 

and was designed to allow meaningful 

risk retention to be held by a party that 

has significant control over the 

underwriting of assets that are typically 

securitized in CLOs, without causing 

significant disruption to the CLO 

market. 

In order to ensure that a lead arranger 

retaining risk had a meaningful level of 

influence on loan underwriting terms, 

the reproposal would have required that 

the lead arranger be identified in the 

legal documents governing the 

origination, participation or syndication 

of the syndicated loan or credit facility 

and that such documents include 

covenants by the lead arranger that it 

will fulfill the requirement to retain a 

minimum of 5 percent of the face 

amount of the CLO-eligible loan 

tranche. The lead arranger also would 

be required to take on an initial 

allocation of at least 20 percent of the 

face amount of the broader syndicated 

loan or credit facility, with no other 

member of the syndicate assuming a 

larger allocation or commitment. 

Additionally, a retaining lead arranger 

would have been required to comply 

with the same sales and hedging 

restrictions as sponsors of other 

securitizations until the repayment, 

maturity, involuntary and unscheduled 

acceleration, payment default, or 

bankruptcy default of the loan tranche. 

Voting rights within the broader 

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77652 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

157The Case for a Better Functioning 

Securitisation Market in the European Union, Bank 

of England and the European Central Bank (May 

2014), available at https://www.ecb.europa.eu/pub/ 

pdf/other/ecb-boe_case_better_functioning_

securitisation_marketen.pdf. 

158The agencies note that Articles 404–410 of the 

EU Capital Requirements Regulation significantly 

amended Article 122a of the European Union’s 

Capital Markets Directive with respect to the use of 

third parties to retain risk. 

syndicated loan or credit facility would 

also have to be defined in such a way 

that holders of the ‘‘CLO-eligible’’ loan 

tranche had, at a minimum, consent 

rights with respect to any material 

waivers and amendments of the legal 

documents governing the underlying 

CLO-eligible loan tranche. Additionally, 

the pro rata provisions, voting 

provisions, and security associated with 

the CLO-eligible loan tranche could not 

be materially less advantageous to the 

holders of that tranche than the terms of 

other tranches of comparable seniority 

in the broader syndicated credit facility. 

Under the reproposal’s lead arranger 

option for open market CLOs, the 

sponsor would have been required to 

disclose a complete list of every asset 

held by an open market CLO (or before 

the CLO’s closing, in a warehouse 

facility in anticipation of transfer into 

the CLO at closing). This list would 

have been required to include the 

following information: (i) The full legal 

name and Standard Industrial 

Classification category code of the 

obligor of the loan or asset; (ii) the full 

name of the specific CLO-eligible loan 

tranche held by the CLO; (iii) the face 

amount of the CLO-eligible loan tranche 

held by the CLO; (iv) the price at which 

the CLO-eligible loan tranche was 

acquired by the CLO; and (v) for each 

loan tranche, the full legal name of the 

lead arranger subject to the sales and 

hedging restrictions. Second, the 

sponsor would have been required to 

disclose the full legal name and form of 

organization of the CLO manager. This 

information would have been required 

to be disclosed a reasonable period of 

time prior to the sale of the asset-backed 

securities in the securitization 

transaction (and at least annually with 

respect to information regarding the 

assets held by the CLO) and, upon 

request, to the Commission and the 

sponsor’s appropriate Federal banking 

agency, if any. Further, the lead arranger 

and CLO manager would be required to 

certify or represent as to the adequacy 

of the collateral and the attributes of the 

borrowers of the senior, secured 

syndicated loans acquired by the CLO 

and certain other matters. 

c. Overview of Public Comments 

The agencies received many 

comments asserting that the proposed 

options for open market CLOs would be 

unworkable under existing CLO 

practices and would lead to a significant 

reduction in CLO offerings and a 

corresponding reduction in credit to 

commercial borrowers. These 

commenters asserted that the likelihood 

of a significant number of lead arrangers 

retaining 5 percent risk retention (in any 

of the forms permitted by the rule) 

would be remote and only the largest 

CLO managers would be able to finance 

the proposed risk retention requirement 

through the standard risk retention 

option. While larger managers might 

have sufficient financing, several 

commented that the risk retention 

requirements would make the 

management of CLOs less profitable and 

might cause many managers to decrease 

their activity in the market. One 

commenter highlighted a recently 

issued paper by the Bank of England 

and the European Central Bank to 

suggest that risk retention rules in 

Europe that apply to CLO managers 

have contributed to a reduction in 

European CLO issuance.157 Several 

commenters asserted that if the risk 

retention requirement causes a 

reduction in participation by open 

market CLOs in the leveraged loan 

market, some of the resulting reduced 

credit availability would be replaced by 

non-CLO credit providers, but cost of 

capital and instability in the market 

would increase. 

Some commenters expressed specific 

concerns about the proposed lead 

arranger option. These commenters 

stated that having lead arrangers hold a 

portion of the loan would increase the 

costs of arranging loans, thus restricting 

the availability of credit to borrowers or 

increasing the cost of credit to 

borrowers. In addition, commenters 

expressed concern that few loans would 

satisfy the definition of ‘‘CLO-eligible 

loan tranche.’’ Furthermore, they 

asserted that the additional voting rights 

required by the reproposal would be 

administratively unworkable and 

commercially unacceptable. Several 

commenters also raised concerns that 

the proposed option would expose the 

arranger to potential liability and 

litigation risks that arrangers should not 

be expected, and would not be willing, 

to assume. Commenters raised 

particular concern about the 

requirement that a lead arranger 

represent that the loans and collateral 

meet specified criteria. They asserted 

that such a representation would require 

the lead arranger to make subjective and 

difficult determinations regarding the 

adequacy of collateral, and the 

sufficiency of the security interest in the 

collateral and certain other matters, and 

could expose the lead arranger to 

potential liability. 

Another concern raised by several 

commenters was that the proposed lead 

arranger option would prevent prudent 

risk management practices and thus 

invite criticism from lead arrangers’ 

bank regulators because the hedging 

restriction would prohibit arrangers 

from actively managing the risks and 

disposing of loan assets in response to 

market conditions, and would limit lead 

arrangers’ capacities to provide other 

forms of credit to borrowers. Further, 

commenters stated that use of the option 

would increase the capital and FDIC 

assessment charges for lead arranger 

banks and cause corresponding 

increases in the pricing of CLO-eligible 

tranches. In addition, some commenters 

raised concerns that the proposed 

option’s creation of both CLO-eligible 

loans and non-eligible loans with 

otherwise comparable characteristics 

would distort and restrict the initial 

syndication process and the secondary 

loan market, as the secondary loan 

market would place a premium on CLOeligible loans and liquidity related to 

non-eligible loans would be reduced. 

Relative to a ‘‘normal’’ market, both 

types of loans would be less liquid 

because they would each reflect a 

smaller, divided market. 

As discussed in Part B.1 of this 

Supplementary Information, a number 

of commenters expressed concern that 

the proposed restriction on cash flow 

distributions to eligible horizontal 

residual interests would make the 

eligible horizontal residual interest an 

unworkable option for CLOs. They 

suggested that the cash flow distribution 

restriction would significantly reduce 

returns to equity investors, making 

CLOs unattractive investments and 

cause dramatically reduced CLO 

issuances. Further, a few commenters 

supported a phase-in period while 

markets adjust to the final rule or a 

grandfathering for certain legacy CLOs. 

Two commenters also recommended 

that the risk retention rules follow the 

European risk retention rules with 

respect to CLOs.158 One such 

commenter expressed concerns that 

inconsistent regulations would cause 

bifurcation of the CLO market and 

substantially reduce market liquidity. 

Further, a few commenters asserted that 

the costs of imposing risk retention on 

CLO managers exceeds the benefits and 

that the agencies have not performed an 

adequate economic analysis in 

connection with the CLO option. 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77653 

159See Leveraged Lending Guidance. 

160See 15 U.S.C. 78c(a)(79). 

161Furthermore, CDOs are specifically mentioned 

as examples both in the definition of ‘‘asset-backed 

security’’ and elsewhere in section 941 of the DoddFrank Act. See 15 U.S.C. 78c(a)(79)(A)(ii) and 78o– 

11(c)(1)(F). As discussed above, CLOs are a type of 

CDO and CLOs and CDOs have the same general 

structure. 

162The definition of ‘‘sponsor’’ is discussed in 

Part II of this Supplementary Information. 

Some commenters continued to assert 

that open market CLO managers are not 

‘‘securitizers’’ and are, therefore, not 

subject to section 15G. These 

commenters asserted that under the 

plain language of the statute, CLO 

managers cannot ‘‘sell’’ or ‘‘transfer’’ the 

assets securitized through the CLO 

because they do not own, possess, or 

control the assets. Additionally, 

commenters asserted that the CLO 

manager acts as an agent to the CLO 

issuing entity in directing the purchase 

of assets, so it could not sell or transfer 

the assets to a third party to meet the 

definition, because it would be 

equivalent to selling or transferring the 

assets to itself. They asserted that the 

use of ‘‘indirectly’’ in the definition of 

securitizer was intended to prevent the 

party that originates a loan from 

avoiding risk retention obligations by 

passing the loan through an associated 

intermediary that organized and 

initiated the securitization. 

The commenters also asserted that the 

interpretation is not supported by the 

legislative history or statutory purpose 

of the Dodd-Frank Act. They suggested 

that Congress primarily intended to 

address problems with the originate-todistribute model and transparency 

issues in securitization transactions, but 

open market CLOs differ from the 

originate-to-distribute model and are 

more transparent than the products 

Congress sought to regulate. The 

commenters stated that in the originateto-distribute model originators receive 

significant up-front fees for originating 

loans, which they transfer into 

securitization pools to promote the 

business of creating additional loans. 

They asserted that CLOs differ from this 

model because the primary purpose of 

CLOs is to provide investors with the 

ability to gain exposure to commercial 

loans on a diversified basis, not to 

finance the creation of financial assets. 

They also asserted that, unlike 

originators in the originate-to-distribute 

model, who receive their compensation 

by originating and transferring the assets 

to securitization pools, the bulk of CLO 

managers’ compensation is based on 

performance of the securitized assets in 

the CLO. Regarding the transparency 

issues that Congress sought to address, 

the commenters suggested that the 

primary concern of Congress was to 

apply risk retention to highly opaque 

and complex products like resecuritizations of asset-backed 

securities. These commenters asserted 

that CLOs are more transparent than 

such products because they contain 

fewer, larger, loans and the obligors of 

such loans are typically known 

corporations on which investors can 

perform extensive due diligence, and 

the loans are traded in a liquid market 

that assesses risks and underwriting 

quality. 

In addition to the above comments, 

some commenters requested alternative 

options for meeting risk retention or that 

the agencies provide an exemption from 

risk retention for managers of open 

market CLOs where certain criteria 

would be met because of the nature and 

characteristics of open market CLOs. In 

this regard, commenters asserted that 

open market CLOs operate 

independently of originators and are not 

part of, and do not pose the same risks 

as, the originate-to-distribute model. 

They also suggested that CLO managers’ 

interests are fully aligned with CLO 

investors’ interests because CLO 

managers bear significant risk through 

their deferred, contingent compensation 

structure, which they asserted is based 

heavily on performance of the 

securitized assets. Further, commenters 

stated that most CLO managers are 

registered investment advisors with 

associated fiduciary duties to their 

investors. One commenter also referred 

to other regulations and guidance, 

asserting that they already provide 

meaningful protections against 

imprudent or inferior underwriting, 

including the leveraged lending 

guidance released by the Federal 

banking agencies in 2013.159 Several 

commenters also supported their 

arguments by indicating that the assets 

selected by CLO managers are evaluated 

through multiple layers of underwriting 

and market decisions and CLO loan 

portfolios are actively managed for 

much of the life of a CLO. Commenters 

further asserted that CLO managers 

select senior secured commercial loans 

with investor protection features. Some 

commenters asserted that, unlike many 

other securitizations, CLOs are 

securitizations of liquid assets and they 

are structurally transparent. They also 

stated that CLOs have historically 

performed well and that this strong 

performance is evidence that further 

regulation is unnecessary and that 

customary features of CLOs, including 

overcollateralization and interests 

coverage tests, protect investors. The 

alternative options and exemption 

requests are discussed in further detail 

below. 

d. Response to Comments 

i. Definition of ‘‘Securitizer’’ and 

Legislative History of Section 15G 

The agencies have considered the 

concerns raised by commenters with 

respect to the reproposal, including 

with respect to open market CLOs. As 

discussed above, commenters asserted 

that CLO managers could not be 

‘‘securitizers’’ within the definition 

thereof in section 15G of the Exchange 

Act, including the contention that they 

do not legally own, possess, or control 

the assets. 

As explained in the reproposal, the 

agencies believe that CLO managers are 

clearly included within the statutory 

definition of ‘‘securitizer’’ set forth in 

section 15G of the Exchange Act. 

Subpart (a)(3)(B) of section 15G begins 

the definition of a ‘‘securitizer’’ by 

describing a securitizer as a ‘‘person 

who organizes and initiates an assetbacked securities transaction.’’ CLOs 

clearly meet the definition of ‘‘assetbacked security’’ set forth in section 3 

of the Exchange Act, which defines 

‘‘asset-backed security’’ as ‘‘a fixed 

income or other security collateralized 

by any type of self-liquidating financial 

asset (including a loan, a lease, a 

mortgage, or a secured or unsecured 

receivable) that allows the holder of the 

security to receive payments that 

depend primarily on the cash flow from 

the asset.’’ 160 As discussed above, a 

CLO is a fixed income or other security 

that is typically collateralized by 

portions of tranches of senior, secured 

commercial loans or similar obligations. 

The holder of a CLO is dependent upon 

the cash flow from the assets 

collateralizing the CLO in order to 

receive payments. Accordingly, a CLO is 

an asset-backed securities transaction 

for purposes of the risk retention 

rules.161

A CLO manager typically negotiates 

the primary deal terms of the 

transaction and the primary rights of the 

issuing entity and uniformly directs 

such entity to acquire the commercial 

loans that comprise its collateral pool. 

Under the plain language of the statute, 

therefore, a CLO manager organizes and 

initiates an asset-backed securities 

transaction.162

The definition continues that the 

organizer and initiator of a CLO does so 

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77654 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

163See, e.g., Babbitt v. Sweet Home Chapter of 

Communities for a Great Or., 515 U.S. 687, 697–98 

(1995) (rejecting the argument that the word 

‘‘harm,’’ defined ‘‘to cause hurt or damage to: 

injure,’’ should be read so narrowly as to require 

a showing of direct injury to something). 

164 Merriam-Webster’s Collegiate Dictionary 1253 

(10th ed. 1995); See also Random House Webster’s 

College Dictionary 1366 (2nd ed. 1997); The New 

Oxford American Dictionary 1797 (Elizabeth J. 

Jewell & Frank Abate eds., 2001). 

165Cf. Hibbs v. Winn, 542 U.S. 88, 101 (2004) 

(stating that it is one of the most basic interpretive 

canons, that ‘‘ ‘[a] statute should be construed so 

that effect is given to all its provisions, so that no 

part will be inoperative or superfluous, void or 

insignificant. . . .’ ’’) (quoting 2A N. Singer, 

Statutes and Statutory Construction § 46.06, 

pp.181–186 (rev. 6th ed. 2000)). 

166See Samantar v. Yousuf, 560 U.S. 305, 316– 

17 (2010). While Congress referred to transferring 

through affiliates as an example of indirect transfer, 

it did not preclude other forms of indirect transfer 

in the definition of ‘‘securitizer,’’ nor did it 

specifically limit the definition to parties in the 

chain of title. 

167See 15 U.S.C. 78o–11(b)(1) (‘‘[T]he Federal 

banking agencies and the Commission shall jointly 

prescribe regulations to require any securitizer to 

retain an economic interest in a portion of the credit 

risk for any asset that the securitizer, through the 

issuance of an asset-backed security, transfers, sells, 

or conveys to a third party.’’). 

168See 15 U.S.C. 78o–11(c)(1)(G)(i) and 15 U.S.C. 

78o–11(e). 

‘‘by selling or transferring assets, either 

directly or indirectly, including through 

an affiliate, to the issuer.’’ A CLO 

manager indirectly transfers the assets 

to the CLO issuing entity because the 

CLO manager has sole authority to 

select the commercial loans to be 

purchased by the CLO issuing entity for 

inclusion in the CLO collateral pool, 

directs the issuing entity to purchase 

such assets in accordance with 

investment guidelines, and manages the 

securitized assets once deposited in the 

CLO structure. Most importantly, an 

asset is not transferred to the CLO 

issuing entity unless the CLO manager 

has selected the asset for inclusion in 

the CLO collateral pool and instructed 

the CLO issuing entity to acquire it. 

Although some commenters have 

narrowly interpreted the term 

‘‘transferring’’ to specifically require 

legal ownership or possession of the 

object being transferred, the agencies 

observe that the plain meaning of 

‘‘transfer’’ does not first require 

ownership or possession and otherwise 

is not as narrow as these commenters 

assert.163 ‘‘Transfer’’ is commonly 

defined as ‘‘to cause to pass from one to 

another,’’ which is precisely what the 

CLO manager does.164 The CLO 

manager causes assets to be passed from 

the seller to the issuing entity because 

the CLO manager selects the assets for 

the collateral pool and directs the 

issuing entity to purchase such assets. 

Therefore, the CLO manager ‘‘transfers’’ 

the assets according to a commonly 

accepted definition of the word. There 

is no indication in the statute that 

Congress intended to interpret the word 

‘‘transfer’’ as narrowly as commenters 

have advocated. If Congress had desired 

such an interpretation that would be 

narrower than how the term is 

commonly defined, the agencies believe 

that additional limiting language would 

have been included in the statute. CLO 

managers, therefore, fall clearly within 

the statutory definition of ‘‘securitizer’’ 

as set forth in Exchange Act section 

15G. 

Even if there were ambiguity as to 

whether CLO managers are covered by 

the definition of ‘‘securitizer,’’ the 

agencies believe that the interpretation 

of ‘‘securitizer’’ to include CLO 

managers is reasonable. In addition to 

being consistent with commonly used 

definitions of ‘‘transfer,’’ as discussed 

above, the interpretation is consistent 

with the context, purposes and 

legislative history of the statute. Further, 

the alternative interpretation argued by 

commenters would lead to results that 

would be contrary to the purposes of 

section 941 and Congressional intent. 

The text surrounding the word 

‘‘transfer’’ supports the agencies’ 

interpretation of the word. To read 

‘‘transfer’’ narrowly to require 

ownership or possession would make 

the preceding word ‘‘sell’’ superfluous 

because the act of selling necessarily 

involves the legal transfer of the 

asset.165 In addition, the agencies do not 

believe that the phrase ‘‘including 

through an affiliate’’ bolsters the 

commenters’ claim that ‘‘transfer’’ was 

intended to be interpreted in this 

limited manner because the use of the 

word ‘‘include’’ in a statute can signal 

that what follows is meant to be 

illustrative rather than exclusive.166 As 

stated earlier, the agencies believe that 

a CLO manager generally acts as the 

sponsor by selecting the commercial 

loans to be purchased by the CLO 

issuing entity and managing the 

securitized assets once deposited in the 

CLO structure, which the agencies 

believe is a transfer or indirect transfer 

of the assets. 

The agencies also disagree with the 

commenters’ assertion that the CLO 

manager does not transfer or sell assets 

because, as an agent of the CLO, it is on 

the same side of the transaction as the 

purchaser (the special purpose issuing 

entity). Under the same reasoning, one 

could claim that an originator of assets 

that creates a special purpose vehicle to 

issue asset-backed securities and 

transfers assets to that special purpose 

vehicle could never be a securitizer, 

because the originator also essentially 

would be transferring the assets to itself. 

If that were the case, then many types 

of securitizations would not have an 

entity that would be subject to risk 

retention. 

Moreover, the agencies disagree with 

commenters’ assertions that Congress 

intended section 15G to apply primarily 

to securitizations within the originateto-distribute model. Congress did not 

specify that the requirements of the 

statute apply only to certain types of 

securitization models or structures. 

Indeed, section 15G specifies that risk 

retention applies to all securitizers,167

unless they have a specific exemption 

under the statute or the agencies 

provide a specific exemption in 

accordance with criteria set forth in the 

statutory text.168 Congress did not 

specifically exclude securitizations that 

are not part of an originate-to-distribute 

model—or any other particular market 

model or structure of securitization— 

from risk retention. Although the 

legislative history indicates that 

Congress was concerned about 

securitizations within the originate-todistribute model, nowhere in the text or 

legislative history did Congress indicate 

that it intended for risk retention not to 

apply to transactions that some may 

assert are not ‘‘originate-to-distribute’’ 

securitizations. 

Furthermore, the leveraged loan 

market shares characteristics with the 

‘‘originate-to-distribute’’ model that led 

to the deterioration in underwriting 

standards that were a major factor in the 

recent financial crisis. Originators of 

leveraged loans often retain little or no 

interest in the assets they originate, and 

originate and underwrite with the 

intention of distributing the entire loan. 

In this regard, leveraged loans 

purchased by CLOs are often originated 

as a fee-generating, rather than a lending 

business, and originators do not have 

the same incentive to underwrite 

carefully as they would for loans they 

intend to keep in portfolio. These 

characteristics of the leveraged loan 

market pose potential systemic risks 

similar to those observed in the 

residential mortgage market during the 

crisis, whether the loans are placed with 

CLOs or other types of institutional 

investors. 

Additionally, there is no evidence to 

support the notion that Congress 

expected ‘‘securitizer’’ to be read 

narrowly so that risk retention 

requirements would apply only to 

sponsors of securitizations which have 

a specific type of structure or only to 

sponsors that fulfill a narrow and 

specific structural role in a 

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169As discussed, Congress clearly expected this 

rule to apply to sponsors of CDOs, but the 

commenters’ claims, if credited, would also exclude 

sponsors of CDOs from the requirements of risk 

retention. 

170Similar to the agencies interpretation of 

‘‘securitizer’’ to include CLO managers, the 

definitions of ‘‘issuer’’ in both the Securities 

Exchange Act of 1934 and Securities Act of 1933 

include, with respect to certain kinds of vehicles, 

‘‘the person or persons performing the acts and 

assuming the duties of depositor or manager 

pursuant to the provisions of the trust or other 

agreement or instrument under which the securities 

are issued.’’ 

171S. Rep. No. 111–176, at 128. 

172 Id. 

173 Id. at 129 (‘‘When securitizers retain . . . risk, 

they have ‘skin in the game,’ aligning their 

economic interests with those of investors. . . . 

Securitizers who retain risk have a strong incentive 

to monitor the quality of the assets they purchase 

from originators, package into securities, and sell. 

. . . Originators . . . will come under increasing 

market discipline because securitizers who retain 

risk will be unwilling to purchase poor-quality 

assets.’’). 

174Furthermore, the agencies believe that this 

applies to other issuances of asset-backed securities 

in which the securitized assets are selected by a 

manager and no other transaction party meets the 

definition of ‘‘sponsor.’’ See Parts III.B.4 and III.B.8 

of this Supplementary Information. 

175 15 U.S.C. 80b–3(b). 

176 15 U.S.C. 80a–3(c)(7). 

177 17 CFR 275.206(3)–2. 

securitization transaction. Furthermore, 

the agencies believe that the narrow 

reading of ‘‘securitizer’’ supported by 

commenters could lead to results that 

would appear contrary to Congressional 

intent by opening the statute to easy 

evasion. Under such an interpretation, it 

would be feasible for many sponsors to 

evade risk retention by hiring a thirdparty manager to ‘‘select’’ assets for 

purchase by the issuing entity that have 

been pre-approved by the sponsor. This 

could result in a situation in which no 

party to a securitization can be found to 

be a ‘‘securitizer’’ because the party that 

organizes the transaction and has the 

most influence over the quality of the 

securitized assets could avoid legally 

owning or possessing the assets.169

Interpreting the term ‘‘securitizer’’ to 

produce such an easily evaded rule 

would be an unreasonable result that 

cannot comport with the intent of 

Congress in enacting section 15G of the 

Exchange Act. 

With respect to the issuance of assetbacked securities, there is always a 

sponsor responsible for the organization 

and initiation of the issuance of assetbacked securities.170 The issuing entity 

for a CLO transaction is a special 

purpose vehicle formed by some other 

party solely for the express purpose of 

issuing asset-backed securities. 

However, some person or other entity— 

namely, the sponsor—‘‘organized and 

initiated’’ this special purpose vehicle 

with the intent that this special purpose 

vehicle would issue asset-backed 

securities. The agencies do not believe 

that the special purpose vehicle formed 

to issue asset-backed securities in a CLO 

transaction does so independent of the 

actions of a sponsor. The agencies also 

note that the commenters did not 

identify another party to an open market 

CLO transaction other than the CLO 

manager that should be considered the 

sponsor. 

As indicated in the legislative history 

of the Dodd-Frank Act, the broad 

purpose of the statute was to ‘‘create 

incentives that will prevent a recurrence 

of the excesses and abuses that preceded 

the crisis, restore investor confidence in 

asset-backed finance, and permit 

securitization markets to resume their 

important role as sources of credit for 

households and businesses.’’ 171 In 

drafting section 941, Congress 

recognized that it would be impractical 

for many investors to adequately assess 

and monitor the risks of assets 

underlying complex securitization 

products.172 As a result, Congress 

sought to encourage monitoring and 

assessment of such assets by the parties 

better suited to do so, namely those who 

organize and initiate the 

securitizations.173 Like other 

securitization sponsors, a CLO manager 

is the party best positioned to 

adequately monitor and assess the risk 

of the securitized assets. For the reasons 

discussed above, the agencies continue 

to find that a CLO manager is a 

‘‘securitizer’’ under section 15G of the 

Exchange Act.174

ii. Exemption Requests and Alternative 

Proposals 

Many commenters suggested that the 

risk retention rules should not be 

applied to open market CLOs because, 

as described above, they believe the 

structural and other characteristics of 

open market CLOs make risk retention 

unnecessary. Among the primary 

characteristics highlighted to justify an 

exemption, commenters asserted that 

CLO managers’ subordinated 

compensation structure aligns their 

interests with those of investors, CLOs 

differ from the originate-to-distribute 

model, and the underwriting of CLOs’ 

assets is subject to multiple levels of 

scrutiny. As an alternative to an 

exemption based solely on such 

characteristics, several commenters 

supported exemptions for open market 

CLOs meeting certain qualifications. 

One commenter proposed an exemption 

from risk retention for open market 

CLOs that met the following conditions: 

(i) The asset manager must be a 

registered investment adviser under the 

Investment Advisers Act of 1940;175 (ii) 

all U.S. investors must be qualified 

purchasers or knowledgeable 

employees, consistent with reliance on 

the section 3(c)(7) exemption from 

investment company status under the 

Investment Company Act; 176 (iii) the 

pool of assets are permitted and 

expected to be traded by the asset 

manager on behalf of the issuer in 

accordance with contractually agreed 

restrictions; (iv) the asset management 

agreement establishes a standard of care 

that requires the asset manager to 

employ a degree of skill and care no less 

than it uses for its own investments and 

consistent with industry standards for 

asset managers that are acting on behalf 

of comparable clients; and (v) the 

investment adviser effects agency cross 

trades on behalf of its advisory client 

only in accordance with section 

275.206(3)–2 of the Commission’s rules 

under the Investment Advisers Act.177

The agencies also received several 

comments in continued support of an 

option that was suggested with respect 

to the original proposal that the agencies 

did not include in the revised proposal. 

This suggestion would allow an open 

market CLO manager to satisfy its risk 

retention requirement by holding a 

combination of notes issued by the CLO, 

modeled to reflect the risks assumed by 

CLO managers through their 

subordinated compensation structure, 

and equity securities issued by the CLO 

and purchased by the CLO manager. 

Several commenters supported an 

option that would expand the above 

proposal by allowing managers of 

‘‘Qualified CLOs’’ to satisfy the risk 

retention requirement by purchasing 5 

percent of the CLO’s equity and 

maintaining a subordinated 

compensation structure. Commenters 

proposed that, in order to be deemed a 

Qualified CLO, the CLO’s governing 

transaction documents would have to 

include specific requirements in the 

following areas: Asset quality; portfolio 

composition; structural features; 

alignment of the interests of the CLO 

manager and investors in the CLO’s 

securities; regulatory oversight; and 

transparency and disclosure. 

Commenters suggested requirements 

under each of these categories that they 

asserted would ensure high quality 

underwriting and investor protection. 

They also suggested that this proposal 

should be adopted along with the thirdparty option and pro rata risk retention 

reduction proposals described below, as 

they do not feel that the option alone 

would sufficiently address the projected 

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178One commenter suggested that the Qualified 

CLO proposal could also be exempted based on the 

agencies’ authority under section 15G(c)(1)(G)(i). 

179 15 U.S.C. 78o–11(e)(2). 

180For similar reasons, the agencies do not 

believe an exemption would be appropriate under 

section 15G(c)(1)(G)(i). 

181 In this context, leverage ratio refers to the 

borrower’s total debt divided by earnings before 

interest, taxes, depreciation and amortization 

(EBITDA). 

effects that the rule will have on open 

market CLOs. 

Several commenters suggested that 

the agencies could adopt the 

commenters’ exemption proposals 

under the agencies’ exemptive authority 

provided by section 15G(e).178

Alternatively, commenters supporting 

the Qualified CLO proposal suggested 

the proposal could be adopted as a 

construction of the statutory 

requirement that a securitizer retain not 

less than 5 percent of the ‘‘credit risk’’ 

of any asset. In this regard, the 

commenters asserted that by acquiring 5 

percent of the equity interest in the 

CLO, and by bearing the subordinated 

risk of non-payment embedded in the 

compensation structure demanded by 

investors, the CLO manager would be 

retaining far more than 5 percent of the 

credit risk associated with the CLO’s 

assets. As support for this suggestion, 

the commenters cited research 

concluding that the majority of likely 

losses for a typical CLO are borne by the 

bottom 20 percent of the CLO capital 

structure. 

The agencies do not believe that it 

would be appropriate to exempt open 

market CLOs from the risk retention 

requirement under section 15G(e). The 

statute permits the agencies to adopt or 

issue exemptions, if the exemption 

would: (A) help ensure high quality 

underwriting standards for the 

securitizers and originators of assets that 

are securitized or available for 

securitization; and (B) encourage 

appropriate risk management practices 

by the securitizers and originators of 

assets, improve the access of consumers 

and businesses to credit on reasonable 

terms, or otherwise be in the public 

interest and for the protection of 

investors.179 While the agencies 

recognize that certain structural features 

of CLOs contribute to aligning the 

interests of CLO managers with 

investors, the agencies do not believe 

these structural features would support 

a finding that the exemption would help 

ensure high quality underwriting 

standards and there are reasons why 

such an exemption may run counter to 

the public interest and protection of 

investors.180

As discussed above, many of the 

structural features that commenters 

cited as mitigating risk factors for CLOs 

were shared by other types of CDOs, 

such as CDOs of asset-backed securities, 

that performed poorly during the 

financial crisis. Although the structural 

features can offer protection to investors 

in senior tranches, such protections are 

exhausted when a portfolio’s default 

rate significantly exceeds anticipated 

losses, as was the case for CDOs of assetbacked securities during the financial 

crisis. In such a situation, the manager 

may be incented to engage in even more 

risky behavior to maintain cash flow 

and ensure the payment of its 

subordinated compensation. Although 

CLOs performed better than other CDOs 

during the financial crisis, the better 

performance of leveraged loans after the 

financial crisis in CLO portfolios could 

be partially attributed to lowered 

interest rates and other government 

interventions. Some commenters 

claimed that CLOs are composed of 

higher quality assets that undergo 

significant underwriting scrutiny and 

that include investor protection 

features, but the significant recent credit 

deterioration in the leveraged loan 

market, as described above, 

demonstrates increasing risks in the 

types of assets held by CLOs. The 

agencies also note that while the final 

rule does not include an exemption for 

open market CLOs, the removal of the 

proposed restriction on cash flow 

distributions to the eligible horizontal 

residual interest, as described in Part 

B.1 of this Supplementary Information, 

will provide greater flexibility for CLO 

managers to satisfy the standard risk 

retention option, which may reduce the 

cost of the standard risk retention 

option. 

The agencies recognize that 

management fees incorporate credit risk 

sensitivity and may contribute to some 

degree to aligning the interests of the 

CLO manager and investors with respect 

to the quality of the securitized loans. 

On the other hand, as discussed above, 

this subordinated compensation 

structure could also lead to a 

misalignment of interests between the 

CLO manager and investors in certain 

circumstances. Moreover, as discussed 

in the reproposal, these fees do not 

appear to provide an adequate substitute 

for risk retention because they typically 

have small expected value, especially 

given that CLOs securitize leveraged 

loans, which carry higher risk than 

many other securitized assets. Even 

combining the expected value of the 

manager’s compensation with a 5 

percent interest in the equity of the CLO 

would be inadequate because, as 

described by a commenter, such an 

equity interest would also likely amount 

to under one percent of the fair value of 

the ABS interests issued to third parties 

(which is less than the 5 percent 

required for an eligible horizontal 

residual interest). Further, management 

fees are not funded in cash at closing 

and therefore may not be available to 

absorb losses as expected. Generally, the 

agencies have declined to recognize 

such unfunded forms of risk retention 

and the agencies are not persuaded that 

an exception should be made for open 

market CLOs. 

Some commenters supported an 

alternative approach that would reduce 

the risk retention requirement for open 

market CLOs, on a pro rata basis, to the 

extent that the commercial loans 

backing the issued CLO securities met 

certain underwriting criteria. In order to 

qualify for reduced risk retention, the 

commercial loans would have to be 

senior secured first lien loans that either 

(i) have a ratio of first lien debt to total 

capitalization of less than or equal to 50 

percent; or (ii) have a total leverage ratio 

of less than or equal to 4.5 times.181

Further, this approach would reduce the 

risk retention requirement to the extent 

that the CLO holds a subset of loans 

requiring certain specialized treatment. 

This approach would require 

determination of whether a loan 

qualifies for reduced risk retention 

treatment to be made at the time of 

origination. Further, this approach 

provided that loans originated before 

the applicable effective date of the rule 

should not require risk retention when 

securitized after such date. 

The agencies are not persuaded that 

the risk retention requirement should be 

reduced to the extent commercial loans 

backing the issued CLO securities meet 

the criteria proposed by the 

commenters. As discussed in Part V.A 

of this Supplementary Information, the 

final rule already provides exemptions 

from the risk retention requirement for 

qualifying commercial loans that meet 

specific underwriting standards. The 

agencies developed these standards to 

be reflective of very high quality loans. 

The commenters’ approach relies on 

significantly weaker standards, and the 

agencies do not believe that these 

criteria, which would permit 

securitization with no risk retention for 

loans to borrowers who are of lower 

credit quality or that do not have a 

third-party evaluation of the likelihood 

of timely payment of interest and 

repayment of principal, would satisfy 

the statutory requirements for an 

exception to help ensure high quality 

underwriting standards. 

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182The risk retention approaches for CLOs 

suggested by commenters also reflect standard 

market practices for certain other types of CDOs 

(e.g., CDOs of asset-backed securities) that 

performed poorly during the financial crisis in 

which key investors negotiated asset selection 

criteria and reinvestment criteria and changes to 

those criteria required investor consent. 

183See, e.g., Monetary Policy Report, at 1–2, 22; 

Semiannual Risk Perspective: Spring 2014, at 5. 

The agencies also disagree with the 

proposition that, in the context of CLOs, 

loans originated before the applicable 

effective date of the rule should not be 

subject to risk retention. Section 15G of 

the Exchange Act applies to any 

issuance of asset-backed securities after 

the applicable effective date of the rule, 

regardless of the date the assets in the 

securitization were originated. The 

agencies note, however, that 

securitizations of loans meeting the 

seasoned loan exemption in section 

19(b)(7) of the rule would not be subject 

to risk retention requirements. 

The agencies also received a number 

of comments in support of approaches 

to allow a third party, rather than the 

CLO manager, to retain some or all of 

the required credit risk in certain 

circumstances. To be eligible under 

these approaches, the third party would 

be required to have a role in setting the 

selection criteria for the assets held by 

a CLO and the power to veto any change 

to asset selection criteria. Specifically, 

the commenters’ proposal would 

require: (i) Prior to the CLO’s 

acquisition of the initial CLO assets, the 

third party to review and assent to key 

transaction portfolio terms, including 

the asset eligibility criteria, 

concentration limits, collateral quality 

tests, and reinvestment criteria of the 

CLO’s asset pool; and (ii) any material 

change to the above parameters to 

receive prior written consent by the 

third party retaining the CLO credit risk. 

Further, to enable the third party 

retaining credit risk to evaluate, before 

the CLO closes, whether the CLO 

manager is able to meet the asset 

selection criteria, the commenters 

proposed that at least 50 percent of the 

initial asset pool would have to be 

acquired (or be under a commitment to 

be acquired) by the closing date. One of 

the approaches would also require that 

the CLO manager be a registered 

investment adviser and would permit 

multiple parties to jointly satisfy the 

CLO’s risk retention requirement. 

Another commenter proposed a 

different third-party retention option, 

under which a sponsor’s risk retention 

requirement would be satisfied if one or 

more third parties agreed to hold the 

required minimum risk retention. The 

commenter’s suggested option would 

only apply to CLOs that are 

securitizations of corporate debt and 

servicing assets; inclusion of other ABS 

interests would be prohibited. The third 

party or a party appointed by the third 

party would be required to perform an 

independent review of the credit risk of 

each securitized asset. Further, the 

proposal would require the CLO 

manager to provide information to 

investors about the investment 

experience of each third-party 

purchaser. 

While the agencies considered the 

third-party retention proposals 

carefully, they have concluded that the 

proposals would not provide an 

appropriate method of risk retention. 

The proposed third-party retention 

options would result in retention of the 

credit risk by a third party that would 

have less control over the CLO portfolio 

than the CLO manager. These 

alternatives would result in weaker 

means of influencing the underwriting 

quality in CLO portfolios and are 

therefore inadequate substitutes for risk 

retention. 

While, as discussed in Part III.B.5 of 

this Supplementary Information, the 

final rule allows third-party purchasers 

to retain credit risk in CMBS 

transactions, CLO and CMBS 

transactions vary in several significant 

ways that make such an option more 

challenging in the CLO context. For 

example, differences between CMBS 

and CLO transactions would make it 

more challenging for third-party 

investors to perform thorough 

independent reviews of loans in CLO 

portfolios, including the dynamic nature 

of CLO portfolios and the larger number 

of loans in typical CLO portfolios. In 

CMBS transactions, the loan pool is 

chosen and is static before issuance, 

which permits loan-level due diligence 

by the third-party investor. In CLOs, the 

loan pool is typically not complete 

before issuance, and the pool is 

dynamic, limiting the ability of a thirdparty investor to conduct loan-level due 

diligence before issuance. Under 

proposals submitted by commenters, the 

third-party purchaser would be limited 

to evaluating investment criteria for the 

CLO and would not conduct loan-level 

due diligence. In this regard, the thirdparty purchaser would not be 

conducting loan-level re-underwriting, 

and consequently is not a reasonable 

substitute for the original effort of the 

sponsor in underwriting the loan pool. 

Furthermore, the third-party retention 

proposals would provide the third-party 

purchaser with minimal power or 

influence over the composition or 

quality of the CLO’s collateral pool after 

closing. In contrast to CMBS 

transactions that generally give the 

third-party purchaser the right to reject 

loans from the pool, no similar authority 

would be granted to CLO third-party 

purchasers under commenters’ 

proposals. 

Given the weakening of underwriting 

and increase in risk in the leveraged 

loan market, the agencies do not believe 

that existing market practice is 

sufficiently robust to substitute for risk 

retention. Furthermore, the agencies do 

not believe the alternative approaches 

suggested by commenters would 

significantly add protection to investors, 

as investors in CLOs would presumably 

already have the opportunity to review 

and assent to key portfolio transaction 

terms.182 For these reasons, the agencies 

have decided against adopting the thirdparty risk retention option. While the 

agencies considered whether further 

parameters around a third-party risk 

retention option for CLO sponsors 

would be appropriate, the agencies were 

not able to identify parameters that 

would function well for CLOs or that 

would further the regulatory purposes of 

the risk retention rules. 

The agencies have also carefully 

considered commenters’ views about 

the impact the proposed rules would 

have on CLO issuance and the 

commercial loan markets in general. As 

discussed in the reproposal, the 

agencies acknowledge that requiring 

open market CLO managers to satisfy 

the risk retention requirement could 

result in fewer CLO issuances and less 

competition in this market. However, 

the agencies note that other entities, 

such as hedge funds and loan mutual 

funds, also purchase commercial loans 

and believe that the market will adjust 

to the rule and that lending to 

creditworthy commercial borrowers, on 

appropriate terms, will continue at a 

healthy rate. The agencies also note that 

commenters’ concerns about the impact 

of European risk retention requirements 

on European CLO issuance may be 

misplaced, as economic conditions have 

constrained the available supply of 

potential collateral for European CLOs. 

Furthermore, the agencies believe 

projected impacts on the CLO market 

are justified by the benefits that will be 

produced by subjecting open market 

CLOs to the risk retention rules. As 

discussed, the agencies have significant 

concerns about recent activity in the 

leveraged loan market. The search for 

yield in the low interest rate 

environment has led investors to take on 

more risk in this market by investing in 

lower quality commercial loans that 

contain fewer lender protections.183 The 

agencies believe that valuations on 

lower-rated corporate bonds and 

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77658 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

184See, e.g., Monetary Policy Report, at 1–2. 

185See, e.g., Leveraged Lending Guidance at 

17771 (‘‘[A] poorly underwritten leveraged loan that 

is pooled with other loans or is participated with 

other institutions may generate risk for the financial 

system.’’); Shared National Credits Program: 2013 

Review at 8 (‘‘Poorly underwritten or low quality 

leveraged loans, including those that are pooled 

with other loans or participated with other 

institutions, may generate risks for the financial 

system.’’). 

186The Commission has prescribed the disclosure 

of LEI in other rulemakings. See, e. g., Nationally 

Recognized Statistical Rating Organizations; Final 

Rule, 79 FR 55078 (Sept. 15, 2014) and Reporting 

by Investment Advisers to Private Funds and 

Certain Commodity Pool Operators and Commodity 

Trading Advisors on Form PF; Final Rule, 76 FR 

71128 (Nov. 16, 2011). 

187 15 U.S.C. 78o–11(c)(G)(iv), (d) (permitting the 

Commission and Federal banking agencies to allow 

leveraged loans are stretched and 

excesses in these markets could lead to 

higher levels of future defaults and 

losses.184 The origination and 

securitization of such poorly 

underwritten loans could generate 

systemic financial risks.185

Increased appetite from investors for 

higher yielding and higher risk assets in 

the leveraged loan market creates an 

environment susceptible to some of the 

abuses and excesses that occurred in the 

residential and commercial mortgage 

markets that contributed to the financial 

crisis. In particular, the agencies are 

concerned that this environment could 

create incentives to originate an 

increased volume of loans, without 

regard for quality or underwriting 

standards, for the purpose of 

distribution through securitization. The 

agencies therefore have concluded that 

requiring open market CLO managers or 

lead arrangers to retain economic 

exposure in the securitized assets will 

help ensure the quality of assets 

purchased by CLOs, promote discipline 

in the underwriting standards for such 

loans, and reduce the risk that such 

loans pose to financial stability. 

For the reasons discussed above, the 

final rule requires open market CLO 

managers to satisfy the minimum risk 

retention requirement for each CLO 

securitization transaction that it 

manages by holding a sufficient amount 

of standard risk retention or meet the 

requirements of the alternative lead 

arranger option. After considering all 

comments, the agencies are adopting, 

largely as proposed, the lead arranger 

option for open market CLOs, under 

which an open market CLO could 

satisfy the risk retention requirement if 

the firm serving as lead arranger for 

each loan purchased by the CLO retains 

at the origination of the syndicated loan 

at least 5 percent of the face amount of 

the term loan tranche purchased by the 

CLO. The lead arranger is required to 

retain this portion of the loan tranche 

until the repayment, maturity, 

involuntary and unscheduled 

acceleration, payment default, or 

bankruptcy default of the loan. This 

requirement applies regardless of 

whether the loan tranche was purchased 

on the primary or secondary market, or 

was held at any particular time by an 

open market CLO issuing entity. 

Under the final rule’s lead arranger 

option, the sponsor is required to 

disclose a complete list of every asset 

held by an open market CLO (or before 

the CLO’s closing, in a warehouse 

facility in anticipation of transfer into 

the CLO at closing). This list requires 

the following information (i) the full 

legal name, Standard Industrial 

Classification category code and legal 

entity identifier (LEI) issued by a utility 

endorsed or otherwise governed by the 

Global LEI Regulatory Oversight 

Committee or the Global LEI Foundation 

(if an LEI has been obtained by the 

obligor) of the obligor of the loan or 

asset; (ii) the full name of the specific 

CLO-eligible loan tranche held by the 

CLO; (iii) the face amount of the CLOeligible loan tranche held by the CLO; 

(iv) the price at which the CLO-eligible 

loan tranche was acquired by the CLO; 

and (v) for each loan tranche, the full 

legal name of the lead arranger subject 

to the sales and hedging restrictions. 

Also, the final rule requires the sponsor 

to disclose the full legal name and form 

of organization of the CLO manager. The 

sponsor is required to provide these 

disclosures a reasonable period of time 

prior to the sale of the asset-backed 

securities in the securitization 

transaction (and at least annually with 

respect to information regarding the 

assets held by the CLO) and, upon 

request, to the Commission and the 

sponsor’s appropriate Federal banking 

agency, if any. Further, the CLO 

manager is required to certify or 

represent as to the adequacy of the 

collateral and certain attributes of the 

borrowers of the senior, secured 

syndicated loans acquired by the CLO 

and certain other matters. 

The agencies have added to the 

disclosure requirement the disclosure of 

an obligor’s LEI issued by a utility 

endorsed or otherwise governed by the 

Global LEI Regulatory Oversight 

Committee or the Global LEI 

Foundation, if an LEI has been obtained 

by the obligor. The agencies believe that 

the LEI requirement allows investors in 

open-market CLOs to better track the 

performance of assets originated by 

specific originators. The effort to 

standardize a universal LEI has 

progressed significantly over the last 

few years.186 As LEI use becomes more 

mandated and widespread pursuant to 

other rules, the agencies anticipate that 

LEI disclosure by obligors under the 

lead arranger option will become the 

standard. 

In response to commenter concerns, 

the agencies have removed from the 

lead arranger option for open market 

CLOs the requirement that lead 

arrangers and CLO managers certify as 

to the adequacy of the collateral and the 

attributes of the borrowers of the senior, 

secured syndicated loans that they 

purchase and certain other matters and 

make certain covenants. Instead, a lead 

arranger will be required to certify that 

it has evaluated the effectiveness of its 

internal supervisory controls with 

respect to the process for ensuring that 

loans included in a CLO-eligible tranche 

meet all of the requirements set forth in 

section 9 of the rule applicable to CLOeligible loan tranches and has 

concluded that its internal supervisory 

controls are effective. CLO managers 

will be required to certify that they have 

policies and procedures to evaluate the 

likelihood of repayment and that they 

have followed such policies and 

procedures when determining the 

adequacy of the collateral and attributes 

of the borrowers of the loans that they 

purchase. These certifications are 

similar to those required of depositors 

with respect to QRMs and other 

qualifying asset classes. The agencies 

believe these modifications will reduce 

concerns about risks and challenges that 

commenters asserted would be faced in 

connection with the requirement that 

there be representations that the loans 

meet the rule’s criteria. The agencies 

also note that the reference to 

‘‘ensuring’’ that loans are CLO-eligible 

loans should be interpreted in a manner 

similar to such reference in this 

Supplementary Information with 

respect to QRMs and other qualifying 

asset classes. 

As the agencies noted in the 

reproposal, the lead arranger option for 

open market CLOs is intended to 

allocate risk retention to the parties that 

originate the underlying loans and that 

likely exert the greatest influence on 

how the loans are underwritten, which 

is an integral component of ensuring the 

quality of assets that are securitized. 

Subject to considering certain factors, 

section 15G permits the agencies to 

allow an originator (rather than a 

sponsor) to retain the required amount 

of credit risk and to reduce the amount 

of credit risk required of the sponsor by 

the amount retained by the 

originator.187 In developing the 

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the allocation of risk retention from a sponsor to an 

originator). 

188 15 U.S.C. 78o–11(d)(2). These factors are 

whether the assets sold to the securitizer have 

terms, conditions, and characteristics that reflect 

low credit risk; whether the form or volume of 

transactions in securitization markets creates 

incentives for imprudent origination of the type of 

loan or asset to be sold to the securitizer; and the 

potential impact of risk retention obligations on the 

access of consumers and business to credit on 

reasonable terms, which may not include the 

transfer of credit risk to a third party. 

189As described by one commenter, a typical 

tender option bond transaction consists of the 

deposit of a single issue of highly rated, long-term 

municipal bonds in a trust and the issuance by the 

trust of two classes of securities: floating rate, 

puttable securities (the ‘‘floaters’’), and an inverse 

floating rate security (the ‘‘residual’’). The holders 

of floaters have the right, generally on a daily or 

weekly basis, to put the floaters for purchase at par, 

which put right is supported by a liquidity facility 

delivered by a highly rated provider and causes the 

floaters to be a short-term security. The floaters are 

in large part purchased and held by money market 

mutual funds. The residual is held by a longer term 

investor (bank, insurance company, mutual fund, 

hedge fund, etc.). The residual investor takes all of 

the market and structural risk related to the tender 

option bond structure, with the floaters investors 

only taking limited, well-defined insolvency and 

default risks associated with the underlying 

municipal bonds, which risks are equivalent to 

those associated with investing in such municipal 

bonds directly. 

190Revenue Procedure 2003–84, 2003–48 I.R.B. 

1159. 

191This requirement is in section 10 of the final 

rule (definition of ‘‘tender option bond’’). 

192This requirement is in section 10 of the final 

rule (definition of ‘‘tender option bond’’). 

193The final rule defines a regulated liquidity 

provider as a depository institution (as defined in 

section 3 of the Federal Deposit Insurance Act (12 

U.S.C. 1813)); a bank holding company (as defined 

in 12 U.S.C. 1841) or a subsidiary thereof; a savings 

and loan holding company (as defined in 12 U.S.C. 

1467a) provided all or substantially all of the 

holding company’s activities are permissible for a 

financial holding company under 12 U.S.C. 1843(k) 

or a subsidiary thereof; or a foreign bank (or a 

subsidiary thereof) whose home country supervisor 

(as defined in section 211.21 of the Board’s 

Regulation K (12 CFR 211.21)) has adopted capital 

standards consistent with the Capital Accord of the 

Basel Committee on Banking Supervision, as 

amended, provided the foreign bank is subject to 

such standards. 

194Section 4.01(5) of IRS Revenue Procedure 

2003–84 defines a tender option termination event 

as: (1) a bankruptcy filing by or against a tax-exempt 

bond issuer; (2) a downgrade in the credit-rating of 

a tax-exempt bond and a downgrade in the credit 

rating of any guarantor of the tax-exempt bond, if 

applicable, below investment grade; (3) a payment 

default on a tax-exempt bond; (4) a final judicial 

determination or a final IRS administrative 

determination of taxability of a tax-exempt bond for 

Continued 

proposed lead arranger option, the 

agencies considered the factors set forth 

in section 15G(d)(2) and concluded that 

it is consistent with the purposes of the 

statute to allow lead arrangers of open 

market CLOs to satisfy the risk retention 

requirement.188

The agencies considered the 

commenters’ views that the option will 

not be widely adopted by lead arranger 

banks, but the agencies believe the 

option provides additional flexibility for 

lead arranger banks and non-banks and 

therefore may reduce disruption to the 

market. The agencies also believe that 

this option for open market CLOs will 

meaningfully align the incentives of the 

party most involved with the credit 

quality of these loans—the lead 

arranger—with the interests of investors. 

Commenters raised concerns that banks 

would likely not want to retain risk 

without being allowed to hedge or 

transfer that risk due to concern about 

criticism from regulators. However, the 

agencies note that these concerns were 

not raised for balance sheet CLOs where 

banks would be required similarly to 

retain a portion of the loans’ risk 

without selling or transferring that 

retained risk. In addition, to the extent 

the comments referred to supervisory 

standards, the Federal banking agencies 

note that supervisors take into account 

many considerations when reviewing 

loan portfolios, including applicable 

regulations and guidance regarding 

underwriting and risk management. 

Alternatively, incentives would be 

placed on the CLO manager to monitor 

the credit quality of loans it securitizes, 

if it retains risk under the standard risk 

retention option. 

For the reasons discussed above, open 

market CLO managers clearly fall within 

the statutory definition of ‘‘securitizer’’ 

in Section 15G and therefore are subject 

to the risk retention requirement. The 

agencies also believe that subjecting 

open market CLOs and their managers 

to the risk retention requirement is 

within their authority and consistent 

with the purposes of section 15G. The 

agencies believe the final rule places 

risk retention responsibility on the 

parties most capable of ensuring and 

monitoring the credit quality of the 

assets collateralizing open market 

CLOs—the CLO manager or the lead 

arranger. Further, the agencies believe 

these two options provide sufficient 

flexibility to avoid significant 

disruptions to the CLO and credit 

markets. 

8. Municipal Bond ‘‘Repackaging’’ 

Securitizations 

a. Overview of the Reproposal and 

Public Comments 

Several commenters on the original 

proposal requested that the agencies 

exempt municipal bond repackaging 

securitizations from risk retention 

requirements, the most common form of 

which are often referred to as ‘‘tender 

option bonds.’’ 189 In order to reflect and 

incorporate the risk retention 

mechanisms currently implemented by 

the market, the reproposal included two 

additional risk retention options for 

certain municipal bond repackagings. 

The proposed rule closely tracked 

certain requirements for these 

repackagings, outlined in IRS Revenue 

Procedure 2003–84, that are relevant to 

risk retention.190 Specifically, in the 

revised proposal, the agencies proposed 

additional risk retention options for 

municipal bond repackagings issued by 

a ‘‘qualified tender option bond entity,’’ 

which would be defined as an issuing 

entity of tender option bonds in which: 

• Only two classes of securities are 

issued: a tender option bond and a 

residual interest; 

• The tender option bond qualifies for 

purchase by money market funds under 

Rule 2a–7 under the Investment 

Company Act of 1940; 191

• The holder of a tender option bond 

has the right to tender such bonds to the 

issuing entity for purchase at any time 

upon no more than 30 days’ notice; 192

• The collateral consists solely of 

municipal securities as defined in 

section 3(a)(29) of the Securities 

Exchange Act of 1934 and servicing 

assets, and all the municipal securities 

have the same municipal issuer and the 

same underlying obligor or source of 

payment; 

• Each of the tender option bond, the 

residual interest and the underlying 

municipal security are issued in 

compliance with the Internal Revenue 

Code of 1986, as amended (the ‘‘IRS 

Code’’), such that the interest payments 

made on those securities are excludable 

from the gross income of the owners; 

• The issuing entity has a legally 

binding commitment from a regulated 

liquidity provider to provide 100 

percent guarantee or liquidity coverage 

with respect to all of the issuing entity’s 

outstanding tender option bonds; 193

and 

• The issuing entity qualifies for 

monthly closing elections pursuant to 

IRS Revenue Procedure 2003–84, as 

amended or supplemented from time to 

time. 

Under the reproposal, the sponsor of 

a qualified tender option bond entity 

could satisfy its risk retention 

requirements by retaining an interest 

that, upon issuance, would meet the 

requirements of an eligible horizontal 

residual interest but that, upon the 

occurrence of a ‘‘tender option 

termination event’’ as defined in section 

4.01(5) of IRS Revenue Procedure 2003– 

84, as amended or supplemented from 

time to time, would meet requirements 

of an eligible vertical interest.194

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77660 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

Federal default on the underlying municipal 

securities and credit enhancement, where 

applicable; (5) a credit rating downgrade below 

investment grade; (6) the bankruptcy of the issuer 

and, when applicable, the credit enhancer; or (7) 

the determination that the municipal securities are 

taxable. 

195One commenter explained that other 

qualifying assets should include taxable municipal 

securities, preferred stock of registered closed-end 

investment companies that primarily invest in 

municipal securities, tender option bonds or tender 

option bond residual interests that are already 

issued and outstanding, and custodial receipts 

representing beneficial interests in any of the 

foregoing. A second commenter’s alternative 

proposal includes tender option bond programs that 

hold taxable municipal securities and ‘‘securities 

evidencing a beneficial ownership interest in 

municipal securities.’’ A third commenter’s 

alternative proposal included tender option bond 

programs for which the ‘‘underlying collateral 

consists solely of tax-exempt assets or beneficial 

interests in such assets.’’ 

196One commenter explained, in limited 

instances, assets held by tender option bond trusts 

consist of municipal securities from different issues 

from the same issuer or of more than one issuer. 

197One commenter explained that this allocation 

is common practice in large fund complexes, and 

broadening this definition would not change the 

alignment of interests of the trust holders. Another 

commenter requested that the agencies allow 

multiple investment companies to satisfy the 

sponsor risk retention requirements. 

198One commenter explained that the liquidity 

facility in a tender option bond program is typically 

structured as a credit enhancement of the 

underlying assets and not of the floaters themselves. 

Under the reproposal, the sponsor of 

a qualified tender option bond entity 

could also satisfy its risk retention 

requirements by holding municipal 

securities from the same issuance of 

municipal securities deposited in the 

qualified tender option bond entity, the 

face value of which retained municipal 

securities would be equal to 5 percent 

of the face value of the municipal 

securities deposited in the qualified 

tender option bond entity. 

The proposed prohibitions on transfer 

and hedging set forth in section 12 of 

the reproposal applied to the holder of 

a residual interest in, as well as any 

municipal securities retained by the 

sponsor of, a qualified tender option 

bond entity, if those interests were held 

in satisfaction of the sponsor’s risk 

retention requirements under section 10 

of the reproposal. 

The reproposal also would have 

allowed the sponsor of a qualified 

tender option bond entity to satisfy its 

risk retention requirements under 

subpart B of the proposed rule using any 

other risk retention option in the 

reproposal, provided the sponsor meets 

the requirements of that option. 

The agencies received many 

comments regarding the proposed 

tender option bond options. Most of the 

comments requested an exemption from 

risk retention for tender option bonds 

and, in the absence of an exemption, 

recommended either technical 

clarifications or adjustments to the 

proposed options for tender option 

bonds to cover a broader range of 

transaction structures. 

Several commenters recommended 

that the final rule exclude issuance of 

tender option bonds from the risk 

retention requirements for a variety of 

reasons, including: 

• The originate-to-distribute model 

that poses moral hazard risks in certain 

securitization transactions is not present 

in a tender option bond program; 

• The tender option bond structure 

does not create information gaps for 

investors because tender option bond 

programs do not involve pooling large 

numbers of unrelated assets; 

• The underlying bonds in a tender 

option bond structure generally are from 

one original issuance with the same 

issuer and borrower/obligor; 

• The fund that selects the municipal 

bond to be deposited into a tender 

option bond structure retains virtually 

all of the risk related to such municipal 

bonds, and the tender option bond 

structure provides liquidity that is not 

found with typical asset-backed security 

products; and 

• The industry generally does not 

define tender option bonds as structured 

finance products or asset-backed 

securities. 

Commenters urging exclusion of 

tender option bonds from the risk 

retention requirements also stated that 

the current tender option bond market 

provides municipal issuers with access 

to a diverse investor base and a more 

liquid market, and subjecting tender 

option bonds to the risk retention 

requirements would significantly 

increase the costs of tender option bond 

programs and adversely affect the state 

and local governments that indirectly 

receive funding through these programs. 

They also commented that applying the 

risk retention rules to these structures 

would decrease the availability of taxexempt investments in the market for 

money market funds, which are 

continuing to face limited investment 

options due to constraints imposed by 

Rule 2a–7 under the Investment 

Company Act. 

A few commenters proposed that a 

sponsor of tender option bonds could 

satisfy its risk retention requirements if 

the residual interest holder provides, 

either directly or indirectly through an 

affiliate (i) 100 percent liquidity 

coverage on the floaters, (ii) a binding 

reimbursement obligation to the 

provider of the 100 percent liquidity 

coverage, or (iii) 100 percent credit 

enhancement on the underlying 

municipal securities. A few commenters 

took the position that any residual 

interest in any tender option bond 

structure should qualify as a risk 

retention option under the rule if the 

residual interest is held by an 

unaffiliated entity that agrees to 

subordinate its right to payment to the 

floater holders and the liquidity 

provider until the occurrence of a tender 

option termination event. 

One commenter recommended 

broadening the exemption relating to 

asset-backed securities issued or 

guaranteed by a state or municipal 

entity to include securities 

collateralized by such exempt securities. 

Several commenters proposed that only 

municipal bond repackaging 

transactions with initial closing dates 

after the applicable effective date of the 

rule be subject to the risk retention 

requirements. 

Other commenters advocated for a 

broader tender option bond risk 

retention option that would include 

most or all currently existing tender 

option bond programs, including those 

that issue tender option bonds with a 

notice period for tender of up to 397 

days, tender option bond programs that 

hold assets other than tax-exempt 

municipal securities and servicing 

assets,195 tender option bond programs 

that hold securities issued by more than 

one issuer,196 and tender option bond 

programs in which the required retained 

interest is held by multiple beneficial 

owners, so long as all such owners are 

managed by a common regulated 

entity.197

Several commenters suggested 

technical clarifications, adjustments and 

corrections, including: The definition of 

qualified tender option bond entity 

should clarify the requirements with 

respect to the liquidity guarantee; 198 the 

requirement that tender option bonds be 

eligible securities under Rule 2a–7 

under the Investment Company Act 

should be removed because it is 

unnecessary in the risk retention 

context; the definition of tender option 

bond should be revised so that the 

purchase price is par or face value plus 

accrued interest; the definition of 

qualified tender option bond entity 

should require that the tender right be 

supported by a liquidity facility or 

guarantee, except upon the occurrence 

of specified tender option termination 

events, and that such liquidity facility 

or guarantee be enforceable against the 

entity obligated to support or guarantee 

the purchase of the bonds upon tender; 

and the agencies should provide more 

specific guidance on how the disclosure 

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199One commenter asked that the agencies clarify 

that the disclosure requirements applicable to the 

sponsor of a qualified municipal repackaging entity 

be limited to: (i) the name and form of organization 

of the qualified municipal repackaging entity, (ii) a 

description of the form and material terms of the 

retained interest, (iii) whether the qualified 

municipal residual interest is held by the sponsor 

or a qualified residual holder, and (iv) a description 

of the face value or fair value of the qualified 

municipal residual interest or the municipal 

securities that are separately retained. 200 15 U.S.C. 78o–11(a). 

requirements would apply to tender 

option bonds.199

A few commenters expressed concern 

that the option to retain the residual 

interest only if it otherwise qualified as 

an eligible horizontal residual interest 

before, and an eligible vertical interest 

after, the occurrence of a tender option 

termination event was inconsistent with 

the partnership tax analysis used to pass 

through the tax-exempt interest on the 

bonds because the residual interest in a 

tender option bond structure is not 

legally subordinated at any time. 

However, another commenter stated that 

a residual interest is substantially 

equivalent to an eligible horizontal 

residual interest prior to the occurrence 

of a tender option termination event and 

an eligible vertical interest after a tender 

option termination event because (i) 

prior to the occurrence of a tender 

option termination event, the residual 

holder bears all the market risk, and (ii) 

after a tender option termination event, 

any credit losses are shared pro rata 

between the floaters and the residuals. 

As part of a broader alternative 

definition for a qualified tender option 

bond entity, it was suggested that the 

retained risk in a qualified municipal 

repackaging entity should be either a 

residual or legally subordinate ABS 

interest equal to at least 5 percent of the 

face value (or fair market value, if no 

face value is available) of the assets of 

the entity at closing. 

A group of commenters suggested 

that, if the agencies do not provide a full 

exemption for tender option bonds, the 

rule should state that retaining a 

residual interest in a qualified tender 

option bond entity equal to 5 percent of 

the fair value (determined as of the date 

of deposit) of the deposited assets 

should satisfy the risk retention 

requirements, without regard to the 

requirements applicable to eligible 

horizontal residual interest or eligible 

vertical interest requirements. 

Other commenters recommended that 

the agencies permit the sponsor or the 

residual holder to purchase and retain a 

residual interest with an upfront cash 

investment value equal to 5 percent of 

the initial market value of the municipal 

securities in the tender option bond 

program. In addition, commenters asked 

that the rule allow a sponsor to 

aggregate the amount of a tender option 

bond residual interest it holds, with the 

municipal securities it directly holds, as 

of the date of deposit, in determining its 

risk retention requirement. 

It was also suggested that the value of 

the collateral posted by a residual 

holder for a liquidity facility should be 

recognized, and that the residual 

holder’s interest should be calculated as 

the sum of (a) the face amount of the 

residual certificate and (b) the market 

value of the collateral posted by the 

residual to secure the liquidity facility. 

In terms of valuing the residual 

interest, one commenter suggested that 

the 5 percent market value retention 

amount be calculated at the time of the 

purchase of the municipal bond or the 

issuance of securities, to better conform 

to common industry practice and the 

realities of the tender option bond 

program, if the agencies decide not to 

exempt tender option bonds. This 

commenter explained that it would be 

impractical and costly to constantly 

monitor any fluctuation in the market 

value of the municipal bonds, and that 

no adjustments should have to be made 

if, during the life of the tender option 

bond trust, the market value of those 

bonds fluctuates above or below the 

market value that is initially calculated. 

Several commenters requested that 

the agencies permit a party other than 

the sponsor of the issuing entity with 

respect to tender option bonds to be the 

risk retainer. Commenters stated that 

such a party may include a third-party 

investor that selects the underlying asset 

for the transaction and obtains the 

primary financing benefit of the 

structure, the funds or other investors 

that purchase residuals in the tender 

option bond trust to satisfy the 

sponsor’s risk retention obligations as 

third-party purchasers, and a third-party 

investor with respect to tender option 

bond programs that are made available 

by sponsors and used by such thirdparty investors. 

A few commenters requested that the 

final rule confirm that the ‘‘sponsor’’ is 

the bank that creates the tender option 

bond program. Commenters explained 

that the residual holders do not perform 

any of the traditional functions of a 

sponsor. One commenter claimed that 

deeming the funds that purchase 

residuals to be the ‘‘sponsors’’ for 

purposes of risk retention would have 

implications under other rules that use 

the term ‘‘sponsor,’’ including Rule 2a– 

7 under the Investment Company Act 

and proposed Securities Act Rule 127B. 

In connection with the prohibition on 

hedging in the reproposal, which 

prohibits hedges that are ‘‘materially 

related to the credit risk’’ of the tender 

option bond residual interests and 

securitized assets, a group of 

commenters requested that the agencies 

clarify the meaning of that restriction to 

ensure that sponsors can manage the 

risks associated with up to 95 percent of 

the assets held by a tender option bond 

program. It was also requested that the 

agencies exclude from the hedging 

prohibition: (i) risk reducing and other 

transactions with regard to the 

underlying municipal security that are 

entered into by the sponsor prior to the 

establishment of the municipal bond 

repackaging structure, and (ii) 

transactions between the sponsor or its 

affiliates and an unrelated third party 

where the purpose of such transaction is 

to provide financing to such unrelated 

third party for such municipal securities 

on connection with a municipal bond 

repackaging structure. 

b. Final Rule 

After considering carefully the 

comments received on the reproposal as 

well as the purpose and language of 

section 15G of the Exchange Act, the 

agencies have adopted in the final rule 

the proposed tender option bond 

options with some modifications. In 

response to specific commenter 

concerns, the final rule incorporates 

certain technical clarifications and 

adjustments. 

The final rule does not provide an 

exemption from risk retention 

requirements for sponsors of issuing 

entities with respect to tender option 

bonds. The agencies continue to believe 

that tender options bonds are assetbacked securities under the definition in 

section 15G because they are securities 

collateralized by self-liquidating 

financial assets and the holders of the 

securities receive payments that depend 

primarily on cash flow from the 

securitized assets.200 Therefore, the 

sponsors of the issuing entities with 

respect to tender option bonds are 

subject to section 15G and the credit 

risk retention rules. 

Consistent with the treatment of 

sponsors of other asset-backed 

securities, the holder of risk retention in 

connection with the issuance of tender 

option bonds may divide the ABS 

interests or tax-exempt municipal 

securities required to be retained under 

the final rule among its majority-owned 

affiliates, but may not do so among 

unrelated entities that are managed by 

the sponsor or managed by an affiliate 

of the sponsor. Accordingly, the sponsor 

of a tender option bond issuance under 

the rule may not sell the ABS interests 

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77662 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

201The designation of a party as a sponsor of an 

issuance of asset-backed securities for purposes of 

the final rule is not related to whether or not such 

party is the sponsor for purposes of other rules and 

regulations, including for example Rule 2a–7 under 

the Investment Company Act (including the 

discussion of sponsor in the Money Market Fund 

Reform, 79 FR at 47876) or section 13G of the Bank 

Holding Company Act (Volcker Rule). Whether or 

not a party is the sponsor under a particular rule 

or regulation is determined by reference to that rule 

or regulation and the related legal authority. 

202While this concern was specifically raised by 

commenters in the context of tender option bonds, 

the agencies note that it is possible that any 

issuance of asset-backed securities could have more 

than one party that meets the definition of sponsor, 

and the analysis in this section would apply 

regardless of the securitization structure or 

securitized assets. 

203As noted in the discussion of the definition of 

‘‘securitizer’’ with respect to CLOs in Part III.B.7 of 

this Supplementary Information, the agencies do 

not believe that a sponsor is required to have had 

legal ownership or possession of the assets that 

collateralize an issuance of asset-backed securities. 

204Nothing in the final rule prohibits the use by 

a sponsor of agents in order to meet the sponsor’s 

obligations under the final rule, including the use 

of third-party service providers, such as an 

underwriter or remarketing agent to distribute 

required disclosures to investors in a timely 

manner. However, the sponsor remains liable for 

compliance with its obligations under the final rule. 

205As proposed, the final rule requires that the 

collateral for a qualified tender option bond entity 

to consist only of servicing assets and tax exempt 

municipal securities. 

206The agencies believe that a beneficial interest 

in a tax-exempt municipal security may be held by 

a qualified tender option bond entity, but only if 

such beneficial interest is a pass-through and pro 

rata interest in the underlying tax-exempt 

municipal security. Therefore, a qualified tender 

option bond entity will be permitted to hold an 

asset-backed security collateralized by a tax-exempt 

municipal security only if such asset-backed 

security is a pass-through and pro rata interest in 

the underlying tax-exempt municipal security and 

the cash flows supporting such asset-backed 

security are not tranched. A qualified tender option 

bond entity will not be permitted to hold credit 

default swaps referencing municipal obligations or 

tranched asset-backed securities, such as tender 

option bonds. 

required to be retained under the rule to 

a fund it manages unless such fund is 

a majority-owned affiliate of the 

sponsor. Otherwise, the credit risk 

associated with holding the ABS 

interest will be transferred to the 

investors in the fund that purchased 

those ABS interests, which would 

undermine the purpose and intent of the 

statute. 

The agencies believe that, with 

respect to some issuances of assetbacked securities, it is possible that 

more than one party could meet the 

definition of sponsor in the rule.201

With respect to those issuances, it is the 

responsibility of the transaction parties 

to designate which party is the sponsor 

and that party is then subject to the 

requirements of the risk retention 

rules.202 The agencies note that various 

commenters requested that the agencies 

designate the bank that arranges and 

organizes the issuance of tender option 

bonds or the party that owns the 

residual interest as the sponsor. 

Regarding such requests, the agencies 

note that the party required to comply 

with the risk retention rules with 

respect to a tender option bond issuance 

is the party or parties that meet the 

definition of ‘‘sponsor’’ in the rule 203

and, depending on the specific facts and 

circumstances of the issuance and how 

the parties structure the transaction, 

either the arranging bank or the residual 

holder could be designated as the 

sponsor in accordance with the final 

rule.204

The purpose of the tender option 

bond risk retention options was to 

address existing market practice for 

traditional tender option bond issuances 

that are specifically structured such that 

the interest payments made on those 

securities are excludable from the gross 

income of the owners in the same way 

that the interest on the underlying 

municipal securities is excludable. 

Certain commenters suggested that the 

requirement that a residual interest in a 

tender option bond structure meet the 

requirements of an eligible horizontal 

residual interest before, and an eligible 

vertical interest after, the occurrence of 

a tender option termination event was 

inconsistent with the partnership tax 

analysis required to be used to ensure 

the pass-through treatment of the taxexempt interest on the tender option 

bonds and tender option bond residuals. 

The agencies acknowledge that some 

asset-backed securities are not legally 

structured as debt and, in order to 

address this, the reproposal included 

and the final rule adopts a definition of 

‘‘collateral’’ which explicitly applies 

‘‘irrespective of the legal structure of 

issuance’’ and includes ‘‘fractional 

undivided property interests in the 

assets or other property of the issuing 

entity, or any other property interest in 

such assets or other property.’’ The 

agencies believe that a residual interest 

in a qualified tender option bond entity 

would meet the requirements of an 

eligible horizontal residual interest 

before, and an eligible vertical interest 

after, the occurrence of a tender option 

termination event if: (i) prior to the 

occurrence of a tender option 

termination event, the residual holder 

bears all the market risk associated with 

the underlying tax-exempt municipal 

security; and (ii) after the occurrence of 

a tender option termination event, any 

credit losses are shared pro rata between 

the tender option bonds and the 

residual interest. 

The agencies do not agree with 

comments suggesting that tender option 

bond structures with an initial closing 

date prior to the date on which rule 

becomes effective should be exempt 

from the rule or ‘‘grandfathered.’’ 

Consistent with the statute, the agencies 

believe that the sponsor of issuances of 

asset-backed securities after the 

applicable effective date should be 

subject to risk retention requirements 

regardless of when the structure that 

issues those securities was formed. A 

tender option bond structure may issue 

additional asset-backed securities on 

multiple dates and may often substitute 

collateral. These features, and the broad 

exemptive relief requested by 

commenters, would allow for 

potentially limitless issuances of assetbacked securities which would not be 

subject to any risk retention 

requirements. Requiring tender option 

bond structures to meet the credit risk 

retention requirements regardless of 

their closing date is consistent with 

treatment of other securitization 

structures that exist prior to and 

continue to issue ABS interests after the 

applicable effective date of the rule, 

such as ABCP conduits and revolving 

pool securitizations. 

The agencies have determined not to 

revise the definition of qualified tender 

option bond entity to expand the types 

of assets such structures can hold.205

The tender option bond option in 

section 10 of the final rule is narrowly 

drawn to address risk retention 

practices in existing market structures 

and limit potential for abuse that could 

result from a broad exemption based 

entirely on structural features. 

Accordingly, under the final rule, 

sponsors of issuances of asset-backed 

securities that are subject to risk 

retention and that are collateralized by 

assets other than tax-exempt municipal 

securities 206 with the same municipal 

issuer and the same underlying obligor 

or source of payment will need to 

comply with the requirements of one of 

the other credit risk retention options. 

As a result, the final rule does not 

permit a qualified tender option bond 

entity to hold a residual interest in 

another tender option bond program or 

preferred stock in a closed-end 

investment company that invests in 

municipal securities. 

The agencies have adopted the 

definition of tender option bond with 

one change and a clarification. After 

considering comments, the agencies are 

permitting tender option bonds with a 

notice period of up to 397 days to 

qualify for the specialized option. The 

agencies note that this time frame 

corresponds to the maximum remaining 

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maturity of securities allowed to be 

purchased by money market funds 

under Rule 2a–7 under the Investment 

Company Act. Consistent with the 

reproposal, the final rule requires that 

the tender option bond have features 

which entitle the holder to tender the 

bond for a purchase price equal to the 

approximate amortized cost of the 

security, plus accrued interest, if any. 

The agencies believe that, in the context 

of a tender option bond, ‘‘amortized cost 

plus accrued interest’’ typically equals 

face value or par value plus accrued 

interest. 

In response to commenters’ 

suggestions for valuation methodologies 

to determine the fair value of a residual 

interest in a tender option bond 

issuance, to the extent that a particular 

valuation methodology is appropriate in 

the fair value measurement framework 

under GAAP to determine the fair value 

of a residual interest in a tender option 

bond issuance, then such valuation 

methodology would be permitted under 

the final rule to determine the fair value 

of a retained residual interest in a tender 

option bond issuance. After careful 

consideration of commenters’ 

suggestions for alternative valuation 

methodologies, the agencies do not 

believe there is a compelling reason to 

treat tender option bond residual 

interests differently from any other 

eligible horizontal residual interest, and 

the final rule requires that the sponsor 

of a tender option bond calculate the 

fair value of the residual interest. 

Consistent with the reproposal, the 

final rule requires the amount of taxexempt municipal securities held by the 

sponsor or a majority-owned affiliate of 

the sponsor outside of the qualified 

tender option bond entity to be 

determined by reference to the face 

value of the municipal securities 

deposited in the qualified tender option 

bond entity. For instance, if the face 

value of the tax-exempt municipal 

securities deposited into a qualified 

tender option bond entity is $100 

million, the sponsor or a majorityowned affiliate of the sponsor will be 

required to hold tax-exempt municipal 

securities, identical to those deposited 

in the tender option bond entity with 

respect to legal maturity and coupon, 

with a face value of $5 million in order 

to satisfy its requirements under the 

final rule. The agencies continue to 

believe that this approach is an accurate 

and easily verifiable means of 

calculating 5 percent risk retention 

because the retained municipal 

securities are identical to and fungible 

with the deposited municipal securities. 

This approach should help to minimize 

operational costs, administrative 

burdens and additional costs. 

Regarding commenters’ requests that 

the agencies give a sponsor of a tender 

option bond credit for cash held as 

collateral for the liquidity agreement, 

the final rule does not allow such cash 

collateral credit to be credited toward 

satisfaction of the risk retention 

requirements unless the cash is held in 

an account that meets the requirements 

for an eligible horizontal cash reserve 

account. This result is consistent with 

the approach regarding cash reserves 

connected to issuances of asset-backed 

securities under other options in the 

final rule. 

Regarding commenters’ requests for 

certain adjustments to, and clarification 

of, the hedging prohibitions with 

respect to the tender option bond risk 

retention options and with respect to 

tender option bond issuances generally, 

the agencies believe there is no reason 

to treat sponsors of tender option bond 

structures any differently from sponsors 

of other asset-backed securities 

issuances. Therefore, subject to 

provisions of the rule regarding 

permitted hedges and the agencies’ 

interpretation of the hedging restrictions 

discussed elsewhere in this preamble, 

the agencies believe that a hedging 

transaction entered into prior to the 

establishment of the tender option bond 

trust should be subject to the hedging 

prohibition. Permitting such hedges 

would allow the sponsor of a tender 

option bond issuance to hedge its credit 

risk exposure to the tender option bond 

issuance simply by hedging its expected 

exposure to the underlying assets prior 

to the initial issuance of the tender 

option bonds, effectively eliminating the 

hedging prohibition. Similarly, 

regarding commenters’ requests for an 

exclusion for hedging transactions 

entered into between the sponsor of a 

tender option bond issuance or its 

affiliates and an unrelated party where 

the purpose of such transaction is to 

provide financing to such third party for 

the municipal securities to be deposited 

into a tender option bond structure, the 

agencies believe that the holder of 

retained credit risk should not be 

permitted to hedge its exposure to the 

retained credit risk. This approach is 

consistent with the treatment of all 

other credit risk retention options in the 

final rule. The agencies further believe 

that consideration of the purpose and 

intent of transactions that effectively 

hedge or reduce the risks associated 

with credit risk retention would 

undermine the hedging prohibition and 

the purpose and intent of section 15G. 

Regarding commenters’ requests to 

clarify the phrase ‘‘materially related to 

the credit risk’’ in the hedging 

prohibition, the agencies expect the 

sponsor of a tender option bond 

issuance to make that determination 

based on the relevant facts and 

circumstances. To the extent that the 

sponsor of a tender option bond 

issuance holds ABS interests or tax 

exempt municipal securities in excess of 

the minimum requirement under the 

final rule, then such sponsor would be 

permitted to hedge such excess 

interests, but must hold ABS interests or 

tax exempt municipal securities 

unhedged in an amount that satisfies the 

minimum risk retention requirements 

applicable to such retained risk. 

The final rule does not include the 

requirement that the tender option 

bonds issued by a qualified tender 

option entity be eligible assets under 

Rule 2a-7 under the Investment 

Company Act. The agencies were 

persuaded by commenters that 

analyzing compliance with such a 

requirement would involve an 

assessment of information that might 

not be available to sponsors and was 

unnecessary given the other conditions 

to the sponsors’ ability to rely on the 

risk retention options specific to tender 

option bonds. 

The agencies are adopting the 

proposed disclosure requirements for 

qualified tender option bonds with 

some clarification and a minor addition. 

Based on comments, the agencies have 

added specific disclosure requirements 

for sponsors that retain municipal 

securities outside of the qualified tender 

option bond entity that are limited to 

the name and form of organization of 

the qualified tender option bond entity, 

the identity of the issuer of the 

municipal securities, the face value of 

the municipal securities deposited into 

the qualified tender option bond entity, 

and the face value of the municipal 

securities retained by the sponsor or its 

majority-owned affiliates and subject to 

the hedging prohibition. 

Also, in response to commenters’ 

requests for clarification of the 

disclosure obligations of a sponsor of a 

tender option bond issuance, the 

agencies believe that the sponsor of a 

tender option bond that holds a residual 

interest that meets the requirements of 

section 10(c) of the final rule should 

provide the disclosures required in 

section 4(c) of the final rule for both an 

eligible horizontal residual interest and 

an eligible vertical interest. 

Under the final rule, the issuing entity 

of a qualified tender option bond must 

have a legally binding commitment from 

a regulated liquidity provider to provide 

100 percent liquidity coverage with 

respect to all of the issuing entity’s 

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207The final rule does not require any specific 

form of liquidity coverage. Provided that the 

liquidity coverage will cover an amount sufficient 

to pay 100 percent of the principal outstanding and 

interest payable on the tender option bonds, the 

final rule permits liquidity coverage structured as 

a guarantee, credit enhancement or credit support 

with respect to the underlying securities or the 

floaters or an irrevocable put option. 

208As discussed above, 15 U.S.C. 78o–11(a)(4) 

defines the term ‘‘originator’’ as a person who, 

through the extension of credit or otherwise, creates 

a financial asset that collateralizes an asset-backed 

security; and who sells an asset directly or 

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

depositor). 

209 15 U.S.C. 78o–11(d)(2). The agencies note that 

section 15G(d) appears to contain an erroneous 

cross-reference. Specifically, the reference at the 

beginning of section 15G(d) to ‘‘paragraph 

(c)(1)(E)(iv)’’ is read to mean ‘‘paragraph 

(c)(1)(G)(iv)’’, as the former paragraph does not 

pertain to allocation, while the latter is the 

paragraph that permits the agencies to provide for 

the allocation of risk retention obligations between 

a securitizer and an originator in the case of a 

securitizer that purchases assets from an originator. 

outstanding tender option bonds.207 In 

response to commenters’ requests for 

certain clarifications with respect to the 

required liquidity coverage, the agencies 

recognize that the liquidity coverage 

may not be enforceable against the 

regulated liquidity provider upon the 

occurrence of a tender option 

termination event. Liquidity coverage 

subject to this condition would 

nevertheless satisfy the liquidity 

coverage requirement in the final rule. 

As commenters requested, the final 

rule also permits the sponsor of a 

qualified tender option bond entity to 

combine the tender option bond risk 

retention options with each other and 

the other risk retention options under 

subpart B of the final rule. In any such 

case, the sum of the percentages of risk 

retention held under each option and 

measured in accordance with that 

option must total at least five. For 

example, if a sponsor securitizes $100 

million face value of bonds in a 

qualified tender option bond entity and 

holds bonds outside the tender option 

structure whose face value is $3 million 

or 3 percent of the face value of the 

bonds in the qualified tender option 

bond entity, it must hold a residual 

interest in the structure that has a fair 

value of at least 2 percent of the fair 

value of all ABS interests issued by the 

structure (the 3 percent plus the 2 

percent when aggregated equal 5 

percent of the fair value). The final rule 

does not require a minimum amount of 

risk retention in any specific risk 

retention option, only that the sum of 

the percentages of risk retention totals at 

least 5 percent of the fair value. The 

agencies believe that permitting this 

flexibility better enables sponsors of 

tender option bonds to use the options 

afforded under the final rule. 

The final rule requires the sponsor to 

calculate the fair value of all ABS 

interests issued upon an issuance of 

tender option bonds that increases the 

face amount of tender option bonds then 

outstanding. The agencies believe that 

this approach appropriately balances 

the costs of determining the fair value 

of the tender option bond residual 

interest with the statutory requirement 

for risk retention. This means that a 

sponsor of an issuance of tender option 

bonds that would like to receive credit 

under the final rule for retaining a 

residual interest in the qualifying tender 

option bond entity would calculate the 

fair value of the residual interest in the 

qualifying tender option bond entity in 

connection with the initial issuance of 

tender option bonds in accordance with 

section 10 of the final rule and would 

not be required to recalculate the fair 

value of such residual interest unless 

either the face value of tender option 

bonds outstanding exceeds the face 

value of bonds initially issued. 

C. Allocation to the Originator 

1. Overview of Proposal and Public 

Comment 

As a general matter, the original 

proposal and reproposal were structured 

so that the sponsor of a securitization 

transaction would be solely responsible 

for complying with the risk retention 

requirements established under section 

15G of the Exchange Act and the 

implementing regulations, consistent 

with that statutory provision. However, 

subject to a number of considerations, 

section 15G authorizes the agencies to 

allow a sponsor to allocate at least a 

portion of the credit risk it is required 

to retain to the originator(s) of 

securitized assets.208 Accordingly, 

subject to conditions and restrictions, 

the reproposal (like the original 

proposal) would have permitted a 

sponsor to reduce its required risk 

retention obligations in a securitization 

transaction by the portion of risk 

retention obligations assumed by one or 

more of the originators of the securitized 

assets. 

When determining how to allocate the 

risk retention requirements, the agencies 

are directed to consider whether the 

assets sold to the sponsor have terms, 

conditions, and characteristics that 

reflect low credit risk; whether the form 

or volume of the transactions in 

securitization markets creates incentives 

for imprudent origination of the type of 

loan or asset to be sold to the sponsor; 

and the potential impact of the risk 

retention obligations on the access of 

consumers and businesses to credit on 

reasonable terms, which may not 

include the transfer of credit risk to a 

third party.209

In the reproposal, the agencies 

proposed a framework that would have 

permitted a sponsor of a securitization 

to allocate a portion of its risk retention 

obligation to an originator that 

contributed a significant amount of 

assets to the underlying asset pool. The 

agencies endeavored to create 

appropriate incentives for both the 

securitization sponsor and the 

originator(s) to maintain and monitor 

appropriate underwriting standards 

without creating undue complexity, 

which potentially could mislead 

investors and confound supervisory 

efforts to monitor compliance. 

Importantly, the reproposal would not 

have required allocation to an 

originator. Therefore, it did not raise the 

types of concerns about allocation of 

burden and credit availability that might 

arise if certain originators, such as 

mortgage brokers or small community 

banks (that may experience difficulty 

obtaining funding to retain risk 

positions), were required to fulfill a 

sponsor’s risk retention requirement. 

The allocation to originator option in 

the reproposal was designed to work in 

tandem with the standard risk retention 

option. Additionally, the reproposal 

would have permitted a securitization 

sponsor to allocate a portion of its risk 

retention obligation to any originator of 

the underlying assets that originated at 

least 20 percent of the underlying assets 

in the pool. The amount of the retention 

interest held by each originator that was 

allocated credit risk in accordance with 

the reproposal was required to be at 

least 20 percent, but not in excess of the 

percentage of the securitized assets it 

originated. The originator would have 

been required to hold its allocated share 

of the risk retention obligation in the 

same manner as would have been 

required of the sponsor, and subject to 

the same restrictions on transferring, 

hedging, and financing the retained 

interest. Thus, for example, if the 

sponsor satisfied its risk retention 

requirements by acquiring an eligible 

horizontal residual interest, an 

originator allocated risk would have 

been required to acquire a portion of 

that interest, in an amount not 

exceeding the percentage of securitized 

assets created by the originator. The 

sponsor’s risk retention requirements 

would have been reduced by the 

amount allocated to the originator. The 

sponsor would have had to provide, or 

cause to be provided, to potential 

investors (and the appropriate regulators 

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upon request) the name and form of 

organization of any originator that will 

acquire and retain (or has acquired and 

retained) an interest in the transaction, 

including a description of the form, 

amount, and nature of the interest (e.g., 

senior or subordinated), as well as the 

method of payment for such interest. 

Finally, the reproposal would have 

made the sponsor responsible for any 

failure of an originator to abide by the 

transfer, hedging, and financing 

restrictions included in the proposed 

rule. 

Comments on the allocation to 

originator proposal focused on the 20 

percent threshold for allocation, the 

requirement that an originator to which 

risk retention was allocated share pro 

rata in all of the losses allocated to the 

type of interest (i.e., horizontal or 

vertical) it holds rather than only the 

losses on assets that it originated, and 

the definition of originator. Some of the 

commenters requested that the 20 

percent minimum should be deleted 

and that it would hurt smaller 

originators while one commenter 

supported the limit and asserted that it 

protected smaller originators. Comments 

as to the required pro rata sharing by the 

originator included an analysis that 

because securitization tranches are 

developed so that tranche holders share 

pari passu in losses, it would cause 

unnecessary complexity to limit an 

originator’s interests to the loans that it 

had originated. Finally, a commenter 

asserted that the definition of 

‘‘originator’’ ought to include parties 

that purchase assets from entities that 

create the assets. 

2. Final Rule 

The agencies have carefully 

considered the concerns raised by 

commenters with respect to the 

reproposal on allocation to originators. 

For the reasons discussed below, the 

agencies have concluded that the 

changes to the reproposal suggested by 

the commenters are not necessary or 

appropriate. Therefore, the agencies are 

adopting the proposed allocation to 

originator provision with minor drafting 

corrections and changes, as discussed 

below. 

The only modifications to this option 

from that proposed in the reproposal are 

a drafting correction and changes to the 

formulation in section 11(a)(1)(ii) of the 

rule of the limit on how much of its risk 

retention obligation a sponsor may 

allocate to an originator. These changes 

to section 11(a)(1)(ii) of the rule reflect 

that no fair value computation is 

required for a vertical interest 

(discussed above in Part III.B.1 of this 

Supplementary Information) and, 

consequently, that in certain 

circumstances the fair value of the 

retained interest as a percentage of all 

ABS interests issued in the 

securitization transaction may not be 

determined. This change to the text of 

section 11(a)(1)(ii) of the rule does not 

result in any substantive change to the 

allocation to originator provisions 

contained in the reproposal. 

While section 11(a)(1)(iv) is 

unchanged from the reproposal, it 

should be noted that the amount that is 

required to be paid by the originator 

might need to be calculated differently 

from how this amount would have been 

calculated under the reproposal. In the 

event that the fair value of all ABS 

interests issued in a securitization 

transaction is not calculated, which 

would be the case if the sponsor opted 

for all of its required risk retention to be 

held as eligible vertical interests and 

one or more classes of ABS interests 

were not sold to investors, the amount 

by which the sponsor’s risk retention is 

reduced by the sale of a portion thereof 

to an originator will not be determinable 

from the calculations required by 

section 4 of the rule. In this 

circumstance, the agencies would 

expect that the value of the retained 

portion of any unsold tranches for 

purposes of section 11 of the rule will 

be determined on a reasonable basis by 

the sponsor and the originator. 

The agencies note that the reference 

in section 11(a)(1)(ii) of the rule to the 

interest retained by the sponsor refers to 

the amount of the interest required to be 

retained by the sponsor before giving 

effect to any sale to an originator. 

Similarly, the provision in section 

11(a)(2) of the rule that a sponsor 

disclose the percentage of the interest 

sold to an originator is intended to 

require calculation of such percentage 

based on the sponsor’s risk retention 

amount before any sale to an originator. 

The rule, like the proposal, requires 

that an originator to which a portion of 

the sponsor’s risk retention obligation is 

allocated acquire and retain eligible 

vertical interests or eligible horizontal 

residual interests in the same manner as 

would have been retained by the 

sponsor. As under the reproposed rule, 

this condition will require an originator 

to acquire horizontal and vertical 

interests in the securitization 

transaction in the same proportion as 

the interests originally to be retained by 

the sponsor. This requirement helps to 

align the interests of originators and 

sponsors, as both will face the same 

likelihood and degree of losses if the 

securitized assets begin to default. In 

addition, if originators were permitted 

to retain their share of the sponsor’s risk 

retention obligation in a proportion that 

is different from the sponsor’s mix of 

the vertical and horizontal interests, 

investor and regulatory monitoring of 

risk retention compliance could become 

very complex. 

As under the reproposal, the rule 

requires a sponsor that uses an eligible 

horizontal cash reserve account and 

desires to allocate a portion of its risk 

retention obligations to an originator to 

allocate a portion of the interest the 

sponsor holds in such account to the 

originator. Such allocation may be 

effected by any method that results in 

the sponsor and each originator to 

which any retention is allocated 

sharing, directly or indirectly, on a pari 

passu basis in one or more eligible 

horizontal residual accounts. For 

example, (1) the originator may deposit 

into the sponsor-established account 

funds in the amount of the originator’s 

share of the sponsor’s risk retention 

obligations, in replacement of a like 

amount of the funds originally 

deposited by the sponsor, or (2) the 

originator may create a separate 

horizontal reserve account in the 

amount of its share of the sponsor’s risk 

retention obligations, in substitution for 

a like amount of funds in the sponsor’s 

reserve account. If an originator 

establishes a separate account, such 

account must share pari passu with the 

sponsor’s eligible horizontal reserve 

account (and any other originator’s 

eligible horizontal reserve account) in 

amounts released to satisfy amounts due 

on ABS interests. 

The rule does not modify the 

requirement that an originator to which 

a sponsor may sell a portion of its 

required risk retention must have 

originated at least 20 percent of the asset 

pool. As explained in the reproposal, by 

limiting this option to originators that 

originate at least 20 percent of the asset 

pool, the agencies seek to ensure that 

the originator retains risk in an amount 

significant enough to function as an 

actual incentive for the originator to 

monitor the quality of all the securitized 

assets (and to which it would retain 

some credit risk exposure). In addition, 

the 20 percent threshold serves to make 

the allocation option available only for 

entities whose assets form a significant 

portion of a pool and who, thus, 

ordinarily could be expected to have 

some bargaining power with a sponsor. 

By restricting originators to holding 

no more than their proportional share of 

the risk retention obligation, the rule 

seeks to prevent sponsors from 

circumventing the purpose of the risk 

retention obligation by transferring an 

outsized portion of the obligation to an 

originator that may have been seeking to 

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210 15 U.S.C. 78o–11(a)(4). 

211The sunset on hedging and transfer 

restrictions is discussed in Part III.F of this 

Supplementary Information. 

acquire a speculative investment. These 

requirements are also intended to 

reduce the rule’s potential complexity 

and facilitate investor and regulatory 

monitoring. 

The rule does not incorporate the 

commenter suggestion that an originator 

be allocated retention in only the loans 

that it originated. The operational 

burden on both securitization sponsors 

and federal supervisors to ensure that 

retention is held by originators on the 

correct individual loans would, for 

many different asset classes, be 

exceedingly high. Therefore, the rule 

requires that originators allocated a 

portion of the risk retention requirement 

be allocated a share of the entire 

securitization pool. 

The rule does not modify the 

definition of originator from that set 

forth in the reproposal and does not 

include persons that acquire loans and 

transfer them to a sponsor. The agencies 

continue to believe that the definition of 

the term originator in section 15G 210

should not be interpreted to include 

such persons. Section 15G defines an 

originator to a person that ‘‘through the 

extension of credit or otherwise, creates 

a financial asset.’’ A person that 

acquires an asset created by another 

person would not be the ‘‘creator’’ of 

such asset. 

Finally, while the final rule omits the 

proposed requirement that a sponsor 

disclose the dollar amount of the 

interests sold to originators because 

such amount may not always be 

calculated, the disclosure requirements 

of the sponsor under section 4 of the 

final rule remain applicable to the 

sponsor and should be construed to 

refer to the required interest originally 

retained by the sponsor, even where the 

sponsor sells some or all of its required 

retained interests to originators. 

D. Hedging, Transfer, and Financing 

Restrictions 

1. Overview of the Reproposal and 

Public Comment 

Section 15G(c)(1)(A) provides that the 

risk retention regulations shall prohibit 

a securitizer from directly or indirectly 

hedging or otherwise transferring the 

credit risk that the securitizer is 

required to retain with respect to an 

asset. Consistent with this statutory 

directive, the reproposal would have 

prohibited a sponsor from (i) 

transferring any interest or assets that it 

was required to retain under the rule to 

any person other than a majority-owned 

affiliate of the sponsor, (ii) hedging the 

credit risk the sponsor is required to 

retain under the rule, unless the hedge 

positions are expressly permitted or not 

materially related to the credit risk of 

the particular ABS interests or 

exposures required to be retained by the 

sponsor, or (iii) pledging as collateral for 

any obligation any interest or asset that 

the sponsor is required to retain, unless 

the pledge collateralizes an obligation 

with full recourse to the sponsor or a 

consolidated affiliate. 

The agencies did not receive any 

comments directly addressing the 

financing restrictions in the reproposal. 

Several commenters addressed the 

hedging and transfer provisions. 

While some commenters supported 

the proposed restrictions on hedging, 

others opposed the provisions as being 

overly restrictive, and certain 

commenters requested clarification as to 

the scope of the proposed restrictions. 

One commenter advocated a blanket 

exception from the hedging restriction 

for pool and asset level credit insurance 

reasoning that such insurance reduces 

credit risk for the benefit of all holders 

of ABS interests, and does not eliminate 

the retaining sponsor’s exposure to 

credit risk or change the ‘‘relative 

distribution of risk among interest 

holders.’’ Another commenter expressed 

the view that issuers of securities 

collateralized by ‘‘qualifying assets’’ 

should be able to hold hedges, 

insurance policies and other forms of 

credit enhancement as discussed in 

Items 1114 and 1115 of the 

Commission’s Regulation AB, and 

asserted that ‘‘interest rate hedges, bond 

insurance policies, pool insurance 

policies and other forms of credit 

enhancement form an important 

component of many securitization 

structures and provide clear benefits to 

investors.’’ 

Several commenters requested that 

the agencies clarify that the term 

‘‘servicing assets’’ (which are generally 

permitted to be held by issuers) 

includes hedge instruments. One of 

these commenters asserted that the 

preamble to the reproposal indicated 

that the term was intended to be defined 

broadly and included ‘‘interest rate and 

foreign currency risk’’ hedges, but the 

definition of the term in the proposed 

regulation did not reflect that breadth. 

The commenter expressed concern that, 

without clarification, issuers that used 

other types of hedges would not be able 

to avail themselves of exemptions from 

risk retention, with the result that costs 

would be borne by investors (in the 

form of less credit enhancement) and 

borrowers (in the form of higher interest 

rates). Another commenter requested 

that permitted hedging activities 

include ‘‘purchasing or selling a 

security or other financial instrument to 

protect or mitigate credit risk in 

servicing assets for the protection of all 

investors.’’ This commenter requested 

that hedges to mitigate risk with respect 

to amounts due for services that are not 

financed as well as vehicle leases be 

allowed. 

One commenter suggested that the 

agencies consider whether the 

restriction prohibiting the sponsor from 

transferring, selling, or otherwise 

encumbering its interest for a period of 

time after establishing the securitization 

entity may have the unintended 

consequence of creating a de facto 

agency relationship between the 

sponsor and the other investors in the 

securitization entity under GAAP. The 

commenter asserted that a de facto 

agency relationship between the 

sponsor and the other investors in a 

securitization entity results in a higher 

likelihood that the sponsor would be 

required to consolidate the 

securitization entity. 

2. Final Rule 

The agencies have carefully 

considered the comments received with 

respect to the reproposal’s hedging, 

transfer, and financing restrictions, and 

for the reasons discussed below, do not 

believe that any significant changes to 

the reproposal’s restrictions are 

necessary or appropriate. Accordingly, 

the final rule contains hedging, transfer, 

and financing restrictions that are 

substantially the same as those 

contained in the reproposal.211

The final rule prohibits a sponsor or 

any affiliate from hedging the credit risk 

the sponsor is required to retain under 

the rule or from purchasing or selling a 

security or other financial instrument, 

or entering into an agreement (including 

an insurance contract), derivative or 

other position, with any other person if: 

(i) Payments on the security or other 

financial instrument or under the 

agreement, derivative, or position are 

materially related to the credit risk of 

one or more particular ABS interests 

that the retaining sponsor is required to 

retain, or one or more of the particular 

securitized assets that collateralize the 

asset-backed securities; and (ii) the 

security, instrument, agreement, 

derivative, or position in any way 

reduces or limits the financial exposure 

of the sponsor to the credit risk of one 

or more of the particular ABS interests 

or one or more of the particular 

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212The two-part test requires that a position be 

both ‘‘materially related to the credit risk’’ and 

actually offset credit risk. These concepts are often 

interrelated and, if significant amounts of credit risk 

are offset, this may indicate a material relationship 

to the retained ABS interests. 

213Because a liquidity facility is required for the 

ABCP option and the qualified tender option bond 

entity options, but does not itself constitute 

required risk retention, it is not subject to the 

transfer or hedging restrictions. 

214One notable exception might arise for cash 

held in a currency different than the currency of 

obligation for the securitization, where the amount 

of currency and time to payment obligation are 

material from the standpoint of the securitization; 

however this foreign exchange risk is more 

commonly hedged at the securitized asset level. 

securitized assets that collateralize the 

asset-backed securities.212

As in the reproposal, because the 

agencies believe it would not be 

‘‘materially related’’ to the particular 

interests or assets that the sponsor is 

required to retain, holding a security 

tied to the return of an index (such as 

the subprime ABX.HE index) is not a 

prohibited hedge so long as: (1) any 

class of ABS interests in the issuing 

entity that were issued in connection 

with the securitization transaction and 

that are included in the index represent 

no more than 10 percent of the dollarweighted average of all instruments 

included in the index, and (2) all classes 

of ABS interests in all issuing entities 

that were issued in connection with any 

securitization transaction in which the 

sponsor was required to retain an 

interest pursuant to the rule and that are 

included in the index represent, in the 

aggregate, no more than 20 percent of 

the dollar weighted average of all 

instruments included in the index. Such 

permitted positions include hedges 

related to overall market movements, 

such as movements of market interest 

rates (but not the specific interest rate 

risk, also known as spread risk, 

associated with the ABS interest that is 

otherwise considered part of the credit 

risk), currency exchange rates, home 

prices, or the overall value of a 

particular broad category of assetbacked securities. 

In response to comments, the agencies 

also note that they do not believe that 

the rule prohibits the retaining sponsor 

from benefiting from credit 

enhancements or risk mitigation 

products that are designed to benefit all 

investors in the securitization in which 

the sponsor is required to retain risk. 

For example, the retaining sponsor may 

benefit from private mortgage insurance 

provided that the proceeds of such 

insurance are subject to the priority of 

payments for all investors. 

The agencies caution that a sponsor 

would not be in compliance with the 

rule if it were to engage in, direct or 

control a series of transactions designed 

to add credit enhancement to assets 

ultimately securitized by it in a manner 

that indirectly achieved what the 

sponsor is prohibited from doing 

directly. The agencies believe that the 

hedging and transfer prohibitions in the 

statute are intended to ensure that the 

sponsor retains meaningful credit 

exposure to the securitized assets rather 

than credit exposure to a third party. As 

a result, the agencies believe that the 

hedging prohibition would impose 

limits on a sponsor benefitting from 

asset-level or pool-level insurance that 

covered 100 percent of the credit risk of 

the securitized assets, unless the 

sponsor’s right to recover insurance 

proceeds from such hedges is 

subordinated to the payment in full of 

all other investors. 

A different approach is applicable 

when risk reducing transactions or 

instruments cover either the ABS 

interests required to be retained by the 

sponsor, such as bond insurance, or 100 

percent of the credit risk of the 

securitized assets, such as municipal 

bond insurance. Under this approach, 

the retaining sponsor would be 

precluded from receiving distributions 

that, but for the proceeds from the 

insurance, would not be available for 

distribution to that retaining sponsor 

unless, at the time of distribution, all 

other amounts due at that time to be 

paid to all other holders of outstanding 

ABS interests have been paid in full. 

Accordingly, until all other holders of 

obligations issued as part of the 

securitization transaction are paid all 

amounts then due to them, a holder of 

an eligible vertical interest would not be 

permitted to benefit from bond 

insurance on a senior class or tranche 

and, thus, would be required to 

subordinate its interest in any bond 

insurance proceeds to the payment of all 

amounts due to all other ABS interests. 

Similarly, a sponsor would not be 

entitled to benefit from a pool insurance 

policy that references amounts payable 

to a specific tranche or class of ABS 

interest unless, at the time of 

distribution, all other ABS interests had 

been paid all amounts due to them at 

the time. 

The agencies are clarifying that the 

liquidity support provided by a 

regulated liquidity provider in 

satisfaction of the requirements set forth 

in the tender option bond risk retention 

option described in section 10 of the 

final rule or in satisfaction of the 

requirements set forth in the ABCP risk 

retention option described in section 6 

of the final rule is not subject to the 

prohibition on hedging and transfer.213

In both cases, the liquidity support is an 

important aspect of the existing market 

practice and alignment of interests in 

these transactions. The agencies note 

that, to the extent that a sponsor of an 

ABCP conduit or tender option bond 

program is also the liquidity provider, a 

liquidity agreement or credit guarantee 

would not violate the prohibition on 

hedging because such an agreement 

would not hedge the sponsor’s credit 

risk retention. Additionally, with 

respect to an eligible ABCP conduit, the 

originator-seller in its capacity as 

sponsor of the intermediate SPV is 

subject to the hedging prohibition and 

would remain exposed to the credit risk 

of the collateral supporting the ABS 

interests issued by the intermediate 

SPV. 

As under the reproposal, because the 

agencies believe that they would not be 

‘‘materially related’’ to the particular 

interests or assets that the sponsor is 

required to retain, hedges tied to 

securities that are collateralized by 

similar assets originated and securitized 

by other sponsors would not be 

prohibited. On the other hand, a 

security, instrument, derivative or 

contract generally would be ‘‘materially 

related’’ to the particular interests or 

assets that the sponsor is required to 

retain if the security, instrument, 

derivative or contract refers to those 

particular interests or assets or requires 

payment in circumstances where there 

is or could reasonably be expected to be 

a loss due to the credit risk of such 

interests or assets (e.g., a credit default 

swap for which the particular interest or 

asset is the reference asset). 

In response to comments requesting 

clarification as to whether servicing 

assets could be hedged, the agencies are 

of the view that cash equivalents that 

are servicing assets should be 

specifically limited so that they do not 

create additional risk for a securitization 

transaction and they should not require 

hedging.214 As for whether servicing 

assets may include hedge instruments, 

the agencies note that interest rate and 

foreign currency hedges are not 

prohibited hedges under section 12 of 

the final rule. As noted earlier, the term 

‘‘servicing assets’’ is similar to the 

definition of the term ‘‘eligible assets’’ 

under Rule 3a–7 of the Investment 

Company Act. 

Regarding commenters’ concerns that 

the rule’s transfer and hedging 

restrictions may create a de facto agency 

relationship between the sponsor and 

the other investors in the securitization 

entity under GAAP, the Commission 

notes, and the other agencies concur, 

that a de facto agency relationship 

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215As the agencies noted in the original proposal, 

the safe harbor is intended solely to provide clarity 

that the agencies will not apply the requirements 

of the final rule to transactions that meet all of the 

conditions of the safe harbor. The safe harbor 

should not be interpreted as reflecting the views of 

any agency as to the potential scope of transactions 

or persons subject to section 15G or the final rule. 

216The agencies note that the value of an ABS 

interest for this purpose would be its fair value on 

the date of sale, determined using the fair value 

measurement framework under GAAP. 

under GAAP will not be created by the 

transfer, hedging, or financing 

restrictions in the final rule, and note 

that the definition of a de facto agency 

relationship in GAAP relates to an 

agreement between variable interest 

holders in an entity that restricts one 

variable interest holder from selling, 

transferring, or encumbering its interest 

in the entity without the prior approval 

of other variable interest holders. A de 

facto agency relationship does not exist 

solely as a result of a regulatory 

restriction imposed on an investor that 

prohibits its ability to transfer, sell, or 

otherwise encumber its interest in an 

entity. As such, the Commission 

confirms, and the other agencies concur, 

that the restriction in the final rule 

prohibiting the sponsor from 

transferring, selling, or otherwise 

encumbering its interest for a period of 

time after establishing the securitization 

entity does not create under GAAP a de 

facto agency relationship between the 

sponsor and the other investors in the 

securitization entity. 

E. Safe Harbor for Certain ForeignRelated Securitizations 

Like the original proposal, the 

reproposal included a ‘‘safe harbor’’ 

provision for certain securitization 

transactions with limited connections to 

the United States and U.S. investors.215

The safe harbor was intended to exclude 

from the risk retention requirements 

transactions in which the effects on U.S. 

interests are sufficiently remote so as 

not to significantly impact underwriting 

standards and risk management 

practices in the United States or the 

interests of U.S. investors. Accordingly, 

reliance on the safe harbor is 

conditioned upon limited involvement 

by persons in the United States with 

respect to both securitized assets and 

the ABS interests sold in connection 

with the transaction. The safe harbor 

would not have been available for any 

transaction or series of transactions that, 

although in technical compliance with 

the conditions of the safe harbor, is part 

of a plan or scheme to evade the 

requirements of section 15G of the 

Exchange Act and these rules. 

Under the reproposal, the risk 

retention requirement would not have 

applied to a securitization transaction if: 

(1) the securitization transaction is not 

required to be and is not registered 

under the Securities Act; (2) no more 

than 10 percent of the dollar value (or 

equivalent if denominated in a foreign 

currency) of all classes of ABS interests 

in the securitization transaction are sold 

or transferred to U.S. persons or for the 

account or benefit of U.S. persons; 216

(3) neither the sponsor of the 

securitization transaction nor the 

issuing entity is (i) chartered, 

incorporated, or organized under the 

laws of the United States, or a U.S. state, 

the District of Columbia, Puerto Rico, 

the Virgin Islands or any other 

possession of the United States (any 

such state, other jurisdiction or 

possession, a ‘‘U.S. state’’), (ii) an 

unincorporated branch or office 

(wherever located) of an entity 

chartered, incorporated or organized 

under the laws of the United States or 

any U.S. state, or (iii) an unincorporated 

branch or office located in the United 

States or any U.S. state (an 

‘‘unincorporated U.S.-located entity’’) of 

an entity not chartered, incorporated, or 

organized under the laws of the United 

States, or a U.S. state; and (4) no more 

than 25 percent of the assets 

collateralizing the ABS interests sold in 

the securitization transaction were 

acquired by the sponsor or issuing 

entity, directly or indirectly, from (i) a 

majority-owned affiliate of the sponsor 

or issuing entity that is chartered, 

incorporated or organized under the 

laws of the United States or a U.S. state, 

or (ii) an unincorporated U.S.-located 

entity of the sponsor or issuing entity. 

Commenters on the reproposal 

generally supported the existence of a 

safe harbor for certain foreign 

securitizations. A few commenters 

suggested increasing the 10 percent 

limit on the value of ABS interests 

permitted to be sold to or for the 

account of U.S. persons. These 

commenters also requested that the 

agencies clarify that the 10 percent limit 

applies only at the time of initial 

issuance and does not include 

secondary market transfers. Commenters 

also proposed to exclude from the 10 

percent limitation (A) securitization 

transactions with a sponsor or issuing 

entity that is a U.S. person which makes 

no offers to U.S. persons and (B) 

issuances of asset-backed securities that 

comply with Regulation S of the 

Securities Act. 

Several commenters requested that 

the rule provide for coordination of the 

rule’s risk retention requirement with 

foreign risk retention requirements, 

including by permitting a foreign issuer 

to comply with home country or other 

applicable foreign risk retention rules. 

In this regard, comment was made that 

U.S. risk retention rules may be 

incompatible with foreign risk retention 

requirements, such as the European 

Union risk retention requirements and, 

accordingly, that sponsors required to 

comply with U.S. as well as foreign risk 

retention regulations could be subject to 

conflicting rules. Commenters also 

requested that the agencies clarify how 

the dollar value of ABS interests should 

be determined and that satisfaction of 

conditions to the safe harbor be tested 

as of the date of issuance only and not 

on an ongoing basis. 

The final rule sets forth a foreign safe 

harbor that is substantially similar to 

that included in the reproposal. The 

agencies have retained the 10 percent 

limit on the value of ABS interests sold 

to U.S. persons for safe harbor 

eligibility. The agencies continue to 

believe that the 10 percent limit 

appropriately aligns the safe harbor with 

the objective of the rule, which is to 

exclude only those transactions with 

limited effect on U.S. interests, 

underwriting standards, risk 

management practices, or U.S. investors. 

The agencies wish to make clear that, 

in general, the rule is intended to 

include in the calculation of the 10 

percent limit only ABS interests sold in 

the initial distribution of ABS interests. 

Secondary sales to U.S. persons would 

not normally be included in the 

calculation. However, secondary sales 

into the U.S. under circumstances that 

indicate that such sales were 

contemplated at the time of the issuance 

(and not included for purposes of 

calculating the 10 percent limit) might 

be viewed as part of a plan or scheme 

to evade the requirements of the rule. 

The 10 percent limit as applied to the 

sale or transfer of any ABS interest 

would need to be computed only on the 

date of initial distribution of that ABS 

interest, not an ongoing basis following 

such initial distribution. If different 

classes or portions of the same class of 

ABS interests are distributed by or on 

behalf of the issuing entity or a sponsor 

on different dates, the 10 percent limit 

would need to be calculated on each 

such distribution date. 

Under the rule, interests retained by 

the sponsor may be included, as part of 

the aggregate ABS interests in the 

securitization transaction, in calculating 

the percentage of those ABS interests 

sold to U.S. persons or for the account 

or benefit of U.S. persons. 

The agencies considered the 

comments requesting a mutual 

recognition framework and observe that 

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217 15 U.S.C. 78o–11(c)(1)(A). As with other 

provisions of risk retention, the agencies could 

provide an exemption under section 15G(e) of the 

Exchange Act if certain findings were met. See id. 

at section 78o–11(e). 

218As described in Part III.B.5 of this 

Supplementary Information, the agencies also 

included in the reproposal, as an exception to the 

transfer and hedging restrictions, the ability to 

transfer the retained B-piece interest in a CMBS 

transaction (whether held by the sponsor or a thirdparty purchaser) to a third-party purchaser five 

years after the date of the closing of the 

securitization transaction, provided that the 

transferee satisfies each of the conditions applicable 

to an initial third-party purchaser under the CMBS 

option. 

such a framework has not been 

generally adopted in non-U.S. 

jurisdictions with risk retention 

requirements. As explained in the 

preamble to the proposed rule, given the 

many differences between jurisdictions, 

such as securitization frameworks that 

place the obligation to comply with risk 

retention requirements upon different 

parties in the securitization transaction, 

different requirements for hedging, risk 

transfer, or unfunded risk retention, and 

other material differences, the agencies 

believe that it would likely not be 

practicable to construct such a ‘‘mutual 

recognition’’ system that would meet all 

the requirements of section 15G of the 

Exchange Act. Moreover, in several such 

jurisdictions, the risk retention 

framework recognizes unfunded forms 

of risk retention, such as standby letters 

of credit, which the agencies do not 

believe provide sufficient alignment of 

incentives and have rejected as eligible 

forms of risk retention under the U.S. 

framework. Finally, the agencies believe 

that the rule incorporates sufficient 

flexibility for sponsors with respect to 

forms of eligible risk retention to permit 

foreign sponsors seeking a significant 

U.S. investor base to retain risk in a 

format that satisfies applicable foreign 

and U.S. regulatory requirements, even 

though such dual compliance 

requirements might cause a sponsor to 

structure a transaction differently than it 

would have chosen had it not been 

subject to such multiple requirements. 

The agencies do not agree that 

securitizations with U.S. persons, 

sponsors or issuing entities with no U.S. 

offerees, or that conduct all sales 

pursuant to Regulation S of the 

Securities Act, should be exempt from 

the 10 percent limit. If the rule excluded 

such securitizations or sales from the 10 

percent limit, a market for poorly 

underwritten assets could evolve and 

negatively impact U.S. underwriting 

standards and risk management 

practices. 

Improving underwriting standards is 

one of the goals of risk retention and, for 

the rule to be effective, the rule should 

be applied in a manner that maintains 

underwriting standards and risk 

management practices in the United 

States. The agencies’ adoption of the 

foreign safe harbor incorporates the 

agencies’ understanding of current 

securitization markets and market 

trends, including the importance of U.S. 

investors in global securitization 

markets. As securitization markets 

evolve, the agencies will be alert to 

ensuring any such changes do not 

undermine the effectiveness of the rule 

in achieving the purposes of section 

15G. Accordingly, the agencies will 

monitor compliance with the safe 

harbor and the contexts in which the 

safe harbor is relied upon. Should it 

become apparent that reliance on the 

safe harbor has resulted in market shifts 

that are detrimental to investors or 

securitization markets, for example 

where significant amounts of 

securitizations collateralized by U.S. 

assets are conducted in reliance on the 

safe harbor and such reliance 

undermines underwriting standards and 

risk management practices in the United 

States, the agencies will consider the 

applicability of the anti-evasion 

provisions of the safe harbor or will 

consider modifications to the safe 

harbor. 

F. Sunset on Hedging and Transfer 

Restrictions 

As discussed in Part III.D of this 

Supplementary Information, section 

15G(c)(1)(A) of the Exchange Act 

provides that sponsors may not hedge or 

transfer the risk retention interest they 

are required to hold.217 However, the 

statute also provides that the agencies 

shall specify the minimum duration of 

risk retention. As explained in the 

reproposal, the agencies believe that the 

primary purpose of risk retention— 

sound underwriting—is less likely to be 

effectively promoted by risk retention 

requirements after a certain period of 

time has passed and a peak number of 

delinquencies for an asset class has 

occurred. Therefore, the agencies 

proposed two categories of duration for 

the transfer and hedging restrictions— 

one for RMBS and one for other types 

of ABS interests. 

For RMBS, the transfer and hedging 

restrictions under the proposed rule 

would expire on or after the date that is 

(1) the later of (a) five years after the 

date of the closing of the securitization 

or (b) the date on which the total unpaid 

principal balance of the securitized 

assets is reduced to 25 percent of the 

original unpaid principal balance as of 

the date of the closing of the 

securitization, but (2) in any event no 

later than seven years after the date of 

the closing of the securitization. 

For all ABS interests other than 

RMBS, the transfer and hedging 

restrictions under the reproposed rule 

would expire on or after the date that is 

the latest of (1) the date on which the 

total unpaid principal balance of the 

securitized assets that collateralize the 

securitization is reduced to 33 percent 

of the original unpaid principal balance 

as of the date of the closing of the 

securitization, (2) the date on which the 

total unpaid principal obligations under 

the ABS interests issued in the 

securitization is reduced to 33 percent 

of the original unpaid principal 

obligations at the closing of the 

securitization transaction, or (3) two 

years after the date of the closing of the 

securitization transaction.218

The reproposal also included a 

provision that the proposed rule’s 

restrictions on transfer and hedging 

would end if a conservator or receiver 

of a sponsor or other holder of risk 

retention is appointed pursuant to 

federal or state law. 

The agencies invited comment on the 

sunset provisions and asked whether 

they were appropriately calibrated for 

RMBS and all other asset classes, and 

whether it was appropriate to provide a 

sunset provision for all RMBS. Several 

commenters expressed general support 

for the sunset provisions but others 

requested shorter time period 

restrictions. One commenter suggested 

longer time period restrictions on 

certain asset classes, while others 

proposed shortening the time periods 

and adding more flexibility. One 

commenter suggested that there should 

be an outside time limit of no more than 

five years for asset classes other than 

RMBS and CMBS, including student 

loans, aircraft leases, shipping container 

leases, railcar leases, and structured 

settlements of personal injury awards, 

lottery winnings, and other assets. A 

few commenters requested clarification 

for transactions that do not typically 

have a nominal ‘‘principal balance’’ and 

one commenter requested that the test 

use the cut-off date instead of the 

closing date for measurement. 

For RMBS, a few commenters 

requested that sunset occur three to four 

years after closing, while another 

commenter requested a sunset of two 

years after the security is issued. One 

commenter recommended that the 

agencies adopt a flat five-year sunset for 

RMBS and eliminate the 25 percent 

remaining unpaid balance test. In 

support of a three-year sunset after 

closing, some commenters requested 

that the RMBS sunset provision be 

analogous to the FHFA framework for 

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219 15 U.S.C. 78o–11(e)(2). 

220See 15 U.S.C. 78o–11(c)(1)(G) and (e). 

221See id. at section 78o–11(e)(3)(B). 

222See id. at section 78o–11(e)(3)(B). 

representations and warranties whereby 

lenders are relieved of certain 

repurchase obligations for loans after 36 

months of on-time payments. One 

commenter requested that the sunset 

provisions be calibrated differently 

depending on the risk associated with 

the underlying RMBS. 

A few commenters recommended a 

two-year sunset provision for open 

market CLOs, noting that anything 

longer would provide no relief given the 

fact that these pools allow for 

reinvestment. Two commenters 

requested alternative sunset provisions 

for student, vehicle, and equipment 

loans where sunset would occur on the 

earlier of (i) two years after the closing 

date, and (ii) the later of (A) the 

reduction of the unpaid principal 

balance of the securitized assets to 33 

percent or less of the cut-of date balance 

and (B) the reduction of the unpaid 

principal balance of the ABS interests 

sold to third parties to 33 percent or less 

of the closing date balance. 

The agencies have carefully 

considered the comments and are 

adopting the sunset provisions as 

proposed. In reviewing the reproposal 

and the comments, the agencies 

considered the duration for which the 

rule should maintain the sponsor’s 

exposure to the performance of the 

assets, balancing the time it might take 

for weaker underwriting to manifest 

itself against the competing 

consideration that, as that time period 

extends, other factors may be more 

influential triggers of asset default. 

Although the time periods proposed by 

the agencies are longer than commenters 

generally asserted were necessary in 

striking this balance, the agencies seek 

to establish a conservative approach. It 

is expected that this approach will 

cause sponsors to focus on underwriting 

criteria on the front end, at the time of 

securitization, and the agencies believe 

that requiring them to be mindful of 

their exposure for the periods the 

agencies proposed will improve the 

sponsor’s alignment of incentives and 

reinforce their focus on the performance 

of their assets beyond their initial 

creation. Accordingly, with respect to 

the proposed risk retention duration 

requirements for RMBS and for nonresidential mortgage ABS interests, the 

agencies are concerned that reducing 

the risk retention periods further would 

weaken the incentive for sponsors to 

ensure sound underwriting. 

With respect to the proposed risk 

retention duration requirement for 

RMBS, as the agencies discussed in the 

reproposal, because residential 

mortgages typically have a longer 

duration than other assets, weaknesses 

in underwriting may manifest 

themselves later than in other asset 

classes and can be masked by strong 

housing markets. Moreover, residential 

mortgage pools are uniquely sensitive to 

adverse selection through prepayments: 

if market interest rates fall, borrowers 

refinance their mortgages and prepay 

their existing mortgages, but refinancing 

is not available to borrowers whose 

credit has deteriorated, so mortgages to 

less creditworthy borrowers become 

concentrated in the RMBS pool in later 

years. Accordingly, the agencies are 

maintaining a different sunset provision 

for RMBS collateralized by residential 

mortgages that are subject to risk 

retention. 

In response to commenters who, in 

the context of assets other than 

residential mortgage loans, asked for 

clarification as to how the sunset 

provisions apply if the securitized assets 

do not have a principal balance, the 

agencies have revised the rule to clarify 

that the sunset criterion relating to 

principal balance would not apply to 

securitized assets that do not have a 

principal balance, if applicable. Thus, 

for such securitized assets, the rule 

provides that the transfer and hedging 

restrictions may terminate upon the 

later of two years after the date of the 

closing of the securitization transaction 

or the date on which the total unpaid 

principal balance of the issued ABS 

interests is reduced to 33 percent of 

their original balance. 

In addition, the agencies continue to 

believe the exemptions to the 

prohibitions on transfer for CMBS 

eligible horizontal residual interests 

proposed in the reproposal would help 

ensure high quality underwriting 

standards for the securitizers and 

originators of non-residential mortgage 

ABS interests and CMBS, would 

improve the access of consumers and 

businesses to credit on reasonable 

terms, and are in the public interest and 

for the protection of investors.219

IV. General Exemptions 

Sections 15G(c)(1)(G) and 15G(e) of 

the Exchange Act require the agencies to 

provide a total or partial exemption 

from the risk retention requirements for 

certain types of asset-backed securities 

or securitization transactions.220

In addition, section 15G(e)(1) permits 

the agencies jointly to adopt or issue 

additional exemptions, exceptions, or 

adjustments to the risk retention 

requirements of the rule, including 

exemptions, exceptions, or adjustments 

for classes of institutions or assets, if the 

exemption, exception, or adjustment 

would: (A) help ensure high quality 

underwriting standards for the 

securitizers and originators of assets that 

are securitized or available for 

securitization; and (B) encourage 

appropriate risk management practices 

by the securitizers and originators of 

assets, improve the access of consumers 

and businesses to credit on reasonable 

terms, or otherwise be in the public 

interest and for the protection of 

investors. 

Consistent with these provisions, the 

reproposal would have exempted 

certain types of asset-backed securities 

or securitization transactions from the 

credit risk retention requirements of the 

rule. Each of these exemptions, along 

with the comments and the final rule 

that the agencies are adopting, are 

discussed below. The agencies have 

determined that each of the exemptions 

adopted pursuant to section 15G(e)(1), 

including for the reasons described 

below and in the reproposal, satisfy the 

requirements described in the preceding 

paragraph. 

A. Exemption for Federally Insured or 

Guaranteed Residential, Multifamily, 

and Health Care Mortgage Loan Assets 

Section 15G(e)(3)(B) of the Exchange 

Act provides that the agencies, in 

implementing risk retention regulations, 

shall not apply risk retention to any 

residential, multifamily, or health care 

facility mortgage loan asset, or 

securitization based directly or 

indirectly on such an asset, that is 

insured or guaranteed by the United 

States or an agency of the United 

States.221 To implement this provision, 

the reproposal would have exempted 

from the risk retention requirements any 

securitization transaction collateralized 

solely by residential, multifamily, or 

health care facility mortgage loan assets 

if the assets are insured or guaranteed as 

to the payment of principal and interest 

by the United States or an agency of the 

United States.222

Several commenters expressed 

support for the exemption for 

securitization transactions collateralized 

solely by assets that are insured or 

guaranteed as to the payment of 

principal and interest by the United 

States or its agencies. One commenter 

urged the agencies to extend the 

government-backed exemptions to assetbacked securities backed by foreign 

governments. Another commenter 

requested that the agencies clarify that 

Enterprise securitizations of multifamily 

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223See id. at section 78o–11(c)(1)(G). 

224See 15 U.S.C. 78o–11(e)(3)(A). 

225See id. at section 78o–11(c)(1)(G)(iii). 

226Section 2 of the rule defines ‘‘state’’ as having 

the same meaning as in section 3(a)(16) of the 

Securities Exchange Act of 1934 (15 U.S.C. 

78c(a)(16)), which includes a state of the United 

States, the District of Columbia, Puerto Rico, the 

Virgin Islands, or any other possession of the 

United States. 

loans are exempt from the risk retention 

requirements. 

After considering the comments 

received, the agencies are adopting as 

proposed the exemption from the risk 

retention requirements for any 

securitization transaction that is 

collateralized solely by residential, 

multifamily, or health care facility 

mortgage loan assets if the assets are 

insured or guaranteed in whole or in 

part as to the payment of principal and 

interest by the United States or an 

agency of the United States. 

The agencies are not adopting an 

exemption from risk retention for 

securitizations of assets issued, 

guaranteed or insured by foreign 

government entities. As the agencies 

noted in the reproposal, the agencies 

continue to believe that it would not be 

appropriate to exempt such transactions 

from risk retention if they were offered 

in the United States to U.S. investors. 

Nor are the agencies expanding this (or 

any other exemption) to include all 

securitizations of multifamily loans by 

the Enterprises. Such securitizations 

require risk retention under the rule 

unless they meet the requirements of 

section 8 of the rule. 

B. Exemption for Securitizations of 

Assets Issued, Insured, or Guaranteed 

by the United States or any Agency of 

the United States and Other Exemptions 

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

Exchange Act requires that the agencies, 

in implementing risk retention 

regulations, provide for a total or partial 

exemption from risk retention for 

securitizations of assets that are issued 

or guaranteed by the United States or an 

agency of the United States, as the 

agencies jointly determine appropriate 

in the public interest and the protection 

of investors.223 The reproposal would 

have provided full exemption from risk 

retention for any securitization 

transaction in which the ABS interests 

issued in the transaction were (1) 

collateralized solely by obligations 

issued by the United States or an agency 

of the United States and servicing 

assets; (2) collateralized solely by assets 

that are fully insured or guaranteed as 

to the payment of principal and interest 

by the United States or an agency of the 

United States (other than residential, 

multifamily, or health care facility 

mortgage loan securitizations discussed 

above) and servicing assets; or (3) fully 

guaranteed as to the timely payment of 

principal and interest by the United 

States or any agency of the United 

States. 

Consistent with section 15G(e)(3)(A) 

of the Exchange Act, the reproposal also 

would have provided an exemption 

from risk retention for any securitization 

transaction collateralized solely by 

loans or other assets made, insured, 

guaranteed, or purchased by any 

institution that is subject to the 

supervision of the Farm Credit 

Administration, including the Federal 

Agricultural Mortgage Corporation, and 

servicing assets.224 Additionally, the 

reproposal would have provided an 

exemption from risk retention, 

consistent with section 15G(c)(1)(G)(iii) 

of the Exchange Act,225 for securities (1) 

issued or guaranteed by any state 226 of 

the United States, or by any political 

subdivision of a state, or by any public 

instrumentality of a state that is exempt 

from the registration requirements of the 

Securities Act by reason of section 

3(a)(2) of the Securities Act, or (2) 

defined as a qualified scholarship 

funding bond in section 150(d)(2) of the 

IRS Code. 

One commenter requested that the 

final rule retain the full exemption for 

securities issued by a state (including a 

political subdivision or public 

instrumentality of a state), and for 

securities that meet the definition of a 

qualified scholarship funding bond. 

This commenter requested clarification 

that the exemption for state and 

municipal securitizations would apply 

to both securities issued on a federally 

taxable basis and securities issued on a 

federal tax-exempt basis. A few 

commenters urged that the agencies 

clarify that all securities issued by 

housing finance agencies and other state 

government agencies and collateralized 

by loans financed by housing finance 

agencies are exempted. 

After considering the comments 

received, the agencies are adopting as 

proposed the exemption from the risk 

retention requirements for any 

securitization transaction that is (1) 

collateralized solely by obligations 

issued by the United States or an agency 

of the United States and servicing 

assets; (2) collateralized solely by assets 

that are fully insured or guaranteed as 

to the payment of principal and interest 

by the United States or an agency of the 

United States (other than residential, 

multifamily, or health care facility 

mortgage loan securitizations discussed 

above) and servicing assets; (3) insured 

or guaranteed as to the payment of 

principal and interest by the United 

States or an agency of the United States; 

(4) collateralized solely by loans or 

other assets made, insured, guaranteed, 

or purchased by any institution that is 

subject to the supervision of the Farm 

Credit Administration, including the 

Federal Agricultural Mortgage 

Corporation, and servicing assets; (5) 

issued or guaranteed by any state of the 

United States, or by any political 

subdivision of a state, or by any public 

instrumentality of a state that is exempt 

from the registration requirements of the 

Securities Act by reason of section 

3(a)(2) of the Securities Act; or (6) 

defined as a qualified scholarship 

funding bond in section 150(d)(2) of the 

IRS Code. 

Regarding whether the exemption for 

state and municipal securitizations 

would apply to both securities issued on 

a federally taxable basis and securities 

issued on a federal tax-exempt basis, the 

agencies note that the text of the 

exemption does not specifically make a 

distinction between taxable and taxexempt securities. To the extent that a 

security otherwise satisfies the 

requirements of the state and municipal 

securitizations exemption, such security 

is exempt from the risk retention rule. 

The agencies are exempting loans that 

are exempt from the ability-to-repay 

requirements (such as loans made 

through state housing finance agency 

programs and certain community 

lending programs) that were not 

separately included in the definition for 

QRM (which under the statute cannot be 

broader than QM) and would only be 

QRMs if they otherwise met the 

qualifying criteria for QMs. This 

exemption is discussed more fully 

below. 

C. Federal Family Education Loan 

Program and Other Student Loan 

Securitizations 

The reproposal would have exempted 

any securitization transaction that is 

collateralized solely (excluding 

servicing assets) by student loans made 

under the Federal Family Education 

Loan Program (‘‘FFELP’’) that are 

guaranteed as to 100 percent of 

defaulted principal and accrued interest 

(i.e., FFELP loans with first 

disbursement prior to October 1993, or 

pursuant to certain limited 

circumstances where a full guarantee 

was required). A securitization 

transaction that is collateralized solely 

(excluding servicing assets) by FFELP 

loans that are guaranteed as to at least 

98 percent (but less than 100 percent) of 

defaulted principal and accrued interest 

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227This commenter suggested, as an example, 

that if only 3 percent of a FFELP loan is uninsured, 

the 5 percent risk retention requirement should 

only apply to the 3 percent uninsured portion, 

resulting in a 0.15 percent risk retention 

requirement with respect to such loan. 

would have its risk retention 

requirement reduced to 2 percent. Any 

other securitization transaction that is 

collateralized solely (excluding 

servicing assets) by FFELP loans would 

have its risk retention requirement 

reduced to 3 percent. 

Several commenters urged the 

agencies to expand the proposed 

exemption for securitization 

transactions collateralized by FFELP 

loans to a full exemption from risk 

retention requirements. These 

commenters asserted that a risk 

retention requirement ranging from zero 

percent to 3 percent for FFELP loan 

securitizations that are subject to a 

guaranty ranging from 97 percent to 100 

percent means risk retention is required 

in an amount greater than the loss 

exposure on the loans. These 

commenters stated that other 

securitization products would receive a 

full exemption under the reproposal 

even if they are only partially insured or 

guaranteed. A few of these commenters 

also asserted that risk retention would 

have no effect on the underwriting 

standards since these loans have already 

been funded and the program is no 

longer underwriting new loans. One of 

these commenters urged the agencies to 

apply the risk retention requirement 

only to the portion of the FFELP loans 

that are not guaranteed.227

Commenters also recommended that 

the agencies accept alternative forms of 

risk retention for FFELP loan 

securitizations. The suggested 

alternative forms of risk retention 

include a simplified representative 

sample method, an exemption for onbalance sheet transactions where the 

structure clearly demonstrates at least 5 

percent risk retention, initial equity 

contribution, overcollateralization, and 

unfunded forms of risk retention. One of 

these commenters cited the European 

Union risk retention regime which 

recognizes certain unfunded forms of 

risk retention. 

One commenter asked that the 

agencies extend the FFELP loan 

securitization exemption to include 

student loan-backed securities issued by 

entities exempt from registration under 

section 3(a)(4) of the Securities Act and 

by entities that have received taxexempt designations under section 

501(c)(3) of the IRS Code. This 

commenter asserted that these issuers 

are constrained in their ability to raise 

sufficient capital to meet the risk 

retention requirements. One other 

commenter requested that student loan 

revenue bonds issued by nonprofit 

issuers that are supported by third-party 

credit enhancement be exempted. This 

commenter asserted that investors in 

these bonds are not making their 

investment decisions based on the 

credit risk and performance of the asset 

pool, and that these bonds are assessed 

based on the creditworthiness and 

structure of the third-party credit 

enhancement. Another commenter 

requested that all nonprofit public 

purpose student loan providers be fully 

exempted from risk retention 

requirements. This commenter asserted 

that the structure of the securitizations 

issued by these entities, and the history 

of investor interest in security issuances 

by nonprofit organizations, reflect the 

strong alignment of interests between 

the investors and sponsors of these 

types of securitization transactions. 

Another commenter requested 

clarification that the exemption for 

qualified scholarship funding bonds 

apply to both securities issued on a 

federally taxable basis and securities 

issued on a federal tax-exempt basis. 

After considering the comments 

received, the agencies are adopting the 

reductions in the amount of required 

risk retention for FFELP loan 

securitization as reproposed. The 

agencies do not believe that providing a 

full exemption to partially insured or 

guaranteed FFELP loans is warranted. 

The agencies believe that the reductions 

in risk retention for FFELP loan 

securitizations described in the 

reproposal reflect the appropriate level 

of ‘‘skin in the game’’ for these 

transactions, encouraging high quality 

underwriting generally in the selection 

of assets for securitization and 

appropriate risk management practices 

in post-default servicing. The agencies 

also reiterate that they have generally 

declined to recognize unfunded forms of 

risk retention and continue to do so for 

purposes of the final rule. 

Consistent with the reproposal, the 

agencies are not expanding the 

proposed exemptions to cover student 

loans other than FFELP student loans, 

including student loan-backed securities 

issued by entities exempt from 

registration under section 3(a)(4) of the 

Securities Act or entities that have 

received tax exempt designations under 

section 501(c)(3) of the IRS Code, 

because comments received on the 

reproposal did not provide a basis to 

allow the agencies to conclude that the 

structures or underwriting practices of 

these securitizations align the interests 

of securitizers with the interests of 

investors such that an exemption would 

be appropriate under section 

15G(c)(1)(G) or section 15G(e) of the 

Exchange Act. The agencies are 

concerned that an exemption for 

sponsors of student loan-backed 

securities issued by entities exempt 

from registration under section 3(a)(4) of 

the Securities Act or entities that receive 

tax exempt designations under section 

501(c)(3) of the IRS Code would permit 

evasion of the rule through the use of an 

entity that meets the requirements of 

such exemption, but whose sole 

purpose is the issuance of ABS interests. 

Regarding whether the exemption for 

qualified scholarship funding bonds 

would apply to both securities issued on 

a federally taxable basis and securities 

issued on a federal tax-exempt basis, the 

agencies note that the text of the 

exemption does not specifically make a 

distinction between taxable and taxexempt securities. To the extent a 

security satisfies the requirements of the 

qualified scholarship funding bond 

exemption in the rule, such security is 

exempt from the risk retention rule. The 

agencies believe that there is not 

sufficient justification to provide an 

exemption for bonds that may have 

some similarities to a qualified 

scholarship funding bond, but do not 

meet the statutory definition. 

D. Certain Public Utility Securitizations 

The reproposal would have provided 

an exemption from risk retention for 

utility legislative securitizations. 

Specifically, the reproposal would have 

exempted any securitization transaction 

where the ABS interests are issued by 

an entity that is wholly owned, directly 

or indirectly, by an investor-owned 

utility company that is subject to the 

regulatory authority of a state public 

utility commission or other appropriate 

state agency. Additionally, ABS 

interests issued in an exempted utility 

legislative securitization transaction 

would have been required to be secured 

by the intangible property right to 

collect charges for the recovery of 

specified costs and such other assets of 

the issuing entity. The reproposal would 

have defined ‘‘specified cost’’ to mean 

any cost identified by a state legislature 

as appropriate for recovery through 

securitization pursuant to ‘‘specified 

cost recovery legislation,’’ which is 

legislation enacted by a state that: 

• Authorizes the investor-owned 

utility company to apply for, and 

authorizes the public utility commission 

or other appropriate state agency to 

issue, a financing order determining the 

amount of specified costs the utility will 

be allowed to recover; 

• Provides that pursuant to a 

financing order, the utility acquires an 

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228The eligibility standards for the exemption are 

similar to certain requirements for these 

securitizations outlined in IRS Revenue Procedure 

2005–62, 2005–2 C.B. 507, that are relevant to risk 

retention. This Revenue Procedure outlines the 

Internal Revenue Service’s requirements in order to 

treat the securities issued in these securitizations as 

debt for tax purposes, which is the primary 

motivation for states and public utilities to engage 

in such securitizations. 

229See Revised Proposal, 78 FR at 57978. 

230See 15 U.S.C. 78o–11(e). 

231See Revised Proposal, 78 FR at 57972–57974. 

In a resecuritization transaction, the asset pool 

collateralizing the ABS interests issued in the 

transaction comprises one or more asset-backed 

securities. 

intangible property right to charge, 

collect, and receive amounts necessary 

to provide for the full recovery of the 

specified costs determined to be 

recoverable, and assures that the charges 

are non-bypassable and will be paid by 

customers within the utility’s historic 

service territory who receive utility 

goods or services through the utility’s 

transmission and distribution system, 

even if those customers elect to 

purchase these goods or services from a 

third party; and 

• Guarantees that neither the state nor 

any of its agencies has the authority to 

rescind or amend the financing order, to 

revise the amount of specified costs, or 

in any way to reduce or impair the value 

of the intangible property right, except 

as may be contemplated by periodic 

adjustments authorized by the specified 

cost recovery legislation.228

The agencies received no comments 

on the utility legislative securitization 

exemption, and are adopting the 

exemption as reproposed. 

E. Seasoned Loan Securitizations 

In the reproposal, the agencies 

proposed to exempt from risk retention 

any securitization transaction that is 

collateralized solely by servicing assets 

and seasoned loans that (1) have not 

been modified since origination and (2) 

have never been delinquent for 30 days 

or more. With respect to residential 

mortgages, the reproposal would have 

defined ‘‘seasoned loan’’ to mean a 

residential mortgage loan that either (1) 

has been outstanding and performing for 

the longer of (i) five years or (ii) the 

period until the outstanding principal 

balance of the loan has been reduced to 

25 percent of the original principal 

balance; or (2) has been outstanding and 

performing for at least seven years. For 

all other asset classes, the reproposal 

would have defined ‘‘seasoned loan’’ to 

mean a loan that has been outstanding 

and performing for the longer of (1) two 

years, or (2) the period until the 

outstanding principal balance of the 

loan has been reduced to 33 percent of 

the original principal balance. 

The agencies received a number of 

comments on the seasoned loan 

exemption from financial entities and 

financial trade organizations. 

Commenters generally favored 

expanding the seasoned loan 

exemption, although they differed in 

how to expand the exemption. One 

commenter proposed that ‘‘seasoned 

loans’’ be redefined to accommodate 

auto loans that have been outstanding 

and performing for the shorter of (1) two 

years, or (2) the period until the 

outstanding principal balance of the 

loan has been reduced to 33 percent of 

the original principal balance. Other 

commenters proposed that the 

exemption be expanded to 

accommodate certain previously 

modified residential mortgage loans that 

have not had past delinquency events. 

One commenter requested that loans 

with delinquencies up to 60 days 

qualify, and another suggested that 

loans that have been delinquent and 

then brought current qualify if they 

perform for 36 months after the 

delinquency. Another commenter asked 

that the exception include loans that 

had no more than three 30-day 

delinquencies if the loan is otherwise 

performing for five years and not 

delinquent at the time of securitization. 

Other commenters asked that the 

agencies permit blended securitizations 

of seasoned loans with other loans that 

require risk retention, with the amount 

of risk retention reduced accordingly. 

These commenters expressed concern of 

potentially fragmenting the market for 

these loans. However, the investor 

members of one commenter questioned 

the need to blend pools of seasoned and 

‘‘non-seasoned’’ loans because ABS 

interests collateralized by these types of 

assets are unlikely to appeal to the same 

types of investors. 

After considering the comments 

received, the agencies are adopting the 

seasoned loan exemption as reproposed. 

The agencies believe that there is 

insufficient data to justify expanding the 

seasoned loan exemption and that the 

alignment of the seasoned loan 

exemption with the sunset provisions 

on hedging and transfer enhances 

consistency across the provisions of the 

rule and better aligns the incentives of 

sponsors and investors. The agencies do 

not believe that the period of time 

during which a loan is required to have 

been outstanding to qualify as a 

seasoned loan should be different from 

the period after which the transfer and 

hedging restrictions sunset. Nor do they 

believe that loans that have at any time 

been more than 30 days delinquent 

should qualify. And, while 

modifications of loans for reasons other 

than loss mitigation might be wellunderwritten loans, it would be difficult 

if not impossible to verify the 

underlying reasons for a modification. 

Commenters did not provide examples 

of securitization transactions 

collateralized by newly originated and 

seasoned loans or data or reasoned 

analysis to support the assertion that 

such transactions would fill existing 

needs for financing. Because the 

agencies are not persuaded that market 

fragmentation would result, the agencies 

are not permitting blended pools of 

seasoned loans and loans that would not 

satisfy the seasoned loan exemption. 

F. Federal Deposit Insurance 

Corporation Securitizations 

In the reproposal, the agencies 

proposed an exemption from risk 

retention for securitization transactions 

that are sponsored by the FDIC, acting 

as conservator or receiver under any 

provision of the Federal Deposit 

Insurance Act or Title II of the DoddFrank Act. For the reasons discussed in 

the reproposal,229 the agencies continue 

to believe that this exemption would 

help ensure high quality underwriting, 

and is in the public interest and for the 

protection of investors.230 These 

receivers and conservators perform a 

function that benefits creditors in 

liquidating and maximizing the value of 

assets of failed financial institutions for 

the benefit of creditors. Accordingly, 

their actions are guided by sound 

underwriting practices, and the quality 

of the assets will be carefully monitored 

in accordance with the relevant 

statutory authority. 

One commenter expressly supported 

this exemption, noting, among other 

things, that it would help the FDIC 

maximize the value of assets in 

conservatorship and receivership. For 

the reasons noted above, the agencies 

are adopting the FDIC securitization 

exemption as reproposed. 

G. Exemption for Certain 

Resecuritization Transactions 

In the reproposal, the agencies 

proposed two different exemptions from 

risk retention for certain ABS interests 

issued in resecuritization transactions 

(resecuritization ABS interests).231 The 

first of these exemptions would have 

applied to resecuritizations of asset 

backed securities that met certain 

specific conditions set forth in proposed 

section 19(b)(5) (pass-through 

resecuritizations). The second one 

would have applied only to 

resecuritizations of certain first pay 

classes of mortgage backed securities 

that met the requirements in proposed 

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77674 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

232Section 2 of the reproposed rule defined 

‘‘state’’ as having the same meaning as in section 

3(a)(16) of the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(16)). Thus, the ABS interests that 

would be resecuritized in a transaction exempted 

under this provision would have been required to 

be collateralized by mortgages on properties located 

in a state of the United States, the District of 

Columbia, Puerto Rico, the Virgin Islands, or any 

other possession of the United States. See Revised 

Proposal, 78 FR at 57973. 

233The reproposal defined ‘‘first-pay class’’ as a 

class of ABS interests for which all interests in the 

class were entitled to the same priority of principal 

payments and that, at the time of closing of the 

transaction, were entitled to repayments of 

principal and payments of interest prior to or prorata, except for principal-only and interest only 

tranches that are prior in payment, with all other 

classes of securities collateralized by the same pool 

of first-lien residential mortgages until such class 

has no principal or notional balance remaining. A 

single class of pass-through ABS interests under 

which an investor would have a fractional, 

undivided interest in the pool of mortgages 

collateralizing the ABS interests would have 

qualified as a ‘‘first pay class’’ under this definition. 

234The reproposal defined ‘‘inverse floater’’ as an 

ABS interest issued as part of a securitization 

transaction for which interest or other income is 

payable to the holder based on a rate or formula that 

varies inversely to a reference rate of interest. The 

exclusion from the proposed exemption of 

transactions involving the issuance of an inverse 

floater class addressed concerns with the high risk 

of loss that has been associated with these 

instruments. See Id. at 57974. 

235 Id. at 57973. 

236 Id. 

237 Id. 

section 19(b)(6) (first-pay-class 

resecuritization). Under the reproposal, 

sponsors of resecuritizations that were 

not structured to meet the terms of one 

of these two exemptions would have 

been required to meet the credit risk 

retention requirements with respect to 

the resecuritization transaction unless 

another exemption for the transaction 

was available. 

Under the section 19(b)(5) of the 

reproposal, the resecuritization ABS 

interests would have to be collateralized 

solely by servicing assets and existing 

ABS interests issued in a securitization 

transaction for which credit risk was 

retained as required under the original 

proposal, or which was otherwise 

exempted from credit risk retention 

requirements (compliant ABS interests). 

Second, the transaction would have to 

be structured so that it involved the 

issuance of only a single class of ABS 

interests and provided for a pass 

through of all principal and interest 

payments received on the underlying 

asset-backed securities (net of expenses 

of the issuing entity) to the holders of 

such class of ABS interests. The 

agencies explained that because the 

holder of a resecuritization ABS interest 

structured as a single-class pass-through 

security would have had a fractional 

undivided interest in the pool of 

underlying asset-backed securities and 

in the distributions of principal and 

interest (including prepayments) from 

these underlying asset-backed 

securities, a resecuritization ABS 

interest meeting these requirements 

would not alter the level or allocation of 

credit and interest rate risk on the 

underlying asset-backed securities. The 

agencies had proposed this exemption 

in the original proposal and did not 

substantively alter it in the reproposal. 

The agencies proposed to adopt this 

exemption under the general exemption 

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

Exchange Act. The agencies noted that 

a resecuritization transaction that 

created a single-class pass-through 

would neither increase nor reallocate 

the credit risk inherent in the 

underlying compliant ABS interests, 

and that the transaction could allow for 

the combination of asset-backed 

securities collateralized by smaller 

pools, and the creation of asset-backed 

securities that may be collateralized by 

more geographically diverse pools than 

those that can be achieved by the 

pooling of individual assets. 

Under the first-pay-class 

resecuritization exemption in proposed 

section 19(b)(6), the agencies proposed 

a limited resecuritization exemption 

that would apply to certain 

resecuritizations of residential 

mortgage-backed securities structured to 

address prepayment risk, but that would 

not apply to a structure that re-allocated 

credit risk by tranching and 

subordination. To qualify for this 

proposed exemption, the transaction 

would have to have been a 

resecuritization of first-pay classes of 

ABS interests, which were themselves 

collateralized by first-lien residential 

mortgages on property located in a 

state,232 and which were issued in 

transactions that complied with the risk 

retention rules or were exempt from the 

rule.233 The reproposal also would have 

allowed a pool collateralizing the 

exempted first-pay-class resecuritization 

to contain servicing assets. 

In addition, to qualify for the 

exemption, any ABS interest issued in 

the resecuritization would have had to 

share pro rata in any realized principal 

losses with all other ABS interests 

issued in the resecuritization based on 

the unpaid principal balance of such 

interest at the time the loss was realized. 

The transaction would have had to be 

structured to reallocate prepayment risk, 

and the proposed exemption 

specifically would have prohibited any 

structure which re-allocated credit risk 

(other than credit risk reallocated only 

as a consequence of reallocating 

prepayment risk). The reproposal also 

would have prohibited the issuance of 

an inverse floater or any similarly 

structured class of ABS interest as part 

of the exempt resecuritization 

transaction.234

The agencies proposed the first-payclass resecuritization exemption in 

response to comments on the original 

proposal about liquidity in underlying 

markets and access to credit on 

reasonable terms.235 The agencies noted 

that residential mortgage-backed 

securities tend to have longer maturities 

than other types of asset-backed 

securities and to have high prepayment 

risk. The agencies reasoned that the 

exemption would help provide 

investors with protection against 

prepayment risk and greater certainty as 

to expected life. The proposed 

exemption, however, did not divide the 

credit risk of the underlying assetbacked securities and therefore did not 

give rise to the same concerns as CDOs 

and other resecuritizations that involved 

tranching of credit risk.236

The agencies proposed the first-payclass resecuritization exemption under 

the general exemption provisions of 

section 15G(e)(1) of the Exchange Act. 

The agencies determined that the 

provision was consistent with the 

requirements of this section, given the 

conditions established for the 

exemption. In particular, the agencies 

noted that the provision limited the 

exemption to resecuritizations of firstpay classes of residential mortgagebacked securities, and that it applied 

specific prohibitions on structures that 

re-allocate credit risk, so it minimized 

credit risk associated with the 

resecuritized residential mortgagebacked securities and prevented the 

transaction from reallocating existing 

credit risk while addressing some of the 

commenters’ concerns with regard to 

liquidity and access to credit.237

The agencies received a number of 

comments on the proposed 

resecuritization exemptions. The 

comments did not raise specific 

objections or concerns with either of the 

two proposed exemptions, but generally 

urged regulators to expand the 

exemptions to other types of structures 

including those that re-tranche credit 

risk. Commenters asserted that applying 

risk retention to resecuritization of 

asset-backed securities that are already 

in the market, especially where the 

interests are compliant ABS interests, 

cannot alter the incentives for the 

original sponsor of asset-backed 

securities to ensure high-quality assets. 

Other commenters stated that the lack of 

a broad resecuritization exemption 

would negatively affect markets by 

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238Section 15G of the Exchange Act would not 

apply to asset-backed securities issued before the 

applicable effective date of the agencies’ final rule, 

and that as a practical matter, private-label assetbacked securities issued before the applicable 

effective date of the final rule would typically not 

be compliant ABS interests. Asset-backed securities 

issued before the applicable effective date that meet 

the terms of an exemption from the rule or that are 

guaranteed by the Enterprises, however, could 

qualify as compliant ABS interests. 

239See 15 U.S.C. 78o–11(a). 240See 15 U.S.C. 78o–11(c)(1)(F). 

241See 15 U.S.C. 78o–11(e). 

242According to commenters, corporate debt 

repackagings are created by the deposit of corporate 

debt securities purchased by the sponsoring 

Continued 

making it harder for investors to restructure and sell existing asset-backed 

securities. A number of commenters 

stated that the agencies should provide 

an exemption for resecuritizations of 

asset-backed securities that were issued 

prior to the applicable effective date of 

the rule. Still others expressed the view 

that the agencies could develop an 

exemption that would allow credit 

tranching in resecuritized asset-backed 

securities while limiting the scope of 

such exemption, such as by excluding 

actively managed pools, to address 

agencies’ concerns regarding CDOs and 

similar structures. The comments were 

generally similar to comments received 

on the original proposal. 

The agencies have carefully 

considered the comments received in 

conjunction with the purposes and 

requirements of the statute. As the 

agencies noted in the reproposal, 

sponsors of resecuritization transactions 

have considerable flexibility in choosing 

what ABS interests to include in the 

underlying pool of securitized assets as 

well as in creating the specific 

structures. This choice of securities is a 

type of underwriting choice with 

respect to those securities for inclusion 

in the underlying pool of securitized 

assets. The agencies continue to 

consider it appropriate, therefore, to 

adopt rules that will provide sponsors 

with sufficient incentive to choose ABS 

interests that have lower levels of credit 

risk and to not use a resecuritization to 

obscure what might have been sub-par 

credit performance of certain ABS 

interests. The agencies also continue to 

consider it appropriate to apply the risk 

retention requirements to 

resecuritization transactions generally 

because resecuritization transactions 

can result in a re-allocation of the credit 

risk of the underlying ABS interest. 

Such considerations are present 

whether or not the original underlying 

asset-backed securities were issued 

prior to the applicable effective date of 

these risk retention rules or are 

compliant with the rule.238 The agencies 

also note that section 15G of the 

Exchange Act specifically contemplates 

applying risk retention to 

resecuritizations.239

Taking into account these 

considerations, the agencies continue to 

believe that requiring additional risk 

retention as the standard for most 

resecuritization transactions is 

consistent with the intent of section 15G 

of the Exchange Act, both in light of 

recent history and the specific statutory 

requirement that the agencies adopt risk 

retention standards for CDOs, and 

similar instruments collateralized by 

asset-backed securities.240 The 

comments received in response to the 

reproposal did not raise any issues to 

cause the agencies to expand the scope 

of the exemptions for resecuritizations. 

In particular, the agencies do not believe 

that suggestions for distinguishing 

‘‘typical’’ resecuritizations from CDOs 

or other higher risk transactions could 

be applied consistently across 

transactions. 

As a consequence, the agencies are 

adopting the pass-through 

resecuritization exemption in section 

19(b)(5), as proposed in the reproposal. 

This exemption will apply only if the 

resulting resecuritization ABS interests 

consist of only a single class of interests 

and provides for a pass through of all 

principal and interest payments 

received on the underlying ABS 

interests (net of expenses of the issuing 

entity). The new ABS interests have to 

be collateralized solely by servicing 

assets and existing ABS interests issued 

in a securitization transaction for which 

credit risk was retained as required 

under the rule, or which are otherwise 

exempted from credit risk retention 

requirements in the rule. 

The agencies are also adopting as 

proposed the exemption in section 

19(b)(6). Thus, to qualify for this 

exemption, the ABS interests issued in 

the resecuritization must share pro rata 

in any realized principal losses with all 

other holders of ABS interests issued in 

the resecuritization based on the unpaid 

principal balance of such interest at the 

time the loss is realized. The transaction 

must be structured to reallocate 

prepayment risk, and cannot re-allocate 

credit risk (other than credit risk 

reallocated as a collateral consequence 

of reallocating prepayment risk). While 

the agencies specifically invited 

comment on whether the issuance of an 

inverse floater as part of a first-pay class 

resecuritization exemption would be 

necessary to provide adequate 

prepayment protection for investors, the 

agencies received no specific response 

to this question or comments on the 

prohibition proposed on the issuance of 

an inverse floater or any similarly 

structured class of ABS interests as part 

of an exempt transaction under section 

19(b)(6), and are adopting this 

prohibition as part of the final rule. 

H. Other Exemptions From Risk 

Retention Requirements 

1. Legacy Loan Securitizations 

Some commenters on the original 

proposal recommended an exemption 

from risk retention for securitizations 

and resecuritizations of loans made 

before the applicable effective date of 

the final rule, or ‘‘legacy loans,’’ 

asserting that risk retention would not 

affect the underwriting standards used 

to create those loans. After considering 

the comments received on the original 

proposal, the agencies did not propose 

to provide an exemption from risk 

retention for legacy loan securitizations 

in the reproposal. The agencies did not 

believe that such securitizations should 

be exempt from risk retention, because 

risk retention requirements are designed 

to incentivize securitizers to select wellunderwritten loans, regardless of when 

those loans were underwritten. 

Furthermore, the agencies did not 

believe that exempting securitizations of 

legacy loans from risk retention would 

satisfy the statutory criteria for an 

exemption under section 15G(e) of the 

Exchange Act.241

On the reproposal, the agencies 

received comments from one financial 

trade organization that again 

recommended exempting securitizations 

of legacy loans. This commenter 

requested that the agencies provide a 

legacy loan exemption, because in the 

case of loans that were originated prior 

to the adoption of the final risk 

retention rules, it would not have been 

possible to create those assets in 

compliance with a regulatory scheme 

whose precise terms were unknown at 

the time of origination. 

As the agencies stated in the 

reproposal, the agencies do not believe 

it is appropriate to exempt legacy loans 

because the risk retention requirements 

affect the quality of loans that are 

selected for a securitization transaction. 

Therefore, the agencies are not adopting 

an exemption from risk retention for 

legacy loan securitizations in the final 

rule. 

2. Corporate Debt Repackagings 

Some commenters on the reproposal 

urged the agencies to adopt an 

exemption from risk retention for 

‘‘corporate debt repackagings.’’ 242 One 

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77676 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

institution in the secondary market into a trust 

which issues certificates collateralized by cash 

flows on the underlying corporate debt securities. 243See Revised Proposal, 78 FR at 57975. 244According to this commenter, servicer 

advance receivables are contractual rights that 

entitle a servicer to reimbursement for advances 

that it is required, under the terms of the servicing 

agreements, to make for purposes of liquidity 

enhancement. 

of these commenters recommended that, 

as an alternative, the agencies create a 

limited exemption for corporate debt 

repackaging transactions that repackage 

securities that could be sold directly to 

investors without risk retention, and 

that do not involve credit tranching. 

This commenter also proposed 

additional means of satisfying the risk 

retention requirements in corporate debt 

repackaging transactions, including the 

retention of 5 percent of the underlying 

securities in the repackaging 

transaction, or the retention of 5 percent 

of any class of securities issued in the 

repackaging that is pari passu with the 

securities being issued to the investors 

in the transaction. 

Consistent with the reproposal and for 

the reasons discussed therein,243 the 

agencies are not adopting an exemption 

for corporate debt repackagings. As 

stated in the reproposal, the agencies do 

not believe an exemption is warranted 

because the underlying assets (the 

corporate bonds) are not asset-backed 

securities. As the agencies stated in the 

reproposal, regardless of the level of 

credit risk a corporate debt issuer 

believes it holds on its underlying 

corporate bonds, the risk retention 

requirement would apply at the 

securitization level, and the sponsor of 

the securitization should be required to 

hold 5 percent of the credit risk of the 

securitization transaction. The agencies 

continue to believe that risk retention at 

the securitization level for corporate 

debt repackagings is necessary in order 

to align the interest of the sponsor in 

selecting the bonds in the pool and 

structuring the terms of the ABS 

interests with the interests of the 

investors in the securitization. 

One commenter requested a general 

exemption for securitization 

transactions in which collateral consists 

primarily of unsecured direct 

obligations of the sponsor or its 

affiliates. The agencies are not adopting 

any such exemption as this commenter 

did not provide sufficient detail on 

which to base such exemption. 

3. Securitizations of Servicer Advance 

Receivables 

Some commenters requested that the 

agencies provide an exemption for 

servicer advance receivables.244

According to these commenters, the 

servicer advance facilities (‘‘SAFs’’) 

pursuant to which these servicer 

advance receivables are securitized 

create the requisite levels of credit 

enhancement through overcollateralization in the form of an equity 

interest in the issuing entity, that is 

subordinated to all other classes of ABS 

interests issued by the issuing entity. 

These commenters indicated that 

securitizations of servicer advance 

receivables should be exempted from 

the risk retention requirements because 

servicer advances are payments that a 

servicer is required to make under the 

terms of the servicing agreements, and 

are not originated for purposes of 

distribution in a securitization 

transaction. These commenters also said 

that the fundamental goal of risk 

retention—the alignment of interests in 

order to produce higher quality 

underwriting standards—is not relevant 

in these servicer advance receivable 

securitizations, because these servicer 

advance receivables do not represent an 

extension of credit by a lender to a 

borrower, and that there is no 

underwriting criteria. 

If the agencies declined to provide an 

exemption, these commenters requested 

that the agencies allow the equity 

interests held by servicer-sponsors of 

the SAFs to satisfy the risk retention 

requirement, and to allow the equity 

interest (in an SAF structured as a 

revolving master trust) that supports all 

series of ABS interests to qualify as a 

risk retention option for revolving 

master trusts. 

The agencies are not adopting an 

exemption from risk retention for SAFs. 

The agencies believe that there is 

insufficient data to justify granting this 

specific exemption. Furthermore, the 

agencies do not believe that there are 

particular features of this type of 

securitization that would warrant an 

exemption under the factors that the 

agencies must consider in section 

15G(e) of the Exchange Act. However, as 

discussed in Part III.B.2 of this 

Supplementary Information, an SAF 

that meets the final rule’s eligibility 

requirements for the seller’s interest 

option for revolving pool securitizations 

may avail itself of that option. 

Alternately, the sponsor of an SAF may 

structure its equity interest in the trust 

as an eligible horizontal residual 

interest. 

V. Reduced Risk Retention 

Requirements and Underwriting 

Standards for ABS Interests 

Collateralized by Qualifying 

Commercial, Commercial Real Estate, 

or Automobile Loans 

As contemplated by section 15G of 

the Exchange Act, the reproposal 

included a zero risk retention 

requirement, or exemption, for 

securitizations consisting solely of 

commercial loans, commercial real 

estate (CRE) loans, and automobile loans 

that met specific proposed underwriting 

standards (qualifying assets). The 

reproposal also would have allowed 

sponsors to commingle qualifying and 

non-qualifying assets of a similar type to 

receive up to a 50 percent reduction in 

the minimum required risk retention 

amount. 

While many commenters supported 

the ability to blend pools of qualifying 

and non-qualifying assets to obtain a 

reduced risk retention amount, 

commenters also requested that the 

agencies reduce or remove the 50 

percent limit on the reduction for 

blended pools of commercial, CRE, or 

automobile loans. Some commenters 

claimed that the limit would be a 

disincentive for sponsors to include 

more qualifying assets in blended pools 

(and thereby improve the overall quality 

of the pool) once the 50 percent 

threshold had been reached. In addition, 

a comment was made that, because the 

agencies would be imposing a risk 

retention requirement on qualifying 

assets if they exceeded 50 percent of the 

pool, this would be contrary to the 

overall proposed exemption for 

qualifying assets. Other commenters 

supported the limit on blended pools or 

generally opposed allowing blended 

pools of qualifying and non-qualifying 

assets because of the concern that a 

blended pool could facilitate the ability 

of sponsors to obscure the credit quality 

of the non-qualifying assets. 

Under the reproposal, a sponsor of a 

transaction with a blended pool would 

have to provide disclosures to investors, 

its primary Federal regulator, and the 

Commission the manner in which the 

sponsor determined the aggregate risk 

retention requirement for the pool after 

including qualifying assets, a 

description of the qualifying and nonqualifying assets, and material 

difference between them. Furthermore, 

the reproposal would have required a 

sponsor to either repurchase out of the 

pool any qualifying asset found not to 

meet the proposed underwriting criteria 

after securitization or to cure the defects 

to bring the loan into conformity with 

the criteria. A few commenters 

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245Revised Proposal, 78 FR at 57986. 246Sections 4(d) and 5(j) of the final rule. 247Revised Proposal, 78 FR 57985. 

expressed concerns about the 

repurchase and certification 

requirements in the reproposal with 

respect to pools containing qualifying 

assets. A few commenters suggested 

that, because of liability concerns, 

sponsors should not be required to make 

the proposed disclosures about 

qualifying assets to investors. One of 

these commenters also claimed that the 

statutory language was drafted such that 

such certifications should only be 

applied to residential mortgages. The 

commenter further asserted that 

investors already receive sufficient 

information about underlying collateral 

in the other asset classes, such that the 

proposed disclosures and certifications 

would be an unnecessary burden, and 

that investors were additionally 

protected by the proposed buy back or 

cure requirement for assets found to be 

non-qualifying post securitization. The 

commenter also asked for clarification 

about how long a sponsor must 

maintain records related to the proposed 

disclosure and certification 

requirements. A commenter also 

requested that with respect to 

automobile loan securitizations that the 

proposed internal control certification 

requirements be allowed to be 

performed less frequently to reduce 

burden. 

The final rule retains the 50 percent 

limit for blended pools for these three 

asset classes. The agencies are 

concerned that reducing the minimum 

risk retention for blended pools to less 

than 2.5 percent of the value of the ABS 

interests would significantly weaken the 

economic incentive for the sponsor to 

ensure that the non-qualifying loans in 

the pool are appropriately underwritten. 

However, the agencies are allowing a 

limited amount of blending, as 

proposed, to increase the liquidity of 

both qualifying and non-qualifying 

assets by allowing these assets to be 

securitized in the same pool. 

The agencies are also adopting the 

disclosure and certification 

requirements with regard to 

securitizations including qualifying 

assets as proposed in the revised 

proposal. As discussed in the revised 

proposal,245 the agencies believe that 

the disclosure and certification 

requirements are important to 

facilitating investors’ ability to evaluate 

and monitor the overall credit quality of 

securitized collateral, especially where 

qualifying and non-qualifying assets are 

combined. The agencies believe that 

these transparency goals are essential to 

the integrity of the exemption from risk 

retention for qualifying assets. The 

agencies note that the record retention 

requirement for certification and 

disclosure in other parts of the rule is 

three years after all ABS interests are no 

longer outstanding.246 The agencies are 

adopting the same standard for 

certification and disclosures with 

respect to the qualifying commercial, 

CRE, and automobile loan exemptions 

to remain consistent throughout the 

rule. The agencies believe this 

timeframe will allow for a sufficient 

period for review by the Commission or 

the sponsor’s Federal banking agency, as 

appropriate. 

The agencies note the concern 

expressed by some commenters with 

respect to all three of these asset classes 

that, for the residential mortgage asset 

class and QRM, a significant portion of 

the existing market would qualify for an 

exemption from risk retention, whereas 

in proposing the underwriting standards 

for qualifying commercial loans, 

commercial real estate loans, and 

automobile loans, the agencies proposed 

conservative underwriting criteria that 

would not capture an equivalent portion 

of the respective markets. The agencies 

observe that there is a homogeneity in 

the securitized residential mortgage loan 

market that does not exist for 

commercial loan or commercial real 

estate loan asset classes. Commercial 

loans and commercial real estate loans 

typically focus on a common set of 

borrower and collateral metrics, but 

they are individually underwritten and 

tailored to a specific borrower or 

property, and often contain terms 

developed in view not only of the 

borrower’s financial position but also 

the general business cycle, industry 

business cycle, and standards for 

appropriate leverage in that industry 

sub-sector. The agencies believe the 

additional complexity needed to create 

underwriting standards for every major 

type of business in every economic 

cycle would be so great that originators 

would almost certainly be dissuaded 

from attempting to implement them or 

attempting to stay abreast of the 

numerous regulatory revisions the 

agencies would need to issue from time 

to time to keep up with the changing 

economic cycles or industries. 

The reproposed underwriting 

standards established a single set of 

requirements, which are necessary to 

enable originators, sponsors, and 

investors to be certain as to whether any 

particular loan meets the rule’s 

requirements for an exemption. For the 

agencies to expand the underwriting 

criteria in the fashion suggested by some 

commenters, the rule would need to 

accommodate numerous relative 

standards. The resulting uncertainty of 

market participants as to whether any 

particular loan was qualified for an 

exemption could undermine the 

market’s willingness to rely on the 

exemption. 

While there may be more 

homogeneity in the securitized 

automobile loan class, the agencies are 

concerned that attempting to 

accommodate a significantly large share 

of the current automobile loan 

securitization market would require 

weakening the underwriting standards 

to the point where the agencies are 

concerned that they would permit the 

inclusion of low quality loans. For 

example, the agencies note that current 

automobile lending practices often 

involves no or small down payments, 

financing in excess of the value of the 

automobile (which is itself an asset of 

quickly declining value) to 

accommodate taxes and fees, and a 

credit score in lieu of an analysis of the 

borrower’s ability to repay. These 

concerns as to credit quality are 

evidenced by the high levels of credit 

support automobile securitization 

sponsors build into their securitization 

transactions, even for so-called ‘‘prime’’ 

automobile loans. Moreover, securitizers 

from the automobile sector who 

commented on the original proposal and 

reproposal expressed no interest in 

using any underwriting-based 

exemptive approach that did not 

incorporate the industry’s current 

model, which relies almost exclusively 

on matrices of consumer credit scores, 

loan-to-value (LTV) ratios, and ‘‘on the 

spot’’ borrower approval. One 

commenter stated that the entire 

underwriting process must occur while 

the customer is at the dealership. As 

was discussed in the reproposal, the 

agencies are not persuaded that it would 

be appropriate for the underwritingbased exemptions under the rule to 

incorporate a credit score metric.247

Finally, commenters requested that 

the agencies clarify that the requirement 

that a depositor certify as to the 

effectiveness of its internal supervisory 

controls with respect to the process for 

ensuring that assets that collateralize the 

asset-backed securities are eligible for 

an exemption does not impose an 

obligation on sponsors to guarantee that 

all assets meet all of the requirements to 

be eligible for 0 percent risk retention. 

As is indicated by the final rule’s 

provision of a buyback option for noncompliant assets, the agencies do not 

view the requirement as requiring that 

the controls guarantee compliance. 

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77678 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

248Under the reproposal, the leverage ratio would 

have been defined as the borrower’s total debt 

divided by the borrower’s annual income of a 

business before expenses for interest, taxes, 

depreciation and amortization are deducted, as 

determined in accordance with GAAP. See section 

14 of the revised proposal (definition of ‘‘leverage 

ratio’’). 

249See Revised Proposal, 78 FR at 57979. 

Rather, the process must be robust and 

sufficient to enable the sponsor to 

carefully evaluate eligibility. 

A. Qualifying Commercial Loans 

The reproposal included definitions 

and underwriting standards for 

qualifying commercial loans (QCLs), 

that, when securitized, would be 

exempt from the risk retention 

requirements. The proposed definition 

of commercial loan generally would 

have included any loan for business 

purposes that was not a commercial real 

estate loan or one-to-four family 

residential real estate loan. 

The proposed criteria for a QCL 

included determining compliance with 

the following financial tests based on 

two years of past data and two years of 

projections: a total liabilities ratio less 

than or equal to 50 percent; a leverage 

ratio 248 of less than or equal to 3.0x; a 

debt service coverage (DSC) ratio of 

greater than or equal to 1.5x. A QCL 

would need to base loan payments on a 

straight-line amortization schedule over 

no more than a 5-year term. Additional 

standards were proposed for QCLs that 

are collateralized, including lien 

perfection and collateral inspection 

standards.249

Commenters generally asserted the 

proposed criteria were too strict in one 

or more areas. One commenter claimed 

that the QCL exemption would have no 

relevance for securitizations of 

commercial loans because loans that 

would satisfy the proposed QCL criteria 

typically would not be securitized and 

that the agencies did not seriously 

attempt to consider the historical 

performance of the asset class. Some 

commenters also supported the 

submission by other commenters to 

allow syndicated loans meeting certain 

criteria, when held by CLOs meeting 

certain other structural criteria, to be 

exempt from risk retention, as discussed 

above in Part III.B.7 of this 

Supplementary Information. 

Some commenters requested that the 

agencies create multiple types of QCL 

underwriting criteria to address 

different industries or different types of 

commercial loans, for example, 

establishing separate criteria for vehicle 

fleet loans or equipment loans in order 

to exempt loans meeting such criteria 

from risk retention. These commenters 

asserted that the securitizations of 

equipment loans have performed well 

before, during, and after the financial 

crisis and that such loans should 

therefore have their own asset class and 

underwriting criteria to qualify for an 

exemption. 

Commenters also suggested that the 

agencies relax the proposed QCL 

standards in various ways, including by: 

Removing the straight-line amortization 

criterion; increasing the maximum 

amortization period beyond 5 years (up 

to 15 or 20 years); allowing payment-inkind loans; reducing retention for 

debtor-in-possession situations and 

loans resulting from Chapter 11 exit 

financings; increasing the leverage ratio 

to 4.5 or less; and replacing the leverage 

ratio with a 60 percent or 50 percent 

debt-to-capitalization ratio. One 

commenter also urged the agencies to 

require a valuation such as a qualified 

appraisal for all collateralized QCLs, 

noting that other proposed criteria— 

such as requiring a perfected security 

interest for secured commercial loans— 

would be of limited utility without a 

valuation requirement. 

For the subsequently discussed 

reasons, the agencies are adopting the 

QCL standards as proposed. While the 

agencies recognize that there are many 

types of commercial loans to serve many 

types of industries and companies, it 

would be impracticable to accommodate 

each category of loan and industry with 

a unique set of underwriting criteria. 

Even applying a different set of criteria 

to a broader category within commercial 

loans, such as equipment loans, would 

be under- and over-inclusive and could 

have unintended consequences for the 

alignment of interests of sponsors and 

investors. Furthermore, as the different 

industries and economic conditions in 

which they operate change over time, 

such regulatory underwriting criteria 

could influence originations in 

unintended ways. In developing the 

underwriting standards for the 

reproposal, the agencies intended for 

the standards to be reflective of very 

high quality loan characteristics for 

most commercial borrowers. To the 

extent that a commercial loan is 

securitized, the agencies believe that 

risk retention provides an appropriate 

incentive to sponsors to carefully 

consider the underwriting quality of the 

loans being securitized; therefore, only 

those commercial loans that are of very 

high quality should be exempt from risk 

retention. The agencies have concluded 

that the proposed high quality 

underwriting standards are appropriate 

for QCLs generally, even if the standards 

do not correspond to the profile of loans 

generally securitized in CLOs. While 

some commercial loans are structured as 

bullet or interest-only loans, the 

agencies determined that such loans are 

not appropriate for QCL given the 

deferral of principal repayment until 

maturity, which can overstate the 

borrower’s repayment capacity as 

measured by the DSC ratio (due to a lack 

of principal payments) and increase 

default risk related to having to 

refinance a larger principal amount at 

maturity. 

While commercial loans do exist with 

longer terms than the maximum 

permitted under the underwriting 

criteria, the agencies do not believe such 

long-term commercial loans are 

common, and they involve more 

uncertainty about continued repayment 

ability, particularly when loans are 

made without collateral. With respect to 

payment-in-kind loans, the agencies 

observe that these loans are generally 

riskier loans, as borrowers may not be 

paying any interest in cash over part or 

all of the loan term. Therefore, the 

agencies do not believe it is appropriate 

to incorporate the changes requested by 

commenters with respect to term and 

payment-in-kind in the QCL 

underwriting criteria. 

The agencies also continue to favor 

the reproposed earnings-based leverage 

ratio, as opposed to a capitalization 

ratio, to measure the ability of a 

borrower to service the debt and thus 

help determine the consequent riskiness 

of a loan. Finally, while a commercial 

lender should consider the accuracy of 

valuation of collateral to the extent it is 

a factor in the repayment of the 

obligation, the agencies are declining to 

impose a requirement of a qualifying 

appraisal or other particular valuation 

for collateral securing a QCL. The 

agencies observe that many types of 

collateral could be pledged to secure a 

commercial loan and, therefore, 

mandating particular valuation methods 

could be very complex and 

unintentionally exclusive, thereby 

discouraging secured loans, which are 

frequently safer as credits than 

unsecured loans and therefore provide 

additional avenues for funding for many 

borrowers. Additionally, a valuation 

requirement would increase the burden 

associated with underwriting a QCL. 

In addition to the underwriting 

criteria discussed above, in the 

reproposal, the agencies proposed that 

all QCLs must be funded prior to the 

securitization and that the securitization 

not allow for any reinvestment periods. 

In addition, if a loan was subsequently 

found not to have met the QCL criteria, 

the sponsor would have been required 

to effect a cure or buyback of the loan. 

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250See Revised Proposal, 78 FR at 57980. 

One commenter requested that the 

agencies allow QCL loans to be funded 

up to six months after the issuance of 

the securitization. Some commenters 

also requested that the agencies allow 

QCL securitizations to have 

reinvestment periods, so long as the 

new loans added to the pool would 

either be QCLs or not reduce the QCL/ 

non-QCL blended pool ratio below 50 

percent. Finally, some commenters 

opposed the buyback provision, noting 

that open market CLO managers 

designated as sponsors under the rule 

are thinly capitalized and generally 

would not have significant financial 

resources available to buy back loans in 

the pools they manage. 

The agencies are not adopting these 

commenter suggestions in the final rule. 

The agencies believe that only funded 

loans should be recognized as QCLs for 

purposes of exemption from risk 

retention, as there could be an adverse 

change in circumstances between the 

closing date of the securitization and a 

subsequent funding date for the loan 

that could disadvantage investors. 

Furthermore, changes in circumstances 

could mean the loan may not meet the 

quantitative QCL requirements upon 

funding. The agencies also decline to 

allow reinvestment periods for 

securitizations including QCLs. As 

discussed herein and in the revised 

proposal, there are increased concerns 

about transparency when qualifying and 

non-qualifying assets are mixed in a 

pool and an exemption from risk 

retention applies to the qualifying 

assets. Allowing reinvestment in 

addition to allowing blending of 

qualified and non-qualified assets could 

exacerbate these concerns and could 

allow sponsors to increase the risk of an 

initial pool that had a significant 

portion of QCLs in ways that would be 

difficult for investors to discern postclosing. Finally, the agencies are not 

removing the buyback requirement 

where QCLs are subsequently found not 

to have met the underwriting criteria at 

origination. The agencies do not believe 

that lack of financial resources of the 

sponsor should excuse the sponsor from 

meeting its obligations to ensure a loan 

labelled a QCL at origination met the 

QCL requirements. In addition, the rule 

allows certain underwriting errors to be 

addressed through cure, which would 

not require repurchase of the entire loan 

out of the pool and thus could be less 

financially burdensome for the sponsor. 

B. Qualifying Commercial Real Estate 

Loans 

Both the original and the revised 

proposals included underwriting 

standards for CRE loans that would be 

exempt from risk retention if the loans 

met those standards (qualifying CRE 

loans, or QCRE loans). As discussed in 

the revised proposal, the agencies made 

a number of changes to the QCRE 

standard in the reproposal to address 

concerns raised by commenters with 

respect to the original proposal. The 

proposed standards focused 

predominantly on the following criteria: 

The borrower’s capacity to repay the 

loan; the value of, and the originator’s 

security interest in, the collateral; the 

LTV ratio; and, whether the loan 

documentation includes the appropriate 

covenants to protect the value of the 

collateral. 

1. Definition of Commercial Real Estate 

Loan 

In the reproposal, a CRE loan would 

have been defined as any loan secured 

by a property of five or more residential 

units or by non-residential real 

property, where the primary source of 

repayment would come from the 

proceeds of sale or refinancing of the 

property or underlying rental income 

from entities not affiliated with the 

borrower. The definition would have 

specifically excluded land loans. 

Some commenters questioned the 

exclusion of certain land loans from the 

definition of CRE in the original and 

revised proposals. Specifically, these 

commenters stated that numerous 

CMBS securitizations include loans to 

owners of a fee interest in land that is 

ground leased to a third party who owns 

the improvements and whose ground 

lease payments are a source of income 

for debt service payments on the loan. 

These commenters suggested that the 

agencies clarify that the exclusion did 

not apply to such loans, because these 

loans are included in many existing 

CMBS securitizations and the entire 

securitization would be unable to use 

CMBS risk retention option due to these 

loans being excluded from the CRE 

definition. 

As explained in the revised proposal, 

the agencies did not take commenters 

suggestion to include some land loans 

in the definition of commercial real 

estate because of concerns, among other 

things, that separation of ownership 

between land and buildings could 

complicate servicing and foreclosure.250

However, having carefully considered 

comments on this point following the 

reproposal, the agencies have decided to 

modify the definition of commercial real 

estate in the final rule to address 

commenters’ concerns about these land 

loans. The agencies have concluded that 

excluding these ground-leased land 

loans on improved property from the 

definition is not warranted and so have 

explicitly included them in the 

definition of commercial real estate so 

that these loans may qualify as QCRE 

loans if they otherwise meet the 

qualifying criteria, or alternatively, may 

be included with pools of other CRE 

loans to allow the sponsor to use the 

third-party purchaser form of risk 

retention discussed in Part III.B.5 of this 

Supplementary Information. 

2. Single Borrower Underwriting 

Standard 

Commenters generally supported the 

reproposed exemption from risk 

retention for QCRE loans. However, as 

discussed further below, many 

commenters stated that the proposed 

underwriting criteria were too strict and 

requested that the agencies modify the 

QCRE loan criteria to allow more loans 

to qualify for the exemption. In 

addition, some commenters requested 

that the agencies expand the QCRE loan 

criteria for, or provide an additional 

QCRE loan exemption for, singleborrower or single-credit (SBSC) 

transactions involving a securitization 

of cross-collateralized loans provided to 

one or more related borrowers. 

Commenters stated that these 

transactions warranted an exemption 

because they typically have had stronger 

historical performance than non-SBSC 

CMBS transactions and due to market 

practice, few or none would qualify as 

a QCRE loan. In addition, commenters 

asserted that B-piece buyers have not 

historically been involved in these 

transactions because of the limited 

number of loans involved. Commenters 

also asserted that these transactions are 

particularly transparent to investors 

because they involved only a few, large 

loans (as compared to other CMBS 

transactions) and investors typically 

receive granular information with 

respect to the loans. Commenters 

asserted that risk retention for these 

structures would cause costs to increase 

and possibly reduce access to credit for 

some companies without a 

commensurate increase in investor 

protection, given the nature of the loans 

involved and transparency to investors. 

One commenter proposed that the SBSC 

exemption rely exclusively on extensive 

disclosure about the securitization 

structure and loans in the structure 

rather than quantitative underwriting 

criteria. Commenters also proposed that 

only larger SBSC deals (over $200 

million in ABS interests issued) be 

exempted from risk retention to reduce 

the possibility that the exemption 

would be used to effectively exempt a 

significant section of the market. 

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77680 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

251Under the reproposal, a ‘‘qualifying multifamily loan’’ would be, generally, a commercial real 

estate loan secured a residential property with five 

or more residential dwellings and where at least 75 

percent of the net operating income is derived from 

residential units and tenant amenities, but not other 

uses. See Revised Proposal, 78 FR at 58038. 

252Under the reproposal, a qualifying leased 

commercial real estate loan generally means a 

commercial real estate loan secured by nonfarm real 

property (other than multi-family and hotel 

properties) that is occupied by tenants meeting 

certain criteria. See Revised Proposal, 78 FR at 

58038. 

The agencies have carefully 

considered the commenters’ requests for 

separate QCRE loan criteria for SBSC 

transactions. Having reviewed 

information provided by commenters as 

well as other information related to this 

market, the agencies have concluded 

that it would not be appropriate to 

adopt separate QCRE loan underwriting 

criteria for SBSC transactions. An SBSC 

transaction may qualify for an 

exemption from risk retention, like 

other CMBS transactions, to the extent 

the securitized loans qualify as QCRE 

loans, and the regulators do not believe 

there is sufficient support to justify 

establishing separate underwriting 

criteria for SBSC transactions. The 

agencies have not concluded that SBSC 

transactions as a category are of 

sufficiently low risk to warrant a special 

exemption from risk retention. While 

most CMBS transactions involve 

diversifying risk across types of 

properties, SBSC transactions generally 

focus on one specific type of property 

(for example, loans on properties related 

to one brand of hotel), which potentially 

concentrates and increases credit risk as 

compared with a diversified CMBS 

securitization. In addition, because of 

the cross-collateralization or crossdefault provisions in these deals and the 

reliance on a single borrower, the failure 

of one loan in a deal could cause a 

default of the entire securitization. 

Furthermore, the agencies are 

concerned that it would be difficult to 

construct a definition that captures an 

SBSC transaction in a way that would 

address the commenters’ concerns while 

also being sufficiently limited in scope 

to prevent widespread use of the option 

in a manner that would undermine 

consistent application of the rule for 

CMBS transactions. The agencies are 

further concerned that using a deal size 

threshold to reduce inappropriate use of 

the option could be unnecessarily 

arbitrary and restrictive for smaller 

borrowers without providing sufficient 

regulatory benefit. Additionally, the 

agencies are concerned that such a 

definition would inadvertently lead to 

exempting from risk retention CMBS 

transactions with lower quality 

underwriting than intended by the 

exemption and less stringent crosscollateralization or cross-default 

features, as well as other criteria 

historically associated with SBSC 

transactions. 

In addition, the agencies have 

concerns that the commenters’ 

suggested conditions for which 

transactions would qualify as a singleborrower transaction or as a singlecredit transaction would allow for 

widespread structural evasion of the 

rule. A sponsor could easily structure a 

CMBS transaction in which the single 

asset is a mortgage loan secured by 

multiple properties or in which the 

single borrower is an SPV formed by an 

entity that wants to finance a portfolio 

of unrelated properties. 

Finally, the agencies note, as 

discussed further below, that the criteria 

for QCRE loans has been modified in the 

final rule to provide some additional 

flexibility. 

3. Proposed QCRE Loan Criteria 

As discussed above, the agencies 

adjusted some of the QCRE loan 

underwriting criteria as set forth in the 

original proposal in response to 

commenter concerns. The agencies 

generally reproposed the original 

structure of the qualifying criteria, 

divided into four categories: ability to 

repay, loan-to-value requirement, 

valuation of the collateral, and risk 

management and monitoring. These 

sections and their associated comments 

are discussed below. 

The agencies received some 

comments that were generally 

supportive of the QCRE loan criteria in 

the reproposal and that requested that 

the agencies not loosen the criteria 

further because of concerns of the effect 

that could have on lender behavior, to 

the detriment of investors in CMBS 

transactions. One commenter in 

particular supported the collateral 

valuation requirements with respect to 

appraisers. 

A number of commenters said the 

QCRE loan criteria were generally too 

conservative, noting that only a small 

number of commercial real estate loans 

would meet the criteria and that the 

exemption from risk retention for QCRE 

loans would be rendered impractical for 

most sponsors, thereby eliminating 

incentives to originate QCRE loans and 

possibly causing funding problems, 

including for multifamily loans if the 

Enterprises were to stop providing 

funding. One commenter claimed that 

because the QCRE loan criteria is 

narrow and many CMBS transactions 

would be subject to risk retention, this 

could cause rents to rise in the 

multifamily sector and slow down job 

creation. 

Some commenters asserted that a 

much lower percentage of commercial 

real estate loans would qualify as QCRE 

loans than residential mortgages would 

qualify as QRMs under the reproposal, 

and generally recommended that the 

QCRE loan criteria be crafted to capture 

a portion of the market similar to that 

portion of the residential mortgage 

market captured by the QRM definition. 

Another commenter suggested that the 

agencies modify the QCRE loan criteria 

to follow metrics ‘‘more typical’’ of 

balance sheet lenders such as insurance 

companies and commercial banks. 

Another commenter asserted that the 

proposed QCRE loan criteria would 

introduce interest rate sensitivity into 

the CMBS market where it does not 

currently exist. A few commenters 

requested that the agencies consider 

distinct QCRE loan underwriting 

standards for different commercial real 

estate sectors. For example, a 

commenter urged the agencies to allow 

for a higher loan-to-value ratio for 

multifamily loans than allowed under 

the reproposed QCRE loan criteria. 

Many of the commenters who 

generally opposed the proposed QCRE 

loan definition had specific critiques or 

suggestions related to each of the 

categories of QCRE loan criteria, as 

discussed below. 

4. Ability To Repay Criteria and Term 

Like the original proposal, the 

reproposal included a number of criteria 

that would relate to the borrower’s 

ability to repay in order for a loan to 

qualify as a QCRE loan. The borrower 

would have been required to have a DSC 

ratio of at least 1.25x for qualifying 

multi-family property loans,251 1.5x for 

qualifying leased QCRE loans,252 and 

1.7x for all other commercial real estate 

loans. The reproposed standards also 

would have required reviewing two 

years of historical financial data and 

two years of prospective financial data 

of the borrower. The loan would have 

been required to have either a fixed 

interest rate or a floating rate that was 

effectively fixed under a related swap 

agreement. The loan documents also 

would have had to prohibit any deferral 

of principal or interest payments and 

any interest reserve fund, resulting in 

excluding interest-only loans from 

qualifying as QCRE loans. 

The reproposal included a maximum 

amortization period of 25 years for most 

commercial real estate loans, and 30 

years for qualifying multi-family loans, 

with payments made at least monthly 

for at least 10 years of the loan’s term. 

Furthermore, payments made under the 

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253These standards include the ‘‘Interagency 

Guidelines for Real Estate Lending.’’ 12 CFR part 

34, subpart D, Appendix A (OCC); 12 CFR part 208, 

subpart C, Appendix A (FRB); 12 CFR part 365, 

Appendix A (FDIC). 

254 In the CRE lending context, a sponsor is the 

party that ultimately controls the property, such as 

by owning an SPV, which in turn owns the CRE. 

loan agreement would be required to be 

based on a straight-line amortization of 

principal and interest over the 

amortization period (up to the 

maximum allowed amortization period, 

noted above). The minimum loan term 

could be no less than 10 years and no 

deferral of repayment of principal or 

interest could be permitted. 

A number of commenters objected to 

the agencies’ reproposed DSC ratios as 

too conservative, or suggested 

eliminating or changing the DSC ratio 

criteria. Some commenters suggested 

lowering qualifying DSC ratios to a 

range between 1.25x and 1.5x, or 

establishing criteria similar to those 

used by Fannie Mae or Freddie Mac to 

fund multifamily real estate loans. 

However, a commenter expressed 

concern that the reproposed QCRE loan 

criteria unduly loosened the standard 

and supported increasing the DSC ratio 

to 2.4x. A commenter claimed that the 

DSC and LTV criteria, without taking 

into consideration other characteristics 

of a property, would lead to an 

inappropriate assessment of risk, and 

that each commercial real estate 

property has a unique risk profile. 

Some commenters supported 

removing the proposed requirement to 

examine two years of past borrower data 

or replacing it with two years of 

property data, as they stated that many 

new CRE loans involve stabilized 

properties purchased by new SPVs and 

the SPVs would not have two years of 

historical data. In addition, as these 

loans are generally non-recourse (or are 

made to SPVs whose only asset is the 

subject real estate), only the property 

and income stream from the property 

are available to satisfy the loan 

obligation. 

Many commenters supported the 

requirement for fixed interest rate loans 

for QCRE loans. However, some 

commenters suggested expanding the 

types of derivatives allowed to convert 

a floating rate into a fixed rate through 

a rate cap derivative. Some commenters 

also supported the restrictions on 

deferrals of principal and interest. 

However, other commenters supported 

allowing interest-only loans if those 

loans had a lower LTV ratio (such at 50 

percent). 

Many commenters objected to the 

minimum length and amortization of 

QCRE loans. These commenters said 

that 3, 5, and 7-year CRE loans have 

become common in the industry, and 

therefore asserted that the proposed 

minimum 10-year term criterion would 

inappropriately disqualify numerous 

loans without much regulatory benefit. 

A commenter asserted, for example, that 

default and delinquency data 

demonstrates that loan term does not 

materially factor into or increase the 

likelihood of loss for CMBS investors. 

Another commenter asserted that the 

loss rate for shorter term loans is better 

than for 10-year loans. For similar 

reasons, these commenters also 

supported a longer amortization period 

for QCRE loans, up to 30 years. Other 

commenters, however, requested that 

the agencies continue to disqualify 

interest-only loans from QCRE loans 

and also to maintain the minimum term 

at 10 years. 

After carefully considering the 

comments on the underwriting criteria 

for QCRE loans, the agencies are 

adopting in the final rule QCRE loan 

criteria similar to those in the 

reproposal, with some modifications to 

address some commenter concerns. The 

agencies are not changing the DSC ratios 

from the reproposal, because the 

agencies believe reducing these 

requirements would inappropriately 

allow riskier loans to qualify for a 

complete exemption from risk retention. 

As noted in the reproposal, these 

criteria are consistent with the Federal 

banking agencies’ historical standards 

for conservative CRE lending.253

The agencies are also retaining the 

requirement not to include interest-only 

loans or loans with interest-only periods 

as QCRE loans. The agencies believe 

that interest-only loans or interest-only 

periods distort assessment of repayment 

ability, increase risk at maturity due to 

lack of principal reduction, and may 

present increased credit risk, even with 

a lower LTV ratio and, accordingly, 

would be inappropriate for qualifying 

CRE loan treatment. 

With respect to maximum 

amortization periods, the agencies are 

aware that there are many nonmultifamily CRE loans with 

amortization periods in excess of 25 

years. However, allowing a longer 

amortization period for these loans 

reduces the amount of principal paid 

each month on the loan before maturity, 

which can increase risks related to 

having to refinance a larger principal 

amount than would be the case for a 

loan with a shorter amortization period. 

Because the agencies believe that loans 

with a maximum 25-year maturity 

reflect more stringent underwriting, and 

believe that exemptions from risk 

retention should be available only for 

the most prudently underwritten CRE 

loans, the agencies are adopting an 

amortization period of 30 years for 

multifamily residential QCRE loans and 

25 years for all other QCRE loans. The 

agencies are also making a technical 

change from requiring straight-line 

amortizing payments to level payments 

of principal and interest. 

The agencies are also adopting a 10- 

year minimum maturity for QCRE loans. 

The agencies believe that loans with 

terms shorter than 10 years, such as 

three, five, or seven years, may create 

underwriting incentives not 

commensurate with the high credit 

quality and low risk necessary for a loan 

to qualify as a QCRE loan. For example, 

when making a shorter term loan, an 

originator may focus only on a short 

timeframe in evaluating the stability of 

the real estate underlying the loan in an 

industry that might be at or near the 

peak of its business cycle. In contrast, a 

10-year maturity CRE loan requires 

underwriting through a longer business 

cycle for the property, including 

downturns that may not be captured 

appropriately when underwriting to a 

shorter time horizon. 

In response to comments on lack of 

data availability for new loans to SPVs 

that recently purchased property, the 

agencies are making modest adjustments 

to the QCRE loan criteria to facilitate 

loans to such borrowers. Therefore, the 

final rule allows originators to use two 

years of historical data from the 

property, when the property has two 

years of operating history.254 Under this 

revised standard, properties with less 

than two years of operating history 

would still be excluded from the QCRE 

loan standards because new properties 

present significant additional risks and 

loans on those properties generally 

should not be exempt from risk 

retention. 

Similar to the reproposal, the final 

rule requires that the interest rate on a 

QCRE loan be fixed or convertible into 

a fixed rate using a derivative product. 

However, in the final rule, the agencies 

have expanded the allowable 

derivatives to include interest rate cap 

derivatives, provided that the loan is 

underwritten based on the maximum 

interest rate allowable under the cap, 

even if the loan is originated at a lower 

rate. The agencies are not proposing to 

allow other types of derivatives because 

they have concluded they are 

insufficiently transparent for a QCRE 

loan standard. 

5. Loan-to-Value Requirement 

The revised proposal would have 

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77682 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

255Revised Proposal, 78 FR at 58041. 

256Revised Proposal, 78 FR at 57982. 

value (CLTV) ratio for first and junior 

loans for QCRE loans be less than or 

equal to 70 percent and the LTV ratio 

for the first-lien loan be less than or 

equal to 65 percent; or that the CLTV 

and LTV ratios be less than or equal to 

65 and 60 percent, respectively, for 

loans with valuation using a 

capitalization rate below a certain 

threshold, as set forth in the 

reproposal.255 As discussed in the 

reproposal, the agencies concluded that 

these criteria would be appropriate for 

high quality commercial real estate 

loans and to help protect securitization 

investors against losses from declining 

property values and potential defaults 

on the CRE loans.256

Many commenters recognized that 

LTV standards are important to ensuring 

high quality CRE loan underwriting. 

While some commenters supported the 

agencies’ proposed ratios, others 

asserted that they were too conservative. 

Some commenters suggested that higher 

LTV ratios (generally up to 70 percent) 

should be allowed in the QCRE loan 

standards, that the CLTV ratio cap be 

removed, and that the reduction in LTV 

and CLTV ratios for loans with certain 

valuation assumptions be removed. 

Others, however, suggested more 

conservative maximum LTV ratio 

criteria, including a 50 percent LTV 

ratio suggestion for interest-only loans, 

if they were to be permitted in the QCRE 

loan criteria by the agencies. One 

commenter indicated that the highest 

quality loans secured in CMBS tended 

to have lower LTV ratios than would be 

permitted for the QCRE loan standard, 

and expressed concern that the agencies 

may not have been conservative enough 

in the reproposal. 

The agencies have considered the 

comments on LTV and CLTV ratio 

requirements for QCRE loans and are 

adopting the standards as reproposed. 

The agencies agree with those 

commenters who generally supported a 

65 percent LTV ratio requirement. 

While the agencies are not adopting a 70 

percent LTV ratio requirement, the 65 

percent LTV ratio requirement still 

allows for 70 percent debt financing 

with up to 5 percent subordinated 

financing. As discussed in the 

reproposal, the agencies observe that the 

more equity a borrower has in a CRE 

project, the lower the lender or 

investor’s exposure to credit risk and 

the greater the incentive for the 

borrower to perform on the loan. 

Overreliance on excessive subordinated 

financing instead of equity financing for 

a CRE property (which increases CLTV 

ratios) can significantly reduce the cash 

flow available to the property, as 

investors in subordinated finance often 

require high rates of return to offset the 

increased risk of their subordinate 

position. The agencies have concluded 

that a 70 percent CLTV ratio cap is 

generally appropriate for a low risk 

QCRE loan standard, which would 

require the borrower to have at least 30 

percent equity in the project to help 

protect securitization investors against 

losses from declining property values 

and potential defaults. 

The agencies decline the commenters’ 

suggestion to reduce the maximum LTV 

ratio requirement for all QCRE loans, as 

65 percent is sufficiently conservative 

for a QCRE loan standard given the 

other conservative underwriting 

requirements in the rule. The agencies 

also decline to adopt a 50 or 55 percent 

LTV ratio requirement for interest-only 

loans. As discussed above, the agencies 

believe interest-only loans, even at 

lower LTV ratios, present significant 

risks that would not meet an 

appropriately conservative QCRE loan 

underwriting standard. 

The agencies are also retaining the 

requirement that the maximum LTV and 

CLTV ratios be lowered by 5 percent 

under certain appraisal conditions, as in 

the reproposal, with minor technical 

modifications to address commenter 

concerns. The ratios are only reduced if 

the appraisal used to qualify the CRE 

loan as a QCRE loan used an income 

approach with a direct capitalization 

rate, and that rate was lower than the 

rate permitted by the final rule. The 

final rule text clarifies that the appraisal 

used to qualify the CRE loan is not 

required to use a direct capitalization 

rate. Generally, as direct capitalization 

rates decline, values increase. In a lower 

cap rate environment there is an 

increase in the amount that can be 

borrowed given a fixed LTV or CLTV 

ratio, which is why the lower LTV and 

CLTV ratios would apply. In addition, 

to address concerns about appraisals 

using excessively high cap rates, the 

agencies are requiring that if a direct 

capitalization rate was used in an 

appraisal to qualify the loan as a QCRE 

loan, the rate must be disclosed to 

investors in the securitizations. 

6. Collateral 

The agencies proposed to require an 

appraisal and environmental risk 

assessment for every property serving as 

collateral for a QCRE loan. Commenters 

strongly supported both the appraisal 

and environmental risk assessment for 

all QCRE loan properties. Many 

commenters indicated this is already 

standard industry practice. A few 

commenters expressed the view that the 

agencies were too strict in requiring 

specific types of appraisals, such as an 

income-based appraisal using a 

discounted cash flow and an appraisal 

using a direct capitalization rate, rather 

than allowing a certified appraiser to 

determine the appropriate valuation 

method. As noted above, the agencies 

have made clarifications in the final rule 

to provide originators and appraisers 

with more flexibility in determining the 

appropriate appraisal approaches for a 

specific property that would be used to 

meet the QCRE loan standards, while 

not restricting appraisers from using 

other valuation methods that they 

believe are appropriate for the property. 

The agencies also made a technical 

change in the final rule to reflect the 

common appraisal terminology and 

Uniform Standards of Professional 

Appraisal Practice terminology for the 

income approach that is required to be 

in the written appraisal. 

7. Risk Management and Monitoring 

The reproposal would have required 

lenders to obtain a first lien in the 

property and limited the ability to 

pledge the property as collateral for 

other loans. While many commenters 

supported the first-lien requirement, 

one commenter supported allowing 

unlimited junior liens to finance energyefficient improvements on the CRE 

property subject to the loan. A 

commenter requested that the agencies 

modify the proposed QCRE loan criteria 

to take into account pari passu and 

junior lien loans, noting that such 

modifications would not increase the 

risk of QCRE loans. Some commenters 

supported the requirement that a 

borrower obtain insurance on the 

property up to the property value, while 

other commenters requested that the 

requirement be changed to require 

insurance up to the lesser of the 

replacement cost of the property 

improvements or the loan balance. 

The agencies are adopting the lien 

requirements as proposed. While 

energy-efficient improvements may 

reduce utility expenses associated with 

the property, the agencies do not wish 

the rule to facilitate structures whereby 

additional financing, even if 

subordinate, is obtained and thus 

increases leverage on the property. 

Regarding the insurance amount, the 

agencies have concluded that a strong 

QCRE loan standard would be 

maintained if the insurance limit in the 

criteria was changed to no less than the 

replacement cost of property 

improvements, in accordance with more 

customary market practice. After 

reviewing the related comment, the 

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257See Revised Proposal, 78 FR at 57983. 258See Revised Proposal, 78 FR at 57984–57985. 

agencies determined that loan balance 

was not an appropriate measurement as, 

in some jurisdictions, a lender may be 

required to make insurance proceeds 

available to a borrower and, in those 

circumstances, a prudent lender would 

wish to make sure that the proceeds are 

sufficient to fully repair or replace the 

insured property. 

C. Qualifying Automobile Loans 

Similar to the original proposal, the 

revised proposal included underwriting 

standards for automobile loans that 

would be individually exempt from risk 

retention (qualifying automobile loans, 

or QALs) if securitized. As in the 

original proposal, the definition of 

automobile loan in the reproposal 

generally would have included only 

first-lien loans on light passenger 

vehicles employed for personal use. It 

specifically excluded loans for vehicles 

for business use, medium or heavy 

vehicles (such as commercial trucks and 

vans), lease financing, fleet sales, and 

recreational vehicles including 

motorcycles. As explained in the 

reproposal, the agencies did not follow 

recommendations to propose including 

loans on vehicles more frequently used 

for recreational purposes, such as 

motorcycles or business purposes, 

because the risks and underwriting of 

those loans would be different than that 

for vehicles used for personal use. In 

addition, the reproposed definition did 

not include automobile leases because, 

as the agencies explained, leases 

represent a different set of risks to 

securitization investors than purchase 

loans. For example, automobile resale 

price at the end of the lease period can 

affect the securitization cash flow, 

which is not the case for purchase loan 

securitizations.257

While some commenters supported 

the reproposed definition of automobile 

loan, others asserted that it continued to 

be too narrow. Several commenters 

suggested expanding the definition to 

include motorcycles, because often they 

are not used solely as recreational 

vehicles but as primary transportation 

and because, as these commenters 

asserted, motorcycle loans perform as 

well as auto loans. The commenters 

asserted that there would be no reason 

to categorically exclude motorcycles 

from the QAL definition, even if they 

could otherwise meet the QAL criteria, 

by excluding motorcycles from the 

definition of automobile loan. They also 

contended that the fact some 

motorcycles are used for recreational 

use does not lead to adverse motorcycle 

loan performance. 

Other commenters supported 

allowing automobile leases to qualify as 

QALs and recommended certain 

technical changes to the proposed QAL 

criteria. In particular, one commenter 

supported expanding the definition to 

include fleet purchases or fleet leasing, 

on the basis that these leases or sales are 

generally with corporations or 

government entities with strong 

repayment histories. 

Another comment on the definition of 

automobile loan raised concerns that it 

would be difficult for an originator to 

determine whether an automobile 

purchase was for consumer or nonconsumer use. 

The agencies have carefully 

considered these comments and are 

adopting the definition of automobile 

loans for QAL underwriting standards 

as reproposed. The agencies believe it 

continues to be appropriate to restrict 

the definition of automobile loan to 

light passenger vehicles employed for 

personal use, not including motorcycles 

and other vehicles that are commonly 

used for recreational purposes, as well 

as everyday personal transportation. 

While the agencies acknowledge some 

motorcycle loans may have strong 

underwriting and risk characteristics 

similar to those of automobile loans, the 

agencies have concluded that overall 

risk profile of motorcycles as a class 

remains distinct from that of 

automobiles and, like other recreational 

vehicles, exhibit overall a higher risk 

profile. Certain recreational vehicles 

may also be highly customized before or 

after purchase, which may reduce resale 

or recovery value in case of borrower 

default. 

The agencies also have decided not to 

expand the definition of automobile 

loan to include vehicles used for 

business purposes through fleet loans, 

as the risks and underwriting of such 

loans differ from those of vehicles used 

for personal transportation. For 

example, a car or truck used in a 

business may endure significantly more 

wear and depreciate much faster than a 

vehicle used only for normal household 

use. 

Similarly, for the reasons discussed in 

the reproposal, the agencies are not 

expanding the definition of automobile 

loan to include automobile leases. The 

agencies remain concerned that the 

credit risks posed by leases are different 

than automobile purchase loans, in part 

(as discussed above) due to resale price 

risk associated with returned vehicles. 

Regarding the comment on difficulties 

determining consumer purpose, the 

agencies believe originators or dealers 

will be able to differentiate between 

types of customers based on the existing 

process dealers and lenders must use to 

comply with TILA, which requires 

disclosures be provided to borrowers 

purchasing vehicles for personal use. 

The QAL underwriting criteria in the 

reproposal included requirements 

regarding a borrower’s ability to repay 

an automobile loan, including with 

respect to verification of borrower 

income and a borrower debt-to-income 

(DTI) ratio of no more than 36 percent. 

The loan term criteria included a first 

lien security interest on the vehicle, 

maximum maturity date, fixed rate 

interest, and level monthly payments 

with full amortization of the loan, as 

well as strict limits on deferral of 

payments and deferral of initiation of 

payments. The credit history criteria 

included verification and minimum 

credit history standards (such as no 

bankruptcy or repossession within the 

previous 3 years). The LTV criteria 

impose a borrower down payment 

requirement equal to fees, warranties 

and 10 percent of the purchase price.258

The agencies received a number of 

comments on the proposed QAL 

underwriting criteria. Generally the 

comments expressed concern that very 

few automobile loans would meet the 

QAL criteria because they would not fit 

existing market practices. Some 

commenters asserted that because the 

QAL criteria would not be met in 

existing market practice, the resulting 

risk retention requirements on 

automobile securitizations could 

discourage new issuances and impede 

liquidity and consumer credit. Others 

asserted this result would be unduly 

punitive to automobile securitizations 

as strong performers during the crisis, 

especially as compared to the proposed 

definition of QRM, which would 

exempt most residential mortgages from 

risk retention. Some commenters also 

offered particular suggestions to change 

the criteria, as discussed further below 

with respect to each category of criteria. 

Additionally, some commenters 

requested that the agencies apply the 

quantitative portions of the 

underwriting standards on a pool basis 

(which would assess underwriting 

standards on a pool-wide, rather than 

loan by loan, basis) rather than to 

individual loans, noting that the 

homogeneity of securitized automobile 

loans and their typical characteristics 

(not subject to interest rate fluctuations 

or refinancings) would make an 

exemption from risk retention based on 

pool level criteria appropriate. The 

agencies are not adopting this 

suggestion in the final rule and the final 

rule only permits the exemption to 

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77684 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

259See 15 U.S.C. 78o–11(c)(1)(B)(ii). 

apply to individual loans that meet the 

QAL criteria. The agencies observe that 

section 15G of the Exchange Act 

indicates that the reduction from risk 

retention for a qualifying asset is limited 

to the asset itself that is securitized, and 

does not suggest an exemption for a 

pool of assets that meets pool-wide 

underwriting criteria.259 Accordingly, 

the final rule provides that the 

underwriting standards for QAL must be 

met by each loan for that loan to be 

exempt from risk retention. 

Furthermore, the agencies do not 

believe providing risk retention on a 

pool basis would further the goals of 

risk retention and could lead to some of 

the transparency concerns discussed 

with respect to unlimited blending of 

non-qualifying assets with qualifying 

assets. For example, an exemption based 

on pool-level underwriting criteria 

could obscure the true credit quality of 

the pool in a way that would be difficult 

for investors to discern because of the 

potential for wide variation (and varying 

degrees of document verification) of the 

underwriting quality of those assets in 

a pool that did not meet a QAL standard 

on an individual basis. 

1. Ability To Repay Criteria 

As noted above, the ability-to-repay 

criteria for QALs in the reproposal 

included a DTI ratio not in excess of 36 

percent of a borrower’s monthly gross 

income. Under the proposed QAL 

criteria, originators would also have 

been required to verify a borrower’s 

income and debt payments using 

standard methods. 

Commenters generally disagreed with 

the proposed ability-to-repay criteria 

and requested a higher maximum DTI 

ratio or elimination of the ratio 

criterion, on the basis that it is not 

typically used in current automobile 

loan underwriting and not using it has 

not adversely affected automobile loan 

performance because (commenters 

claimed) borrowers often prioritize 

payment of their automobile loans over 

other debt obligations. Some 

commenters offered a number of 

suggested adjustments to the proposed 

DTI and verification requirements. 

Other commenters suggested using a 

payment-to-income (PTI) ratio instead of 

a DTI ratio because, they claimed, a PTI 

ratio is a stronger predictor of vehicle 

loan performance than a DTI ratio and 

does not involve as many operational 

burdens as a DTI ratio in providing 

quick approval of automobile loans, a 

practice expected by automobile 

consumers. A commenter also asserted 

that the proposed DTI requirements 

would put lenders that rely on the 

securitization markets for funding at a 

disadvantage to lenders that do not. 

Regarding the verification requirements, 

commenters suggested that if 

verification of debt and income would 

be retained as a criterion, originators 

should only be required to verify those 

debts listed on a borrower’s credit report 

and rely on borrower stated income 

without verification. 

The agencies have carefully 

considered these comments, but have 

concluded that the reproposed DTI 

criteria, including verification 

requirements, is essential to 

determining a borrower’s ability to 

repay, which in turn is essential to a 

strong consumer underwriting standard. 

As discussed in the original and revised 

proposals, the agencies believe that a 

total exemption from risk retention 

should be applied only to those loans 

that meet underwriting criteria 

associated with strong credit 

performance. A DTI ratio is a 

meaningful and comprehensive method 

for calculating a borrower’s ability to 

repay a loan, while a PTI ratio does not 

include other potentially significant 

debts that may reduce a borrower’s 

ability to repay the automobile loan. 

The agencies have continued to find a 

36 percent DTI ratio to be an 

appropriately conservative measure of 

ability to repay commensurate with a 

high quality automobile loan with low 

credit risk. Regarding verification, the 

agencies are concerned that not all of a 

borrower’s liabilities may be listed on a 

credit report and therefore are adopting 

the verification standards as proposed. 

In addition, relying on borrower stated 

income in assessing ability to repay 

could lead to overstatement of income 

by the borrower to obtain the loan or by 

the originator to qualify the loan as a 

QAL. For these reasons, as well as those 

discussed in the reproposal, the 

agencies are adopting the DTI and 

verification requirements as reproposed. 

2. Loan Terms 

As noted above, the reproposal 

included a number of criteria relating to 

the automobile loan, including that the 

loan term be calculated based on the 

origination date and loan payments 

could not be contractually deferred. 

A commenter requested that the loan 

term be calculated from the date of first 

payment rather than the origination 

date. Commenters also requested that 

loan deferrals be allowed to assist 

borrowers with hardship events. 

The agencies observe that the loan 

origination date and date of first 

payment should usually be within a few 

weeks of each other, which would not 

materially affect the loan term. The 

agencies do not view a long period prior 

to the first payment date as consistent 

with a strong QAL standard, as it could 

extend the total loan term for months 

beyond the limits for maturity the 

agencies have identified as appropriate 

for a QAL. While the agencies are 

retaining the requirement that the 

contract not allow borrower-initiated 

payment deferrals, this requirement 

would not affect subsequent servicerinitiated deferrals that may be triggered 

by borrower hardships described by the 

commenters. For these reasons and 

those discussed in the revised proposal, 

the agencies are finalizing the loan term 

criteria as proposed. 

3. Reviewing Credit History 

In the reproposal, the QAL criteria 

included an originator verification, 

within 30 days of originating a QAL, 

that the borrower was not 30 days or 

more past due on any obligation; was 

not more than 60 days past due over the 

past two years on any obligation; and 

was not a judgment debtor or in 

bankruptcy in the past three years. The 

agencies also proposed a safe harbor 

enabling the originator to rely on a 

borrower’s credit report showing the 

borrower complies with the standards. 

Also, the agencies proposed a 

requirement that all QALs be 

contractually current at the closing of 

the securitization. 

Several commenters opposed the 

proposed credit history criteria and 

requested that the agencies use instead 

a credit scoring system based on FICO 

or a similar system of rating potential 

borrowers based on credit history, 

generally using proprietary models. 

Commenters pointed out that the 

automobile lending industry has used 

credit scoring as a primary underwriting 

tool and would be unable under the 

QAL criteria to continue to rely on that 

method for qualifying its best borrowers, 

and therefore would not be able to use 

the criteria in order not to lose those 

borrowers as customers. 

Commenters further asserted that the 

proposed credit history verification 

criteria would be more burdensome 

than credit scoring systems, thereby 

increasing costs for lenders and 

consumers. A commenter suggested that 

the criteria would result in conclusions 

possibly less objective than credit 

scoring systems. In addition, a few 

commenters claimed that the QAL 

credit history standards would exclude 

many consumers of good credit quality 

while failing to identify risky 

consumers, whereas credit scoring 

models used in the industry would 

more accurately discriminate between 

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260 12 CFR part 327. 

261See 15 U.S.C. 78o–11(c)(2)(B). 

262See id. at sections 78o–11(c)(2)(B) and 78– 

11(e)(4)(B). 

263 15 U.S.C. 1639c. 

high and low-credit quality borrowers. 

These commenters asserted that this 

result would occur because the 

proposed criteria do not capture many 

aspects of credit history that are 

captured by credit scoring models. The 

commenters also recommended that the 

agencies adopt a ‘‘vendor-neutral’’ 

approach to incorporating the use of 

credit scores in the QAL criteria to 

ensure that there would be no undue 

reliance on a particular vendor and that 

credit models are already subject to 

regulatory oversight (including being 

the subject of the banking agencies’ 

guidance on model validation) and are 

rigorously validated. A commenter 

pointed to the FDIC’s large bank 

assessment rule 260 as an example of 

how the agencies could adopt a vendorneutral credit score criterion into the 

QAL criteria. Some commenters also 

requested that the agencies define 

‘‘contractually current’’ and base 

compliance on the securitization cut-off 

date rather than the closing date. 

The agencies have carefully 

considered the comments regarding the 

proposed QAL criteria and the requests 

to use credit scoring in the criteria. The 

agencies recognize that much of the 

current automobile lending industry 

relies heavily or solely on an internally 

or externally developed credit scoring 

system to approve automobile loans. 

However, the agencies do not believe 

that a credit score alone is sufficient 

underwriting for a conservative 

automobile loan with a low risk of 

default. Furthermore, the agencies do 

not believe it is appropriate for purposes 

of risk retention to establish regulatory 

requirements that rely on a credit 

scoring system or combination of 

proprietary credit scoring systems. The 

agencies are concerned that, over time, 

market pressures around meeting QAL 

criteria or other factors could lead to 

distortions in the scoring systems that 

do not appropriately reflect credit risk. 

Additionally, the agencies have broad 

policy concerns with linking regulatory 

underwriting criteria for risk retention 

purposes to proprietary credit analyses 

using privately developed models. 

Additionally, the agencies believe that 

a borrower must be contractually 

current on the loan obligation prior to 

securitization in order to have a robust 

underwriting requirement. However, the 

agencies do not believe it is necessary 

to establish a definition of contractually 

current, instead leaving this decision to 

the contract between the originator and 

borrower. While the agencies believe a 

securitization exempt from risk 

retention should contain only current 

automobile loans, the agencies will 

adopt the commenters’ suggestion to 

require evaluation of a loan’s status 

based on the cut-off date or similar date 

for establishing the composition of the 

asset pool collateralizing asset-backed 

securities issued pursuant to a 

securitization transaction rather than 

the closing date of the securitization. 

For these reasons, the agencies are 

adopting the credit history criteria as set 

forth in the revised proposal. 

4. Down Payment Requirement 

As noted above, the proposed QAL 

criteria included a down payment 

requirement whereby automobile loan 

borrowers would have been required to 

pay 100 percent of the taxes, fees, and 

extended warranties in addition to 10 

percent of the net purchase price 

(negotiated price less manufacturer 

rebates and incentive payments) of the 

car. 

Most comments on the QAL criteria 

opposed the proposed down payment 

requirements. The commenters 

proposed eliminating the down 

payment entirely, eliminating the down 

payment requirement for the taxes, fees, 

and extended warranties, or reducing 

the down payment requirement on the 

net purchase price. One of these 

commenters asserted that prime 

automobile loans do not require down 

payments generally because vehicles 

depreciate rapidly and therefore, 

lenders generally do not rely 

significantly on the value of the 

collateral when underwriting. 

Furthermore, the commenter asserted 

that depreciation makes strategic 

defaults highly unlikely and the short 

term of most automobile loans makes 

down payments unnecessary. As with 

the verification requirements discussed 

above, the commenter claimed that the 

down payment requirement in the QAL 

criteria could put automobile lenders 

that use securitization financing at a 

disadvantage as compared to others 

because of increased burden on 

consumers in meeting the QAL criteria 

or having more costs due to risk 

retention. The commenter also asserted 

that down payments have far less 

relevance to the credit risk of 

automobile loans than they do to 

residential loans, and that having such 

a requirement in the QAL criteria would 

not be consistent with the agencies’ 

position on the QRM definition. 

As discussed in the reproposal, the 

agencies do not believe that an 

automobile loan with an LTV ratio over 

90 percent would be low-risk, and that 

a customer should put some of the 

customer’s own cash or trade-in value 

into the deal to reduce risks for strategic 

default and incent repayment of the 

loan. The agencies recognize that down 

payment requirements for prime 

borrowers are not common in 

automobile lending, but note that down 

payments provide an additional level of 

protection to lenders and investors in 

automobile securitizations that ensures 

a low level of credit risk over time as 

market conditions change. 

For the reasons discussed above, the 

agencies are adopting the QAL criteria 

as set forth in the reproposal. As 

explained above, the criteria ensure that 

QAL loans (that are fully exempt from 

risk retention) are of very high quality 

and low credit risk, as required by 

section 15G of the Exchange Act.261 The 

agencies recognize that the QAL 

standards are in some respects more 

conservative than those of the QRM 

definition. The agencies observe, 

however, that the statutory standards for 

establishing QAL criteria and the QRM 

definition are different.262 Furthermore, 

as discussed in the reproposal and Part 

VI of this Supplementary Information, 

the agencies’ decisions with regard to 

the QRM definition take into 

consideration the particular dynamics 

in the residential mortgage market and 

the effect of that market on the 

economy. The dynamics in the 

automobile market are different, as are 

the effects of the automobile market on 

the broader financial system and 

economy, and the agencies have 

therefore considered the automobile and 

residential markets separately, together 

with the differences in the relevant 

statutory requirements, in establishing 

the QRM and QAL standards. 

VI. Qualified Residential Mortgages 

After carefully considering comments 

received on the reproposed definition of 

QRM, as well as comments received on 

the alternative approach to defining 

QRM, the agencies are adopting, as 

reproposed, the definition of QRM that 

aligns with the definition of QM, as 

defined in section 129C of TILA 263 and 

the regulations thereunder. The agencies 

are also providing an exemption from 

risk retention requirements for certain 

mortgage loans secured by three-to-four 

unit residential properties that meet the 

criteria for QM other than being a 

consumer credit, as well as an 

exemption to permit sponsors to blend 

these exempted mortgage loans with 

QRMs. 

The final rule also includes a separate 

exemption from risk retention 

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77686 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

264See Part VII of this Supplementary 

Information. 

265See 15 U.S.C. 78o–11(c)(1)(C)(iii). 

266See id. at section 78o–11(e)(4). 

267Under the original proposal, QRM was limited 

to a closed-end first-lien mortgage to purchase or 

refinance a one-to-four family property, at least one 

unit of which is the principal dwelling of a 

borrower. In addition, consistent with the QM 

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

maturity date of a QRM could not exceed 30 years 

and QRMs would have been prohibited from 

having, among other features, payment terms that 

allow interest-only payments, negative 

amortization, ‘‘balloon payments,’’ or prepayment 

penalties. See Original Proposal, 76 FR at 24122. 

268See Original Proposal, 76 FR at 24117. 

269The agencies reviewed data supplied by 

McDash Analytics, LLC, a wholly owned subsidiary 

of Lender Processing Services, Inc., on prime fixedrate loans originated from 2005 to 2008, which 

included underwriting and performance 

information on approximately 8.9 million 

mortgages; data from the 1992 to 2007 waves of the 

triennial Survey of Consumer Finances, which 

focused on respondents who had purchased their 

homes either in the survey year or the previous 

year, and included information on approximately 

1,500 families; and data regarding loans purchased 

or securitized by the Enterprises from 1997 to 2009, 

which consisted of more than 78 million mortgages, 

and included data on loan products and terms, 

borrower characteristics (e.g., income and credit 

score), and performance data through the third 

quarter of 2010. See Original Proposal, 76 FR at 

24152. 

270First, the agencies stated that QRMs should be 

of very high credit quality, given that Congress 

exempted QRMs completely from the credit risk 

retention requirements. Second, the agencies 

recognized that setting fixed underwriting rules to 

define a QRM could exclude many mortgages to 

creditworthy borrowers. Third, the agencies sought 

to preserve a sufficiently large population of nonQRMs to help enable the market for securities 

collateralized by non-QRM mortgages to be 

relatively liquid. Fourth, the agencies sought to 

implement standards that would be transparent and 

verifiable to participants in the market. See Original 

Proposal, 76 FR at 24117. 

271See 15 U.S.C. 78o–11(e)(4)(C). At the time of 

issuance of the original proposal on April 29, 2011, 

the Board had sole rulemaking authority for 

defining QM, which authority transferred to CFPB 

on July 21, 2011, the designated transfer date under 

the Dodd-Frank Act. 

272See Final QM Rule. 

273See Revised Proposal, 78 FR at 57989–57990. 

274See id. at 57991. 

275See id. at 57989. 

276See id. at 57990. 

277See id. at 57991. 

278See id. 

requirements for certain types of 

community-focused residential 

mortgages that are not eligible for QRM 

status under the rule, similar to the 

exemptions provided from Regulation 

Z’s ability-to-repay requirement.264

The agencies are also including a 

provision in the final rule that will 

require the agencies to periodically 

review the definition of QRM and its 

effect on the mortgage securitization 

market, as well as the exemptions 

provided for the three-to-four unit 

residential properties and the 

community-focused residential 

mortgages. Each of these aspects of the 

final rule is discussed more fully below. 

A. Background 

Section 15G of the Exchange Act 

exempts sponsors of securitizations 

from the risk retention requirements if 

all the assets that collateralize the 

securities issued in the transaction are 

QRMs.265 In defining QRM, the statute 

requires that the agencies take into 

consideration underwriting and product 

features that historical loan performance 

data indicate result in a lower risk of 

default. In addition, the statute requires 

that the definition of QRM be ‘‘no 

broader than’’ the definition of QM.266

In the original proposal, the agencies 

proposed to define QRM to mean a 

covered closed-end credit transaction 

that meets the statutory QM 

standards 267 as well as additional 

underwriting criteria. These additional 

underwriting criteria included 

minimum LTV and down payment 

requirements, DTI requirements, and 

credit history criteria.268 These 

additional criteria were developed after 

the agencies examined extensive data on 

loan performance from several 

sources,269 and were based on several 

goals and principles the agencies 

articulated in the original proposal.270

The agencies also sought to implement 

the statutory requirement that the 

definition of QRM be no broader than 

the definition of a QM, as mandated by 

the Dodd-Frank Act. 271 At the time of 

the original proposal, the definition of 

QM had not been adopted in a final 

rule. 

The majority of commenters opposed 

the QRM definition in the original 

proposal, expressing concerns over the 

20 percent down payment requirement 

in particular. These commenters stated 

that the proposed definition of QRM 

was too narrow and would constrain 

credit availability, especially for lowand moderate-income (LMI) borrowers 

or first-time homebuyers. Many of these 

commenters urged the agencies to 

postpone finalizing the QRM definition 

until after the QM definition was 

finalized by the CFPB.272

As discussed in the reproposal, in 

deciding to propose a broader QRM 

definition, the agencies carefully 

considered the concerns raised by 

commenters with respect to the original 

proposed definition, the cost of risk 

retention, current and historical data on 

mortgage lending and performance, and 

the provisions of the final QM 

definition. The agencies examined 

updated loan performance information 

and considered the historical 

performance of residential mortgage 

loans with respect to the QM criteria.273

Further, the agencies considered the 

potential effects of a QRM definition on 

credit pricing and access under 

prevailing market conditions, as well as 

direct and indirect costs of lending that 

could be passed on to borrowers and 

restrict credit availability.274

The agencies decided in the 

reproposal to align the QRM definition 

with the QM definition for several key 

reasons, which include meeting the 

statutory goals and directive under 

section 15G of the Exchange Act to limit 

credit risk, preserving access to 

affordable credit, and reducing 

compliance burden. Among other 

factors related to credit risk, the 

agencies discussed in the reproposal 

observations that loans that meet the 

QM criteria have a lower probability of 

default than mortgages that do not, most 

notably for loans originated near the 

peak of the housing bubble that 

preceded the financial crisis.275 In 

addition, the agencies observed that a 

QRM definition aligned with QM 

should limit the scope of information 

asymmetry between sponsors and 

investors because the QM definition 

requires, among other things, 

documentation and verification of 

income and debt.276 In addition, the 

agencies expressed concern about 

imposing further constraints on 

mortgage credit availability under the 

prevailing tight mortgage lending 

conditions, including through 

additional criteria that could reduce the 

credit risk of QRMs further, such as LTV 

and credit history-related criteria. The 

agencies also observed that the indirect 

costs of the interaction of QRM with 

existing regulations and market 

conditions is difficult to quantify and 

has the potential to be large, and that 

aligning the QRM definition with the 

QM definition should minimize these 

costs.277 Finally, the agencies noted 

with concern that a QRM definition not 

aligned with the QM definition could 

compound the segmentation in the 

securitization market that may already 

occur between QMs and non-QMs. It 

was acknowledged that, while the 

agencies recognized that the alignment 

of QRM with QM could also further 

solidify the non-QM/QM segmentation 

in the market, the consequences of 

segmentation due to non-alignment 

were judged to be more severe.278

In reproposing to align the QRM 

definition with QM, the agencies 

expressed an intention to review the 

advantages and disadvantages of this 

decision as the market evolves, to 

ensure the risk retention rule best meets 

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279See id. 

280 15 U.S.C. 1639c. 

281See Final QM Rule. 

282See 12 CFR 1026.43(a) and 1026.43(c). 

283See Revised Proposal, 78 FR at 57993–57996. 

284See Revised Proposal, 78 FR at 57993. 

285See id. at 57995. 

the statutory objectives of section 15G of 

the Exchange Act.279

B. Overview of the Reproposed Rule 

The reproposal would have 

implemented the statutory exemption 

for QRMs by defining ‘‘qualified 

residential mortgage’’ to mean 

‘‘qualified mortgage’’ as defined in 

section 129C of TILA 280 and the 

regulations issued thereunder.281 The 

agencies proposed to align the 

definition of QRM with QM to minimize 

potential conflicts between the two 

definitions and minimize burden in 

meeting both QM and QRM criteria. 

Therefore, under the reproposal, a QRM 

would have been a loan that 

(i) Met the general criteria for a QM 

under section 1026.43(e)(2); 

(ii) Met the special criteria of the 

temporary QM definition under section 

1026.43(e)(4); 

(iii) Met the criteria for small creditor 

portfolio loans under section 

1026.43(e)(5) or (e)(6); or 

(iv) Met the criteria for rural or 

underserved creditor balloon loans 

under section 1026.43(f). 

This reproposed definition of QRM 

included any closed-end loan secured 

by any dwelling (e.g., home purchase, 

refinances, home equity loans, second 

or vacation homes), whether a first or 

subordinate lien. However, the 

reproposed definition of QRM would 

not have included any loan exempt from 

the ability-to-repay requirements and 

not eligible to be a QM, such as homeequity lines of credit (HELOCs) or 

reverse mortgages.282 In addition, loans 

exempt from the ability-to-repay 

requirements (such as loans made 

through state housing finance agency 

programs and certain community 

lending programs) were not separately 

included in the definition of QRM, 

which under the statute cannot be 

broader than QM. 

The agencies invited comment on all 

aspects of the reproposed definition of 

QRM. In particular, the agencies asked 

whether the reproposed definition 

would reasonably balance the goals of 

helping to ensure high quality 

underwriting and appropriate risk 

management with the public interest in 

continuing access to credit for 

creditworthy borrowers. The agencies 

also asked whether the definition of 

QRM should be limited to certain QM 

loans, such as loans that qualify for the 

QM safe harbor under 12 CFR 

1026.43(e)(1), and if the reproposed 

definition of QRM should include loans 

secured by subordinate liens. In 

addition, the agencies invited comment 

on an alternative approach to defining 

QRM (QM-plus approach). Consistent 

with the statutory requirement that 

QRM be no broader than QM, the QMplus approach would have taken the 

CFPB’s definition of QM as a starting 

point, including the requirements for 

product type, loan term, points and fees, 

underwriting, income, and debt 

verification, and DTI,283 and added four 

additional factors: the loan would have 

had to be a first-lien mortgage loan, be 

secured by a one-to-four family 

principal dwelling, and have an LTV 

ratio of 70 percent or less, and the 

borrower would have had to meet 

specific credit history criteria.284 Under 

this approach, significantly fewer loans 

likely would have qualified as QRMs. 

The agencies asked a number of 

questions about the QM-plus approach, 

including whether the benefits of the 

QM-plus approach would exceed the 

benefits of the reproposed approach to 

align the QRM definition to QM, taking 

into consideration financial stability, 

credit access, and regulatory burden.285

C. Overview of Public Comments 

1. Comments Received on the 

Reproposed QRM Definition 

The agencies received a significant 

number of comments with respect to the 

reproposed QRM definition, with most 

commenters expressing support for the 

reproposal that would align the QRM 

definition with the QM definition. 

Generally, these commenters stated that 

aligning the two definitions would 

comply with statutory requirements, 

minimize negative impact on the 

availability and cost of credit to 

borrowers (especially LMI borrowers, 

minority borrowers, and first-time 

homebuyers), and reduce potential 

costs, regulatory uncertainty, and 

compliance burden. Some commenters 

specifically expressed support for 

retaining the proposed full alignment 

with QM so that the proposed QRM 

definition would not distinguish 

between loans that receive a ‘‘safe 

harbor’’ or a ‘‘rebuttable presumption’’ 

of compliance under the QM provisions. 

Some commenters requested 

clarifications, expressed concerns, or 

suggested modifications to the proposed 

QRM definition, including with respect 

to loans exempted from the ability-torepay rules under TILA, which are 

discussed and addressed in more detail 

in Part VII of this Supplementary 

Information. 

Several commenters opposed aligning 

the QRM definition with the QM 

definition, asserting that such an 

approach would be contrary to statutory 

intent. These commenters asserted that 

the definitions of QRM and QM have 

distinct and different purposes, with the 

former addressing risk posed to 

investors and the latter addressing 

consumer protection. These commenters 

further stated that broadening the QRM 

definition would reduce the effect of the 

risk retention rule with respect to 

residential mortgages, which comprised 

one of the main securitization markets 

that led to the financial crisis. These 

commenters also expressed concern that 

the proposed QRM definition would be 

insufficient to support the credit quality 

on which a stable mortgage market 

depends. 

Most commenters that opposed the 

revised definition of QRM supported 

most, if not all, aspects of the QRM 

definition in the original proposal and 

recommended that the agencies adopt 

that QRM definition instead. These 

commenters asserted that LTV and 

credit history requirements are key 

criteria to ensure that QRMs represent a 

lower risk of default and the risk 

retention rules offer some protection to 

RMBS investors. One commenter 

asserted that the reproposed QRM 

definition is based on the same credit 

reporting requirements used prior to the 

financial crisis and continues to lack 

credit reporting verification safeguards 

to ensure completeness and accuracy. 

Another commenter suggested that the 

agencies require a loan-level credit 

enhancement when QM loans exceed a 

stated LTV ratio. 

A few commenters expressed concern 

about the potential effects the 

reproposed QRM definition might have 

on the market, in that QMs and QRMs 

could become the only type of mortgage 

loans made and accepted on the 

secondary market, or that the market 

may shift more towards federally 

insured or guaranteed mortgages. 

Finally, commenters requested that 

the agencies clarify that the requirement 

that a depositor certify as to the 

effectiveness of its internal supervisory 

controls with respect to the process for 

ensuring that mortgages included in a 

pool of QRM assets qualify as QRMs 

does not impose an obligation on 

sponsors to guarantee that all assets are, 

in fact, QRMs. As is indicated by the 

final rule’s provision of a buyback 

option for non-compliant assets, the 

agencies do not view the certification as 

requiring that the controls guarantee 

compliance. Rather, the process must be 

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286See 12 U.S.C. 5512. 

287 15 U.S.C. 78o–11(e)(4). 

288See Shane M. Sherlund, ‘‘The Past, Present, 

and Future of Subprime Mortgages,’’ Finance and 

Economics Discussion Series, Paper 2008–63 

available at http://www.federalreserve.gov/pubs/ 

feds/2008/200863/200863pap.pdf; Ronel Elul, 

Nicholas S. Souleles, Souphala Chomsisengphet, 

Dennis Glennon, and Robert Hunt. ‘‘What ‘Triggers’ 

Mortgage Default?’’ American Economic Review 100 

(May 2010): 490–494. 

289For further detail, see Revised Proposal, 78 FR 

at 57989–57990. 

robust and sufficient to enable the 

sponsor to carefully evaluate eligibility. 

2. Comments Received on the 

Alternative Approach to QRM 

The agencies also received numerous 

comments on the alternative QM-plus 

approach. Commenters generally 

opposed the QM-plus approach, 

asserting that it would be too restrictive, 

impose additional compliance costs, 

and have a negative effect on the 

availability of affordable credit, 

especially to LMI borrowers, minority 

borrowers, and first-time homebuyers. 

In addition, many commenters 

expressed concern that a QM-plus 

approach would slow the return of 

private capital in the mortgage market 

because it would increase government 

and agency involvement in the mortgage 

market and would make it more difficult 

for sponsors to assemble a critical mass 

of QRMs necessary for a securitization. 

Commenters also expressed concern 

that mortgages meeting the QM-plus 

standard would effectively become the 

primary mortgage product available, 

thus pushing out other mortgage loans 

that would qualify as QMs from the 

mortgage market. Some commenters 

supported a narrow definition of QRM 

as reflected in the QM-plus approach, 

but generally recommended that the 

agencies adopt the original proposed 

QRM definition rather than the QM-plus 

approach. 

One commenter specifically 

expressed concern about the exclusion 

of secondary liens from the QM-plus 

approach, asserting that secondary liens 

facilitate credit to borrowers and benefit 

the economy. Another commenter 

asserted that because the QM-plus 

approach was described only in the 

preamble, there was insufficient 

information to determine how the QMplus approach would be implemented. 

Some commenters requested specific 

changes if the agencies were to go 

forward with the QM-plus approach, 

including a lower down payment 

requirement, the exclusion of piggyback 

loans, and the inclusion of credit scores. 

D. Summary and Analysis of Final QRM 

Definition 

1. Alignment of QRM With QM 

After carefully considering the 

comments received, the agencies are 

adopting a definition of QRM that is 

aligned with the definition of QM, with 

some modifications. Accordingly, the 

final rule defines a QRM to mean a QM, 

as defined under section 129C of TILA 

and the regulations issued thereunder, 

as may be amended from time to time. 

The agencies also believe it is necessary 

to periodically review the QRM 

definition to take into account 

developments in the residential 

mortgage market, as well as the results 

of the CFPB’s five-year review of the 

ability-to-repay rules and the QM 

definition, which is required under 

section 1022(d) of the Dodd-Frank 

Act.286 Therefore, the final rule also 

includes a provision that requires the 

agencies to conduct a periodic review of 

the definition of QRM, which is 

discussed more fully below. 

The agencies have declined to adopt 

the QM-plus approach or the approach 

from the original proposal. While the 

additional requirements in those two 

approaches may include useful factors 

in determining the probability of 

mortgage default, these additional credit 

overlays may have ramifications for the 

availability of credit that many 

commenters asserted were not 

outweighed by the corresponding 

reductions in the likelihood of default 

from including these determinants in 

the QRM definition. The agencies are 

concerned about the prospect of 

imposing potential additional 

constraints on mortgage credit 

availability at this time, especially as 

such constraints might 

disproportionately affect LMI, minority, 

or first-time homebuyers. 

The agencies continue to believe that 

a QRM definition aligned with the 

definition of QM meets the statutory 

goals and directive of section 15G of the 

Exchange Act to limit credit risk and 

promote sound underwriting. At the 

same time, the agencies believe this 

definition will also meet the important 

goals of preserving access to affordable 

credit for various types of borrowers and 

facilitating the return of private capital 

to the mortgage market. Furthermore, 

the agencies believe this definition 

appropriately minimizes regulatory 

compliance burdens in the origination 

of residential mortgage loans. The final 

definition of QRM does not incorporate 

either an LTV ratio requirement or 

standards related to a borrower’s credit 

history, such as those in the alternative 

QM-plus approach discussed in the 

reproposal. As the agencies explained in 

the reproposal, although credit history 

and LTV ratio are significant factors in 

determining the probability of mortgage 

default and are important aspects of 

prudent underwriting, on balance, the 

agencies believe policy considerations 

weigh in favor of aligning QRM with 

QM at this time. 

Consistent with the discussion in the 

reproposal, the agencies believe that a 

QRM definition that is aligned with the 

QM definition meets the statutory 

requirement to take into consideration 

underwriting and product features that 

historical loan performance data 

indicate result in a lower risk of 

default.287 The criteria of the QM 

definition support this determination. 

The QM criteria are structured to help 

ensure that borrowers are offered and 

receive residential mortgage loans that 

borrowers can afford. For example, the 

QM definition requires full 

documentation and verification of 

consumers’ debt and income, and 

generally requires borrowers to meet a 

DTI threshold of 43 percent or less, 

which helps to address certain 

underwriting deficiencies, such as the 

existence of subordinate liens, and may 

help to reduce incidents of mortgage 

fraud. The QM definition also restricts 

the use of certain product features, such 

as negative amortization, interest-only 

and balloon payments (except as 

provided under special definitions 

available only to small portfolio 

creditors) that historical data have 

shown correlate to higher rates of 

default. As discussed in the reproposal, 

formal statistical models indicate that 

borrowers with mortgages that do not 

meet these aspects of the QM definition 

rule exhibit higher probabilities of 

default.288 Consistent with these 

statistical models, historical data 

indicate that borrowers with mortgages 

that meet the QM criteria have lower 

probabilities of default than those with 

mortgages that do not meet the 

criteria.289

The agencies continue to believe that 

aligning the QRM and QM definitions at 

this time will help promote access to 

affordable credit by minimizing 

additional regulatory burden and 

compliance cost and facilitating the 

return of private capital to the mortgage 

market. Although mortgage lending 

conditions appear to have been easing 

gradually for several quarters, standards 

overall remain tight, especially for 

borrowers with lower credit scores or 

fewer funds for a down payment. In the 

July 2014 Senior Loan Officer Opinion 

Survey of Bank Lending Practices, 

approximately a fourth of all banks 

surveyed reported that they had eased 

their standards for prime residential 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77689 

290Senior Loan Officer Opinion Survey of Bank 

Lending Practices, Board of Governors of the 

Federal Reserve System (July 2014), available at 

http://www.federalreserve.gov/boarddocs/ 

SnLoanSurvey/201408/default.htm. 

291Mortgage Bankers Association, Quarterly 

Mortgage Originations Estimates as of July 2014; 

Intex Solutions, Inc., and Asset-Backed Alert, prime 

non-agency RMBS issued in second quarter of 2014. 

292See Asset-Backed Securities Disclosure and 

Registration; Final Rule, 79 FR 57184 (Sept. 24, 

2014). 293 15 U.S.C. 77z–2a. 294See Prohibition Against Conflicts of Interest in 

Certain Securitizations; Proposed Rule, 76 FR 60320 

(Sept. 28, 2011). 295 12 U.S.C. 5641. 296See Incentive-Based Compensation 

Arrangements; Proposed Rule, 76 FR 21170 (Apr. 

14, 2011). 297See Revised Proposal, 78 FR at 57990. 298See Revised Proposal, 78 FR at 57991. 

mortgages in the second quarter of 

2014.290 However, approximately half of 

the banks surveyed reported that their 

standards for prime conforming 

residential mortgages were tighter than 

the midpoint of their longer-term 

ranges. Even more lenders reported 

levels of standards that were tighter 

than historical averages for jumbo, 

nontraditional, and subprime mortgages. 

Likewise, the Mortgage Bankers 

Association’s index of mortgage credit 

availability—designed to capture the 

credit risk profile of mortgages being 

offered in the market place—edged up 

over the first few months of 2014, 

suggesting that mortgage credit 

conditions continue to improve. 

Nonetheless, comparisons of this index 

to a roughly equivalent proxy for 

lending conditions in 2004 suggest that 

credit availability is quite restricted. 

An additional manifestation, in part, 

of tight credit standards is the subdued 

level of mortgage and housing activity. 

Mortgage applications in the first six 

months of 2014, as measured by the 

Mortgage Bankers Association 

application indexes, were at the lowest 

levels since the 1990s. Existing home 

sales rose only 3.5 percent in the first 

six months of 2014 and are still roughly 

25 percent below their 2004 level. In 

addition, the private-label RMBS market 

remains extremely small and limited to 

mortgages of very high credit quality. In 

the second quarter of 2014, less than 1 

percent of mortgage originations were 

funded through private-label RMBS.291

The securitizations that were issued 

were collateralized by mortgages with a 

weighted average loan-to-value ratio of 

around 70 percent and, in most cases, 

weighted average credit scores greater 

than 750. 

At the same time, several mortgage 

and securitization regulatory changes 

have been put in place that increase the 

amount of information available to 

investors, improve mortgage 

underwriting, and increase investors’ 

ability to exercise their rights and obtain 

recoveries in the event of mortgage 

default. For example, the CFPB has 

implemented regulations governing 

mortgage servicing and loan originator 

compensation in addition to the abilityto-repay rule and QM standards. The 

ability-to-repay rule is particularly 

noteworthy for requiring loan 

originators to document income, debts, 

and other underwriting factors, which 

should in turn provide investors a more 

complete set of information on which to 

base their investment decision. The 

Commission recently adopted revisions 

to Regulation AB that, among other 

things, require disclosure in registered 

RMBS transactions of detailed loanlevel information at the time of issuance 

and on an ongoing basis. These 

revisions also require that securitizers 

provide investors with this information 

three business days prior to the first sale 

of securities so that they can analyze 

this information when making their 

investment decision.292 The 

Commission also has proposed rules 

required by section 621 of the DoddFrank Act 293 that would prevent 

sponsors and certain other 

securitization participants from 

engaging in material conflicts of interest 

with respect to their securitizations.294

Additionally, the Board, the FDIC, the 

OCC, the FHFA and the Commission, 

among other federal agencies, have 

jointly proposed rules required by 

section 956 of the Dodd-Frank Act 295

that would enhance reporting and 

oversight of incentive-based 

compensation practices and prohibit 

compensation arrangements that 

encourage inappropriate risk taking by 

financial institutions.296 These 

regulatory actions are further 

complemented by efforts on the part of 

the Enterprises and the industry to 

improve standards for due diligence, 

representations and warranties, 

appraisals, and loan information.297

Although additional changes may be 

necessary, taken together, these changes 

and the other changes to be completed 

provide additional support for aligning 

the definition of QRM with that of QM. 

2. Periodic Review of the QRM 

Definition 

The agencies recognized that aligning 

the QRM definition with the QM 

definition could have potential 

problematic effects on securitization 

markets, such as increasing of 

bifurcation in the mortgage market 

between QM and non-QM loans. 

Although the agencies continue to 

believe the benefits of the alignment at 

this time outweigh these potential risks, 

the agencies stated in the reproposal 

that they intended to review the 

advantages and disadvantages of 

aligning the QRM and QM definitions as 

the market evolves.298

The agencies are adopting the 

reproposed QRM definition, but also 

recognize that mortgage and 

securitization market conditions and 

practices change over time, and 

therefore, believe it would be beneficial 

to periodically review the QRM 

definition. Thus, the agencies are 

committing in the final rule to review 

the QRM definition at regular intervals 

to consider, among other things, 

changes in the mortgage and 

securitization market conditions and 

practices (which may include, for 

example, the structures of 

securitizations, the relationship 

between, and roles undertaken by, the 

various transaction parties, implications 

for investor protection and financial 

stability arising from the relationship 

between Enterprise markets and private 

label markets, and trends in mortgage 

products in various markets and 

structures), as well as how the QRM 

definition is affecting residential 

mortgage underwriting and 

securitization of residential mortgage 

loans under evolving market conditions. 

The agencies also want the opportunity 

to consider the results of future reviews 

of, and any changes made to, the QM 

definition by the CFPB, any additional 

regulatory changes affecting 

securitization that are adopted by the 

agencies, as well as any changes to the 

structure and framework of the 

Enterprises and those markets. As a 

result of these reviews, the agencies may 

or may not decide to modify the 

definition of QRM. Any such 

modification would occur through 

notice and comment rulemaking. 

Otherwise, any changes the CFPB makes 

to the QM definition automatically will 

modify the QRM definition. 

As provided in the final rule, the 

agencies will commence a review of the 

definition of QRM not later than four 

years after the effective date of this rule 

with respect to securitizations of 

residential mortgages, five years after 

the completion of that initial review, 

and every five years thereafter. In 

addition, the agencies will commence a 

review at any time upon the request of 

any one of the agencies. The agencies 

will jointly publish in the Federal 

Register notice of the commencement of 

a review, including the reason for the 

review if it has been initiated upon the 

request of one of the agencies. In the 

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77690 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

299See 12 U.S.C. 5512. 300See 12 CFR 1026.43(b)(1), which defines 

‘‘covered transaction’’ as a consumer credit 

transaction that is secured by a dwelling, as defined 

in section 1026.2(a)(19), including any real property 

attached to a dwelling, other than a transaction 

exempt from coverage under section 1026.43(a) (i.e., 

HELOCs, time shares, reverse mortgages, temporary 

or ‘‘bridge’’ loans of 12 months or less, and certain 

construction loans). 

301See 12 CFR 1026.4(e)(2). 

302See 12 CFR 1026.43(e)(4). 

303See 12 CFR 1026.43(e)(2) and 1026.43(e)(4). 

304See 12 CFR 1026.43(e)(4)(ii). 

305See 12 CFR 1026.43(e)(4)(iii). 

306See id. 

307See Qualified Mortgage Definition for HUD 

Insured and Guaranteed Single Family Mortgages, 

78 FR 75215 (Dec. 11, 2013). 

308See Loan Guaranty: Ability-to-Repay 

Standards and Qualified Mortgage Definition Under 

the Truth in Lending Act, 79 FR 26620 (May 9, 

2014). 

309See 12 CFR 1026.43(e)(5) and (e)(6). 

310See 12 CFR 1026.43(e)(5), (e)(6), and (f). 

311See 12 CFR 1026.43(e)(2). 

312See 12 CFR 1026.43(e)(5), (e)(6), and (f). 

313See 12 CFR 1026.43(e)(6). 

notice, the agencies will seek public 

input on the review. The agencies 

intend to complete each review no later 

than 6 months after initial notice of the 

review, subject to extension by the 

agencies as conditions warrant. 

Following the review, the agencies will 

jointly publish a notice that includes 

their conclusions from the review and, 

as part of such review, take whatever 

action is required by applicable law, 

including the Administrative Procedure 

Act. If, as a result of the review, the 

agencies decide to modify the definition 

of QRM, the agencies will complete 

such rulemaking within 12 months of 

publication in the Federal Register of 

the notice disclosing the determination 

of their review, unless extended by the 

agencies. 

The agencies intend for their initial 

review of the QRM definition to be 

completed after the publication of the 

report of the CFPB’s assessment of the 

ability-to-repay rules, including the QM 

definition, which the CFPB is required 

to publish within five years of the 

effective date of the ability-to-repay rule 

(i.e., January 10, 2019).299 However, as 

noted above, the agencies’ initial review 

will start no later than four years after 

the effective date of this final rule with 

respect to residential mortgages. The 

agencies believe this timing helps to 

ensure the initial review of the QRM 

definition benefits from the CFPB’s 

review and course of action regarding 

the definition of QM, and will help the 

agencies in determining whether the 

QRM definition should continue to 

align fully with the QM definition in all 

aspects. Furthermore, the agencies 

expect additional information on the 

housing and mortgage market will be 

available at the time the initial review 

is conducted that would be important in 

determining whether the then-current 

QRM definition remains appropriate 

under prevailing market conditions and 

continues to meet the requirements and 

policy purposes of section 15G of the 

Exchange Act. 

3. Definition of QRM 

Under the final rule, QRM is defined 

by aligning it to the definition of QM in 

the CFPB regulations under section 

129C of TILA. A QRM is a loan that is 

a ‘‘covered transaction’’ 300 that meets 

the general definition of a QM. The 

general definition of a QM provides that 

the loan must have: 

• Regular periodic payments that are 

substantially equal; 

• No negative amortization, interest 

only or balloon features; 

• A maximum loan term of 30 years; 

• Total points and fees that do not 

exceed 3 percent of the total loan 

amount, or the applicable amounts 

specified for small loans up to $100,000; 

• Payments underwritten using the 

maximum interest rate that may apply 

during the first five years after the date 

on which the first regular periodic 

payment is due; 

• Consideration and verification of 

the consumer’s income and assets, 

including employment status if relied 

upon, and current debt obligations, 

mortgage-related obligations, alimony 

and child support; and 

• Total DTI ratio that does not exceed 

43 percent.301

In addition, in the final rule, the 

definition of QRM includes loans that 

meet one of the special types of QMs. 

One special QM is a covered transaction 

that meets the CFPB’s temporary 

government QM definition.302 A loan 

eligible under the temporary QM 

definition must satisfy the loan-feature 

limitations of the general definition of a 

QM: the loans must have substantially 

equal periodic payments, with no 

interest-only, negative amortization or 

balloon features; must have a maximum 

30-year term; and must comply with the 

points and fees limitations.303 However, 

the loans are not subject to the 

underwriting provisions of the general 

QM definition, such as the total DTI 

ratio requirement of 43 percent or less. 

To be eligible under the CFPB’s 

temporary government QM definition, 

loans must be eligible for purchase, 

guarantee or insurance by an Enterprise, 

U.S. Department of Agriculture (USDA), 

or Rural Housing Services (RHS).304

As discussed in the reproposal, the 

temporary QM definition with respect to 

an Enterprise expires once the 

Enterprise exits conservatorship, but in 

any case no later than January 21, 

2021.305 Additionally, the temporary 

QM definition with respect to USDA 

and RHS expires when USDA and RHS 

issue their own QM rules or, in any 

case, no later than January 21, 2021.306

Lastly, a QRM is a loan that meets the 

definitions of QM issued by HUD, the 

Department of Veterans Affairs (VA), 

USDA, and RHS under section 129C of 

TILA. HUD, VA, USDA, and RHS each 

have authority under the Dodd-Frank 

Act to define QM for their own loans. 

Specifically, section 129C(a)(3) of TILA 

authorizes these agencies to issue rules 

implementing the QM requirements 

under section 129C(a)(2) of TILA. USDA 

and RHS have not yet issued rules 

under section 129C of TILA 

On December 11, 2013, HUD adopted 

a final rule to define QM for the single 

family residential loans that it insures, 

guarantees or administers and which 

took effect on January 10, 2014.307 In 

addition, the VA issued an interim final 

rule to define QM for loans that it 

insures or guarantees, with an effective 

date of May 9, 2014.308 Accordingly, the 

final definition of QRM now includes 

any loan insured, guaranteed or 

administered as a QM under either the 

HUD or VA definition of QM, as 

applicable. 

In the final rule, the definition of 

QRM also includes a loan that meets 

any of the special QM definitions 

designed to facilitate credit offered by 

small creditors.309 To qualify as a 

‘‘small creditor’’ eligible under one of 

these special QM definitions, however, 

the entity must meet certain asset and 

threshold criteria and hold the QM 

loans in portfolio for at least three years, 

with certain exceptions.310 Thus, loans 

meeting these special small creditor QM 

definitions would generally be ineligible 

for securitization as QRMs for three 

years following consummation. 

A loan eligible under these special 

‘‘small creditor’’ QM definitions must 

meet the general requirements of a 

QM,311 except that these loans receive 

greater underwriting flexibility (i.e., do 

not need to meet the quantitative DTI 

threshold of 43 percent or less).312

Additionally, a loan originated by a 

qualifying small creditor may contain a 

balloon feature if the loan is originated 

during the two-year transition period, 

which expires January 10, 2016, 

provided the loan meets certain other 

criteria, such as a 5-year minimum 

term.313 After January 10, 2016, the 

ability to write a balloon QM will be 

limited to small creditors that operate 

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314See 12 CFR 1026.43(f). 

315See 12 CFR 1026.43(e)(2), which provides that 

QM is a covered transaction that meets the criteria 

set forth in 12 CFR 1026.43(e)(2), (4), (5), (6) or (f). 

A ‘‘covered transaction’’ is defined to mean ‘‘a 

consumer credit transaction that is secured by a 

dwelling, as defined in § 1026.2(a)(19), including 

any real property attached to a dwelling, other than 

a transaction exempt from coverage under 

[§ 1026.43(a)].’’ 

316The Dodd-Frank Act excludes from the term 

‘‘residential mortgage loan’’ an open-end credit plan 

or an extension of credit secured by an interest in 

a timeshare plan. See 15 U.S.C. 1602(cc)(5) and 

1639c(i). The Dodd-Frank Act does not apply the 

ability-to-repay provisions of TILA to reverse 

mortgages and temporary or ‘‘bridge’’ loans with a 

term of 12 months or less. See 15 U.S.C. 1639c(a)(8). 

Therefore they are also exempt from the ability-topay rules. Also excluded are most loan 

modifications, unless the transaction meets the 

definition of refinancing set forth in section 

1026.20(a) of the Final QM rule. For a complete list, 

see 12 CFR 1026.43(a). 

317See 12 CFR 1026.43(c)(1) and corresponding 

official staff commentary. 

primarily in rural or underserved 

areas.314

Consistent with the reproposed 

definition described above, the final 

definition of QRM includes any closedend loan secured by any dwelling (e.g., 

home purchase, refinances, home equity 

loans, second or vacation homes, and 

mobile homes, and trailers used as 

residences), whether a first or 

subordinate lien.315 The final definition 

of QRM does not include any loan 

exempt from the ability-to-repay 

requirements under TILA and the 

ability-to-repay rules, such as HELOCs, 

reverse mortgages, timeshares or 

temporary or ‘‘bridge’’ loans of 12 

months or less.316 In addition, the final 

definition of QRM does not include 

those loans that were provided a 

regulatory exemption from the abilityto-repay rules, such as loans made 

through state housing finance agency 

programs and certain community 

lenders. If a loan is not subject to TILA 

because it is deemed to be extended for 

a business purpose, it is also not 

included in the definition of QM (and 

therefore, is not a QRM). The agencies 

believe this approach is consistent with 

the language and intent of section 15G 

of the Exchange Act, whereby a QRM 

can be no ‘‘broader than’’ a QM. 

To provide relief from risk retention 

for mortgage loans that are collateralized 

by three-to-four unit residential 

properties and are not included in the 

QRM definition because they are 

deemed not to be covered transactions 

in the QM definition, but that otherwise 

meet all the criteria to be a QM, the final 

rule includes a separate exemption, as 

discussed further below in Part VII of 

this Supplementary Information. 

Several commenters requested that 

the agencies clarify that the 

incorporated QM definition include all 

statutory provisions, the regulation, the 

regulation’s commentary and appendix, 

and future supporting guidance to 

prevent any difficult interpretive 

questions about whether it is possible 

for a loan to be a QM and not a QRM. 

As noted above, the agencies are 

defining QRM by cross-reference to the 

definition of QM under section 129C of 

TILA, and any regulations issued 

thereunder, to avoid potential conflicts 

between the definitions of QRM and QM 

and to facilitate compliance. By crossreferencing to the definition of QM, the 

final rule incorporates any rules issued 

under section 129C of TILA that define 

QM, including any Official 

Interpretation that interprets such rules. 

The rule provides that QRM means 

QM as amended by the CFPB from time 

to time. As such, the rule presumes that 

each amendment to the definition of 

QM will automatically be incorporated 

into the definition of QRM unless the 

agencies act to amend the definition of 

QRM. However, in exercising their 

responsibility under section 15G, the 

agencies will evaluate and collectively 

consider each amendment to QM to 

decide whether that amendment meets 

the requirements of section 15G, and 

take such action, if any, as is required 

under applicable law, including the 

Administrative Procedure Act. The 

agencies note that they will have notice 

of proposed CFPB changes to the 

definition of QM and, thus, will be in 

a position to commence consideration of 

possible changes to the QM definition 

before the CFPB issues a final rule. As 

noted above, section 13(d) of the rule 

also requires the agencies to conduct 

periodic reviews of the definition of 

QRM. 

One commenter requested 

clarification that all QM definitions 

would be included in the revised QRM 

definition and there would be full 

alignment of QRM and QM throughout 

the life cycle of a loan. As discussed 

more fully above, QRM is defined to 

include a loan that meets any of the 

definitions of QM issued under section 

129C of TILA. The agencies also note 

that the determination of whether a loan 

meets the QM definition occurs at 

consummation; post-consummation 

events that cannot be reasonably 

anticipated are not relevant.317

Some commenters requested revisions 

to provisions that are set forth in the 

QM definition, such as the cap on 

points and fees or the 43 percent DTI 

ratio limit. The agencies are required to 

implement the statutory requirement 

that the definition of QRM be no 

broader than the definition of a QM, and 

therefore cannot expand the definition 

of QRM in this manner. 

Some commenters expressed concern 

with the reproposal to allow higherpriced QMs to be pooled and securitized 

with non-higher priced QMs. These 

commenters asserted that higher-priced 

means higher risk. The commenters 

asserted, however, that excluding 

higher-priced QMs from the definition 

of QRM would unduly restrict LMI 

access, and in that case, it may be 

appropriate to treat these loans as QRMs 

but that the agencies should prohibit 

their inclusion in securitizations that 

consisted of non-higher-priced QMs. 

The requirements for QMs are the same 

whether they are higher-priced or lowerpriced, and those QM criteria are one of 

the reasons the agencies defined QRM to 

mean QM. A higher-priced QM under 

the CFPB’s rule must generally meet the 

43 percent DTI ratio requirement, have 

verified income and assets, generally 

have points and fees that do not exceed 

the 3 percent cap, have regular periodic 

payments, and contain no negative 

amortization, interest only or balloon 

features (with exceptions for certain 

small creditors). Accordingly, the final 

rule does not distinguish between nonhigher priced and higher-priced QMs, 

and both are eligible to be QRMs 

without distinction, and therefore, can 

be pooled together in the same 

securitization. 

A few commenters expressed concern 

that the reproposed QRM definition 

would still contain in its practical 

implementation an implicit bias in favor 

of a single credit scoring brand, FICO, 

to the exclusion of others. These 

commenters stated that the Enterprises 

exclusively use the credit scoring brand 

FICO when underwriting and 

determining eligibility of loans for 

purchase. These commenters claimed 

that because the QRM definition 

incorporates the temporary QM 

definition by reference, which permits 

loans that are eligible for purchase, 

guarantee or insurance by an Enterprise 

to be QRMs (such loans must also still 

generally meet the general definition of 

a QM), there is an implicit bias towards 

the FICO scoring brand. One commenter 

further asserted that the unintended bias 

in favor of a single credit scoring brand 

could be fixed while still ensuring the 

QM and QRM definitions are aligned by 

having FHFA require the Enterprises to 

revise their policies and practices to 

accept mortgages underwritten with 

other validated credit scoring models in 

addition to the single scoring brand 

currently permitted. 

The agencies note that, under the final 

rule, the definition of QRM is a loan that 

meets any of the definitions of QM 

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77692 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

318Some commenters also called on FHFA to 

require the Enterprises to apply prime loan criteria 

in the automatic underwriting system so that the 

combination of aligning the definitions of QRM and 

QM and temporary QM definition applicable to 

loans that qualify for purchase or guarantee by the 

Enterprises does not cause a decline in 

underwriting standards and assures high 

underwriting standards. The agencies view this 

issue to be outside the scope of this joint 

rulemaking. 

319The underwriting requirements under the 

general QM definition and the small creditor QM 

definitions do not include a requirement for a credit 

score or an explicit requirement to consider credit 

history. However, credit history may be included in 

underwriting for debt and DTI. 

issued under section 129C of TILA. 

Accordingly, the agencies note that a 

loan is not required to be eligible for 

purchase by the Enterprises to meet the 

definition of QRM.318 Thus, the 

agencies do not believe the alignment of 

the QRM definition with the QM 

definition includes an implicit bias in 

favor of a single credit scoring brand as 

there is no requirement in the QM 

definition that a consolidated credit 

score be used or obtained.319 Therefore, 

the agencies do not believe that any 

changes to the QRM definition are 

needed. 

A few commenters expressed concern 

about the potential bifurcation effect on 

the market if the definitions of QRM to 

QM were to be aligned, asserting that a 

QM/QRM loan may become the only 

type of residential mortgage made and 

securitized. Some commenters 

suggested that the agencies provide 

flexibility for creditors to continue 

originating non-QM and non-QRM loans 

by allowing certain loans to qualify for 

a lower than 5 percent risk retention 

requirement. As noted in the reproposal, 

the agencies recognize that aligning the 

QRM and QM definitions has the 

potential to intensify any existing 

bifurcation in the mortgage market that 

may occur between QM and non-QM 

loans, as securitizations collateralized 

by non-QMs could have higher funding 

costs due to risk retention requirements 

in addition to potential risk of legal 

liability under the ability-to-repay rule. 

The agencies acknowledge this risk but 

believe that not aligning the QRM and 

QM definitions would likely result in 

even more segmentation in the 

securitization market and higher costs 

for consumers. Securitization typically 

is a more cost-effective source of 

funding when the underlying pool 

includes a large number of loans. 

However, QM and non-QM loans are 

less likely to be combined in a pool 

because of the different risk profiles and 

legal liabilities associated with these 

loans, and QRM and non-QRM loans 

cannot be combined in a pool under the 

restrictions of the rule. Accordingly, if 

the QRM and QM definitions are not 

aligned and lenders have difficulty 

amassing a critical number of loans for 

an asset pool to provide cost effective 

funding, they may choose a source of 

funding other than securitization or 

charge higher mortgage rates to 

consumers. 

A few other suggestions and concerns 

expressed by commenters include: (i) a 

request that the agencies acknowledge 

that first mortgages secured by real 

property in priority lien states are 

encompassed within the QRM 

definition; (ii) caution that the QRM and 

credit risk retention rule not evolve into 

a safety and soundness standard in 

terms of evaluating an individual 

lender’s real estate portfolio; (iii) a 

request that the QRM definition reflect 

the value of Homeownership Education 

and Counseling in reducing default; and 

(iv) a request to allow non-U.S. 

originated transactions to benefit from 

the QRM exemption. The agencies’ 

definition of QRM is adopted as a 

component of the broader credit risk 

retention rule that helps address 

underwriting and incentive alignment 

concerns in the securitization market 

and is not a safety and soundness, 

standard. The agencies’ adoption of the 

QRM definition does not limit or change 

the definition of QM and, thus, the 

application of the definition of QM in 

priority lien states and to non-U.S. 

originated transactions is limited by the 

applicability of the QM definition under 

TILA and not the adoption of the 

definition of QRM. Similarly, the 

agencies are not expressly requiring or 

including as criteria to meet the QRM 

definition homeownership education 

and counseling. The agencies also will 

evaluate a lender’s mortgage portfolio 

on its own merits and do not expect to 

judge the safety and soundness of a loan 

or portfolio on whether or not it meets 

the definition of QRM. 

A few commenters also expressed 

concern about including subordinate 

liens in the scope of the QRM 

definition. These commenters were 

concerned that permitting subordinate 

liens to be eligible for the QRM 

exemption would introduce a layer of 

additional risk, especially where the 

QRM definition did not contain a LTV 

ratio requirement. One commenter 

specifically requested that the agencies 

reconsider the inclusion of subordinate 

lien loans in the definition of QRM, 

noting that second lien holders have 

been blamed for holding up short sales 

and complicating efforts to resolve 

defaulted loans. 

The agencies appreciate these 

commenters’ concerns. However, 

similar to the reasons discussed in the 

reproposal, the agencies believe aligning 

the definition of QRM to the QM 

definition, which includes loans 

secured by any dwelling, as well as 

subordinate liens, is appropriate to 

minimize potential conflicts between 

the two definitions. The agencies 

believe allowing subordinate liens to 

qualify for the QRM exemption also will 

help preserve credit access. Last, as 

noted above, the QM definition requires 

full documentation and verification of 

consumers’ debt and income on all 

loans, which the agencies believe helps 

to address risks that may accompany 

subordinate liens. 

E. Certification and Other QRM Issues 

In order for a QRM to be exempted 

from the risk retention requirement, the 

rule includes evaluation and 

certification conditions related to QRM 

status, consistent with statutory 

requirements and similar to the 

reproposal. One commenter requested 

that the requirement for measuring 

performance data be as of the cut-off 

date, and not the closing date. In 

response to commenters’ requests, the 

agencies have modified the performance 

measurement date from the closing date 

to the cut-off date or similar date. 

While some commenters supported 

the proposed certification requirements, 

others suggested that the certification be 

submitted to the appropriate Federal 

banking agency or the Commission, and 

not to the investors, which the 

commenters said would create 

additional liability and be functionally 

burdensome. One commenter suggested 

that the agencies make clear that these 

certifications must be retained by the 

sponsor for a period of no more than 

five years. 

The agencies believe that the 

certification by the depositor for the 

securitization is important information 

that should be disclosed to investors 

and therefore are not persuaded by the 

commenters’ requests to require that 

certification be submitted only to the 

Commission and the appropriate 

Federal banking agency, if any. 

Several commenters expressed the 

belief that allowing for blended pools of 

QRMs and non-QRMs would help 

ensure that a greater variety of loans 

could be securitized and reduce market 

fragmentation between QRMs and nonQRMs. These commenters requested 

that the agencies permit the blending of 

non-QRMs and QRMs, with the QRMs 

being exempt from risk retention and 

the non-QRMs being subject to risk 

retention (unless otherwise exempt). 

Under this approach, the sponsor would 

be required to hold credit risk in 

proportion to the non-qualifying assets 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77693 

320The agencies are not addressing the 

permissibility of exempting pools blending QRMs 

and non-QRMs at this time. The agencies note that 

section15G of the Exchange Act refers to an 

exemption from risk retention requirements with 

respect to an asset-backed security if all the assets 

that collateralize the asset-backed security are 

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

321Sponsors may choose to repurchase a loan 

from securitized pools even if there is no 

determination that the loan is not a QRM. The 

agencies would not view such repurchases as 

determinative of whether or not a loan meets the 

QRM standard. 

322HELOCs and timeshares are also not subject to 

any ATR requirement, but not because of a statutory 

or regulatory exemption. Rather, these loans were 

never included in the scope of loans defined to be 

subject to the ATR requirement (i.e., residential 

mortgage loans). 

323See 15 U.S.C. 1604(f). See also 78 FR 35430 

(June 12, 2013). 

324Housing Finance Agency means any public 

body, agency, or instrumentality created by a 

specific act of a State legislature or local 

municipality empowered to finance activities 

designed to provide housing and related facilities, 

through land acquisition, construction or 

rehabilitation. The term State includes the several 

States, Puerto Rico, the District of Columbia, Guam, 

the Trust Territory of the Pacific Islands, American 

Samoa and the Virgin Islands. 

in the pool. These commenters 

expressed the belief that the exemption 

authority under section 15G(e)(1) and 

(2) of the Exchange Act was sufficiently 

broad to permit the agencies to provide 

a partial exemption for securitizations 

collateralized by QRMs and non-QRMs. 

Another approach suggested was that 

the agencies permit blending exempt 

mortgage assets (e.g., seasoned loans) 

and QRMs, with all such securitized 

assets remaining exempt from risk 

retention. Under this approach the 

sponsor would not be required to hold 

any credit risk since all of the assets in 

the pool would qualify for an 

exemption. 

Except as described in Part VII of this 

Supplementary Information with 

respect to certain mortgage loans 

secured by three-to-four unit properties 

that meet the QM criteria other than 

being an extension of consumer credit, 

the agencies are not adopting the 

requested exemption for blended pools 

of QRMs and non-QRMs. The agencies 

believe that the breadth of the QRM 

definition in the final rule, as well as the 

additional mortgage exemptions 

discussed in Part VII of this 

Supplementary Information, should 

facilitate the return of private capital to 

the mortgage market and preserve access 

to affordable credit for various types of 

borrowers while the mortgage market 

continues to stabilize. Furthermore, the 

agencies observe that differences in 

product features, underwriting 

standards, and other factors associated 

with QRMs and non-QRMs generally 

could tend to reduce the likelihood of 

investors preferring combined pools. 

The agencies also note that a reduction 

in a risk retention requirement for the 

pool based on inclusion of QRMs would 

add complexity to the risk retention 

regime for residential mortgages without 

evidence of any significant benefit. 

Finally, the agencies are concerned, 

given the breadth of the QRM definition, 

that allowing reduced risk retention for 

combined pools of QRMs and nonQRMs will not provide sponsors with 

sufficient incentives to ensure high 

quality underwriting of the non-QRM 

mortgages.320

F. Repurchase of Loans Subsequently 

Determined To Be Non-Qualified After 

Closing 

The reproposal provided that, if after 

the closing of a QRM securitization 

transaction, it was discovered that a 

mortgage did not meet all of the criteria 

to be a QRM due to inadvertent error, 

the sponsor would be obligated to 

repurchase the mortgage.321 While some 

commenters expressed support for the 

proposed requirement, one commenter 

asserted that investors have historically 

preferred substitution over repurchase, 

especially when the required repurchase 

would impact the value of the 

investment. 

Similar to the reproposal, the final 

rule includes a buyback requirement for 

mortgages that are determined not to 

meet the QRM definition by inadvertent 

error after the closing of the 

securitization transaction, provided that 

the conditions set forth in section 13(c) 

of the rule are met. These conditions are 

intended to provide a sponsor with the 

opportunity to correct inadvertent errors 

by promptly repurchasing any nonqualifying mortgage loans from the pool. 

In addition, this requirement helps 

ensure that sponsors have a strong 

economic incentive to ensure that all 

mortgages collateralizing a QRM 

securitization satisfy all of the 

conditions applicable to QRMs prior to 

closing of the transactions. As long as 

the loan met the QRM requirements at 

the closing of the securitization 

transaction, however, subsequent nonperformance of the loan does not trigger 

the proposed buyback requirement. For 

the reasons described above, the 

agencies are not allowing substitution 

instead of repurchase in the final rule. 

VII. Additional Exemptions 

As discussed in Part VI of this 

Supplementary Information, under the 

final rule, a loan is eligible for the QRM 

exemption if it meets one of the QM 

definitions issued under section 129C of 

TILA, as may be amended from time to 

time. Meeting the QM criteria is also 

one of several ways that a lender can 

choose to satisfy the minimum 

underwriting standards for the abilityto-repay requirements under TILA. 

Because QM loans may provide greater 

protection from potential legal liability 

under TILA, many lenders are 

incentivized to make QMs.322

Community-Focused Lending 

Exemption 

In addition to the classes of 

transactions exempt from the ability-torepay requirement under the DoddFrank Act, such as HELOCs, reverse 

mortgages, timeshares or temporary or 

‘‘bridge’’ loans of 12 months or less, the 

CFPB exempted certain additional 

categories of loans made by certain 

lenders from the ability-to-repay rules, 

under its regulatory authority to exempt 

classes of transactions to help ensure 

borrowers continue to have access to 

affordable mortgage credit. The CFPB 

used its regulatory authority to exempt 

these lenders because they typically use 

flexible and unique underwriting 

standards that differ from the minimum 

underwriting standards of the ability-torepay or QM criteria, and the types of 

loans exempted are important sources of 

credit for LMI, minority and first-time 

homebuyers.323 Loans exempt from the 

ability-to-repay requirement fall into the 

following categories: 

• An extension of credit made 

pursuant to a program administered by 

a Housing Finance Agency, as defined 

under 24 CFR 266.5 (HFA).324

• An extension of credit made by an 

entity creditor designated by the U.S. 

Treasury as Community Development 

Financial Institution, as defined under 

12 CFR 1805.104(h) (CDFI). 

• An extension of credit made by a 

HUD-designated Downpayment 

Assistance through Secondary 

Financing Provider (DAP), pursuant to 

24 CFR 200.194(a), operating in 

accordance with HUD regulations. 

• An extension of credit made by a 

HUD-designated Community Housing 

Development Organization, as defined 

under 24 CFR 92.2 (CHDO), provided it 

has entered into a commitment with a 

participating jurisdiction and is 

undertaking a project pursuant to HUD’s 

HOME Investment Partnership Program, 

pursuant to 24 CFR 92.300(a). 

• An extension of credit made by 

certain non-profit organizations that 

extend credit no more than 200 times 

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77694 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

325See 79 FR 25730 (May 6, 2014). The CFPB’s 

proposed rule would exclude from the 200 

originations count certain forgivable or deferred 

second lien loans. 

326 12 U.S.C. 5211; 5219. 

327 15 U.S.C. 78o–11(c)(1)(G)(iii). See also Part 

IV.B of this Supplementary Information. 328 15 U.S.C. 78o–11(e)(2). 

annually,325 provide credit only to LMI 

consumers, and follow their own 

written procedures to determine that 

consumers have a reasonable ability to 

repay their loans (Eligible Nonprofits) 

• An extension of credit made 

pursuant to a program authorized by 

sections 101 and 109 of the Emergency 

Economic Stabilization Act of 2008 

(EESA).326

As a result, loans made by these 

entities do not need to comply with the 

ability-to-repay requirement, for which 

QM is one way to comply. 

The agencies received several 

comments regarding some of the above 

extensions of credit. One commenter 

requested that the agencies clarify that 

the proposed exemption from risk 

retention for asset-backed securities 

issued or guaranteed by states, 

municipalities, and public 

instrumentalities of states (state and 

municipal securitization exemption) 327

would include asset-backed securities 

issued by HFAs and other state agencies 

and collateralized by loans financed by 

HFAs. This commenter also asked for 

clarification on whether the use of 

private servicers in those transactions 

would affect the availability of the 

exemption. A few commenters 

requested that the agencies 

automatically classify all state HFA 

loans as QRMs. One commenter 

observed that the CFPB granted HFA 

loans an exemption from the ability-torepay requirement because of a strong 

record of lending to LMI borrowers, so 

that compliance with the ability-torepay requirement would be of little 

benefit and could impede access to 

credit by LMI borrowers. Another 

commenter also asserted that strong 

credit performance from HFA loans 

would mean that risk retention is not 

necessary to protect investors. This 

commenter further expressed concern 

that if any HFA loans were subject to 

risk retention, other securitization 

structures employed by the HFA that 

may not technically qualify for the state 

and municipal securitizations 

exemption would then be subject to risk 

retention, with negative consequences 

for access to credit for underserved 

borrowers. 

Several commenters similarly 

observed that CDFIs and nonprofit 

lenders are an important source of 

mortgage credit for LMI borrowers and 

play a key role in neighborhood 

stabilization and community 

development. These commenters stated 

that loans made by these entities 

frequently would not fit the QM criteria 

because they use flexible underwriting 

standards that consider an individual 

borrower’s unique circumstances and 

use homebuyer education and housing 

counseling to support homeowners 

throughout the mortgage process. These 

commenters raised the concern that the 

risk retention requirement would 

impose disproportionate compliance 

burdens on these entities and could be 

a significant barrier to obtaining 

investment in these lending programs. 

Commenters also indicated that 

exempting these entities from the risk 

retention requirement would be within 

the spirit of aligning QRM with QM. 

A few other commenters also 

requested that the agencies similarly 

consider including under the definition 

of QRM the other categories of loans 

exempted by the CFPB from the abilityto-repay rules, or otherwise provide 

them with an exemption from risk 

retention. Commenters observed that 

CDFIs and nonprofit mortgage lenders 

are an important source of mortgage 

credit for LMI borrowers and play a key 

role in neighborhood stabilization and 

community development. The loans 

made by these entities are not covered 

transactions under the ability-to-repay 

rules (and therefore would not be 

classified as QMs in any case) but also 

frequently would not independently 

meet the type of underwriting standards 

in the CFPB’s QM criteria because they 

use flexible features that consider an 

individual borrower’s unique 

circumstances. At the same time, these 

lenders use homebuyer education and 

housing counseling to support 

homeowners throughout the mortgage 

process. These commenters raised the 

concern that the risk retention 

requirements would be a 

disproportionate compliance burden for 

these entities and could be a significant 

barrier to obtaining investment in these 

lending programs if an exemption was 

not provided. 

Under section 15G of the Securities 

Act, the definition of a QRM can be ‘‘no 

broader than’’ the definition of a QM. 

Because there are various and unique 

underwriting practices used to make the 

loans described above that are exempted 

from the ability-to-repay requirement, 

including significant variations in DTI 

ratios and other underwriting criteria, it 

is not possible for the agencies to 

determine that these loans generally are 

not ‘‘broader than’’ QM. Therefore, the 

agencies have concluded that they 

cannot include these communityfocused residential mortgages in the 

definition of QRM. 

As discussed previously with respect 

to other exemptions (or requests for 

exemptions) from risk retention, 

however, the agencies may provide an 

exemption from risk retention if the 

exemption would: (i) help ensure highquality underwriting standards for the 

securitizers and originators of assets that 

are securitized or available for 

securitization; and (ii) encourage 

appropriate risk management practices 

by the securitizers and originators of 

assets, improve the access of consumers 

and businesses to credit on reasonable 

terms, or otherwise be in the public 

interest and for the protection of 

investors.328

For the reasons discussed below, and 

in response to concerns raised by 

commenters, the agencies are providing 

an exemption from risk retention under 

section 15G(e) of the Exchange Act for 

the categories of loans described above 

(community-focused exempted loans), 

other than extensions of credit made 

pursuant to a program authorized by 

sections 101 and 109 of the EESA. 

Generally, the agencies have concluded 

that the loans made by lenders 

identified above and covered by this 

exemption meet the requirements for an 

exemption under section 15G(e) because 

they are either government-certified, or 

originated by government-administered 

programs, or small non-profit programs 

that have a specific community mission. 

As the primary mission of these lenders 

is building and strengthening at-risk 

communities, or building wealth for 

LMI families, strong underwriting 

procedures to maximize affordability 

and borrower success in keeping their 

homes has been integral to the programs 

that originate the community-focused 

exempted loans. Because the stated 

mission is integral to the lending 

programs administered by these lenders, 

the agencies believe these entities have 

the incentive to maintain strong 

underwriting standards to help ensure 

that they offer affordable loans to the 

borrowers they serve. The stated 

mission also helps to protect investors 

because of the incentives to maintain 

high underwriting standards and ensure 

that borrowers are given appropriate 

and affordable loans. Additionally, 

exemptions from risk retention for loans 

made by the above-listed entities serve 

the public interest because these entities 

have stated public mission purposes to 

make safe, sustainable loans available 

primarily to LMI communities, which 

helps to improve access to credit on 

reasonable terms for borrowers and is in 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77695 

329 15 U.S.C. 77c(a)(2). 

330See 78 FR 35430, 35432–33 (June 12, 2013). 

331 12 CFR 1805.104(h). 

332There were 874 CDFIs as of June 30, 2014. 

CDFI Fund, CDFI Certification, visited August 1, 

2014, available at: http://www.cdfifund.gov/what_

we_do/programs_id.asp?programID=9#certified. 

333 12 U.S.C. 1401 et seq. 

334 12 CFR 1805.201. 

335 78 FR at 35433, 35461 (June 12, 2013). 

336There are 353 creditors certified by HUD as 

CHDOs. OneCPD, HUD Exchange, visited on August 

1, 2014, available at: https://www.onecpd.info/

search. 

the public interest. The agencies further 

observe that these programs are a 

significant source of credit to LMI 

communities. To the extent these loans 

are or will be securitized, an exemption 

helps to ensure that a risk retention 

requirement would not impede 

financing on reasonable terms for such 

borrowers. 

In addition, the agencies below 

respond to concerns raised by 

commenters with respect to the 

exemption under section 15G of the 

Exchange Act and the final rule for 

asset-backed securities issued or 

guaranteed by states and their 

instrumentalities, or by municipal 

entities. 

i. Housing Finance Agency Program 

Loans 

State HFAs are state lending programs 

established to help meet the affordable 

housing needs of the residents of their 

states. Although their characteristics 

vary widely, such as their relationship 

to the state government, most HFAs are 

independent entities that operate under 

the direction of a board of directors 

appointed by each state’s governor. 

They typically administer a wide range 

of affordable housing and community 

development programs, including 

providing first-time homebuyers with 

loans for existing and new construction 

and providing financing to build and 

revitalize affordable housing units, 

revitalize older neighborhoods and 

communities, and build shelters and 

transitional and supportive housing. 

If an HFA is a public instrumentality 

of a state, then an asset-backed security 

issued or guaranteed by such HFA (or 

otherwise issued or guaranteed by the 

state that established the HFA or one of 

its public instrumentalities) is exempt 

from the registration requirements 

under section 3(a)(2) of the Securities 

Act 329 and should be exempt from risk 

retention under the state and municipal 

securitization exemption provided in 

section 19(b)(3) of the final rule. 

Further, the use of a private-sector 

entity to service loans that collateralize 

such asset-backed securities would not, 

in and of itself, invalidate this 

exemption. If an HFA is not a public 

instrumentality of a state whose 

securities are exempt from the 

registration requirements under section 

3(a)(2) of the Securities Act, then 

securitizations issued or guaranteed by 

the HFA would not automatically be 

exempt from risk retention unless 

another exemption applied. 

Securitizations of loans made by HFAs 

through private-sector sponsors also 

would not have an exemption from risk 

retention. The agencies understand that 

it is unclear whether there are any HFA 

securitizations currently occurring that 

are not covered under that state and 

municipal securitizations exemption in 

section 19(b)(3) of the final rule. 

However, the agencies believe it may be 

possible that some future securitizations 

of HFA loans would not be covered and 

that an exemption under section 15G(e) 

of the Exchange Act would help ensure 

that HFA lending programs continue to 

have access to the financial markets, 

which in turn should help to ensure 

affordable access to credit for the 

borrowers that they serve. 

Many HFA underwriting standards 

are similarly stringent or more stringent 

than those of the Enterprises or Federal 

government agencies thorough their 

program analyses of a consumer’s ability 

to repay.330 The agencies believe that an 

exemption under section 15G(e) would 

encourage HFAs to continue providing 

sound underwriting and access to 

affordable credit for their communities. 

In addition, as discussed above, the 

state HFA programs are established 

under public oversight under a specific 

state legal framework and provide a key 

source of affordable mortgage credit for 

LMI and first-time borrowers that is 

important to sustaining homeownership 

(and the public benefits that flow 

therefrom) in many communities. 

ii. Community Development Financial 

Institution Loans 

Creditors designated as CDFIs, as 

defined under Treasury regulations,331

include such entities as regulated banks, 

savings associations and credit unions 

as well as nonprofit funds and 

institutions.332 The Community 

Development Banking and Financial 

Institutions Act of 1994,333 defines a 

CDFI as an entity that (1) has a primary 

mission of promoting community 

development; (2) serves an investment 

area or targeted population; (3) provides 

development services in conjunction 

with equity investments or loans 

directly or through a subsidiary or 

affiliate; (4) maintains, through 

representation on its governing board 

accountability to residents of its area or 

target population; and (5) is a 

nongovernmental entity. Treasury’s 

CDFI certification and application 

regulations incorporate the statutory 

definition requirements and contain 

additional requirements for eligibility 

verification, applications, matching 

funds, and other standards. These 

requirements include that a CDFI must 

be certified by Treasury’s CDFI Fund 

Program.334 Additionally, at least 60 

percent of the financing activities of a 

CDFI must be targeted to one or more 

LMI or underserved communities. 

Although CDFI securitization volume 

data is not available, at least one CDFI, 

the Community Reinvestment Fund, has 

issued securitizations in the past. 

Access to the securitization market for 

CDFIs may help to ensure that these 

entities can continue to focus on their 

mission of providing community 

development and helping LMI 

borrowers by preserving access to the 

securitization market. In determining 

that these entities warranted an 

exemption from the ability-to-repay 

rules, the CFPB found that, although 

these entities do not have standardized 

underwriting criteria, they use a variety 

of compensating factors and compare 

the strength of different underwriting 

factors, such as credit history and 

income, to determine if the LMI 

consumer qualified.335 Similar to state 

HFAs, an exemption from risk retention 

would assist CDFIs in continuing their 

mission of providing affordable credit to 

various communities by allowing them 

to access securitization markets without 

risk retention requirements if they were 

to seek such funding in the future. 

Furthermore CDFIs have a stated 

mission requirement to serve the 

community which requires them to 

maintain strong underwriting standards 

to protect the individual borrower and 

the organization, thus lowering risk for 

the public and investors. 

iii. Community Housing Development 

Organizations and Downpayment 

Assistance Programs 

To be a CHDO, an organization must 

qualify under HUD’s regulations for 

such designation and re-qualify every 

time it receives additional set-asides 

through the HOME program. HUD’s 

HOME Investment Partnership 

Program 336 requires the allocation of 15 

percent of funds to a CHDO to undergo 

HOME activities. A CHDO has 5 years 

to allocate the funds and its activities 

must be in compliance with both HUD’s 

and the awarding jurisdiction’s 

requirements for use of the HOME 

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337 24 CFR 92.254. 

338 78 FR at 35434, 35461 (June 12, 2013). 

339 24 CFR 92.254. 

340 Id. 

341 Id. 

342 12 CFR 1026.43(a)(3)(v)(B). 

343There are currently 205 organizations certified 

as DAPs. HUD, Nonprofits, visited on August 1, 

2014, available at: https://entp.hud.gov/idapp/html/ 

f17npdata.cfm. 

344See 78 FR 35430, 35464 (June 12, 2014). 

345 12 CFR 1026.43(a)(3)(v)(D), 

346The CFPB has proposed an amendment to 

exclude from the 200 originations count certain 

forgivable or deferred second lien loans. See 79 FR 

25730 (May 6, 2014). Update if CFPB adopts change 

before this rule is finalized. 

funds.337 HUD’s requirements for being 

a CHDO and eligible for an award 

include: (1) being a private nonprofit 

organization; (2) having among its 

purposes the provision of decent 

housing that is affordable to LMI 

persons, as evidenced in its charter, 

articles of incorporation, resolutions or 

by-laws; (3) having a demonstrated 

capacity for carrying out housing 

projects assisted with HOME funds; and 

(4) having a history of serving the 

community within which housing to be 

assisted with HOME funds is to be 

located. Data indicates that lending at 

CHDOs totaled $64 million in 2011 with 

just under 500 loans.338

As with CDFIs, although CHDOs do 

not have standardized underwriting 

criteria, CHDOs use a variety of 

compensating factors, including an 

ability-to-repay analysis,339 in 

underwriting mortgage loans to ensure 

that the loan is appropriate for the 

borrower.340 CHDOs use these factors in 

addition to standard underwriting 

factors, such as credit history and 

income, to determine if the LMI 

consumer qualifies.341 CHDOs’ stated 

mission to serve LMI persons and 

requirements to qualify under the HUD 

program helps to ensure strong, but 

flexible underwriting of loans to sustain 

their mission. 

For its loans to qualify for an 

exemption from the ability-to-repay 

rules, a Downpayment Assistance 

Provider must operate in accordance 

with applicable HUD regulations.342

Consequently, a DAP must be listed on 

HUD’s nonprofit organization roster by 

applying every two years and specifying 

the FHA activities it proposes to carry 

out.343 The organization must comply 

with all requirements stated in the 

specific applicable provision of the 

single family regulations applicable to 

the FHA activity it undertakes. Similar 

to CHDOs, DAPs also use underwriting 

requirements that are tailored to the 

target LMI populations.344 The DAPs’ 

mission requires them to tailor their 

programs to provide lending for LMI 

populations, but they must also follow 

HUD and program-specific requirements 

which encourage sound lending. 

iv. Exempt Nonprofit Organizations 

To be exempt from the ability-torepay rules, a nonprofit organization 

must have an IRS tax-exempt ruling or 

determination letter as a 501(c)(3) 

organization, and meet the following 

additional criteria: 345 (1) during the 

preceding calendar year, the 

organization extended a maximum of 

200 dwelling-secured loans; 346 (2) 

during the preceding calendar year, 

extended credit only to consumers with 

income that did not exceed the LMI 

household limit; (3) the extension of 

credit must be made to consumers with 

income that does not exceed the LMI 

household limit; and (4) the creditor has 

and uses written procedures to 

determine the consumer’s reasonable 

ability to repay. Similar to the other 

categories of lenders exempted from risk 

retention because of their communityfocused lending, as discussed above, 

these entities serve LMI consumers, and 

as non-profits, seek to provide 

borrowers with loans that will be 

affordable to lower risk to the borrower 

and the non-profit. Additionally, such 

entities must maintain a written policy 

on determining ability to repay for the 

LMI consumers it serves. 

For the reasons discussed above, 

under section 15G(e) of the Exchange 

Act, the agencies are exempting from 

risk retention loans made by the above 

entities that are also exempt from the 

ability-to-repay rules under the CFPB’s 

Regulation Z. As discussed above, the 

agencies have concluded that the 

history of sound underwriting of 

affordable mortgage credit to LMI and 

similar communities by these entities, 

government oversight and program 

requirements, as well as the public 

mission of these entities generally 

supports findings that these exemptions 

from risk retention would help ensure 

high-quality underwriting and be in the 

public interest and for the protection of 

investors. 

The agencies have not concluded that 

an exemption is warranted for 

extensions of credit under EESA 

programs. Unlike the communityfocused lending exemption, the EESA 

exemption covers special, temporary 

homeownership stabilization and 

foreclosure prevention programs that 

were specially enacted in the wake of 

the financial crisis to promote the 

recovery and prevent foreclosures. The 

EESA programs exempted from the 

ability-to-repay rule are those 

authorized under the ‘‘Making Home 

Affordable’’ (MHA) provision and the 

Hardest Hit Fund (HHF), which 

includes programs such as the Home 

Affordable Modification Program and 

the Home Affordable Foreclosure 

Alternatives Program. Currently the 

MHA programs are scheduled to expire 

on December 31, 2015, and the HHF 

programs are scheduled to expire on 

December 31, 2017. The rehabilitative 

purpose of these programs and their 

limited duration distinguish these 

programs from the community-focused 

lending programs. Consequently, the 

agencies are not exempting these 

programs from risk retention. 

Under the final rule, an exemption is 

provided if the asset-backed securities 

issued in the transaction are 

collateralized solely by communityfocused residential mortgages and by 

servicing assets. Alternatively, if the 

community-focused residential 

mortgages are included in a pool with 

other non-QRMs, the amount of risk 

retention required under section 4(a) of 

the rule is reduced by a ratio of the 

unpaid principal balance of the 

community-focused residential 

mortgages to the total unpaid principal 

balance of residential mortgages that are 

included in the pool of assets 

collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction (the 

community-focused residential 

mortgage asset ratio). This communityfocused residential mortgage asset ratio 

must be measured as of the cut-off date 

or similar date for establishing the 

composition of the securitized assets 

collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction. In addition, 

under the final rule, if the communityfocused residential mortgage asset ratio 

exceeds 50 percent, it is treated as 50 

percent, which provides the same 

ability to pool exempt communityfocused residential mortgages with other 

non-QRMs, as permitted for qualifying 

and non-qualifying commercial loans, 

CRE loans, and automobile loans. 

Additionally, the agencies are 

committing in the final rule to review 

the community-focused lending 

exemption at the same time the agencies 

review the QRM definition (i.e., no later 

than four years after the effective date of 

this rule with respect to securitizations 

of residential mortgages, five years after 

the completion of that initial review, 

and every five years thereafter.) In 

addition, the agencies will commence a 

review of the exemption at any time 

upon the request of any one of the 

agencies. This will allow the agencies to 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77697 

347See 12 CFR 1026.43(e)(2), (e)(4), (e)(5), and 

(e)(6). 

348 12 CFR 1026.43(b)(1). 

349See 12 CFR 1026.2(a)(19). 

350See 12 CFR part 1026 Supplement I, paragraph 

3(a)–5.i. 

351See, for example, the discussion in the 

preamble to the 2013 proposal at 57991 (78 FR 

57928, 57991 (September 20, 2013)) and the 

proposed definition of commercial loan, which 

excluded any loan to a company or an individual 

for business purposes to purchase or refinance a 

one-to-four family residential property (78 FR 

57928, 58037 (September 20, 2013)). 

352See, for example, https://

www.americansecuritization.com/uploadedFiles/

RMBS%20Outline.pdf 

353The agencies also note that other regulations 

categorize mortgages on one-to-four unit (or family) 

properties as residential mortgages. See, for 

example, the definition of ‘‘residential mortgage 

exposure’’ in the banking agency capital regulations 

(12 CFR 3.2, 12 CFR 217.2; 12 CFR 324.2). See also 

similar definitions in 12 CFR 37.2; 12 CFR part 30, 

appendix C; 12 CFR part 208, appendix C. 

354 In a review mortgages originated from 2005 to 

2013, with respect to each vintage, mortgages 

collateralized by two-to-four unit properties 

accounted for between 1 percent and 3 percent of 

the count of residential mortgages and to one to four 

percent of the dollar volume (at origination). Data 

sources reviewed do not generally separately 

identify one-to-four unit properties. (Data reviewed 

was from Black Knight Data and Analytics (formerly 

known as McDash)). It is noted that there are some 

metropolitan statistical areas across the country in 

which the share of housing units located in 3 and 

4 unit properties is significantly higher than the 

national average of 4.5 percent, based on data from 

the U.S. Census, 2013 American Community 

Survey, 1-year estimates. 355 12 CFR 1026.43(e). 

assess the advantages and disadvantages 

of the exemption over time and as the 

market evolves. 

Exemption for Certain Mortgage Loans 

Secured by Three-to-Four Unit 

Residential Properties 

Under Regulation Z, only loans that 

are ‘‘covered transactions’’ are QMs 

under the definitions adopted by the 

CFPB.347 A ‘‘covered transaction’’ under 

Regulation Z means a consumer credit 

transaction that is secured by a dwelling 

(including any real property attached to 

a dwelling) other than those consumer 

credit transactions exempted from the 

ability-to-repay rules by the CFPB.348 A 

‘‘dwelling’’ is defined under the CFPB 

rules as a residential structure that 

contains one-to-four units (and can 

include various types of properties such 

as mobile homes and 

condominiums).349 However, the 

Regulation Z Official Interpretations 

specify that credit extended to acquire 

a rental property that is or will be 

owner-occupied within the coming year 

and that has more than two housing 

units is deemed to be for business 

purposes.350 In that case, the loan is not 

a consumer credit transaction or 

covered transaction under Regulation Z, 

and therefore does not appear to meet 

the definition of QM. 

In aligning the QRM definition with 

QM, the agencies understood that 

covered transactions could include 

owner-occupied, one-to-four unit 

residential properties.351 The agencies 

also understand that market practice is 

generally to categorize residential 

mortgage securitizations as those 

collateralized by one-to-four unit 

properties, with mortgages of three-tofour unit properties frequently 

combined in a single collateral pool 

with one- or two-unit properties.352

Enterprise guidelines for residential 

mortgage securitizations also categorize 

residential mortgages by one-to-four 

family units.353 From a credit risk 

perspective, mortgages secured by threeto-four unit residential properties 

generally have the same characteristics 

as mortgages secured by two-unit 

properties, which are covered 

transactions under Regulation Z and 

may qualify as QMs, and therefore 

QRMs. 

The agencies are concerned that the 

categorical exclusion of some mortgage 

loans secured by three-to-four unit 

mortgages from the definition of 

‘‘covered transaction’’ under Regulation 

Z (in accordance with the Official 

Interpretations) and the consequence 

that such loans appear not to be QMs 

even if they otherwise meet all of the 

other QM criteria, would 

inappropriately constrain funding from 

the securitization markets for these 

types of residential mortgages. This in 

turn could significantly impact the 

availability of credit to finance the 

purchase of such properties by owneroccupiers. While the overall volume of 

mortgage lending secured by three-tofour unit residential properties is small 

in relation to all residential mortgage 

lending, there are some metropolitan 

areas that contain a significant stock of 

such properties, including in many lowand-moderate income areas.354

At the same time, the agencies believe 

that owner-occupied, three-to-four unit 

mortgages that meet the same 

underwriting qualifications under the 

QM rule as two unit residential 

mortgages that meet the QM definition 

have similar risk characteristics. In 

order to ensure that such mortgage loans 

have the same access to securitization 

markets as similar loans secured by oneto-two unit properties, pursuant to the 

authority in section 15G(e)(1) of the 

Exchange Act, the agencies are 

exempting from risk retention 

requirements owner-occupied mortgage 

loans secured by three-to-four unit 

residential properties that meet all the 

criteria for QM in Regulation Z except 

for being a ‘‘consumer credit 

transaction,’’ as determined under 

Regulation Z and the Official 

Interpretations. These mortgages are 

referred to in the final rule as 

‘‘qualifying three-to-four unit residential 

mortgage loans.’’ To qualify for the 

exemption, a mortgage loan secured by 

a three-to-four unit residential property 

must be owner-occupied and must 

comply with all of the requirements for 

qualified mortgages as set forth in 

sections 1026.43(e) and (f) of Regulation 

Z as if the mortgage were a covered 

transaction for purposes of that 

section.355

The agencies recognize that in order 

for qualifying three-to-four unit 

residential mortgage loans to benefit 

from the exemption from risk retention 

as intended and maintain access to 

securitization markets and mortgage 

credit similar to residential mortgages 

that are QRMs, it must be possible for 

sponsors to combine these loans with 

QRMs in a single collateral pool. 

Therefore, pursuant to their exemptive 

authority in section15G (e)(1), the 

agencies are also providing an 

exemption from risk retention for 

securitizations that contain both QRMs 

and qualifying three-to-four unit 

residential mortgage loans. 

To qualify for these combined pools, 

the final rule requires that depositors 

comply with the certification 

requirements for these exempt 

securitization transactions on the same 

basis as qualifying residential mortgage 

securitization transactions that are 

exempted from risk retention. That is, 

the depositor must certify that all the 

assets in the pool meet either the QRM 

definition or are qualifying three-to-four 

unit residential mortgage loans that 

meet the requirements of section 

1026.43(e) (other than being deemed a 

consumer credit transaction). 

Additionally, a sponsor must comply 

with the repurchase requirements for 

these exempt securitization transactions 

on the same basis as qualifying 

residential mortgage securitization 

transactions that are exempted from risk 

retention, if it is determined after 

closing that a loan does not meet all of 

the criteria to be either a QRM or a 

qualifying three-to-four unit residential 

mortgage loan. 

As discussed previously with respect 

to other exemptions from risk retention 

pursuant to section 15G(e)(1) of the 

Exchange Act, the agencies may issue 

exemptions, exceptions or adjustments 

to the risk retention rules, including for 

classes of institutions or assets relating 

to the risk retention requirement, if the 

exemption would: (i) Help ensure highmstockstill on DSK4VPTVN1PROD with RULES2

77698 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

356 15 U.S.C. 78o–11(e)(1) and (2). 

357The agencies do not otherwise address the 

permissibility of exemptions for pools blending 

QRMs and non-QRMs at this time. See note 322, 

supra, and accompanying text. 

358See 15 U.S.C. 78o–11(e)(5) and (e)(6). 

359 5 U.S.C. 604. 

360The Small Business Administration defines 

small entity to include national banks or Federal 

savings associations with assets of $550 million or 

less. 13 CFR 121.201. 

361 5 U.S.C. 605(b). 

362Call Report Schedule RC–S provides 

information on the servicing, securitization, and 

asset sale activities of banking organizations. For 

purposes of the RFA analysis, the OCC evaluated 

data regarding residential mortgage loan origination 

for securitization, as this is the primary 

securitization activity by small banking 

organizations. 

quality underwriting standards for the 

securitizers and originators of assets that 

are securitized or available for 

securitization; and (ii) encourage 

appropriate risk management practices 

by the securitizers and originators of 

assets, improve the access of consumers 

and businesses to credit on reasonable 

terms, or otherwise be in the public 

interest and for the protection of 

investors.356

The agencies believe that an 

exemption from risk retention for 

securitization transactions collateralized 

by qualifying three-to-four unit 

residential mortgage loans and an 

exemption for combining qualifying 

three-to-four unit residential mortgage 

loans and QRMs (as well as servicing 

assets) in a single securitization pool 

meets these statutory standards for an 

exemption under section 15G(e)(1). The 

exemptions will help ensure highquality underwriting standards for 

securitizers and originators of assets that 

are securitized or available for 

securitization because all the collateral 

will have to be mortgage loans secured 

by owner-occupied, one-to-four family 

residential properties that met all the 

requirements to be a QM (other than 

being deemed a loan for business 

purposes, and therefore not a covered 

transaction, under the Official 

Interpretations of Regulation Z (12 CFR 

part 1026, Supplement I, paragraph 

3(a)(5)(i)). As discussed above with 

respect to the alignment of the QRM and 

QM definitions, the agencies believe 

that the underwriting and product 

standards for QMs limit credit risk and 

promote sound underwriting. 

The agencies also believe that the 

exemptions will improve the access of 

consumers and businesses to credit on 

reasonable terms because they will help 

preserve access to securitization funding 

for mortgage loans to owner-occupied 

three-to-four unit residential properties 

on the same basis as other one-to-four 

unit residential properties. The 

exemptions are also in the public 

interest and for the protection of 

investors because they require all the 

loans in a securitization transaction that 

benefit from the exemption to meet the 

underwriting and product standards of 

QM, which, for the reasons discussed 

above in Section VI, appropriately limit 

credit risk for residential mortgages 

exempted from risk retention. 

The agencies also believe that, 

because the qualifying three-to-four unit 

residential mortgage loans will meet all 

QM criteria other than being a consumer 

credit transaction, these exemptions are 

not inconsistent with the provisions of 

section 15G of the Exchange Act that, 

absent an exemption, require the 

agencies to apply risk retention to 

transactions collateralized by both 

QRMs and non-QRMs.357 The agencies 

have separately retained the exemption 

mandated in section 15G for risk 

retention for securitization transactions 

collateralized solely by QRMs, 

including the certification requirements 

also specified in the statute.358

Moreover, the exemption the agencies 

are providing for securitizations 

collateralized by both QRMs and 

qualifying three-to-four unit residential 

mortgage loans is limited in scope and 

only permits the mixing of QRMs and 

non-QRM loans that are subject to the 

exact same underwriting and product 

type standards that limit credit risk and 

define QM. For these reasons, the 

agencies are adopting the above 

described exemption from risk retention 

in the final rule. 

Additionally, the agencies are 

committing in the final rule to review 

the exemption for qualifying three-tofour unit residential mortgage loans at 

the same time the agencies review the 

QRM definition (i.e., no later than four 

years after the effective date of this rule 

with respect to securitizations of 

residential mortgages, five years after 

the completion of that initial review, 

and every five years thereafter.) In 

addition, the agencies will commence a 

review of the exemption at any time 

upon the request of any one of the 

agencies. This will allow the agencies to 

assess the advantages and disadvantages 

of the exemption over time and as the 

market evolves. 

VIII. Severability 

If any provision of this rule, or the 

application thereof to any person or 

circumstance, is held to be invalid, such 

invalidity shall not affect other 

provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

IX. Plain Language 

Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, sec. 

722, 113 Stat. 1338, 1471 (Nov. 12, 

1999), requires the Federal banking 

agencies to use plain language in all 

proposed and final rules published after 

January 1, 2000. The Federal banking 

agencies invited comments on how to 

make the reproposal easier to 

understand. 

X. Administrative Law Matters 

A. Regulatory Flexibility Act 

OCC: The Regulatory Flexibility Act 

(RFA) generally requires that, when 

promulgating a final rule, an agency 

publish a final regulatory flexibility 

analysis that describes, among other 

items, the impact of the final rule on 

small entities.359 However, a regulatory 

flexibility analysis is not required if the 

head of the agency certifies that the rule 

will not have a significant economic 

impact on a substantial number of small 

entities 360 and publishes the 

certification and a statement of the 

factual basis for such certification.361

As discussed in the Supplementary 

Information, the final rule generally 

requires a securitizer to retain not less 

than 5 percent of the credit risk of any 

asset that the securitizer, through the 

issuance of an asset-backed security 

(ABS), transfers, sells, or conveys to a 

third party; and prohibits a securitizer 

from directly or indirectly hedging or 

otherwise transferring the credit risk 

that the securitizer is required to retain. 

In certain situations, the final rule 

allows securitizers to allocate a portion 

of the risk retention requirement to the 

originator(s) of the securitized assets, if 

an originator contributes at least 20 

percent of the assets in the 

securitization. The final rule also 

provides an exemption for ABS 

collateralized exclusively by QRM 

loans. 

In determining whether the final rule 

would have a significant economic 

impact on a substantial number of small 

national banks and Federal savings 

associations, the OCC reviewed 

December 31, 2013 Call Report data 362

to evaluate the securitization activity 

and approximate the number of small 

banking organizations that potentially 

could retain credit risk under the final 

rule primarily through the allocation to 

originator provisions. 

As of December 31, 2013, the OCC 

regulated approximately 1,231 small 

national banks and Federal savings 

associations that would be subject to 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77699 

363The OCC previously concluded that the 

reproposed rule, if finalized, would not have a 

significant economic impact on a substantial 

number of small national banks and Federal savings 

associations. See Section VIII.A, 78 FR 57928 

(September 20, 2013). The OCC requested comment 

and received no responsive comments on that 

conclusion. 

364See 13 CFR 121.201; See also 13 CFR 

121.103(a)(6) (noting factors that the Small Business 

Administration considers in determining whether 

an entity qualifies as a small business, including 

receipts, employees, and other measures of its 

domestic and foreign affiliates). 

365For purposes of the proposed rules, this would 

include a small bank holding company; savings and 

loan holding company; state member bank; Edge 

corporation; agreement corporation; foreign banking 

organization; and any subsidiary of the foregoing. 

366Call Report Schedule RC–S; Data based on the 

Reporting Form FR 2866b; Structure Data for the 

U.S. Offices of Foreign Banking Organizations; and 

Aggregate Data on Assets and Liabilities of U.S. 

Branches and agencies of Foreign Banks based on 

the quarterly form FFIEC 002. 

367With respect to an open market CLO 

transaction, the risk retention retained by the 

originator must be at least 20 percent of the 

aggregate principal balance at origination of a CLOeligible loan tranche. 

368Call Report Schedule RC–S provides 

information on the servicing, securitization, and 

asset sale activities of banking organizations. For 

purposes of the RFA analysis, the agencies gathered 

and evaluated data regarding (1) the outstanding 

principal balance of assets sold and securitized by 

the reporting entity with servicing retained or with 

recourse or other seller-provided credit 

enhancements, and (2) assets sold with recourse or 

other seller-provided credit enhancements and not 

securitized by the reporting bank. 

369Based on the data provided in Table 1, page 

29 of the Board’s ‘‘Report to the Congress on Risk 

Retention’’, it appears that the average MBS 

issuance is collateralized by a pool of 

approximately $620 million in mortgage loans (for 

prime MBS issuances) or approximately $690 

million in mortgage loans (for subprime MBS 

issuances). For purposes of the RFA analysis, the 

agencies used an average asset pool size of $500 

million to account for reductions in mortgage 

securitization activity following 2007, and to add an 

element of conservatism to the analysis. 

370The FDIC notes that this finding assumes that 

no portion of the assets originated by small banking 

organizations were sold to securitizations that 

qualify for an exemption from the risk retention 

requirements under the proposed rule. 

this rule. The Call Report data indicates 

that approximately 155 small national 

banks and Federal savings associations 

originate loans for securitization, 

predominantly one-to-four family 

residential mortgages. Using a threshold 

of 5 percent of small regulated 

institutions, the final rule could impact 

a substantial number of small national 

banks and Federal savings associations. 

The vast majority of securitization 

activity by small banks is in the 

residential mortgage sector. Many of 

these banks originate and sell 

residential mortgage loans to the 

Enterprises, which satisfy risk retention 

under the final rule when they 

securitize those loans and would not 

allocate risk retention to the originating 

banks under the final rule. Small banks 

that originate mortgages for 

securitization through other channels 

likely would be exempt from risk 

retention by another provision in the 

rule, such as that the loans meet the 

QRM definition or meet the community 

focused lending securitization 

exemption. For these reasons, the OCC 

concludes that the final rule would not 

have a significant economic impact on 

a substantial number of small national 

banks and Federal savings 

associations.363

Board: In general, section 4 of the 

Regulatory Flexibility Act (5 U.S.C. 604) 

requires an agency to prepare a final 

regulatory flexibility analysis for a final 

rule unless the agency certifies that the 

rule will not, if promulgated, have a 

significant economic impact on a 

substantial number of small entities 

(defined as of July 14, 2014, to include 

banking entities with total assets of $550 

million or less) (‘‘small banking 

entities’’).364 Pursuant to section 505(b) 

of the Regulatory Flexibility Act, a final 

regulatory flexibility analysis is not 

required if an agency certifies that the 

final rule will not have a significant 

economic impact on a substantial 

number of small entities. The Board has 

considered the potential economic 

impact of the final rule on small 

banking entities supervised by the 

Board in accordance with the 

Regulatory Flexibility Act. The Board 

believes that the final rule will not have 

a significant economic impact on a 

substantial number of small banking 

entities supervised by the Board for the 

reasons described below. 

For the reasons discussed in Part II of 

this Supplementary Information, the 

final rule defines a securitizer as a 

‘‘sponsor’’ in a manner consistent with 

the definition of that term in the 

Commission’s Regulation AB and 

provides that the sponsor of a 

securitization transaction is generally 

responsible for complying with the risk 

retention requirements established 

under section 15G. The Board is 

unaware of any small banking 

organization under the supervision of 

the Board that has acted as a sponsor of 

a securitization transaction 365 (based on 

December 31, 2013 data).366 As of 

December 31, 2013, there were 

approximately 5,051 small banking 

organizations supervised by the Board, 

which includes 4,009 bank holding 

companies, 298 savings and loan 

holding companies, 651 state member 

banks, 23 Edge and agreement 

corporations and 70 U.S. offices of 

foreign banking organizations. 

The final rule permits, but does not 

require, a sponsor to allocate a portion 

of its risk retention requirement to one 

or more originators of the securitized 

assets, subject to certain conditions 

being met. In particular, a sponsor may 

offset the risk retention requirement by 

the amount of any eligible vertical risk 

retention interest or eligible horizontal 

residual interest acquired by an 

originator of one or more securitized 

assets if certain requirements are 

satisfied, including, the originator must 

originate at least 20 percent of the 

securitized assets.367 A sponsor using 

this risk retention option remains 

responsible for ensuring that the 

originator has satisfied the risk retention 

requirements. In light of this option, the 

Board has considered the impact of the 

final rule on originators that are small 

banking organizations. 

The December 31, 2013 regulatory 

report data 368 indicates that 

approximately 757 small banking 

organizations, 102 of which are small 

banking organizations that are 

supervised by the Board, originate loans 

for securitization, namely ABS 

issuances collateralized by one-to-four 

family residential mortgages. The 

majority of these originators sell their 

loans to the Enterprises, which retain 

credit risk through agency guarantees 

and would not be able to allocate credit 

risk to originators under this proposed 

rule. Additionally, based on publiclyavailable market data, it appears that 

most residential mortgage-backed 

securities offerings are collateralized by 

a pool of mortgages with an unpaid 

aggregate principal balance of at least 

$500 million.369 Accordingly, under the 

final rule a sponsor could potentially 

allocate a portion of the risk retention 

requirement to a small banking 

organization only if such organization 

originated at least 20 percent ($100 

million) of the securitized mortgages. As 

of December 31, 2012, only one small 

banking organization supervised by the 

Board reported an outstanding principal 

balance of assets sold and securitized of 

$100 million or more.370

For residential mortgage-backed 

securitizations, the draft final rule is 

expected to have minimal impact on the 

cost of credit for sponsors of nonEnterprise mortgage-backed 

securitizations that currently retain less 

than the draft final rule’s base risk 

retention requirement. The markets for 

those residential mortgages exempted 

under the draft final rule should be very 

large, and result in significant liquidity, 

economies of scale, little to no impact 

for these securitizations. 

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77700 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

371See 5 U.S.C. 601 et seq. 

372Codified at section 15G of the Exchange Act, 

17 U.S.C. 78o–11. 

373With respect to an open market CLO 

transaction, the risk retention retained by the 

originator must be at least 20 percent of the 

aggregate principal balance at origination of a CLOeligible loan tranche. 

374Call Report Schedule RC–S provides 

information on the servicing, securitization, and 

asset sale activities of banking organizations. For 

purposes of the RFA analysis, the agencies gathered 

and evaluated data regarding (1) the outstanding 

principal balance of assets sold and securitized by 

the reporting entity with servicing retained or with 

recourse or other seller-provided credit 

Commercial loans that have in recent 

years been securitized through open 

market CLOs may experience a modest 

incremental impact in the cost of credit, 

as mangers of open market CLOs 

increase their credit exposure to 5 

percent using the horizontal risk 

retention option under the draft final 

rule. There could also be consolidation 

in the asset manager industry as a result. 

The alternative option for lead arrangers 

to hold risk in the final rule should have 

minimal impact on the cost of credit 

(approximately 0–10 basis points) 

because it would be a vertical interest. 

An estimate for the incremental increase 

in the cost of credit for CLO managers 

is approximately 10–20 basis points, but 

because risk retention would affect the 

current business model, costs may be 

higher than expected. 

The draft final rule will also likely 

have an effect on CMBS transactions. 

The typical market practice of holding 

horizontal risk retention of 2.5 percent 

for conduit transactions will double to 

5 percent under the draft rule. The 

Board estimates that the rule will have 

a small incremental impact on cost of 

credit (of up to 10 basis points, 

approximately) for sponsors subject to 

the rule, but reducing the leverage of 

third-party purchasers could 

significantly improve issuer incentives, 

and other requirements in the rule could 

mitigate existing conflicts of interest 

between third-party purchasers and 

sponsors who hold residual interests 

and senior investors. Single-Borrower 

CMBS, despite a lack of current risk 

retention in practice, should experience 

a modest incremental impact on cost of 

credit (of up to approximately 25 basis 

points). The rule should have little to no 

effect on the cost of credit for credit 

card, prime and non-prime auto, student 

loan, and less common (esoteric) 

securitizations, because the amount of 

credit risk retention typical to these 

securitizations already being held in the 

market is generally adequate to satisfy 

the requirements in the final rule. 

In light of the foregoing, the Board 

does not believe, for the banking entities 

subject to the Board’s jurisdiction, that 

the final rule would have a significant 

economic impact on a substantial 

number of small entities. 

FDIC: The Regulatory Flexibility Act, 

5 U.S.C. 601 et seq. (RFA), requires an 

agency, in connection with a final rule, 

to prepare a Final Regulatory Flexibility 

Act analysis describing the impact of 

the rule on small entities (defined by the 

Small Business Administration for 

purposes of the RFA to include banking 

entities with total assets of $550 million 

or less) or to certify that the rule will not 

have a significant economic impact on 

a substantial number of small 

entities.371

As of June 30, 2014, there were 3,573 

small FDIC-supervised institutions, 

which include 3,267 state nonmember 

banks and 306 state-chartered savings 

institutions. For the reasons provided 

below, the FDIC certifies that the final 

rule will not have a significant 

economic impact on a substantial 

number of small entities, which in this 

context are small banking organizations 

supervised by the FDIC with total assets 

of $550 million or less. Accordingly, a 

regulatory flexibility analysis is not 

required. 

As discussed in the Supplementary 

Information above, section 941 of the 

Dodd-Frank Act 372 generally requires 

the Federal banking agencies and the 

Commission, and, in the case of the 

securitization of any residential 

mortgage asset, together with HUD and 

FHFA, to jointly prescribe regulations, 

that (i) require a securitizer to retain not 

less than 5 percent of the credit risk of 

any asset that the securitizer, through 

the issuance of an asset-backed security 

(ABS), transfers, sells, or conveys to a 

third party; and (ii) prohibit a 

securitizer from directly or indirectly 

hedging or otherwise transferring the 

credit risk that the securitizer is 

required to retain under section 15G. 

Although the final rule will apply 

directly only to securitizers, subject to 

certain considerations section 15G 

authorizes the agencies to permit 

securitizers to allocate at least a portion 

of the risk retention requirement to the 

originator(s) of the securitized assets. 

Section 15G provides a total 

exemption from the risk retention 

requirements for securitizers of certain 

securitization transactions, such as an 

ABS issuance collateralized exclusively 

by QRMs, and further authorizes the 

agencies to establish a lower risk 

retention requirement for securitizers of 

ABS issuances collateralized by other 

asset types, such as commercial, 

commercial real estate (CRE), and 

automobile loans, which satisfy 

underwriting standards established by 

the Federal banking agencies and the 

Commission. The risk retention 

requirements of section 15G apply 

generally to a ‘‘securitizer’’ of ABS, 

where securitizer is defined to mean (i) 

an issuer of an ABS; or (ii) a person who 

organizes and initiates an asset-backed 

transaction by selling or transferring 

assets, either directly or indirectly, 

including through an affiliate, to the 

issuer. Section 15G also defines an 

‘‘originator’’ as a person who (i) through 

the extension of credit or otherwise, 

creates a financial asset that 

collateralizes an asset-backed security; 

and (ii) sells an asset directly or 

indirectly to a securitizer. The final rule 

implements the credit risk retention 

requirements of section 15G. The final 

rule, as a general matter, requires that a 

‘‘sponsor’’ of a securitization transaction 

retain the credit risk of the securitized 

assets in the form and amount required 

by the final rule. The agencies believe 

that imposing the risk retention 

requirement on the sponsor of the 

ABS—as permitted by section 15G—is 

appropriate in view of the active and 

direct role that a sponsor typically has 

in arranging a securitization transaction 

and selecting the assets to be 

securitized. The FDIC is aware of only 

22 small banking organizations that 

currently sponsor securitizations (three 

of which are national banks, eight of 

which are state member banks, eight of 

which are state nonmember banks, and 

three of which are savings associations, 

based on June 30, 2014 information) 

and, therefore, the risk retention 

requirements of the final rule, as 

generally applicable to sponsors, will 

not have a significant economic impact 

on small banking organizations. Under 

the final rule a sponsor may offset the 

risk retention requirement by the 

amount of any eligible vertical interest 

or eligible horizontal residual interest 

acquired by an originator of one or more 

securitized assets if certain 

requirements are satisfied, including, 

the originator must originate at least 20 

percent of the securitized assets, as 

measured by the aggregate unpaid 

principal balance of the asset pool.373 In 

determining whether the allocation 

provisions of the final rule will have a 

significant economic impact on a 

substantial number of small banking 

organizations, the Federal banking 

agencies reviewed June 30, 2014, 

consolidated reports of condition and 

income (‘‘Call Report’’) data to evaluate 

the securitization activity and 

approximate the number of small 

banking organizations that potentially 

could retain credit risk under allocation 

provisions of the final rule.374 As of 

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enhancements, and (2) assets sold with recourse or 

other seller-provided credit enhancements and not 

securitized by the reporting bank. 

375Based on the data provided in Table 1, page 

29 of the Board’s October 2010 Report covering 

2002 through 2010 entitled, ‘‘Report to the Congress 

on Risk Retention,’’ it appears that the average 

RMBS issuance is collateralized by a pool of 

approximately $620 million in mortgage loans (for 

prime RMBS issuances) or approximately $690 

million in mortgage loans (for subprime RMBS 

issuances). For purposes of the RFA analysis, the 

agencies used an average asset pool size of $500 

million to account for reductions in mortgage 

securitization activity following 2007, and to add an 

element of conservatism to the analysis. 

376The FDIC notes that this finding assumes that 

all assets originated by small banking organizations 

reported on RC–S as being sold, whether or not 

securitized by the reporting bank, would be subject 

to the 5 percent risk retention requirement (and 

would not qualify for an exemption from the risk 

retention requirements under the final rule). 

377One commenter urged the agencies to develop 

the required Regulatory Flexibility Act analysis to 

accurately assess the impact on small entities of the 

QM-plus approach to define QRM, if the agencies 

adopt such approach. The agencies are not adopting 

the QM-plus approach to define QRM. 

378See 17 U.S.C. 78o–11. 

379The affected public of the FDIC, OCC, and 

Board is assigned generally in accordance with the 

entities covered by the scope and authority section 

of their respective rule. The affected public of the 

Commission is based on those entities not already 

accounted for by the FDIC, OCC, and Board. 

June 30, 2014, the Call Report data 

indicates that approximately 763 small 

banking organizations, 493 of which are 

state nonmember banks, originate loans 

for securitization which are largely ABS 

issuances collateralized by one-to-four 

family residential mortgages. Many of 

these originators sell their loans either 

to Fannie Mae or Freddie Mac, which 

retain credit risk through agency 

guarantees, and therefore will not be 

allocated credit risk under the final rule. 

Additionally, based on publicly 

available market data, it appears that 

most residential mortgage-backed 

securities offerings are collateralized by 

a pool of mortgages with an unpaid 

aggregate principal balance of at least 

$500 million.375 Accordingly, under the 

final rule a sponsor could potentially 

allocate a portion of the risk retention 

requirement to a small banking 

organization only if such organization 

originated at least 20 percent ($100 

million) of the securitized mortgages. As 

of June 30, 2014, only nine small 

banking organizations supervised by the 

FDIC reported an outstanding principal 

balance of assets sold and not 

securitized by the reporting bank of 

$100 million or more.376

Therefore, the FDIC does not believe 

that the final rule will result in a 

significant economic impact on a 

substantial number of small banking 

organizations under its supervisory 

jurisdiction. The FDIC certifies that the 

final rule will not have a significant 

economic impact on a substantial 

number of small FDIC-supervised 

institutions. 

Commission: The Regulatory 

Flexibility Act of 1980 requires the 

Commission, in promulgating rules, to 

consider the impact of those rules on 

small entities. An initial Regulatory 

Flexibility Act Analysis was prepared in 

accordance with the Regulatory 

Flexibility Act and included in the reproposing release. The Commission 

certified in the re-proposing release, 

pursuant to 5 U.S.C. 605(b), that the 

proposed rule, if adopted, would not 

have a significant economic impact on 

a substantial number of small entities. 

The Commission received one 

comment 377 on this certification. 

The final rule implements the risk 

retention requirements of section 15G of 

the Exchange Act, which, in general, 

requires the securitizer of asset-backed 

securities (ABS) to retain not less than 

5 percent of the credit risk of the assets 

collateralizing the ABS.378 Under the 

final rule, the risk retention 

requirements apply to ‘‘sponsors’’, as 

defined in the final rule. Based on the 

analysis set forth in the original 

proposal and the reproposal, the 

Commission continues to believe that 

the final rule would not have a 

significant economic impact on a 

substantial number of small entities. 

Some commenters on the re-proposal 

expressed concern that the re-proposed 

risk retention requirements could 

indirectly affect the costs and 

availability of credit to small businesses 

and the availability of mortgage credit to 

low- to moderate-income buyers. The 

Regulatory Flexibility Act only requires 

an agency to consider regulatory 

alternatives for those small entities 

subject to the final rule. The 

Commission has considered the broader 

economic impact of the final rule, 

including their potential effect on 

efficiency, competition and capital 

formation, in the Commission’s 

Economic Analysis below. 

For the reasons described above, the 

Commission again hereby certifies, 

pursuant to 5 U.S.C. 605(b), that the 

final rule will not have a significant 

economic impact on a substantial 

number of small entities. 

FHFA: FHFA has considered the 

impact of the final rule on the entities 

that it regulates, none of which come 

within the meaning of small entities as 

defined in the Regulatory Flexibility Act 

(RFA). See 5 U.S.C. 601(6). Pursuant to 

section 605(b) of the RFA, FHFA hereby 

certifies that the final rule will not have 

a significant economic impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

1. Background 

Certain provisions of the final rule 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’), 44 U.S.C. 3501–3521. In 

accordance with the requirements of the 

PRA, the agencies may not conduct or 

sponsor, and the respondent is not 

required to respond to, an information 

collection unless it displays a currently 

valid Office of Management and Budget 

(OMB) control number. The agencies 

published a notice requesting comment 

on the collection of information 

requirements in the Original Proposal 

and the Revised Proposal, and the 

information collection requirements 

contained in this joint final rule have 

been submitted by the FDIC, OCC, and 

the Commission to OMB for approval 

under section 3507(d) of the PRA and 

section 1320.11 of OMB’s implementing 

regulations (5 CFR part 1320). The 

Board reviewed the rule under the 

authority delegated to the Board by 

OMB. While commenters provided 

qualitative comments on the possible 

costs of the rule, the agencies did not 

receive any quantitative comments on 

the PRA analysis. 

2. Information Collection 

Title of Information Collection: Credit 

Risk Retention. 

Frequency of response: Event 

generated; annual. 

Affected Public: 379

FDIC: Insured state non-member 

banks, insured state branches of foreign 

banks, state savings associations, and 

certain subsidiaries of these entities. 

OCC: National banks, Federal savings 

associations, Federal branches or 

agencies of foreign banks, or any 

operating subsidiary thereof. 

Board: Insured state member banks, 

bank holding companies, savings and 

loan holding companies, Edge and 

agreement corporations, foreign banking 

organizations, nonbank financial 

companies supervised by the Board, and 

any subsidiary thereof. 

Commission: All entities other than 

those assigned to the FDIC, OCC, or 

Board. 

Abstract: The rule sets forth 

permissible forms of risk retention for 

securitizations that involve issuance of 

asset-backed securities, as well as 

exemptions from the risk retention 

requirements, and contains 

requirements subject to the PRA. The 

information requirements in the joint 

regulations adopted by the three Federal 

banking agencies and the Commission 

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77702 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

are found in sections l.4, l.5, l.6, 

l.7, l.8, l.9, l.10, l.11, l.13, l.15, 

l.16, l.17, l.18, and l.19(g). The 

agencies believe that the disclosure and 

recordkeeping requirements associated 

with the various forms of risk retention 

will enhance market discipline, help 

ensure the quality of the assets 

underlying a securitization transaction, 

and assist investors in evaluating 

transactions. Compliance with the 

information collections is mandatory. 

Responses to the information collections 

will not be kept confidential and, except 

for the recordkeeping requirements set 

forth in sections l.4(d), l.5(k)(3) and 

l.15(d), there will be no mandatory 

retention period for the collections of 

information. 

3. Section-by-Section Analysis 

Section l.4 sets forth the conditions 

that must be met by sponsors electing to 

use the standard risk retention option, 

which may consist of an eligible vertical 

interest or an eligible horizontal 

residual interest, or any combination 

thereof. Sections l.4(c)(1) and l.4(c)(2) 

specify the disclosures required with 

respect to eligible horizontal residual 

interests and eligible vertical interests, 

respectively. 

A sponsor retaining any eligible 

horizontal residual interest (or funding 

a horizontal cash reserve account) is 

required to disclose: The fair value (or 

a range of fair values and the method 

used to determine such range) of the 

eligible horizontal residual interest that 

the sponsor expects to retain at the 

closing of the securitization transaction 

(§ l.4(c)(1)(i)(A)); the material terms of 

the eligible horizontal residual interest 

(§ l.4(c)(1)(i)(B)); the methodology used 

to calculate the fair value (or range of 

fair values) of all classes of ABS 

interests (§l.4(c)(1)(i)(C)); the key 

inputs and assumptions used in 

measuring the estimated total fair value 

(or range of fair values) of all classes of 

ABS interests (§ l.4(c)(1)(i)(D)); the 

reference data set or other historical 

information used to develop the key 

inputs and assumptions 

(§ l.4(c)(1)(i)(G)); the fair value of the 

eligible horizontal residual interest 

retained by the sponsor 

(§ l.4(c)(1)(ii)(A)); the fair value of the 

eligible horizontal residual interest 

required to be retained by the sponsor 

(§ l.4(c)(1)(ii)(B)); description of any 

material differences between the 

methodology used in calculating the fair 

value disclosed prior to sale and the 

methodology used to calculate the fair 

value at the time of closing 

(§ l.4(c)(1)(ii)(C)); and the amount 

placed by the sponsor in the horizontal 

cash reserve account at closing, the fair 

value of the eligible horizontal residual 

interest that the sponsor is required to 

fund through such account, and a 

description of such account 

(§ l.4(c)(1)(iii)). 

For eligible vertical interests, the 

sponsor is required to disclose: The 

form of the eligible vertical interest 

(§ l.4(c)(2)(i)(A)); the percentage that 

the sponsor is required to retain 

(§ l.4(c)(2)(i)(B)); a description of the 

material terms of the vertical interest 

and the amount the sponsor expects to 

retain at closing (§l.4(c)(2)(i)(C)); and 

the amount of vertical interest retained 

by the sponsor at closing 

((§ l.4(c)(2)(ii)). 

Section l.4(d) requires a sponsor to 

retain the certifications and disclosures 

required in paragraphs (a) and (c) of this 

section in its records and must provide 

the disclosure upon request to the 

Commission and the sponsor’s 

appropriate Federal banking agency, if 

any, until three years after no ABS 

interests are outstanding. 

Section l.5 requires sponsors relying 

on the master trust (or revolving pool 

securitization) risk retention option to 

disclose: The material terms of the 

seller’s interest and the percentage of 

the seller’s interest that the sponsor 

expects to retain at the closing of the 

transaction (§l.5(k)(1)(i)); the 

percentage of the seller’s interest that 

the sponsor retained at closing 

(§ l.5(k)(1)(ii)); the material terms of 

any horizontal risk retention offsetting 

the seller’s interest under §l.5(g), 

§ l.5(h) and § l.5(i) (§l.5(k)(1)(iii)); 

and the fair value of any horizontal risk 

retention retained by the sponsor 

(§ l.5(k)(1)(iv)). Additionally, a sponsor 

must retain the disclosures required in 

§ l.5(k)(1) in its records and must 

provide the disclosure upon request to 

the Commission and the sponsor’s 

appropriate Federal banking agency, if 

any, until three years after no ABS 

interests are outstanding (§ l.5(k)(3)). 

Section l.6 addresses the 

requirements for sponsors utilizing the 

eligible ABCP conduit risk retention 

option. The requirements for the eligible 

ABCP conduit risk retention option 

include disclosure to each purchaser of 

ABCP and periodically to each holder of 

commercial paper issued by the ABCP 

conduit of the name and form of 

organization of the regulated liquidity 

provider that provides liquidity 

coverage to the eligible ABCP conduit, 

including a description of the material 

terms of such liquidity coverage, and 

notice of any failure to fund; and with 

respect to each ABS interest held by the 

ABCP conduit, the asset class or brief 

description of the underlying 

securitized assets, the standard 

industrial category code for each 

originator-seller that retains an interest 

in the securitization transaction, and a 

description of the percentage amount 

and form of interest retained by each 

originator-seller (§l.6(d)(1)). An ABCP 

conduit sponsor relying upon this 

section shall provide, upon request, to 

the Commission and the sponsor’s 

appropriate Federal banking agency, if 

any, the information required under 

§ l.6(d)(1), in addition to the name and 

form of organization of each originatorseller that retains an interest in the 

securitization transaction (§ l.6(d)(2)). 

A sponsor relying on the eligible 

ABCP conduit risk retention option 

shall maintain and adhere to policies 

and procedures to monitor compliance 

by each originator-seller (§ l.6(f)(2)(i)). 

If the ABCP conduit sponsor determines 

that an originator-seller is no longer in 

compliance, the sponsor must promptly 

notify the holders of the ABCP, and 

upon request, the Commission and the 

sponsor’s appropriate Federal banking 

agency, in writing of the name and form 

of organization of any originator-seller 

that fails to retain, and the amount of 

ABS interests issued by an intermediate 

SPV of such originator-seller and held 

by the ABCP conduit 

(§ l.6(f)(2)(ii)(A)(1)); the name and form 

of organization of any originator-seller 

that hedges, directly or indirectly 

through an intermediate SPV, its risk 

retention in violation of the rule, and 

the amount of ABS interests issued by 

an intermediate SPV of such originatorseller and held by the ABCP conduit 

(§ l.6(f)(2)(ii)(A)(2)); and any remedial 

actions taken by the ABCP conduit 

sponsor or other party with respect to 

such ABS interests (§l.6(f)(2)(ii)(A)(3)). 

Section l.7 sets forth the 

requirements for sponsors relying on the 

commercial mortgage-backed securities 

risk retention option, and includes 

disclosures of: The name and form of 

organization of each initial third-party 

purchaser (§l.7(b)(7)(i)); each initial 

third-party purchaser’s experience in 

investing in commercial mortgagebacked securities (§ l.7(b)(7)(ii)); other 

material information (§ l.7(b)(7)(iii)); 

the fair value and purchase price of the 

eligible horizontal residual interest 

retained by each third-party purchaser, 

and the fair value of the eligible 

horizontal residual interest that the 

sponsor would have retained if the 

sponsor had relied on retaining an 

eligible horizontal residual interest 

under the standard risk retention option 

(§ l.7(b)(7)(iv) and (v)); a description of 

the material terms of the eligible 

horizontal residual interest retained by 

each initial third-party purchaser, 

including the same information as is 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77703 

required to be disclosed by sponsors 

retaining horizontal interests pursuant 

to §l.4 (§l.7(b)(7)(vi)); the material 

terms of the applicable transaction 

documents with respect to the 

Operating Advisor (§ l.7(b)(7)(vii)); and 

representations and warranties 

concerning the securitized assets, a 

schedule of any securitized assets that 

are determined not to comply with such 

representations and warranties, and the 

factors used to determine that such 

securitized assets should be included in 

the pool notwithstanding that they did 

not comply with the representations and 

warranties (§l.7(b)(7)(viii)). A sponsor 

relying on the commercial mortgagebacked securities risk retention option is 

also required to provide in the 

underlying securitization transaction 

documents certain provisions related to 

the Operating Advisor (§l.7(b)(6)), to 

maintain and adhere to policies and 

procedures to monitor compliance by 

third-party purchasers with regulatory 

requirements (§l.7(c)(2)(A)), and to 

notify the holders of the ABS interests 

in the event of noncompliance by a 

third-party purchaser with such 

regulatory requirements (§ l.7(c)(2)(B)). 

Section l.8 requires that a sponsor 

relying on the Federal National 

Mortgage Association and Federal Home 

Loan Mortgage Corporation risk 

retention option must disclose a 

description of the manner in which it 

has met the credit risk retention 

requirements (§l.8(c)). 

Section l.9 sets forth the 

requirements for sponsors relying on the 

open market CLO risk retention option, 

and includes disclosures of a complete 

list of, and certain information related 

to, every asset held by an open market 

CLO (§l.9(d)(1)), and the full legal 

name and form of organization of the 

CLO manager (§ l.9(d)(2)). 

Section l.10 sets forth the 

requirements for sponsors relying on the 

qualified tender option bond risk 

retention option, and includes 

disclosures of the name and form of 

organization of the qualified tender 

option bond entity, a description of the 

form and subordination features of the 

retained interest in accordance with the 

disclosure obligations in section l.4(d), 

the fair value of any portion of the 

retained interest that is claimed by the 

sponsor as an eligible horizontal 

residual interest, and the percentage of 

ABS interests issued that is represented 

by any portion of the retained interest 

that is claimed by the sponsor as an 

eligible vertical interest (§ l.10(e)(1)– 

(4)). In addition, to the extent any 

portion of the retained interest claimed 

by the sponsor is a municipal security 

held outside of the qualified tender 

option bond entity, the sponsor must 

disclose the name and form of 

organization of the qualified tender 

option bond entity, the identity of the 

issuer of the municipal securities, the 

face value of the municipal securities 

deposited into the qualified tender 

option bond entity, and the face value 

of the municipal securities retained 

outside of the qualified tender option 

bond entity by the sponsor or its 

majority-owned affiliates (§ l.10(e)(5)). 

Section l.11 sets forth the conditions 

that apply when the sponsor of a 

securitization allocates to originators of 

securitized assets a portion of the credit 

risk the sponsor is required to retain, 

including disclosure of the name and 

form of organization of any originator 

that acquires and retains an interest in 

the transaction, a description of the 

form, amount and nature of such 

interest, and the method of payment for 

such interest (§ l.11(a)(2)). A sponsor 

relying on this section is required to 

maintain and adhere to policies and 

procedures that are reasonably designed 

to monitor originator compliance with 

retention amount and hedging, 

transferring and pledging requirements 

(§ l.11(b)(2)(A)), and to promptly notify 

the holders of the ABS interests in the 

transaction in the event of originator 

non-compliance with such regulatory 

requirements (§l.11(b)(2)(B)). 

Sections l.13 and l.19(g) provide 

exemptions from the risk retention 

requirements for qualified residential 

mortgages and qualifying 3-to-4 unit 

residential mortgage loans that meet 

certain specified criteria, including that 

the depositor with respect to the 

securitization transaction certify that it 

has evaluated the effectiveness of its 

internal supervisory controls and 

concluded that the controls are effective 

(§§ l.13(b)(4)(i) and l.19(g)(2)), and 

that the sponsor provide a copy of the 

certification to potential investors prior 

to sale of asset-backed securities in the 

issuing entity (§§ l.13(b)(4)(iii) and 

l.19(g)(2)). In addition, §§l.13(c)(3) 

and l.19(g)(3) provide that a sponsor 

that has relied upon the exemptions will 

not lose the exemptions if, after closing 

of the transaction, it is determined that 

one or more of the residential mortgage 

loans does not meet all of the criteria; 

provided that the depositor complies 

with certain specified requirements, 

including prompt notice to the holders 

of the asset-backed securities of any 

loan that is required to be repurchased 

by the sponsor, the amount of such 

repurchased loan, and the cause for 

such repurchase. 

Section l.15 provides exemptions 

from the risk retention requirements for 

qualifying commercial loans that meet 

the criteria specified in Section l.16, 

qualifying CRE loans that meet the 

criteria specified in Section l.17, and 

qualifying automobile loans that meet 

the criteria specified in Section l.18. 

Section l.15 also requires the sponsor 

to disclose a description of the manner 

in which the sponsor determined the 

aggregate risk retention requirement for 

the securitization transaction after 

including qualifying commercial loans, 

qualifying CRE loans, or qualifying 

automobile loans with 0 percent risk 

retention (§l.15(a)(4)). In addition, the 

sponsor is required to disclose 

descriptions of the qualifying 

commercial loans, qualifying CRE loans, 

and qualifying automobile loans 

(‘‘qualifying assets’’), and descriptions 

of the assets that are not qualifying 

assets, and the material differences 

between the group of qualifying assets 

and the group of assets that are not 

qualifying assets with respect to the 

composition of each group’s loan 

balances, loan terms, interest rates, 

borrower credit information, and 

characteristics of any loan collateral 

(§ l.15(b)(3)). Additionally, a sponsor 

must retain the disclosures required in 

§§ l.15(a) and (b) in its records and 

must provide the disclosure upon 

request to the Commission and the 

sponsor’s appropriate Federal banking 

agency, if any, until three years after no 

ABS interests are outstanding 

(§ l.15(d)). 

Sections l.16, l.17 and l.18 each 

require that: The depositor of the assetbacked security certify that it has 

evaluated the effectiveness of its 

internal supervisory controls and 

concluded that its internal supervisory 

controls are effective (§§l.16(a)(8)(i), 

l.17(a)(10)(i), and l.18(a)(8)(i)); the 

sponsor is required to provide a copy of 

the certification to potential investors 

prior to the sale of asset-backed 

securities in the issuing entity 

(§§ l.16(a)(8)(iii), l.17(a)(10)(iii), and 

l.18(a)(8)(iii)); and the sponsor must 

promptly notify the holders of the assetbacked securities of any loan included 

in the transaction that is required to be 

cured or repurchased by the sponsor, 

including the principal amount of such 

loan and the cause for such cure or 

repurchase (§§l.16(b)(3), l.17(b)(3), 

and l.18(b)(3)). Additionally, a sponsor 

must retain the disclosures required in 

§§ l.16(a)(8), l.17(a)(10) and 

l.18(a)(8) in its records and must 

provide the disclosure upon request to 

the Commission and the sponsor’s 

appropriate Federal banking agency, if 

any, until three years after no ABS 

interests are outstanding (§ l.15(d)). 

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77704 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

380The allocation percentages among the agencies 

have been adjusted based on the agencies’ latest 

assessment of more recent data, including the 

securitization activity reported by FDIC-insured 

depository institutions in the June 30, 2014 

Consolidated Reports of Condition. 

381Based on ABS issuance data from AssetBacked Alert on the initial terms of offerings, 

supplemented with information from Commercial 

Mortgage Alert. This estimate includes registered 

offerings, offerings made under Securities Act Rule 

144A, and traditional private placements. This 

estimate is for offerings that are not exempted under 

§§ _.19(a)–(f) and _.20 of the rule. 

382Estimate of 1,275 offerings per year minus the 

estimate of the number of offerings qualifying for 

an exemption under §§ __.13, __.15, and 19(g) (220 

total). 

383For purposes of this calculation, the 

horizontal, vertical, and combined horizontal and 

vertical risk retention methods under the standard 

risk retention option are each counted as a separate 

option under subpart B of the rule. 

4. Estimated Paperwork Burden 

Estimated Burden per Response: 

§ l.4—Standard risk retention: 

horizontal interests: recordkeeping—0.5 

hours, disclosures—5.5 hours; vertical 

interests: recordkeeping—0.5 hours, 

disclosures—2.0 hours; combined 

horizontal and vertical interests: 

recordkeeping—0.5 hours, disclosures— 

7.5 hours. 

§ l.5—Revolving master trusts: 

recordkeeping—0.5 hours; disclosures— 

7.0 hours. 

§ l.6—Eligible BCP conduits: 

recordkeeping—20.0 hours; 

disclosures—3.0 hours. 

§ l.7—Commercial mortgage-backed 

securities: recordkeeping—30.0 hours; 

disclosures—20.75 hours. 

§ l.8—Federal National Mortgage 

Association and Federal Home Loan 

Mortgage Corporation ABS: 

disclosures—1.5 hours. 

§ l.9—Open market CLOs: 

disclosures—20.25 hours. 

§ l.10—Qualified tender option 

bonds: disclosures—6.0 hours. 

§ l.11—Allocation of risk retention 

to an originator: recordkeeping 20.0 

hours; disclosures 2.5 hours. 

§§ l.13 and l.19(g)—Exemption for 

qualified residential mortgages and 

qualifying 3-to-4 unit residential 

mortgage loans: recordkeeping—40.0 

hours; disclosures 1.25 hours. 

§ l.15—Exemption for qualifying 

commercial loans, commercial real 

estate loans, and automobile loans: 

disclosure—20.0 hours; recordkeeping— 

0.5 hour. 

§ l.16—Underwriting standards for 

qualifying commercial loans: 

recordkeeping—40.5 hours; 

disclosures—1.25 hours. 

§ __.17— Underwriting standards for 

qualifying CRE loans: recordkeeping— 

40.5 hours; disclosures—1.25 hours. 

§ __.18—Underwriting standards for 

qualifying automobile loans: 

recordkeeping—40.5 hours; 

disclosures—1.25 hours. 

FDIC 

Estimated Number of Respondents: 32 

sponsors; 153 annual offerings per year. 

Total Estimated Annual Burden: 

3,235 hours. 

OCC 

Estimated Number of Respondents: 35 

sponsors; 166 annual offerings per year. 

Total Estimated Annual Burden: 

3,444 hours. 

Board 

Estimated Number of Respondents: 22 

sponsors; 102 annual offerings per year. 

Total Estimated Annual Burden: 

2,114 hours. 

Commission 

Estimated Number of Respondents: 

181 sponsors; 854 annual offerings per 

year. 

Total Estimated Annual Burden: 

17,768 hours. 

Commission’s explanation of the 

calculation: 

To determine the total paperwork 

burden for the requirements contained 

in this rule the agencies first estimated 

the universe of sponsors that would be 

required to comply with the disclosure 

and recordkeeping requirements. The 

agencies estimate that approximately 

270 unique sponsors conduct ABS 

offerings each year. This estimate was 

based on the average number of ABS 

offerings from 2004 through 2013 

reported by the ABS database AssetBacked Alert for all non-CMBS 

transactions and by Commercial 

Mortgage Alert for all CMBS 

transactions. Of the 270 sponsors, the 

agencies have assigned 8 percent of 

these sponsors to the Board, 12 percent 

to the FDIC, 13 percent to the OCC, and 

67 percent to the Commission.380

Next, the agencies estimated the 

burden per response that is associated 

with each disclosure and recordkeeping 

requirement, and then estimated how 

frequently the entities would make the 

required disclosure by estimating the 

proportionate amount of offerings per 

year for each agency. In making this 

determination, the estimate was based 

on the average number of ABS offerings 

from 2004 through 2013 and, therefore, 

the agencies estimate the total number 

of annual offerings per year to be 

1,275.381 The agencies also made the 

following additional estimates: 

• 12 offerings per year will be subject 

to disclosure and recordkeeping 

requirements under § __.11, which are 

divided equally among the four agencies 

(i.e., 3 offerings per year per agency); 

• 100 offerings per year will be 

subject to disclosure and recordkeeping 

requirements under §§ __.13 

and __.19(g), which are divided 

proportionately among the agencies 

based on the entity percentages 

described above (i.e., 8 offerings per 

year subject to §§ __.13 and 

__.19(g) for the Board; 12 offerings per 

year subject to §§ __.13 and __.19(g) for 

the FDIC; 13 offerings per year subject 

to §§ __.13 and __.19(g) for the OCC; and 

67 offerings per year subject to §§ __.13 

and __.19(g) for the Commission); and 

• 120 offerings per year will be 

subject to the disclosure requirements 

under § __.15, which are divided 

proportionately among the agencies 

based on the entity percentages 

described above (i.e., 10 offerings per 

year subject to § __.15 for the Board, 14 

offerings per year subject to § __.15 for 

the FDIC; 16 offerings per year subject 

to § __.15 for the OCC, and 80 offerings 

per year subject to § __.15 for the 

Commission. Of these 120 offerings per 

year, 40 offerings per year will be 

subject to disclosure and recordkeeping 

requirements under §§ __.16, __.17, and 

__.18, respectively, which are divided 

proportionately among the agencies 

based on the entity percentages 

described above (i.e., 3 offerings per 

year subject to each section for the 

Board, 5 offerings per year subject to 

each section for the FDIC; 5 offerings 

per year subject to each section for the 

OCC, and 27 offerings per year subject 

to each section for the Commission). 

To obtain the estimated number of 

responses (equal to the number of 

offerings) for each option in subpart B 

of the rule, the agencies multiplied the 

number of offerings estimated to be 

subject to the base risk retention 

requirements (i.e., 1,055) 382 by the 

sponsor percentages described above. 

The result was the number of base risk 

retention offerings per year per agency. 

For the Commission, this was calculated 

by multiplying 1,055 offerings per year 

by 67 percent, which equals 707 

offerings per year. This number was 

then divided by the number of base risk 

retention options under subpart B of the 

rule (i.e., nine) 383 to arrive at the 

estimate of the number of offerings per 

year per agency per base risk retention 

option. For the Commission, this was 

calculated by dividing 707 offerings per 

year by nine options, resulting in 79 

offerings per year per base risk retention 

option. 

The total estimated annual burden for 

each agency was then calculated by 

multiplying the number of offerings per 

year per section for such agency by the 

number of burden hours estimated for 

the respective section, then adding these 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77705 

384These are the disclosures required by §§ _.4 

(c)(1)(i) and (iii), and (c)(2)(i) (as applicable to 

horizontal interests, vertical interests, or any 

combination of horizontal and vertical interests); 

§§ _.5(k)(1)(i), (iii) and (iv) ; _.6(d); _.7(b)(7)(i) 

through (viii); _.8(c); _.9(d); 10(e); _.11(a)(2); 

_.13(b)(4)(iii); _.15(a)(4) and (b)(3); _.16(a)(8)(iii); 

_.17(a)(10)(iii); _.18(a)(8)(iii); and __.19(g)(2). 

385These are the disclosures required by §§ _.4 

(c)(1)(ii) and (c)(2)(ii) (as applicable to horizontal 

interests, vertical interests, or any combination of 

horizontal and vertical interests); §§ _.5(k)(1)(ii); 

_.6(f)(2)(ii); _.7(c)(2)(B); _.9(d)(1); _.11(b)(2)(B); 

_13(c)(3); _.16(b)(3); _17(b)(3); _.18(b)(3); and 

__.19(g)(3). 

386See 15 U.S.C. 78o–11(b), (c)(1)(A) and 

(c)(1)(B). 

387 15 U.S.C. 78w(a). 

388 17 U.S.C. 78c(f). 

389While most securitized assets are loans or 

other extensions of credit, other assets are routinely 

securitized. This discussion focuses on loans 

because they are the most commonly securitized 

assets and their impact is more widespread. The 

Commission believes that the impact on other kinds 

of receivables should be similar. 

390See, e.g., Board of Governors of the Federal 

Reserve System, ‘‘Report to the Congress on Risk 

Retention’’ (October 2010) and Financial Stability 

Oversight Committee, ‘‘Macroeconomic Effects of 

Risk Retention Requirements’’ (January 2011). 

391Purnanandam, ‘‘Originate-to-Distribute Model 

and the Sub-Prime Mortgage Crisis’’, 24(6) Rev. Fin. 

Stud. 1881–1915 (2011). 

subtotals together. For example, under 

§ __.10, the Commission multiplied the 

estimated number of offerings per year 

for § __.10 (i.e., 79 offerings per year) by 

the estimated annual frequency of the 

response for § __.10 of one response, 

and then by the disclosure burden hour 

estimate for § __.10 of 6.0 hours. Thus, 

the estimated annual burden hours for 

respondents to which the Commission 

accounts for the burden hours under 

§ __.10 is 474 hours (79 × 1 × 6.0 hours 

= 474 hours). 

For disclosures made at the time of 

the securitization transaction,384 the 

Commission allocates 25 percent of 

these hours (1,773 hours) to internal 

burden for all sponsors. For the 

remaining 75 percent of these hours, 

(5,319 hours), the Commission uses an 

estimate of $400 per hour for external 

costs for retaining outside professionals 

totaling $2,127,750. For disclosures 

made after the time of sale in a 

securitization transaction,385 the 

Commission allocated 75 percent of the 

total estimated burden hours (1,565 

hours) to internal burden for all 

sponsors. For the remaining 25 percent 

of these hours (522 hours), the 

Commission uses an estimate of $400 

per hour for external costs for retaining 

outside professionals totaling $208,650. 

FHFA: The rule does not contain any 

FHFA information collection 

requirement that requires the approval 

of OMB under the Paperwork Reduction 

Act. 

HUD: The rule does not contain any 

HUD information collection 

requirement that requires the approval 

of OMB under the Paperwork Reduction 

Act. 

C. Commission Economic Analysis 

1. Introduction 

Pursuant to Section 15G (Section 15G) 

of the Securities Exchange Act of 1934 

(Exchange Act), as added by Section 

941(b) of the Dodd-Frank Act, the 

agencies are jointly prescribing 

regulations that (i) require a sponsor to 

retain not less than 5 percent of the 

credit risk of any asset that the sponsor, 

through the issuance of an asset-backed 

security, transfers, sells, or conveys to a 

third party, and (ii) prohibit a sponsor 

from directly or indirectly hedging or 

otherwise transferring the credit risk 

that the sponsor is required to retain 

under Section 15G and the agencies’ 

implementing rules.386 Section 15G also 

exempts certain types of securitization 

transactions from these risk retention 

requirements and authorizes the 

agencies to exempt or establish a lower 

risk retention requirement for other 

types of securitization transactions. 

The Commission is sensitive to the 

economic impacts, including the costs 

and benefits, of its rules. The discussion 

below addresses the economic effects of 

the final rule, including the likely 

benefits and costs of the rule as well as 

their effects on efficiency, competition 

and capital formation. Some of the 

economic effects stem from the statutory 

mandate of Section 15G, whereas others 

are affected by the discretion the 

agencies have exercised in 

implementing this mandate. These two 

types of impacts may not be entirely 

separable to the extent that the agencies’ 

discretion is exercised to realize the 

goals of Section 15G. 

Section 23(a)(2) of the Exchange Act 

requires the Commission, when making 

rules under the Exchange Act, to 

consider the impact on competition that 

the rules would have, and prohibits the 

Commission from adopting any rule that 

would impose a burden on competition 

not necessary or appropriate in 

furtherance of the Exchange Act.387

Further, Section 3(f) of the Exchange 

Act requires the Commission,388 when 

engaging in rulemaking where it is 

required to consider or determine 

whether an action is necessary or 

appropriate in the public interest, to 

consider, in addition to the protection of 

investors, whether the action will 

promote efficiency, competition and 

capital formation. 

While we make every reasonable 

attempt to quantify the economic impact 

of the rule that we are adopting, we are 

unable to do so for several components 

of the new rule due to the lack of 

available data. We also recognize that 

several components of the new rule are 

designed to change existing market 

practices and as a result, existing data 

may not provide a basis to fully assess 

the rule’s economic impact. 

Specifically, the rule’s effects will 

depend on how sponsors, issuers, 

investors, and other parties to the 

transactions (e.g., originators, trustees, 

underwriters, and other parties that 

facilitate transactions between 

borrowers, issuers and investors) will 

adjust on a long-term basis to this new 

rule and the resulting evolving 

conditions. The ways in which these 

parties could adjust, and the associated 

effects, are complex and interrelated. As 

a result, we are unable to predict them 

with specificity nor are we able to 

quantify them at this time. 

2. Broad Economic Considerations 

a. Policy Goals of the Risk Retention 

Requirement 

Asset-backed securitizations play an 

important role in the creation of credit 

by increasing the amount of capital 

available for the origination of loans and 

other receivables 389 through the transfer 

of those assets—in exchange for new 

capital—to other market participants. 

The intended benefits of the 

securitization process include reduced 

cost of credit and expanded access to 

credit for borrowers, ability to match 

risk profiles of securities to investors’ 

specific demands, and increased 

secondary market liquidity for loans and 

other receivables.390

Asset-backed securitizations can also 

generate significant risks to the 

economy. Indeed, many observers claim 

that the ‘‘originate-to-distribute’’ model 

underlying securitization for some asset 

classes contributed to the onset of the 

financial crisis.391 The informational 

asymmetries in securitization markets 

generated between the borrower and the 

investors in the asset-backed securities, 

who are the ultimate providers of credit, 

give rise to the moral hazard problem of 

loan originators or securitization 

sponsors incurring risks in the 

underwriting or securitization process 

for which they did not bear the 

consequence. Loan originators who 

establish and enforce the underwriting 

standards are best able to understand 

the potential consequences of their 

credit decisions. If loan originators hold 

the loans they originated, then they are 

more likely to exercise appropriate care 

in evaluating the credit quality of the 

loan, including the borrower’s ability to 

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77706 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

392 Dell’Ariccia, Deniz and Laeven, ‘‘Credit 

Booms and Lending Standards: Evidence from the 

Subprime Mortgage Market’’, Journal of Money, 

Credit and Banking, vol. 44, no. 2–3, pp. 367–384, 

March-April 2012; Mian and Sufi, ‘‘The 

Consequences of Mortgage Credit Expansion: 

Evidence from the 2007 Mortgage Default Crisis’’, 

Quarterly Journal of Economics 2009, vol. 124, no. 

4, pp. 1449–1496. 

393Furfine, Complexity and Loan Performance: 

Evidence from the Securitization of Commercial 

Mortgages, Review of Corporate Finance Studies, v. 

2, no. 2, March 2014, pp. 154–187; Ghent, Torous, 

and Valkanov, Complexity in Structured Finance: 

Financial Wizardry or Smoke and Mirrors? (2013, 

Working Paper, available at http://papers.ssrn.com/ 

sol3/papers.cfm?abstract_id=2325835). 

394See, e.g., Benmelech and Dlugosz, 2010, The 

Credit Rating Crisis, Chapter 3 of NBER 

Macroeconomics Annual 2009, Vol. 24, pp. 161– 

207, Acemoglu, Rogoff and Woodford, eds., 

University of Chicago Press; Bolton, Freixas and 

Shapiro, ‘‘The Credit Ratings Game’’, Journal of 

Finance, vol. 67, no. 1, pp. 85–111, February 2012; 

Griffin and Tang, ‘‘Did Subjectivity Play a Role in 

CDO Credit Ratings?’’, Journal of Finance, vol. 67, 

no. 4, pp. 1293–1328, August 2012. 

395Likewise, if the originator were required to 

share in the pool’s risk, or were required to buy 

back loans that did not meet pre-specified 

underwriting standards, the originator could be 

incentivized to exercise more care in making loans. 

However, because such arrangements are unfunded, 

they may not effectively mitigate the moral hazard 

problem described above, and investors may not 

benefit from the credit protection because the 

obligor under the unfunded obligations may not be 

able to fulfill those obligations when they come 

due. Consequently, the agencies have not 

recognized these arrangements as acceptable forms 

of risk retention. 

396See Section 5.a of this Economic Analysis for 

further detailed discussion of the economic effects 

associated with the different options of standard 

risk retention. Section 5.b discusses additional 

forms of risk retention available to sponsors of 

certain securitization structures, including 

revolving pool securitizations, tender option bonds, 

and asset-backed commercial paper conduits. 

repay. However, if the originator can 

sell the loan, the originator has less 

incentive to screen borrowers carefully. 

Likewise, sponsors have limited 

incentives to accurately assess the 

actual risks of the loans they purchase 

from originators because the 

consequences of their decisions are 

passed on to the investors in the assetbacked securities. Further, because both 

loan originators and asset-backed 

securities sponsors are compensated on 

the basis of volume rather than quality 

of underwriting, there are economic 

incentives to originate and securitize as 

many loans as possible. Consequently, 

default risk is less important to the 

market participants originating and 

securitizing loans. 

In addition to this fundamental moral 

hazard problem, other features of the 

securitization market contribute to the 

risks posed by these financing 

transactions. The ultimate investors in 

the securitized assets have access to less 

information about the credit quality and 

other relevant characteristics of the 

borrowers than either the originator or 

sponsor, and may not have effective 

recourse when the assets do not perform 

as expected. Moreover, in the early 

2000s, demand from securitization 

sponsors for additional assets to 

securitize encouraged originators to 

focus capital towards higher risk assets, 

including the sub-prime residential 

mortgage market, which serves the 

mortgage needs of individuals who are 

less creditworthy than typical home 

buyers.392 The effects of these 

incentives were compounded by the 

entry of new market originators and 

sponsors with varying amounts of 

experience and capacity to effectively 

evaluate credit risk. 

The moral hazard problem may be 

especially severe when there are 

inadequate processes in place to elicit 

sufficient transparency about the assets 

or securitization structure to overcome 

informational differences. In these 

cases, the securitization process can 

misalign incentives so that the welfare 

of some participants is maximized at the 

expense of other participants. Many of 

these risks are not adequately disclosed 

to investors in securitizations, an issue 

compounded as sponsors introduce 

increasingly complex structures.393 The 

financial crisis also revealed that credit 

rating agencies had generally not 

appropriately evaluated the credit risk 

of certain asset-backed securities. In 

particular, credit rating agencies 

assigned high ratings on the senior 

classes of RMBS or CDOs backed by 

RMBS that were subsequently not 

supported by the actual performance of 

those securities.394

Requiring the retention of credit risk 

by sponsors of asset-backed securities is 

intended to address these misaligned 

incentives by requiring originators and 

sponsors of asset-backed securities to 

internalize some of the same risks faced 

by the investors in those asset-backed 

securities. For example, risk-averse 

sponsors will be reluctant to absorb the 

uncertain payouts associated with highrisk loans. In order to limit their 

exposure to loans with high default risk, 

these sponsors will be incentivized to 

scrutinize loan originators’ loans and 

underwriting procedures more 

carefully.395 Under the risk retention 

requirements, securitized loans should 

therefore be less subject to the lax 

lending and credit enhancement 

standards that imposed large losses on 

asset-backed securities (in particular, 

RMBS) investors during the financial 

crisis. By requiring sponsors to retain 

credit exposure to the securitized assets, 

risk retention is intended to ensure that 

sponsors have ‘‘skin in the game’’ and 

thus are economically motivated to be 

more judicious in their selection of 

loans being securitized, thereby helping 

to produce asset-backed securities 

collateralized by loans with higher 

underwriting standards. More generally, 

when a sponsor or originator with better 

information about the securitized loans 

is required to hold some of the same 

risks being transferred to asset-backed 

securities investors, those investors 

should be subject to lower risks. When 

a sponsor shares the risk of the 

securitized loans with asset-backed 

securities investors, the sponsor is more 

likely to be aware of the exact nature 

and scope of the potential risks, and 

therefore to be in a position to provide 

those investors with more accurately 

represented risks. 

b. Potential Economic Effects of 

Requiring Risk Retention 

Mandatory risk retention reflects a 

belief that sponsors of asset-backed 

securities have a more accurate 

assessment of the underlying assets’ risk 

properties than can be attained by their 

ultimate investors. This information 

asymmetry can have adverse market 

effects to the extent that sponsors seek 

to profit from their differential 

information. Some observers contend 

that during the financial crisis, sponsors 

sold assets that they knew to be very 

risky, without conveying that 

information to ABS investors. One way 

to offset information asymmetries is to 

require that sponsors retain some ‘‘skin 

in the game,’’ through which loan 

performance can affect sponsors’ profits 

as much as—or more than—those of the 

ABS investors. 

The standard forms of risk retention 

in the final rule include a vertical 

option, a horizontal option, or a 

combination of a vertical option and a 

horizontal option. Sponsors’ choice of a 

particular risk retention option will 

depend on tradeoffs among direct costs, 

the sponsors’ required returns on 

capital, and investors’ uncertainty about 

the quality of the underlying loan pool. 

In turn, the overall economic impact of 

requiring risk retention will depend on 

the form in which it is held by 

sponsors.396 A sponsor relying 

exclusively on the vertical risk retention 

option will hold 5 percent of every 

tranche, from the senior tranche to the 

residual interest, and shares the same 

credit risk as investors in every tranche. 

The retention of a 5 percent vertical 

slice of ABS securities ties the sponsor’s 

profits to the underlying assets’ default 

rates. For any given securitization of 

assets characterized by a fixed set of 

underlying loan interest rates, the ABS 

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397 If sponsors are risk-averse, vertical risk 

retention might also discourage them from 

securitizing higher-risk loans. See below. 

398Sponsors also share credit risk in a horizontal 

manner through overcollateralization, subordinated 

management fees, or other arrangements. Many of 

such arrangements are unfunded, however, and 

consequently, the agencies have not recognized 

them as acceptable forms of risk retention. 

399Two papers provide evidence that risk 

retention by a lead underwriter affects the risks 

perceived by other, less informed, members of the 

syndicate. Victoria Ivashina, 2009, Asymmetric 

information effects on loan spreads, Journal of 

Financial Economics, vol. 92, no. 2, pp. 300–319; 

Amir Sufi, 2007, Information Asymmetry and 

Financing Arrangements: Evidence from Syndicated 

Loans, The Journal of Finance, vol. 62, no. 2, pp. 

629–668. 

400See Piskorski, Seru, and Witkin, 2013, Asset 

Quality Misrepresentation by Financial 

Intermediaries: Evidence from RMBS Market, NBER 

Working Paper No. 18843; and Griffin and 

Maturana, Who Facilitated Misreporting in 

Securitized Loans? Journal of Finance, forthcoming. 

Both papers find evidence of mortgage misreporting 

in non-agency RMBS by both originators and 

underwriters; this misreporting was not priced by 

investors at issuance and yet strongly predicted 

future RMBS losses. 

401See appendix A of the 2013 Reproposal, 78 FR 

at 58019. 

402This assessment assumes that the underlying 

loan pool characteristics are accurately disclosed 

and with sufficient detail for investors to properly 

assess the underlying risk. Such a scenario would 

be reflective of the risk retention requirements 

solving the moral hazard problem that might 

otherwise result in the obfuscation of intrinsic risks 

to the ultimate investors. These results also rely on 

Continued 

sponsor earns less if the loans default at 

a higher-than-expected rate. This gives 

the sponsor an enhanced incentive to be 

sure that the loan interest rates 

accurately reflect the loans’ expected 

default rates. ABS investors can 

therefore be more confident that their 

ABS interests will perform as promised 

when the ABS sponsor retains a vertical 

slide of risk. In other words, the 

information asymmetry between 

sponsor and investors is ameliorated by 

the risk retention requirement, which 

leads the sponsor to make sure that loan 

interest rates reflect their expected 

default probabilities.397

An eligible horizontal residual 

interest, or EHRI, is the most 

subordinated tranche(s) of a 

securitization, which exposes the owner 

to a disproportionate share of losses 

from the securitized loans.398 A sponsor 

holding an EHRI will suffer greater 

default losses from a given percentage 

investment than from an equal percent 

investment in a vertical slice, making it 

a more expensive form of risk retention. 

Horizontal risk retention is nonetheless 

the norm in some market segments 

because ABS investors’ beliefs about the 

quality of loans in the securitization are 

influenced by the ABS sponsor’s 

exposure to credit losses. Investors can 

therefore be more confident that the 

underlying assets are high-quality when 

the sponsor retains a larger subordinate 

exposure.399 In other words, the sponsor 

‘‘signals’’ to ABS investors its belief that 

defaults will be low by taking a larger, 

but junior, claim on the portfolio’s cash 

flows. 

In general, although ABS investors 

may find it difficult to assess the 

securitized assets’ risks on their own, 

sponsors can signal the quality of the 

underlying assets by purchasing a first 

loss position at a price that reflects its 

fundamental value only if loan defaults 

turn out to be low. Relatively larger 

residual interest tranches may be 

required when the assets being 

securitized suffer from more acute 

information asymmetries or higher 

uncertainty about their true default risk. 

Horizontal risk retention forces the 

sponsor to accept more default losses 

than an equal investment in vertical 

retention. But the increased risk 

exposure permits a horizontal risk 

position to signal the pool’s asset 

quality and, in turn, permits the 

securitization transaction to provide an 

economically efficient source of funding 

for the sponsor. 

We anticipate that the ultimate market 

impact of the credit risk retention 

requirements will depend in part on the 

individual sponsor’s level of risk 

aversion and required return on 

invested capital. Some sponsors may 

find that holding relatively more risky 

assets would adversely impact their 

financial position. The risk retention 

requirement will incentivize these 

sponsors to securitize assets with lower 

default risk. Securitizing assets with 

lower anticipated losses would lessen 

the resulting credit risk exposure for 

asset-backed securities investors. 

Higher-quality loan pools with more 

homogenous risk characteristics would 

give sponsors more incentive to provide 

accurate information about the pool’s 

risk characteristics. With less 

uncertainty about the quality of 

securitized assets, investors should be 

willing to pay more or demand a lower 

rate of return for bearing the credit risk, 

which in turn could reduce borrowing 

costs for underlying borrowers. Thus, 

the net effect of reducing the moral 

hazard in a securitization transaction 

may be to reduce the cost of loans for 

more creditworthy borrowers. 

The risk retention requirements, 

however, will not necessarily increase 

the quality of all loan pools offered for 

securitization. Asset-backed securities 

investors may fund riskier pools 

provided that they are properly 

compensated (in the form of higher 

promised tranche returns). The market’s 

appetite for risk could lead sponsors to 

package high-risk loans that can 

generate high expected returns. 

Sponsors with higher cost of capital 

may also need to earn higher return on 

their retained tranches, which requires 

that the underlying loans have higher 

interest rates, which tend to be riskier 

loans. Less creditworthy borrowers 

could be required to pay higher loan 

interest rates than in the past to the 

extent that the risk retention requires 

sponsors to more accurately account for 

the potential losses associated with 

these riskier loans. 

The effect of risk retention on 

borrowing costs will also depend on 

how securitization investors react to the 

requirements of the final rule. If risk 

retention increases investor confidence 

that incentives are properly aligned in 

the securitization market, this should 

increase their likelihood of participating 

in the market, making more capital 

available and increasing competition for 

issuances of asset-backed securities. As 

a result, the higher prices paid for 

issuances will mitigate the costs 

imposed on sponsors to retain credit 

risk. In the past, asset-backed security 

investors did not always have accurate, 

timely or accessible information about 

securitized asset quality and in certain 

instances were misled about the quality 

of those assets.400 If risk retention 

results in the transmission of more 

accurate information about loan quality 

to investors (e.g., through pricing of 

EHRIs, the level of horizontal risk 

retention, or fair value disclosures) and 

allows asset-backed security investors to 

distinguish lower quality loans from 

higher quality loans, then risk should be 

more efficiently priced in asset-backed 

security markets. 

Quantifying the potential impact of 

the credit risk retention on borrowing 

rates of the loans underlying the assetbacked securities will depend on the 

tradeoff between the costs associated 

with financing the additional capital 

required by sponsors to fund the 

retained risk and its effect on the pricing 

of the asset-backed securities. For 

example, two studies by the Federal 

Reserve Bank of New York estimate the 

potential impact of risk retention on the 

cost of residential mortgage borrowing 

by estimating the change in interest 

rates on securitized loans required to 

compensate for the sponsors’ risk 

retention requirements.401 The analyses 

suggest that incremental increases to 

sponsors’ rate of return requirements for 

securitizations of residential mortgage 

loans with higher levels of risk retention 

are relatively modest, approximately 0– 

30 basis points.402 These estimates 

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77708 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

specific assumptions about the return on equity 

demanded by different types of sponsors. 

403Asset-Backed Securities Disclosure and 

Registration; Final Rule, 79 FR 57184 (Sept. 24, 

2014). 

404See, Adam B. Ashcraft & Til Schuermann, 

Understanding the Securitization of Subprime 

Mortgage Credit (Staff Report, Fed. Reserve Bank of 

N.Y., Working Paper No. 318, 2008) (identifying at 

least seven different frictions in the residential 

mortgage securitization chain that can cause agency 

and adverse selection problems in a securitization 

transaction and explaining that given that there are 

many different parties in a securitization, each with 

differing economic interests and incentives, the 

overarching friction that creates all other problems 

at every step in the securitization process is 

asymmetric information). 

405For example, the rules require a minimum 

three-business day waiting period before the first 

sale of securities in the offering to provide investors 

with time to conduct analysis of the offering. 

Additionally, as a shelf eligibility requirement, the 

chief executive officer of the depositor must 

provide a certification at the time of each takedown 

about the disclosure contained in the prospectus 

and the structure of the securitization. As another 

shelf eligibility requirement, the underlying 

transaction agreements must include provisions 

that require a review of pool assets upon the 

occurrence of a two-prong trigger based first upon 

the occurrence of a specified percentage of 

delinquencies in the pool and, if the delinquency 

trigger is met, upon the direction of investors by 

vote. 

suggest that the underlying loans would 

need to have an interest rate 

approximately 0.25 percent higher. As 

discussed above, however, risk retention 

will likely influence the composition of 

loan pools. Although the New York Fed 

studies do not incorporate this effect, 

perceptibly higher quality loan pools 

will require less costly financing or 

lower yielding asset-backed securities. 

Thus, the underlying loan interests rates 

may rise (due to more risk being borne 

by the sponsor or high opportunity cost 

of capital for retained capital) or fall 

(because the pool is higher quality). By 

contrast, to the extent that riskier loans 

continue to be securitized even with the 

requirement to retain risk, the 

underlying loan interest rates are likely 

to rise. Developments that make riskier 

loans more expensive, at a cost 

commensurate to their intrinsic risk, 

will improve the efficiency of capital 

markets. 

Requiring sponsors to retain risk in 

the portfolios of assets they securitize 

could impose significant costs on 

financial markets. Currently, sponsors 

who do not retain 5 percent of the 

securitization deploy those funds to 

other uses, such as repaying lines of 

credit used to fund securitized loans, 

holding other assets or making new 

loans, which may earn a different 

interest rate and have a different risk 

exposure. Tying up capital as a result of 

the imposition of risk retention 

requirements could pose an opportunity 

cost to sponsors who do not currently 

retain risk and could limit the volume 

of securitizations that they can sponsor. 

These costs would likely be passed on 

to borrowers, either in terms of 

increased borrowing costs or loss of 

access to credit. In particular, borrowers 

whose loans do not qualify for an 

exemption from risk retention (e.g., 

those loans that do not meet the 

underwriting criteria for being deemed 

a qualified asset) could face increased 

borrowing costs, or be priced out of the 

loan market, thus restricting their access 

to credit. As a result, there could be a 

negative impact on capital formation by 

loan originators to the extent that it 

impedes the flow of capital from ABS 

investors, particularly if credit is denied 

to creditworthy borrowers. More 

generally, if the costs are deemed by 

sponsors to be significant enough that 

they would no longer be able to earn a 

sufficiently high expected return by 

sponsoring securitizations, this form of 

supplying capital to lenders would 

decline. 

The net impact of requiring credit risk 

retention on capital markets and the 

costs of credit will ultimately depend on 

the availability of alternative 

arrangements for transferring capital to 

lenders and the costs of transferring 

capital to sponsors. For example, the 

impact of the potential decrease in the 

use of securitizations in the residential 

mortgage market would depend on the 

cost and availability to lenders of 

alternative mortgage funding sources, 

and the willingness of these sponsors to 

retain the full burden of the risks 

associated with credit risk retention and 

securitization. To the extent there are 

funding alternatives, and these funding 

alternatives can provide funding to 

lenders on terms similar to those 

available as a result of sponsors’ use of 

the securitization markets, the impact of 

the substitution of these alternatives for 

securitizations would likely be minimal. 

Similarly, to the extent that sponsors 

can find sources of capital at costs 

similar to the returns paid on retained 

interests in securitizations, the impact 

of risk retention requirements would 

likely be minimal. Currently, there is no 

relevant and available empirical 

evidence to reliably estimate the cost 

and consequence of either such 

outcome. 

c. The Impact of Asset-Level Disclosure 

and Other Requirements of Revised 

Regulation AB 

On August 27, 2014, the Commission 

adopted significant revisions to 

Regulation AB and other rules 

governing the offering process, 

disclosure, and reporting for assetbacked securities.403 Among other 

things, these revisions require that 

prospectuses for registered offerings of 

asset-backed securities backed by 

residential and commercial mortgages, 

auto loans and leases, or debt securities 

(including resecuritizations), and 

ongoing reports with respect to such 

securities contain specified asset-level 

information about each of the assets in 

the pool. 

Increased transparency for these 

securitizations through the introduction 

of enhanced disclosure requirements 

and enhanced transactional safeguards 

for ABS shelf offerings should help to 

address the moral hazard problem that 

contributed to the poor performance of 

asset-backed securities during the 

financial crisis.404 For registered 

offerings of asset-backed securities 

subject to the new requirements, the 

revisions to Regulation AB should 

improve the amount of information 

available to investors about the quality 

of securitized assets. The availability of 

detailed loan-level data in a machine 

readable format will provide investors 

with information needed to perform 

their own assessments of the associated 

risks and lessen the risk of overreliance 

on third-party evaluations such as credit 

ratings. 

The new requirements for shelf 

offerings of asset-backed securities 

include additional safeguards to 

improve the offering process, encourage 

greater oversight of the structuring and 

disclosure of the transaction and 

provide additional recourse for 

resolving potential problems by 

providing stronger mechanisms to 

enforce compliance with the sponsors’ 

representations and warranties.405

Combined, these rules should improve 

investors’ willingness to invest in assetbacked securities and to help the 

recovery in the asset-backed securities 

market with attendant positive effects 

on informational and allocative 

efficiency, competition, and the level of 

capital formation. 

The amendments to Regulation AB 

should significantly reduce the moral 

hazard problem in the publicly offered 

asset-backed securities market and offer 

an important complement to, but not a 

substitute for, the risk retention 

requirement. In particular, there are 

several ways in which the risk retention 

requirement will further address the 

moral hazard problem. As an initial 

matter, the scope of the risk retention 

requirement is significantly broader 

than the asset-level disclosure 

requirements of the revised Regulation 

AB, which does not apply across all 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77709 

406Using the Asset-Backed Alert and Commercial 

Mortgage Alert databases, DERA staff calculated 

that, during the 2009–2013 period, only 12.8 

percent of non-U.S. agency asset-backed securities 

deals (excluding ABCP and TOB), or 24.5 percent 

by dollar volume, will be subject to asset-level 

disclosure requirements under revised Regulation 

AB. 

407The Commission continues to consider 

whether asset-level disclosure would be useful to 

investors across other asset classes as well as in 

private offerings. See revised Regulation AB 

Adopting Release, 79 FR at 57191 and 57197. 

408AB Alert. 

409For example, in 2013, the Commission 

charged Bank of America entities for failing to 

disclose key risks and misrepresenting facts about 

the mortgages underlying an RMBS securitization 

that the firms underwrote, sponsored, and issued in 

2008 (see Commission press release of August 6, 

2013, available at http://www.sec.gov/News/

PressRelease/Detail/PressRelease/1370539751924). 

Similarly, in 2014, the Commission charged Morgan 

Stanley entities, with misleading investors and 

misrepresenting the current or historical 

delinquency status of mortgage loans underlying 

two subprime RMBS securitizations that the firms 

underwrote, sponsored, and issued in 2007 (see 

Commission press release of July 24, 2014, available 

at http://www.sec.gov/News/PressRelease/Detail/

PressRelease/1370542355594). See also footnote 

400 for academic papers that find evidence of 

mortgage misreporting in non-agency MBS by both 

originators and underwriters. 

410The groups are: (1) Those where the sponsor 

is subject to risk retention and for which asset-level 

disclosure is required (e.g., registered RMBS of 

loans that are not qualified residential mortgages 

(QRM), CMBS of loans that are not qualifying 

commercial real estate (QCRE) loans, and registered 

asset-backed securities backed by non-qualifying 

automobile loans); (2) those for which only assetlevel disclosure is required (e.g., registered RMBS 

of QRM loans, registered CMBS of QCRE loans, and 

registered asset-backed securities backed by 

qualifying automobile loans); (3) those for which 

only risk retention is required (e.g., unregistered 

RMBS of non-QRM loans, unregistered CMBS of 

non-QCRE loans, unregistered asset-backed 

securities backed by non-qualifying automobile 

loans, and all unregistered asset-backed securities 

backed by any other assets not otherwise exempt 

from risk retention); and (4) those for which neither 

asset-level disclosure nor risk retention is required 

(e.g., unregistered non-U.S. agency RMBS backed by 

QRM loans and U.S. agency RMBS). 

asset classes or to unregistered offerings 

(e.g., private sales of securities to 

qualified institutional buyers pursuant 

to Rule 144A under the Securities 

Act).406 Hence, the impact of the assetlevel disclosure requirements under the 

revised Regulation AB may be limited 

by the extent to which market practices 

for asset classes not covered by the 

revised Regulation AB and privately 

offered asset-backed securities do not 

incorporate or develop similar 

disclosure standards and sponsors 

pursue private offerings instead of 

registered offerings.407

There is reason to believe, however, 

that the revised Regulation AB could 

have positive spillover effects into the 

private markets. With the adoption of 

standardized loan-level disclosures and 

increased investor confidence in the 

registered market, similar practices may 

develop in the private offering market, 

particularly to the extent that sponsors 

and investors participate in both 

markets. At present, 37 percent of the 

dollar volume of ABS transactions had 

sponsors who issued both registered and 

unregistered offerings.408 With respect 

to asset classes and originators for 

which these sponsors have conducted 

registered offerings, the sponsors would 

have relatively low incremental costs to 

apply existing infrastructure developed 

to comply with the new disclosure 

requirements of Regulation AB in any 

private market offerings that they may 

conduct for those asset classes and those 

originators. 

These benefits will be further 

supplemented with the overlay of the 

risk retention requirements. Risk 

retention forces sponsors to internalize 

the costs of inappropriate behaviors 

such as the obfuscation of the intrinsic 

risks of the securitization and failure to 

do appropriate diligence. This 

internalization will occur 

contemporaneously with the losses 

incurred by investors. In contrast, even 

with the additional disclosures and 

transactional safeguards required under 

the revised Regulation AB, sponsors 

may misrepresent the characteristics of 

the securitized assets and, in such cases, 

investor recourse to the sponsor can 

only occur after the fact of the losses, 

such as through legal remedy. Analysis 

from recent studies and details of 

Commission enforcement cases show 

that RMBS sponsors misrepresented the 

quality of the securitized asset pool in 

RMBS prospectuses leading up to the 

financial crisis.409 The additional 

disclosure requirements and 

transactional safeguards mandated by 

Regulation AB may not cause sponsors 

of registered securitizations to 

internalize the costs of such practices as 

fully as if the sponsor retained a portion 

of the credit risk. Thus, the risk 

retention requirements for certain 

registered offerings should be beneficial 

even with the existence of Regulation 

AB’s additional disclosure and 

transactional requirements because 

those disclosure requirements do not 

create the same alignment of interests of 

sponsors and investors that would serve 

to reduce the prevalence of moral 

hazard and improve underwriting in the 

publicly offered securitization market. 

The disclosure practices that evolve 

in connection with revised Regulation 

AB will work together with the credit 

risk retention requirement to address 

the moral hazard problem in the 

publicly offered asset-backed securities 

market, encourage better underwriting, 

and better inform investors on the 

nature of the retained risk. In particular, 

revised Regulation AB may influence a 

sponsor’s choice between the vertical 

and (potentially more costly) horizontal 

forms of risk retention. The revisions to 

Regulation AB require public disclosure 

of asset-level information for registered 

offerings, and because investors in these 

transactions will be able to better assess 

the characteristics of the securitized 

assets, they may be willing to invest in 

more risky tranches of securitizations, 

which could increase the ability of the 

sponsor to rely on a larger vertical 

interest. As a result, more sponsors 

might choose to use the less costly 

vertical risk retention option (or, if they 

use a combination of the horizontal and 

vertical forms of risk retention, they 

might choose to reduce the relative 

weight of the horizontal form and 

increase the relative weight of the 

vertical form), and if so, the 

implementation of the revisions to 

Regulation AB could reduce the costs of 

risk retention to sponsors of registered 

offerings. 

After the implementation of both 

revised Regulation AB and the risk 

retention rules, asset-backed securities 

offerings will be subject to varying 

levels of compliance with asset-level 

requirements and the risk retention 

rules, which may result in differing 

levels of incentive alignment and 

transparency. Offerings would fall into 

different groups 410 and these groups 

may have different levels of exposure to 

underwriting quality, moral hazard and 

asymmetric information problems and 

may attract different types of investors 

because different risk tolerances among 

investors will result in preferences for 

different types of asset classes and 

offering methods. Some of these offering 

groups would be subject to higher 

underwriting standards and lower risk 

of default, but could be relatively more 

exposed to the moral hazard problem 

(e.g., an incentive to misrepresent the 

characteristics of the securitized assets) 

due to the lack of risk retention and 

asset-level disclosures. Other offering 

groups may contain lower quality assets, 

but could be less exposed to the moral 

hazard problem because of the risk 

retention requirement. Such distinction 

could create different demand for each 

group commensurate with the level of 

perceived asset underwriting quality 

and moral hazard, with corresponding 

implications for risk premium and cost 

of capital. 

3. Economic Baseline 

The baseline the Commission uses to 

analyze the economic effects of the risk 

retention requirements mandated by 

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77710 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

411The impact of the recently adopted but not yet 

effective revisions to Regulation AB is discussed in 

Section 2.c of this Economic Analysis. 

412Source: SIFMA Statistics available at http://

www.sifma.org/research/statistics.aspx, accessed on 

July 11, 2014. 

413To estimate the size and composition of the 

private-label securitization market, the Commission 

uses data from the Securities Industry and Financial 

Markets Association (SIFMA) and Asset-Backed 

Alert. It is not clear how corporate debt 

repackagings are classified in these databases. In the 

following analysis, the Commission excludes all 

securities guaranteed by U.S. government agencies. 

ABCP is a short-term financing instrument and is 

frequently rolled over; thus, its issuance volume is 

not directly comparable to the issuance volume of 

other asset classes of asset-backed securities. 

Section 15G is the current set of rules, 

regulations, and market practices that 

may affect the amount of credit 

exposure retained by sponsors. To the 

extent not already encompassed by 

current market practices, the risk 

retention requirements being adopted 

are expected to have a significant 

impact on market practices of, and risks 

faced by, asset-backed securities market 

participants, including loan originators, 

sponsors and investors in asset-backed 

securities, and consumers and 

businesses that seek access to credit 

using financial products that are 

securitized. The costs and benefits of 

the risk retention requirements depend 

largely on the current market practices 

specific to each securitization asset 

class—including current risk retention 

practices—and corresponding asset 

characteristics. The magnitude of the 

potential effects of the risk retention 

requirements depend on the overall size 

of the securitization market and the 

extent to which the requirements affect 

borrower access to credit and the cost of 

capital for lenders. The discussion 

below describes the Commission’s 

understanding of the securitization 

markets that are affected by the final 

rule.411

a. Size of Securitization Markets 

The asset-backed securities market is 

important for the U.S. economy and 

comprises a large fraction of the U.S. 

debt market. During the five-year period 

from 2009 to 2013, 31.5 percent of the 

$33.2 trillion in public and private debt 

issued in the United States was in the 

form of mortgage-backed securities 

(MBS) or other asset-backed securities, 

and 3.0 percent was in the form of nonU.S. agency backed (private label) MBS 

or asset-backed securities. For 

comparison, 32.9 percent of all debt 

issued was U.S. Treasury debt, and 5.6 

percent was municipal debt at the end 

of 2013.412 Figure 1 shows the 

percentage breakdown of total nonagency issuances from 2009 to 2013 for 

various asset classes excluding short 

term asset-backed securities, such as 

asset-backed commercial paper (ABCP) 

or Tender Option Bonds (TOBs) and 

excluding collateralized loan and debt 

obligations (CLOs and CDOs).413

Consumer credit categories, including 

asset-backed securities backed by 

automobile loans and leases and credit 

card receivables, comprise 37 percent 

and 14 percent of the total annual 

issuance volume, respectively. Nonagency RMBS and CMBS comprise 4 

percent and 18 percent of the market, 

respectively, while asset-backed 

securities backed by student loans 

account for 9 percent of the market. 

Below the Commission analyzes the 

variation in issuance among these five 

largest asset classes. For several 

categories, the Commission outlines 

detailed information about issuance 

volume and the number of active 

sponsors (Tables 2 and 3). 

Prior to the financial crisis of 2008, 

the number of non-agency RMBS 

issuances was substantial. For example, 

new issuances totaled $760.3 billion in 

2005 and peaked at $801.7 billion in 

2006. Non-agency RMBS issuances fell 

dramatically in 2008, to $34.5 billion, as 

did the total number of sponsors, from 

a high of 80 in 2006 to 27 in 2008. In 

2013, there was only $25.2 billion in 

new non-agency RMBS issuances by 22 

separate sponsors. 


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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77711 

TABLE 2—ANNUAL ISSUANCE VOLUME AND NUMBER OF SPONSORS BY OFFERING TYPE FOR ASSET-BACKED SECURITIES

BACKED BY CONSUMER LOANS

Year 

Credit Card ABS Automobile ABS Student Loan ABS 

SEC 144A Private Total SEC 144A Private Total SEC 144A Private Total 

Panel A—Annual Issuance Volume by Offering Type ($ bn) 

2005 ................................................ 61.2 1.8 0.0 62.9 85.1 8.7 0.0 93.9 54.1 8.1 0.4 62.6 

2006 ................................................ 60.0 12.5 0.0 72.5 68.0 12.2 0.0 80.2 54.9 10.9 0.5 66.2 

2007 ................................................ 88.1 6.4 0.0 94.5 55.8 6.8 0.0 62.6 41.7 16.0 0.6 58.3 

2008 ................................................ 56.7 5.0 0.0 61.6 31.9 5.7 0.0 37.6 25.8 2.4 0.0 28.2 

2009 ................................................ 34.1 12.5 0.0 46.6 33.9 15.4 0.0 49.2 8.3 12.5 0.0 20.8 

2010 ................................................ 5.3 2.1 0.0 7.5 37.9 15.3 0.0 53.2 2.8 16.2 1.2 20.2 

2011 ................................................ 10.0 4.8 1.5 16.3 41.9 14.4 0.0 56.3 2.5 13.9 1.1 17.5 

2012 ................................................ 28.7 10.5 0.0 39.2 65.6 13.9 0.0 79.5 6.6 23.2 0.0 29.9 

2013 ................................................ 32.0 3.1 0.0 35.1 62.5 12.8 0.0 75.2 6.5 14.9 0.0 21.4 

Panel B—Annual Number of Sponsors by Offering Type 

2005 ................................................ 13 5 0 17 30 9 0 38 13 7 1 19 

2006 ................................................ 10 11 0 18 23 12 0 30 8 17 1 24 

2007 ................................................ 12 8 0 16 23 9 0 28 7 17 1 22 

2008 ................................................ 9 3 0 11 16 8 0 21 3 6 0 8 

2009 ................................................ 9 6 0 11 13 13 0 22 3 6 0 6 

2010 ................................................ 5 5 0 9 19 15 0 27 2 18 1 19 

2011 ................................................ 5 7 1 12 14 16 0 25 1 19 1 20 

2012 ................................................ 7 9 0 13 18 24 0 36 1 26 0 26 

2013 ................................................ 9 5 0 14 17 19 0 32 1 22 0 22 

Notes: The numbers in the table were calculated by staff from the Commission’s Division of Economic and Risk Analysis (DERA) using the

Asset-Backed Alert database. The deals are categorized by offering year, underlying asset type, and offering type (SEC registered offerings, 

Rule 144A offerings, or traditional private placements). Automobile asset-backed securities include asset-backed securities backed by automobile 

loans and leases, both prime and subprime, motorcycle loans, and truck loans. Panel A shows the total issuance amount in billions of dollars. 

Panel B shows the number of unique sponsors (based on sponsor name) of ABS in each category (the number in the column ‘‘Total’’ may not be 

the sum of the numbers in the columns ‘‘SEC’’, ‘‘144A’’ and ‘‘Private’’ because some sponsors may sponsor deals in several categories). Only 

asset-backed securities classified by Asset-Backed Alert as deals sold in the U.S. and sponsors of such deals are counted. 

TABLE 3—ANNUAL ISSUANCE VOLUME AND NUMBER OF SPONSORS BY OFFERING TYPE FOR REAL ESTATE-BACKED ABS 

Year 

Non-agency RMBS CMBS 

SEC 144A Private Total SEC 144A Private Total 

Panel A—Annual Issuance Volume by Offering Type ($ bn) 

2005 738.5 21.7 0.0 760.3 136.23 34.44 0.00 170.68 

2006 727.1 74.6 0.0 801.7 161.76 41.05 0.00 202.81 

2007 634.8 80.4 0.0 715.3 190.57 40.58 0.00 231.15 

2008 12.2 22.3 0.0 34.5 10.71 1.49 0.00 12.20 

2009 0.0 48.1 0.0 48.1 0.00 6.86 0.00 6.86 

2010 0.2 67.2 12.8 80.3 0.00 19.54 0.00 19.54 

2011 0.7 40.8 9.7 51.3 8.45 26.05 0.00 34.50 

2012 1.9 27.0 0.0 29.0 32.56 18.68 0.00 51.24 

2013 4.0 21.1 0.0 25.2 53.07 33.27 0.00 86.35 

Panel B—Annual Number of Sponsors by Offering Type 

2005 54 21 0 60 41 42 0 61 

2006 55 43 0 80 39 40 0 57 

2007 53 45 0 78 43 29 0 54 

2008 12 22 0 27 19 2 0 21 

2009 0 17 0 17 0 13 0 13 

2010 1 26 1 28 0 25 0 25 

2011 1 16 2 18 16 31 0 31 

2012 1 20 0 21 26 33 0 56 

2013 1 22 0 22 32 57 0 83 

Notes: The numbers in the table were calculated by DERA staff using the Asset-Backed Alert and Commercial Mortgage Alert databases. The 

deals are categorized by offering year, underlying asset type, and offering type (SEC registered offerings, Rule 144A offerings, or traditional private placement). Non-agency RMBS include residential, Alt-A, and subprime RMBS. Panel A shows the total issuance amount in billions of dollars. Panel B shows the number of unique sponsors (based on sponsor name) of asset-backed securities in each category (the number in the 

column ‘‘Total’’ may not be the sum of the numbers in the columns ‘‘SEC’’, ‘‘144A’’ and ‘‘Private’’ because some sponsors may sponsor deals in 

several categories). Only asset-backed securities deals classified by Asset-Backed Alert as sold in the U.S. and sponsors of such deals are 

counted. 

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77712 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

414The elimination of the Federal Family 

Education Loan Program (FFELP), a federally 

guaranteed student loan program, in March 2010 

may be a significant contributor to the decline in 

the issuance of asset-backed securities backed by 

student loans as no subsequent loans were 

permitted to be made under the program after June 

2010. 

415Based on information from the Federal 

Reserve Bank of St. Louis FRED Economic Data 

database. 

Similar to the market for non-agency 

RMBS, the market for CMBS also 

experienced a decline following the 

financial crisis. There were $231.15 

billion in new issuances at the market’s 

peak in 2007. New issuances fell to 

$12.20 billion in 2008 and to $6.86 

billion in 2009. In 2013, there were 

$86.35 billion in new CMBS issuances. 

While the markets for asset-backed 

securities backed by credit card 

receivables, automobile loans and 

leases, and student loans experienced a 

similar decline in issuances following 

the financial crisis, the issuance trends 

in Table 2 indicate that they have 

rebounded substantially more than the 

non-agency RMBS and CMBS markets. 

Asset-backed securities collateralized by 

automobile loans and leases currently 

have the largest issuance volume and 

the largest number of active sponsors of 

asset-backed securities among all asset 

classes. There were $75.2 billion in new 

asset-backed securities issuances 

collateralized by automobile loans and 

leases in 2013 from 32 sponsors. This 

amount of new issuances is 

approximately twice the amount of new 

issuances in 2008 ($37.6 billion) in this 

asset class and is similar to the amount 

of new issuances in this asset class from 

2004 to 2007. 

Although the amount of new 

issuances of asset-backed securities 

backed by credit card receivables has 

not fully rebounded from pre-crisis 

levels, it is currently substantially larger 

than in recent years. There were $35.6 

billion in new issuances of asset-backed 

securities backed by credit card 

receivables in 2013, a five-fold increase 

over the amount of new issuances in 

2010 ($7.5 billion). The number of 

sponsors of such transactions has 

remained steady over time, totaling 14 

in 2013. The amount of new issuances 

of asset-backed securities backed by 

student loans has also not fully 

rebounded from pre-crisis levels.414

There were $21.3 billion in new 

issuances of asset-backed securities 

backed by student loans in 2013, 

compared to a range from $45.9 billion 

to $58.3 billion between 2004 and 2007. 

The number of sponsors of such 

transactions has returned to pre-crisis 

levels, totaling 22 in 2013. 

In addition to these asset classes, 

sponsors will have to retain risk for all 

issuances of asset-backed securities, 

including equipment loans and leases, 

corporate debt repackagings, TOBs, 

ABCP, CDOs and CLOs. 

Information describing the amount of 

issuances and the number of sponsors in 

the ABCP markets is not readily 

available. Information on the total 

amount of issuances outstanding 

indicates that the ABCP market has 

decreased since the end of 2006, when 

the total amount outstanding was 

$1,081.4 billion, or 55 percent of the 

entire commercial paper market.415 As 

of the end of 2013, there were $254.7 

billion of ABCP outstanding, accounting 

for less than 25 percent of the 

commercial paper market. 

TABLE 4—COMMERCIAL PAPER (CP) OUTSTANDING ($BN) 

Year ABCP All CP 

outstanding 

ABCP share 

(%) 

2004 ............................................................................................................................................. 688.9 1,401.5 49.2 

2005 ............................................................................................................................................. 860.3 1,637.5 52.5 

2006 ............................................................................................................................................. 1,081.4 1,974.7 54.8 

2007 ............................................................................................................................................. 774.5 1,785.9 43.4 

2008 ............................................................................................................................................. 734.0 1,681.5 43.7 

2009 ............................................................................................................................................. 487.0 1,170.0 41.6 

2010 ............................................................................................................................................. 348.1 971.5 35.8 

2011 ............................................................................................................................................. 328.8 959.3 34.3 

2012 ............................................................................................................................................. 319.0 1,065.6 29.9 

2013 ............................................................................................................................................. 254.7 1,086.2 23.4 

NOTES: Source—Federal Reserve. 

Like other asset-backed securities 

markets, the CLO market went through 

the same cycle of high growth right 

before the crisis in 2005–2007 followed 

by steep decline in 2008–2010. 

However, by 2013 the CLO market had 

almost recovered to its pre-crisis level 

(see Table 5), in terms of the number of 

CLO deals per year, the aggregate dollar 

volume of issuance, and the number of 

active sponsors (CLO managers). It 

should also be noted that, in most of the 

years in the table below, the median 

sponsor had only one CLO deal 

sponsored per year. 

TABLE 5—ANNUAL ISSUANCE VOLUME AND NUMBER OF SPONSORS FOR ARBITRAGE CLOS 416

Year Deals Total volume, 

$ bn 

Unique CLO 

managers 

2004 ............................................................................................................................................. 89 30.6 60 

2005 ............................................................................................................................................. 124 56.05 79 

2006 ............................................................................................................................................. 215 106.74 119 

2007 ............................................................................................................................................. 187 95.56 101 

2008 ............................................................................................................................................. 44 22.05 26 

2009 ............................................................................................................................................. 8 2.84 6 

2010 ............................................................................................................................................. 7 2.39 6 

2011 ............................................................................................................................................. 30 12.86 26 

2012 ............................................................................................................................................. 123 55.99 72 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77713 

416The agencies are adopting a risk retention 

option for CLOs that meet certain criteria, described 

herein as ‘‘open-market CLOs.’’ Arbitrage CLOs 

have many of the features of open-market CLOs, but 

as these requirements were not part of the market 

prior to this rulemaking, there is no reasonable 

means of determining which CLOs would have 

qualified as an open-market CLO. 

417See also the Board of Governors of the Federal 

Reserve System’s ‘‘Report to the Congress on Risk 

Retention’’ (October 2010), pp. 41–48, where other 

mechanisms intended to align incentives and 

mitigate risk are described, including alternatives 

such as overcollateralization, subordination, 

guarantees, representations and warranties, and 

conditional cash flows as well as the retention of 

credit risk. The report also contains a description 

of the most common incentive alignment and credit 

enhancement mechanisms used in the various 

securitization asset classes. The report does not 

establish the extent to which these alternatives 

might be substitutes for the retention of credit risk. 

418See 12 CFR 360.6. Upon their effective date, 

the final rule will replace the FDIC regulations and 

shall exclusively govern the requirement to retain 

credit risk for insured depository institutions. 

419The FDIC would have to pay damages to the 

securitization vehicle for any repossessed assets; 

however, those damages might be less than the full 

amount of principal and interest due on 

outstanding securities backed by such assets. 

420Article 122a of the Capital Requirements 

Directive mandates that European Economic Arearegulated credit institutions and investment firms 

and their affiliates may only invest in securitization 

transactions if the original lender, originator or 

sponsor of the securitization retains 5 percent of the 

net economic interest of the transaction. Related EU 

Alternative Investment Fund Manager’s Directive 

imposes similar risk retention requirements on 

securitizations that most private equity, real estate 

investment services and hedge funds are allowed to 

invest in. 

421Taylor Begley and Amiyatosh Purnanandam, 

Design of Financial Securities: Empirical Evidence 

from Private-label RMBS Deals (2014), University of 

Michigan working paper. They find that the size of 

the residual interest is proportional to the fraction 

of no document loans—their proxy for increased 

information asymmetry between sponsors and 

investors. 

TABLE 5—ANNUAL ISSUANCE VOLUME AND NUMBER OF SPONSORS FOR ARBITRAGE CLOS 416—Continued 

Year Deals Total volume, 

$ bn 

Unique CLO 

managers 

2013 ............................................................................................................................................. 179 85.83 97 

NOTES: The numbers in the table were calculated by DERA staff using the Asset-Backed Alert database. Only arbitrage CLOs backed by corporate loans and sold in the U.S. and sponsors of such deals are counted. The total issuance amount is in billions of dollars. 

b. Current Risk Retention Market 

Practices 

As noted earlier, the potential 

economic effects of the final risk 

retention requirements will depend on 

current market practices. Currently, risk 

retention is not legally mandated in any 

sector of the U.S. asset-backed securities 

market (with the exception of the FDIC 

safe harbor option discussed below 

where risk retention is one of the 

compliance options), although some 

sponsors of different asset-backed 

securities classes do remain exposed to 

credit risk, at least at initial issuance, in 

response to investors’ or rating agencies’ 

demand. The new risk retention 

requirements will impose a cost on 

sponsors that will depend on the 

amount and form of risk currently 

retained by a sponsor of asset-backed 

securities and the length of time 

sponsors remain exposed to such risk. 

Market practices are different for 

different sectors (to the extent that they 

are applied at all) and there is no 

uniform reporting of the types or 

amounts of risk exposure. Because of 

the lack of aggregated quantitative 

information relating to the current risk 

exposure practices of sponsors, the 

Commission does not have full 

information on the extent to which 

sponsors remain exposed to risk. Below 

the Commission describes current risk 

exposure practices for various asset 

classes based upon its understanding of 

these markets and public comment 

received to date.417 Almost all asset 

classes include structural features in 

which sponsors remain exposed to some 

amount of credit risk, including RMBS, 

CMBS, automobile loans and leases, 

credit card receivables, equipment loans 

and leases and automobile floorplan 

loans. We note, however, that even if 

some sponsors voluntarily retain risk in 

the form of a combination of several 

tranches, including residual interest that 

adds up to 5 percent of the principal 

amount of the deal, the sponsors 

typically do not contractually commit in 

the transaction documents to holding 

these interests after the initial sale 

(however, a rating agency might 

downgrade the entire securitization if 

the residual is sold). Notable exceptions 

include: TOBs, CLOs and CMBS where 

depending on the specific structure and 

the funding needs of the sponsor, either 

the sponsor or a third party might 

purchase a residual or equity interest; 

and structures in which parties involved 

in the securitization, other than the 

sponsors, retain risk, such as ABCP 

conduits, in which the seller of 

receivables holds a pro rata or residual 

interest in the receivables sold to the 

ABCP conduit. 

In 2010, the Federal Deposit 

Insurance Corporation (FDIC) adopted 

an amended rule regarding the 

treatment by the FDIC, as receiver or 

conservator of an insured depository 

institution, of financial assets 

transferred by the institution in 

connection with a securitization.418 If 

the FDIC does not deem a transfer of 

assets to a securitization vehicle a true 

sale, the FDIC could repudiate 

transaction agreements for the 

securitization, recover financial assets 

that had been transferred, and thereby 

compromise the ‘‘legal isolation,’’ as 

determined by relevant accounting 

standards, of the assets upon which the 

securitization was predicated.419 The 

FDIC’s rule imposes several new 

conditions to qualify for a safe harbor 

from such repudiation, with risk 

retention being one of the new 

conditions. Thus, in the absence of 

other forms of ‘‘true sale’’ protection, 

banking institutions that would like to 

avoid the potential future FDIC 

repudiation of a securitization could 

retain credit risk. As discussed below in 

Section 3.b.iii, some banks sponsoring 

asset-backed securities comply with the 

FDIC safe harbor rule by retaining risk 

in the form of a representative sample 

of the securitized assets—one of the 

forms of risk retention permitted under 

the FDIC’s rule. 

Finally, sponsors that intend to 

market their asset-backed securities in 

both the United States and the European 

Union and that issue securities after 

January 1, 2014, may need to retain 5 

percent credit risk to comply with E.U. 

risk retention rules that, instead of 

imposing a direct risk retention 

obligation on sponsors, regulate the 

types of securities that certain investors 

can buy.420 The Commission does not 

have data on the fraction or types of 

asset-backed securities currently sold in 

the U.S. that retain credit risk to comply 

with these rules or asset-backed 

securities sold by U.S. sponsors to 

investors covered by E.U. risk retention 

rules. 

i. Residential Mortgage-Backed 

Securities 

The Commission understands that 

sponsors of non-agency RMBS 

historically did not generally retain a 

portion of credit risk in the form and at 

a level consistent with the rule being 

adopted. One study 421 finds that, on 

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77714 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

422We also note that one of the largest sponsors 

of registered RMBS has stated it currently retains 

some interest in the RMBS transactions that it 

sponsors. See Sequoia Mortgage Trust 2013–1, Final 

Prospectus filed pursuant to Rule 424(b)(5), File No. 

333–179292–06 filed January 16, 2013; http:// 

www.sec.gov/Archives/edgar/data/1176320/ 

000114420413002646/v332142_424b5.htm. 

423However, not every CMBS deal has a B-piece 

buyer. According to Commercial Mortgage Alert, 46 

percent of CMBS deals in 2009–2013 had a B-piece 

buyer. 

424CMBS have much smaller number of 

underlying loans in a pool (based on data from 

Commercial Mortgage Alert, in 2009–2013, CMBS, 

on average, had about 100 commercial properties in 

a pool, whereas RMBS had about 3,000 assets in a 

pool and automobile loan/lease ABS typically had 

75,000 assets) and these loans are often not 

standardized. Thus, direct management of 

individual underperforming loans is often 

necessary and is much more viable for CMBS than 

for other asset classes. 

425Based on Commercial Mortgage Alert data, in 

2009–2013, there were 38 different B-piece buyers 

with 9 of them participating in 70 percent of CMBS 

deals. 

426See, for example, Bank of America Auto Trust 

2012–1 (http://www.sec.gov/Archives/edgar/data/

1488082/000119312512149853/d309744d42

4b3.htm) or Ally Auto Receivables Trust 2012–3 

(http://www.sec.gov/Archives/edgar/data/1477336/

000119312512243201/d357186d424b5.htm). 

average, RMBS deals had a 1.2 percent 

residual interest by face value that was 

proportional to the perceived level of 

information asymmetry between the 

sponsor and ABS investors, although 

the study could not determine whether 

sponsors retained the residual interest 

or, if retained, for how long it was held 

after issuance. Thus, even if sponsors of 

RMBS deals were holding the residual 

interest and were not selling it to third 

parties, they were not, on average, 

retaining 5 percent of the credit risk by 

face value.422 Consequently, as 

discussed below, except in the case 

where exemptions are applicable (e.g., 

the QRM exemption), the final risk 

retention requirements likely will 

impose new constraints on RMBS 

sponsors. 

ii. Commercial Mortgage-Backed 

Securities 

The current risk retention practice in 

the CMBS market is to retain at issuance 

the ‘‘first loss piece’’ (riskiest tranche). 

This tranche is typically sold to a 

specialized category of CMBS investor, 

known as a ‘‘B-piece buyer.’’ 423 The Bpiece investors in CMBS securitizations 

often hold dual roles as bond investors, 

if the assets remain current on their 

obligations, and as holders of 

controlling interests to appoint special 

servicers, if the loans default and go into 

special servicing. As holders of the 

controlling interest, they will typically 

appoint an affiliate as the special 

servicer. The B-piece CMBS investors 

are typically commercial real estate 

specialists who use their knowledge 

about the securitized assets in the pools 

to conduct extensive due diligence on 

new deals.424 The B-piece market has 

very few participants.425 The B-pieces 

are often ‘‘buy-and-hold’’ investments, 

and, based on the Commission’s 

knowledge of the asset-backed securities 

market, the secondary market for Bpieces is relatively illiquid at this time. 

According to one comment letter, a 

typical B-piece makes up 2.6 percent of 

economic and 7 percent of the notional 

balance of a CMBS. Thus, the 

Commission believes the prevailing 

market practice for risk retention in the 

CMBS sector is to hold less than the 

final rule’s risk retention option for 

CMBS sponsors. 

iii. Master Trusts (Revolving Pool 

Securitizations) 

Master trusts generally issue multiple 

series of asset-backed securities over 

time, backed by a common pool of 

securitized assets. The transaction 

agreements require the sponsor to 

maintain the principal balance of the 

securitized assets at an amount that is 

at all times sufficient to back the 

aggregate amount of asset-backed 

securities outstanding to investors with 

a specified amount of collateral above 

that amount. The principal amount of 

outstanding investor ABS interests 

changes over time as new series are 

issued or existing series are paid off. 

Moreover, as each series is issued, it 

begins with a revolving period (typically 

for some number of years), during 

which the investors receive only 

interest, and cash from borrower 

principal repayments on the pool assets 

are used to buy additional assets for the 

pool from the sponsor. This provides 

the sponsor with ongoing funding for its 

operations, and maintains the level of 

pool assets over time. Then, at a date 

specified under the terms of the series, 

the revolving phase for the series comes 

to an end, and cash from borrower 

principal repayments on pool assets is 

used to repay investors and retire that 

series of investor ABS interests. 

Sponsors of revolving master trusts 

often maintain risk exposures through 

the use of a seller’s interest which is 

intended to be equivalent to the 

sponsor’s interest in the receivables 

underlying the asset-backed securities. 

In current market practices, the amount 

and form of risk exposure generally 

depends on the asset class in the master 

trust; there is typically more risk 

exposure for assets with higher rates of 

default or that are more difficult to 

assess. For example, credit card master 

trusts sponsors retain economic 

exposure through excess spread and 

fees, while dealer floorplan asset-backed 

securities have significant residual 

exposure. The Commission requested 

additional information about current 

practices and data from market 

participants, but none was provided. As 

a result, the Commission does not have 

reasonably accessible data about 

revolving master trusts that would 

permit it to estimate current market 

practice about the amount of risk 

exposure held by sponsors. 

As discussed above, banks sponsoring 

asset-backed securities that intend to 

comply with the FDIC safe harbor rule 

could retain 5 percent of credit risk of 

the securitized pool. Some banks that 

use trust structures to sponsor assetbacked securities backed by automobile 

loans and leases use one of the allowed 

options under the FDIC rule, the 

representative sample option, to comply 

with the safe harbor rule requirements. 

Under this option, the sponsor 

randomly selects a separate pool of 

receivables that represents the 

characteristics of the securitized pool of 

assets and holds it on their balance 

sheet.426

iv. Other Asset-Backed Securities 

The current market practices for other 

categories of asset-backed securities that 

serve to align the interests of the 

sponsor and investors vary across asset 

classes. The Commission understands 

that sponsors of automobile loans 

typically maintain exposure to the 

quality of their underwriting by 

retaining a significant residual interest 

in their securitization transactions. 

However, there is insufficient data 

available to the Commission to estimate 

the fair value of these retained residual 

interests. Also, as discussed above, 

some banking institutions that are 

affiliated with a sponsor of asset-backed 

securities collateralized by automobile 

loans and leases retain a 5 percent 

representative sample to comply with 

the FDIC safe harbor rule. As noted 

above, the final rule does not include a 

representative sample option. The 

Commission also understands that many 

sponsors of asset-backed securities 

backed by student loans did not retain 

credit risk as many were federally 

guaranteed. Sallie Mae, the largest 

sponsor of student loan asset-backed 

securities, typically retains through an 

affiliate a residual interest in the form 

of overcollateralization in the 

securitizations that it sponsors. 

v. Asset-Backed Commercial Paper 

ABCP is a type of asset-backed 

security that is typically issued to 

investors by a special purpose vehicle 

(commonly referred to as a ‘‘conduit’’) 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77715 

427See Original Proposal at § __.9. 

428See footnote 395 for the general agencies 

position on acceptability of unfunded arrangements 

as forms of risk retention. 

429The term ‘‘CLO’’ is also used to refer to the 

special purpose vehicle that issues the asset-backed 

securities and the overall securitization structure. 

430Report to the Congress on Risk Retention, 

Board of Governors of the Federal Reserve System, 

at 22 (Oct. 2010), available at http://federalreserve.

gov/boarddocs/rptcongress/securitization/

riskretention.pdf. 

431 In general, the size of the equity tranche 

increases in downturns and decreases in booms. 

See Updating the CLO Primer, Bank of America/ 

Merrill Lynch, July 2012. 

432The face value of the underlying loans may be 

adjusted in accordance with the CLOs transaction 

documents to reflect concentration limits, 

delinquencies and/or discounted purchase prices. 

433Asset-Backed Alert, July 11th, 2014. 

434As discussed below, the final rule does give 

sponsors credit for overcollateralization to the 

extent the fair value of the horizontal form of risk 

retention takes into consideration the fair value of 

the overcollateralization. 

435The agencies have not recognized 

subordinated management fees as an acceptable 

form of risk retention in the final rule because, if 

the CLO underperforms, subordinate management 

fees may not align the interests of the manager with 

those of investors. See also footnote 395 for the 

general agencies position on acceptability of 

unfunded arrangements as forms of risk retention. 

sponsored by a financial institution. The 

commercial paper issued by the conduit 

is collateralized by a pool of assetbacked securities, which may change 

over the life of the entity. ABCP 

conduits generally purchase longer-term 

assets financed by the issuance of 

shorter-term liabilities, and the 

liabilities are ‘‘rolled,’’ or refinanced, at 

regular intervals.427

In a typical ABCP conduit transaction, 

the sponsor’s customer (an ‘‘originatorseller’’) sells loans or receivables to an 

intermediate, bankruptcy remote special 

purpose vehicle (SPV). The credit risk of 

the receivables transferred to the 

intermediate SPV then typically is 

separated into two classes—a senior 

ABS interest that is acquired by the 

ABCP conduit and a residual interest 

that absorbs first losses on the 

receivables and that is retained by the 

originator-seller. The residual interest 

retained by the originator-seller 

typically is sized with the intention that 

it be sufficiently large to absorb all 

losses on the underlying receivables. 

In this structure, the ABCP conduit 

issues short-term ABCP that is 

collateralized by the senior ABS 

interests purchased from one or more 

intermediate SPVs, which are, in turn, 

supported by the subordination 

provided by the residual ABS interests 

retained by the originator-sellers (i.e., 

the sponsors of underlying ABS 

interests would be subject to risk 

retention requirements). The sponsor of 

this type of ABCP conduit, which is 

usually a bank or other regulated 

financial institution or their affiliate, 

also typically provides (or arranges for 

another regulated financial institution 

or group of financial institution to 

provide) 100 percent liquidity coverage 

on the ABCP issued by the conduit. This 

liquidity coverage typically requires the 

support provider to provide funding to, 

or purchase assets or ABCP from, the 

ABCP conduit in the event that the 

conduit lacks the funds necessary to 

repay maturing ABCP issued by the 

conduit. 

Commenting on the original proposal, 

ABCP conduit sponsors noted that there 

are structural features in ABCP 

securitizations that align the interests of 

the ABCP conduit sponsor and the 

ABCP investors. For instance, 

commenters stated that ABCP conduits 

usually have some mix of credit support 

and liquidity support equal to 100 

percent of the ABCP outstanding. In the 

view of commenters, this liquidity and 

credit support exposes the ABCP 

conduit sponsor to the quality of the 

assets in an amount that far exceeds 5 

percent of the fair value of the 

outstanding ABCP.428

vi. Collateralized Loan Obligations 

A collateralized loan obligation (CLO) 

is an asset-backed security that is 

typically collateralized by portions of 

tranches of senior, secured commercial 

loans or similar obligations of noninvestment grade borrowers.429 CLOs 

are organized and initiated by a CLO 

manager, usually when the CLO 

manager partners with a structuring 

bank that assists in financing asset 

purchases that occur before the 

formation of the CLO.430 The CLO 

manager actively manages the asset 

portfolio and earns management fees 

and performance fees for investment 

management services provided to the 

CLO. 

The Commission understands that 

CLO managers often retain a small 

portion—significantly less than 5 

percent—of the residual interest, 

although the party retaining the risk 

may vary depending on the CLO. Some 

types of CLO managers are more likely 

to hold a significant residual interest in 

their CLO, while others are more likely 

to secure a third-party equity investor to 

purchase the residual interest. 

According to one commenter, a common 

CLO market practice is for the CLO 

manager to hold 5 percent of the 

residual interest, which is typically 

around 8 percent of the value of the 

CLO at issuance.431 This level of 

retention equates to approximately 0.4 

percent of the value of the CLO. 

The Commission understands that 

many CLO structures use 

overcollateralization—the amount by 

which the face value of the underlying 

loan portfolio 432 exceeds the face value 

of the outstanding asset-backed 

securities—which many CLO managers 

consider as a form of risk retention 

because the value of the 

overcollateralization is ascribed to the 

residual interest. For example, the 

current senior overcollateralization for 

older vintage CLO 1.0 deals (CLO 

structure used before the crisis) is 132 

percent, while for CLO 2.0 deals (the 

structure used for newer CLO) it is 135 

percent.433 This means that a CLO 1.0 

deal has $132 supporting every $100 of 

the most senior tranche outstanding. 

The amount of overcollateralization for 

the entire CLO structure would be much 

lower because it would also include 

mezzanine and subordinate bonds in 

addition to the residual interest. The 

agencies do not consider 

overcollateralization by face value to be 

an acceptable form of risk retention 

because the face values of both the 

securitized assets and of the ABS 

interests can materially differ from their 

relative value and/or cost to the 

sponsor.434

The Commission requested comments 

on whether any practices in the CLO 

market reflected risk retention as 

envisioned by the proposed rule. Many 

commenters indicated that the proposed 

rule requirements would change current 

practices and therefore substantially 

impact the CLO market. No commenter 

indicated the presence of, or 

development towards, risk retention 

practices that would satisfy the 

requirements of the proposed rule. 

Some commenters described the amount 

of risk retention currently held and how 

managers of CLOs often retain a small 

portion of the residual interest and 

asserted that sponsors retain risk 

through subordinated management and 

performance fees that have performance 

components that depend on the 

performance of the overall pool or 

junior tranches.435

vii. Tender Option Bonds 

There are two typical tender option 

bonds (TOBs) structures that generally 

have different amounts of risk retention. 

One type of TOB is a bank-sponsored 

TOB where a single bank and its 

affiliates serve as the sponsor, residual 

holder and liquidity provider; in this 

structure, the bank will typically hold 

nominal equity. Commenters noted that 

the bank’s credit exposure is 

significantly greater than 5 percent 

because it is the provider of 100 percent 

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77716 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

436The agencies do not believe that it is necessary 

or appropriate to attempt to vary the amount of risk 

retention based on the quality of the assets or other, 

similar, factors. Doing so would unnecessarily 

complicate compliance with the rule. Furthermore, 

as discussed in the following section, the 

Commission believes that requiring risk retention to 

be measured by fair value adequately incorporates 

the quality of the assets. Specifically, it would 

calibrate the sponsor’s economic exposure to the 

asset pool depending on quality of securitized 

assets. For example, the Commission notes that if 

the securitized asset pool consists of low-quality 

assets, the value of the residual interest would be 

relatively low and a sponsor would have to hold a 

larger equity tranche to meet the five percent fair 

value credit risk exposure requirement. On the 

other hand, if the securitized asset pool consists of 

high quality assets, the value of the residual interest 

would be relatively higher and a sponsor would be 

able to satisfy the requirement by holding smaller 

residual interest. Use of face value or 

overcollateralization to avoid the 5 percent risk 

retention requirement will not be possible using fair 

value methodologies acceptable under GAAP as it 

would account for the expected losses associated 

with the residual interest. 

liquidity support. The second type of 

TOB is one in which the bank that is the 

liquidity provider does not hold the 

residual interest; in this case the TOB 

residual holder will retain a more 

significant amount of risk. Other 

features of TOBs include a put feature 

as part of the bond that allows investors 

to put the bond back to the sponsor and 

a 100 percent liquidity support. The 

Commission requested data on current 

market levels of risk retention for TOBs 

but received no data from commenters. 

4. Analysis of Risk Retention 

Requirements 

As discussed above, the agencies are 

adopting the rule requiring sponsors of 

asset-backed securitizations to retain 

risk. Each of the asset classes subject to 

the final rule has its own particular 

structure and, as a result, the 

implementation and impact of risk 

retention will vary across asset classes, 

although certain attributes of risk 

retention are common to all asset 

classes. In this section, the Commission 

discusses those aspects of the final rule 

that apply across a broad range of asset 

classes: The requirement that sponsors 

hold 5 percent of the credit risk of a 

securitization; the use of fair value of 

the securitization to measure the 

amount of horizontal risk retained by 

the sponsor; and the length of time that 

a sponsor will be required to hold its 

risk exposure. 

a. Level and Measurement of Risk 

Retention 

i. Requirement To Hold Five Percent of 

Risk 

Section 15G requires the agencies to 

jointly prescribe regulations that require 

a sponsor to retain not less than 5 

percent of the credit risk of any asset 

that the sponsor, through the issuance of 

ABS, transfers, sells, or conveys to a 

third party, unless an exemption from 

the risk retention requirements for the 

securities or transaction is otherwise 

available. The agencies reproposed a 

requirement to hold a minimum 5 

percent base risk retention for most ABS 

transactions that are within the scope of 

Section 15G, with some exemptions. 

Commenters did not comment 

specifically on the discussion of the 5 

percent risk retention requirement in 

the Commission’s Economic Analysis in 

the 2013 reproposal. One commenter 

did suggest the minimum amount of risk 

retention be increased to 20 percent. As 

discussed in more detail below, 

increasing the minimum amount of risk 

retention could increase the cost to 

sponsors and impede capital formation 

in the economy by preventing the more 

efficient reinvestment of the sponsors’ 

capital, while not necessarily providing 

significant incremental benefit to 

investors. In addition, several 

commenters suggested risk retention 

requirements be determined by 

reference to asset quality.436

The agencies are adopting a 5 percent 

risk retention requirement as 

reproposed. The Commission lacks the 

data—and commenters did not provide 

quantitative information—to allow for 

analysis of an optimal level of retained 

risk, taking into account the goal of 

aligning the incentives of the sponsors 

and the investors in asset-backed 

securities. As discussed above, barring 

any exemption, the required level of risk 

retention is set by statute at no less than 

5 percent. Below is a discussion of the 

trade-offs between setting the level of 

required risk retention too high or too 

low. 

As a general matter, if the required 

level of risk retention is set too low, it 

may not adequately align the incentives 

of investors and sponsors. While we 

recognize that Congress prescribed a 

minimum level of risk retention, the 

Commission is also aware that, as 

discussed in the Economic Baseline, 

sponsors of asset-backed securities in 

many asset classes retained less than 5 

percent credit exposure to 

securitizations in the past. Moral hazard 

problems persisted at these lower levels. 

In contrast, asset classes with relatively 

higher levels of risk retention (e.g., 

asset-backed securities backed by auto 

loans and leases) performed relatively 

better throughout the financial crisis. 

A level of risk retention that is set too 

high, however, could lead to inefficient 

deployment of capital by unduly 

restricting a sponsor’s ability to 

structure new deals. If sponsors are 

limited in their ability to secure the 

necessary financing to retain the 

required amount of credit risk in their 

intended offerings, then this could 

adversely impact the flow of capital 

from ABS investors to originators of the 

assets intended for securitization. 

Hence, excessive required risk retention 

levels may lead to less capital available 

to lenders, potentially increasing 

borrowing rates as borrowers compete 

for a more limited supply of credit. In 

this scenario, the reduction in capital 

formation would have a negative impact 

on competition due to the increased cost 

of securitizing non-qualified assets, 

disadvantaging their ability to be 

financed by ABS investors relative to 

qualified assets and other sources of 

capital. 

ii. Measurement of Risk Retention Using 

Fair Value 

The agencies are adopting a 

requirement for sponsors to measure 

risk retention of an ‘‘eligible horizontal 

residual interest’’ (EHRI) using a fair 

value measurement framework 

consistent with GAAP. As described in 

the 2013 reproposal, the agencies 

believe that measuring risk retention 

with a fair value measurement 

framework will align the measurement 

more closely with the credit risk of a 

securitization transaction than 

alternative frameworks. The agencies 

are not requiring vertical interests to be 

measured using a fair value 

measurement framework, as proposed, 

because they were persuaded by 

commenters that such measurement is 

not necessary to ensure that the sponsor 

has retained 5 percent of the credit risk 

of the ABS interests issued. 

Commenters generally supported 

basing the measurement of the 

horizontal risk retention requirement on 

fair value. Some commenters raised 

general concerns with the proposed 

method by which sponsors would be 

required to measure their risk retention 

because some sponsors do not currently 

use fair value calculations. Thus, 

requiring such sponsors to measure 

their risk retention with fair value 

would create significant burden and 

expense. Commenters also expressed 

several specific accounting concerns 

regarding use of fair value to measure 

risk retention. Specifically, they 

expressed concern regarding the timing 

of the pre-sale fair value disclosure 

requirement. Commenters noted that the 

most objective and accurate way to 

calculate the fair value of the residual 

interest is to base the valuation on 

observable market prices for the 

remaining securities; however, because 

the reproposal required that sponsors 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77717 

calculate the fair value of the residual 

interest in advance of the final pricing 

of the issued securities, the fair value of 

the residual interest would have to be 

calculated using estimates of final 

pricing levels. Commenters asserted that 

potential differences between the presale fair value calculated using 

estimated pricing levels and the postclosing fair value calculated using 

actual pricing levels would confuse 

investors. 

To provide investors with sufficient 

information to allow them to evaluate 

whether the sponsor’s estimated 

calculation of fair value was reasonable, 

the proposed rule would have required 

sponsors to disclose the key inputs and 

assumptions used in measuring fair 

value and the sponsor’s technique(s) 

used to derive the key inputs and 

assumptions. Many commenters 

expressed concerns about the proposed 

requirement, indicating that the 

proposal would require sponsors to 

disclose information that is proprietary, 

highly confidential and commercially 

sensitive, which could be used by third 

parties to the competitive disadvantage 

of the sponsor. Other commenters 

suggested significant modifications to 

the disclosure requirements. For 

example, several commenters asserted 

that sponsors should only be required to 

make disclosures to the Commission 

and banking agencies, rather than to 

investors. Significant concern was 

raised regarding potential liability and 

litigation that commenters indicated 

may result when fair value projections, 

assumptions and calculations disclosed 

to investors turn out to be incorrect. 

A few commenters asserted that for 

simple structures, sponsors should not 

be required to make fair value 

determinations or related disclosures, 

nor should the cash flow restriction (as 

described below) apply. Several 

commenters requested that the final rule 

should not require sponsors to measure 

and disclose the fair value of eligible 

vertical interests, so long as the 

underlying ABS interests have either a 

principal or notional balance. The 

commenters noted that a 5 percent 

interest in the cash flow of each class 

would always be equivalent to 5 percent 

of the fair value of each class. In this 

regard, the commenters asserted that 

requiring fair value measurement and 

disclosures for the vertical option would 

be unnecessary for ensuring compliance 

with the rule. 

The final rule does not require 

sponsors holding risk retention in a 

vertical form to measure and disclose 

the fair value of their vertical risk 

retention. With the vertical form of risk 

retention, requiring sponsors to measure 

and disclose the fair value would 

impose additional cost on the sponsor 

with little, if any, corresponding 

enhancement of investors’ ability to 

evaluate and understand the amount of 

credit risk exposure of the sponsor. This 

is because 5 percent of the fair value of 

each tranche will be equal to 5 percent 

of face value of each tranche. Therefore, 

if investors know that a sponsor is 

holding 5 percent of each tranche, they 

will be able to assess the credit exposure 

of the sponsor regardless of whether it 

is face value or fair value. 

Using a fair value measurement 

framework acceptable under GAAP, as 

applicable, to value the EHRI will 

provide a number of benefits. First, it 

allows investors and sponsors to 

objectively measure and understand the 

amount of credit risk exposure of the 

sponsor. The use of fair value is 

intended to prevent sponsors from 

structuring around risk retention, as 

may otherwise be the case when using 

the face value of residual interests or 

overcollateralization to measure the 

amount of horizontal risk retention. For 

example, if a sponsor issues $100 

million in asset-backed securities at par 

and retains a first-loss residual interest 

with a face value of $5 million, that 

residual interest could yield a market 

value below $5 million given the 

expected losses associated with the 

securitized assets, in which case the 

sponsor would be holding less than 5 

percent of the deal’s value. Use of face 

value or overcollateralization to avoid 

the 5 percent risk retention requirement 

will not be possible using fair value 

methodologies acceptable under GAAP 

as it would account for the expected 

losses associated with the residual 

interest. Moreover, and as a general 

matter, most investors and sponsors 

have experience with fair value 

methodologies acceptable under GAAP 

and therefore using it in this context 

will help to minimize the costs of 

evaluating the amount of risk retention 

held by sponsors because it will be 

consistent with other valuation 

experiences. 

There are also potential costs to 

investors associated with the use of a 

fair value measurement framework. Fair 

value is a measurement framework that, 

for certain types of instruments, where 

significant unobservable inputs are used 

to determine fair value, requires an 

extensive use of judgment. Because of 

this extensive use of judgment, an 

investor may be unable to determine if 

the sponsor’s fair value calculation uses 

assumptions that are similar to the 

investor’s assumptions. In order to help 

mitigate this potential cost, the agencies 

also are requiring, as proposed, that the 

sponsor disclose specified information 

about how it calculates fair value. While 

this requirement should discourage 

manipulation, sponsors will incur 

additional costs to prepare the necessary 

disclosures. In addition, because the 

final rule specifies that fair value must 

be determined using a fair value 

measurement framework consistent 

with GAAP, sponsors will incur costs to 

ensure that the reported valuations are 

compliant with the valuation standard. 

With respect to the disclosure 

required in order to allow investors to 

evaluate and understand the sponsor’s 

fair value calculation, the reproposal 

discussed the appropriate level of detail 

to be provided to investors. One 

approach would be to provide the same 

model inputs (e.g., prepayment rate, 

discount rates) that the sponsors used so 

that investors could more precisely 

evaluate the sponsor’s fair value 

calculations. While sponsors already 

have the model inputs they use to 

calculate fair value, as commenters 

noted, there may be costs to the 

sponsors associated with providing 

investors with sponsors’ proprietary 

information. For example, sponsors may 

base their model inputs on proprietary 

information derived from the historical 

performance data of their loan pools, 

information that has commercial value 

and is often compiled and sold to 

market participants who purchase the 

data in order to derive model inputs 

similar to the ones that sponsors would 

be required to disclose. Disclosure of the 

model inputs could thus lower the 

commercial value of the historical data. 

Disclosing their inputs could also 

provide competitors—with similar 

access to historical performance data— 

with insight into the sponsor’s 

interpretation or selection of relevant 

benchmark data. Access to this insight 

could reveal proprietary valuation 

methods or, as some commenters 

suggested, give rise to litigation risk to 

the extent that there are differences in 

opinions on how to interpret the data. 

Taken together, requiring sponsors to 

disclose precise information about their 

model inputs could increase the cost to 

sponsors without necessarily providing 

additional benefit to investors. 

To help mitigate these potential costs, 

the final rule permits the disclosure of 

fair value based on estimated ranges for 

tranche size, interest rates for each 

tranche, and underwriting discount. The 

information is required to be provided 

a reasonable amount of time prior to the 

sale of the asset-backed security. Also 

required to be included are the 

sponsor’s key inputs and assumptions 

that may be described as a curve. The 

rule requires that this disclosure be 

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77718 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

437See Hartman-Glaser, Piskorski and Tchistyi, 

2012, Optimal Securitization with Moral Hazard. 

Journal of Financial Economics, vol. 104, no. 1, 

April 2012, pp. 186–202. They consider the optimal 

design of MBS contracts between a mortgage 

underwriter that can engage in costly hidden effort 

to screen borrowers and investors and show, among 

other things, that the maturity of the optimal 

contract can be short. 

updated to reflect actual fair values of 

the ABS interests sold at the closing 

date. This approach may enable 

investors to make meaningful 

assessments of whether a sponsor’s fair 

value calculations are reasonable prior 

to making their investment decisions, 

and at the same time may help to 

address sponsors’ concerns about 

disclosing what they believe to be 

proprietary information and the timing 

of the disclosure. The ranges of pricing 

information will allow investors to 

decide if the sponsor’s model input 

curves are aggressive or conservative 

compared to their own expectations 

based on their experiences and 

knowledge of the asset class. 

In the case of revolving pool 

securitizations, the agencies are 

permitting the seller’s interest option to 

be measured using face value. These 

securitizations have unique structures 

described further below that would 

address the agencies’ concerns about the 

use of face value of the ABS interests or 

the face value of the securitized assets 

to circumvent risk retention 

requirements as described above. This 

option recognizes the unique 

characteristics of certain structures and 

the impact of those structures on the 

alignment of incentives for the 

transaction parties. This option also 

helps to minimize the burden of fair 

value disclosure discussed in the 

reproposal while still allowing certain 

structures to have a meaningful amount 

of risk retained and addressing some 

commenters’ concerns about using a fair 

value measurement framework to 

measure risk retention. One unique 

characteristic is that the vehicle will 

engage in multiple issuances for the life 

of the master trust. Because of this, if 

the revolving pool securitization 

contains poorly underwritten 

receivables that are expected to default 

then, in the future, this will impact the 

ability of the sponsor to make future 

issuances of asset-backed securities 

using the revolving pool securitization. 

The structure of revolving pool 

securitizations aligns incentives 

between sponsors and investors, 

reduces the need for fair value 

measurement that does not bring 

benefits to investors, and allows for face 

value measurement, which will help to 

minimize costs for sponsors of revolving 

pool securitizations. 

b. Duration of the Risk Retention 

Requirement 

Under the reproposal, sponsors would 

have been prohibited from selling or 

otherwise transferring any interest or 

assets that they would be required to 

retain under the rule to any person other 

than a consolidated affiliate for 

specified time periods. For all ABS 

other than RMBS, the specified time 

period would have been the later of two 

years after the closing date of the 

securitization or when the aggregate 

unpaid balance of the ABS interests has 

been reduced to 33 percent. For RMBS, 

the specified time period would have 

been the later of five years after the 

closing of the securitization or when the 

pool balance has been reduced to 25 

percent, but in no event later than seven 

years after the closing of the 

securitization. 

In response to the reproposal, 

commenters recommended various 

modifications to the length of risk 

retention requirements. Some 

commenters suggested lengthening the 

non-RMBS duration to three years, 

while other commenters questioned 

why only RMBS and CMBS had asset 

specific durations and suggested 

lengthening or shortening periods of 

time that were tied to a specific asset 

class or securitized asset quality. 

Finally, some commenters suggested 

eliminating the alternative sunset period 

contingent on the unpaid pool balance. 

The agencies are adopting the sunset 

provisions as reproposed. The 

Commission lacks the data to determine 

an optimal duration of these risk 

retention requirements, and while 

commenters supported their positions 

based on relevant time periods that are 

tied to securitized assets, no 

commenters submitted relevant data or 

other quantifiable information. In 

particular, as stated in the reproposal, 

these time periods were chosen to strike 

a balance between retaining risk long 

enough to align the sponsors’ and 

investors’ incentives and allowing the 

redeployment of retained capital for 

other productive uses. A shorter 

duration was chosen for non-mortgage 

asset classes, because these loans tend 

to have shorter maturities than 

mortgages and thus it may not be 

necessary to retain risk for a longer 

period. The alternative sunset 

component contingent on the reduction 

of pool balance further calibrates the 

required duration of risk retention based 

on the remaining balances. By the time 

the loan pool balance decreases to 33 

percent, the information about the loan 

pool performance will be largely 

revealed, at which point the moral 

hazard problem between the sponsor 

and the investor is likely to be 

significantly reduced. 

We recognize that, in the case where 

the loan pool balance drops below the 

prescribed threshold (25 percent for 

RMBS and 33 percent for other ABS) 

before the prescribed number of years 

(five years for RMBS and two years for 

other ABS), the additional required 

duration might be costly to the sponsor. 

A requirement that the sponsor continue 

to retain exposure to the securitization 

once the impact of the initial 

uncertainty about the ABS is resolved 

could potentially impede allocative 

efficiency by limiting the sponsor’s 

ability to redeploy capital to new 

securitizations or other investment 

opportunities. Moreover, as loan 

balances are paid down, the sponsor 

may hold more risk relative to other 

investors because the size of the credit 

risk retention piece is based on the 

initial size of the securitization and does 

not change with the current market 

value. Thus, sponsors could face 

increased levels of risk retention on a 

percentage of outstanding basis at the 

same time retained risk becomes less 

necessary. While economic efficiency 

might be increased in certain 

circumstances by allowing sponsors to 

withdraw their risk retention 

investment to use in new securitizations 

or other credit forming activities,437 the 

minimum fixed duration of risk 

retention is appropriate to prevent 

structuring securitizations that would be 

quickly paid off to the balance threshold 

points (25 percent or 33 percent) for the 

purposes of avoiding risk retention. 

5. Forms of Risk Retention Menu of 

Options 

Rather than prescribe a single form of 

risk retention, the final rule allows 

sponsors to choose from a range of 

options to satisfy their risk retention 

requirements. As a standard form of risk 

retention available to sponsors of all 

securitizations, sponsors may choose 

vertical risk retention, horizontal risk 

retention, or any combination of those 

two forms. Both the vertical and 

horizontal forms of risk retention 

require the sponsor to share the risk of 

the securitized asset pool. The final rule 

also includes options tailored to specific 

asset classes and structures such as 

revolving master trusts, CMBS, ABCP, 

CLOs, and TOBs. Given the special 

characteristics of certain asset classes, 

some of these options permit the 

sponsor to allocate a portion of the 

shared risk to originators, allow the risk 

to be held by specified third parties, or 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77719 

438For example, if a sponsor is affiliated with a 

servicer (or has another way to influence the 

servicing of assets), then different forms of risk 

retention may change how distressed assets are 

serviced—more to the benefit of all investors or 

more to the benefit of junior tranche holders’. In 

most cases, investors in the more senior tranches 

would favor liquidation because liquidation of the 

securitized assets would reduce uncertainty and 

eliminate the credit risk of a delinquent or 

defaulted asset and because losses resulting from 

such liquidation of the securitized assets would be 

absorbed by investors in more subordinated 

tranches. Alternatively, investors in more 

subordinated tranches would favor a modification 

of the terms of a defaulted or delinquent asset 

because modification potentially could minimize 

losses. 

allow the risk to be held in an identical 

asset outside of the securitization. 

Commenters generally supported the 

menu-based approach of providing 

sponsors with the flexibility to choose 

from a number of permissible forms of 

risk retention. These commenters 

believed that this provides sponsors 

with the flexibility to structure their risk 

retention requirements to accommodate 

current market practices. 

By adopting a rule that will allow 

sponsors flexibility to choose how they 

retain risk, the agencies seek to enable 

sponsors to select the approach that is 

most cost-effective for them, while still 

fulfilling the purposes of Section 15G. 

As discussed previously, the agencies 

are sensitive to the need to balance the 

goals of risk retention (reduction of the 

moral hazard problem and better 

underwriting) with the need to facilitate 

the efficient deployment of capital. A 

flexible approach to retaining risk will 

permit sponsors to take into account a 

variety of factors, as discussed in more 

detail below. 

Various factors are likely to impact 

sponsors’ preferred method of retaining 

risk, including size, funding costs, 

financial condition, riskiness of the 

securitized assets, potential regulatory 

capital requirements, return on capital 

requirements, risk tolerances, and 

accounting conventions. All else being 

equal, sponsors may prefer the option 

that involves the least exposure to credit 

risk. For example, the horizontal form of 

standard risk retention creates a fully 

subordinated residual interest that is 

more exposed to the expected losses of 

the deal than a similarly sized vertical 

form, and therefore is more sensitive to 

the deal’s credit risk. By contrast, a 

vertical form of standard risk retention 

is comparable to a stand-alone passthrough securitization, which when 

held by the sponsor, is the form of risk 

retention least exposed to a deal’s credit 

risk. As discussed below, some sponsors 

may choose to use the horizontal 

method of risk retention or some 

combination of the horizontal and 

vertical method in order to meet the risk 

retention requirement. 

In particular, sponsors have an 

incentive to calibrate the level of risk 

exposure that minimizes their overall 

cost of funding. For example, some 

investors may be more likely to 

purchase senior ABS interests if the 

sponsor retains a larger residual interest 

and thus has more ‘‘skin in the game.’’ 

Alternatively, the sponsor may be 

unable to sell the residual interest on 

terms that would minimize the 

sponsor’s cost of funding. In both 

instances, sponsors would prefer an 

option with a higher level of exposure 

to credit risk. This might be particularly 

true for securitizations that involve 

riskier or more opaque assets or more 

complicated securitization structures. 

As discussed previously, the potential 

need for retaining risk in a more costly 

form because the sponsor could not sell 

the residual interest on acceptable terms 

could be attenuated for registered 

offerings that are subject to the assetlevel disclosure requirements under 

revised Regulation AB to the extent that 

investors are able to quantify risks using 

the required loan-level disclosures and 

are willing to purchase more of the 

residual interest on terms acceptable to 

the sponsor. 

As the Commission discusses below, 

a number of the options also attempt to 

correspond to current market practices. 

By allowing sponsors to satisfy their risk 

retention requirement while still 

maintaining current market practices, 

the proposed menu of options approach 

should help to reduce additional costs 

of the required regime. Moreover, the 

flexibility sponsors have to design how 

they hold credit risk will allow them to 

calibrate and adjust their selections for 

each transaction according to changing 

market conditions. 

On the other hand, because sponsors 

will have a choice on how to retain risk, 

their chosen structure may not always 

align interests and mitigate risks for 

investors in the same manner. Thus, to 

the extent that some forms of risk 

retention create disparate incentives for 

sponsors and investors,438 the ability to 

rely on those options may not fully 

address some of the conflicts of interest 

that contribute to the moral hazard 

problem that characterize 

securitizations. In addition, the 

flexibility of this approach may increase 

the complexity of implementation of 

risk retention because of the wide range 

of possible choices available to 

sponsors. 

a. Standard Risk Retention 

The agencies are adopting the 

standard risk retention option as 

reproposed. In the reproposal, the 

Commission provided separate analyses 

of the economic effects of vertical risk 

retention, horizontal risk retention, or 

any combination of these two forms. 

Many commenters generally supported 

the reproposal to allow a sponsor to 

meet its risk retention obligation by 

using the standard risk retention option 

and approved of the flexibility that the 

proposal would provide to sponsors in 

structuring their risk retention. One 

commenter specifically expressed 

support for the single vertical security 

option, asserting that it would simplify 

compliance and monitoring obligations 

of the sponsor. 

The agencies continue to believe that 

it is appropriate to provide flexibility to 

sponsors. This approach allows 

sponsors to minimize costs by selecting 

a customized combination of vertical 

and horizontal risk retention that suits 

their individual situation and 

circumstances, including relative 

market demand for the various types of 

interest that may be retained under the 

rule. To the extent that the costs and 

benefits of credit risk retention vary 

across time, across asset classes, or 

across sponsors, this approach would 

implement risk retention in the broadest 

possible manner such that sponsors may 

choose the combination of vertical and 

horizontal risk retention that they view 

as optimal. For example, if investors are 

unable to accurately estimate the risk of 

the securitized asset, the sponsor may 

be unable to sell the residual interest on 

acceptable terms, which would mean 

any excess vertical risk retention would 

be an additional cost to such a sponsor. 

Allowing flexibility will not only 

benefit sponsors but also will allow 

investors’ demands to be more easily 

satisfied. 

Below we discuss the economic 

implications of particular risk retention 

structures. 

i. Eligible Horizontal Residual Interest 

Under the eligible horizontal residual 

interest (EHRI) option, sponsors would 

hold the first loss piece, which as 

described above, would reflect a larger 

credit exposure than an equal 

percentage of retained risk using a form 

that included vertical retention. To the 

extent that such a holding signals to 

investors that the information about the 

asset portfolio being securitized is 

accurately represented and fairly priced, 

having this option available to sponsors 

may improve investor participation and 

lead to enhanced capital formation. 

However, horizontal risk retention used 

without vertical risk retention may not 

fully align sponsor incentives with the 

incentives of investors in all of the 

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77720 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

439See footnote 438. 

tranches or classes. Investors who are 

investing in the most senior tranches 

will have different interests than the 

sponsor holding the residual interest, 

which is the most junior tranche, 

especially concerning the servicing of 

under-performing assets.439

There are several reasons why a 

sponsor may choose to hold a residual 

interest instead of a vertical interest. 

Sponsors may be unable to sell the 

residual interest or, if they are 

securitizing riskier loans, may hold the 

residual interest to increase investors’ 

interest in more senior tranches. In 

particular, to the extent that a sponsor 

is willing to incur exposure to the first 

losses, investors may be willing to 

purchase the senior tranches at higher 

prices. Also, if sponsors have a cost of 

capital that is higher than the return 

provided by holding vertical risk 

retention, sponsors may choose to hold 

more subordinated tranches and more of 

the credit risk to generate a return 

sufficient to meet their required cost of 

capital. The holder of the residual 

interest generally receives a higher rate 

of return than any other tranche of the 

deal and therefore a sponsor may choose 

to hold horizontal risk retention in order 

to make the deal economically viable for 

the sponsor. This would increase the 

amount of capital available for riskier 

loans as sponsors’ demand for loans of 

a higher risk increases. In all these 

cases, any requirement to retain a 

vertical interest would only impose 

additional costs on such sponsors. 

In the reproposal, the agencies 

included cash flow restrictions with 

EHRI, reasoning that if sponsors can 

structure securitizations in such a way 

that the residual interest is able to 

receive cash early on in the deal then 

the sponsor’s incentive to select loans 

with better underwriting may be 

reduced because the sponsor may be 

repaid all of their principal investment 

(‘‘cash out of the deal’’) before losses 

accumulate and the deal underperforms. 

Many commenters supported 

elimination of the cash flow restrictions. 

They asserted that these restrictions are 

incompatible with a variety of 

securitization structures, that the 

certifications and disclosures to 

investors that would be required by the 

proposed cash flow restriction would 

create potential liability, and that there 

are possible ways around these 

restrictions such that they will not be 

meaningful but only increase costs to 

sponsors. Commenters also stated that 

cash flow restrictions would prohibit 

almost all securitizations from being 

issued as they are designed to pay high 

interest rates early on to the residual 

holder as compensation for risk taken, 

and that most of the structures in 

previously issued asset-backed 

securities would have failed the cash 

flow restriction tests. According to these 

commenters, imposing the cash flow 

restrictions could thus require current 

market participants to change their 

current practices, which could lead to a 

reduction or cessation of the 

securitization markets, resulting in a 

decrease in capital formation and 

reduction in allocative efficiency. 

After considering the numerous 

comments received, the agencies have 

concluded that the proposed cash flow 

restrictions on the EHRI (as well as the 

alternative described in the reproposal 

and alternatives suggested by 

commenters) could lead to unintended 

consequences and impose unnecessary 

burdens on some asset classes. 

Therefore, the agencies have eliminated 

the previously proposed restrictions 

from the final rule. The revised 

disclosure requirements being adopted 

relating to the key inputs and 

assumptions underlying fair value 

calculations, however, should provide 

investors with the information 

necessary to analyze whether the 

sponsor is being conservative or 

aggressive in its estimate of the 5 

percent risk retention holding. The rule 

also requires disclosure of the material 

terms of the residual interest. By 

providing this information to investors, 

the disclosure helps mitigate the 

concern that sponsors may provide 

accelerated returns to themselves 

through the residual interest since 

investors will be able assess the 

likelihood of such scenario based on 

this information. Eliminating the cash 

flow restriction requirements would 

eliminate the costs to sponsors 

associated with changing their market 

practice while potentially promoting 

competition among the sponsors for 

alternative structures that optimize their 

retention and investor preferences. 

ii. Eligible Vertical Interest 

A sponsor relying solely on the 

vertical option would hold a percentage 

of each tranche, resulting in an 

economic exposure of 5 percent of the 

credit risk of the entire loan pool. The 

primary benefit of vertical risk retention 

as compared to other standard forms of 

risk retention is that investor-sponsor 

incentives will be equally aligned across 

all ABS tranches. 

Vertical risk retention is also subject 

to less credit risk exposure, and thus it 

will be a cheaper method for the 

sponsor to satisfy the requirement both 

in terms of cost of capital and in 

measurement and disclosure to 

investors. There is no requirement for 

sponsors to provide a fair value estimate 

to investors, which could reduce the 

cost of retaining risk relative to the costs 

associated with the other risk retention 

options. Vertical risk retention will be 

relatively simple for investors to 

evaluate because the sponsor will hold 

a specified percentage of each tranche. 

However, vertical risk retention may be 

less optimal for sponsors who typically 

hold a first loss piece with the intent of 

signaling higher quality of the senior 

tranches or for other reasons. 

The benefits of the vertical form of 

risk retention extend to other market 

participants as well. By allowing 

sponsors to choose a vertical form of 

risk retention, there will be increased 

flexibility to choose higher yielding 

assets and provide greater access to 

credit to viable but higher-risk 

borrowers than would otherwise be 

possible through only a horizontal form 

of risk retention. Investors interested in 

holding residual interests will benefit 

from a vertical form of risk retention as 

they will be able to purchase more 

higher-yielding first loss pieces of 

securitizations, while investors who 

demand tranches above the first loss 

piece will have less supply available 

because the sponsor would hold 5 

percent of each tranche instead of 

holding all of its retained risk in the 

residual interest. 

The final rule also permits a single 

vertical security, as proposed. All 

economic considerations that apply to 

vertical risk retention will apply to the 

single vertical security except that the 

single vertical security may allow 

sponsors to comply with risk retention 

in a less costly manner in terms of 

administrative fees and accounting 

costs. If the sponsors’ costs of risk 

retention are lower while still providing 

the same incentive alignment, then cost 

of credit for borrowers may be lower. 

iii. Combined Risk Retention Option 

The final rule allows sponsors to 

retain risk through any combination of 

a vertical form and a horizontal form 

provided that the total percentages of 

retained forms in the securitization add 

up to 5 percent. For example, a sponsor 

can hold 3 percent in the vertical form 

and 2 percent in the horizontal form in 

reliance on a combination of the 

horizontal and vertical forms of risk 

retention. 

As noted above, horizontal risk 

retention allows sponsors to provide a 

stronger signal about their private 

information about asset quality than 

vertical risk retention because of the 

increased amount of credit exposure for 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77721 

sponsors. Hence, a sponsor choosing to 

retain risk in a more expensive 

horizontal form over a vertical form 

would have greater exposure to credit 

risk, and that sponsor’s incentives 

should be better aligned with investors’. 

As previously described, by choosing a 

higher cost method of retaining risk, 

such as through the horizontal form, a 

sponsor can signal to the market greater 

certainty about the quality of assets and 

the level of risk in the senior tranches 

because the sponsor is willing to incur 

the losses in the lower subordination. 

However, the optimal size of the 

residual interest for a sponsor that seeks 

to maximize the proceeds and minimize 

the sponsor’s overall cost of funding 

from securitization may not be 5 

percent. 

Finally, sponsors may choose to hold 

some residual interest in an attempt to 

gain a higher return on capital. In this 

case, again, the optimal size of the 

residual interest to achieve sponsor’s 

required return may not be 5 percent. 

The combination of the horizontal and 

vertical forms reduces costs to sponsors 

by allowing them to hold some of their 

risk retention in the cheaper vertical 

form while still receiving credit for the 

residual interest they retain. Moreover, 

the vertical form of risk retention still 

allows for a more equal alignment of 

sponsors’ interests with all types of 

investors because the sponsor will hold 

a portion of all of the tranches in the 

securitization. 

Allowing a flexible combination of 

the horizontal and vertical forms 

accommodates various current market 

practices. Some asset classes have been 

able to monetize more of their exposure 

to securitized assets than other asset 

classes. Typically the range for RMBS 

has been closer to 1–3 percent of 

overcollateralization than to the 5 

percent of fair value for the retained first 

loss piece required by the final rule. 

Thus, the flexible combination of 

horizontal and vertical forms will allow 

sponsors to continue to retain risk as 

they have in the past while keeping the 

cost of risk retention to a minimum. 

The flexibility of the combination of 

the horizontal and vertical forms also 

allows sponsors to better meet demands 

of investors. If investors want to hold 

more of the residual tranche, the 

sponsor can hold less risk in the 

horizontal form and more risk in the 

vertical form to be able to sell interests 

in the residual tranche to investors. 

Alternatively, if there is a larger demand 

for more senior tranches, then sponsors 

can hold more risk horizontally. This 

flexibility will increase allocative 

efficiency within the ABS market. The 

flexible combination of the horizontal 

and vertical forms also increases 

competition among sponsors because it 

allows sponsors to adjust several 

dimensions of the securitization: risk 

retention costs, expected returns on 

retained pieces, and supply of tranches 

with different risk characteristics. 

b. Options for Specific Asset Classes 

and Structures 

i. Seller’s Interest Option 

The reproposed rule would have 

allowed a sponsor of a revolving master 

trust that is collateralized by loans or 

other extensions of credit to meet its 

risk retention requirement by retaining 

a seller’s interest in an amount not less 

than 5 percent of the unpaid principal 

balance of the pool assets held by the 

sponsor. Commenters stated that the 

reproposed version of the seller’s 

interest option would not accommodate 

all the common market practices in the 

master trust market. They suggested 

methods to broaden the options 

available to revolving master trusts to 

allow a wider variety of market 

practices to count as risk retention. 

The agencies are revising the seller’s 

interest option for revolving pool 

securitizations (referred to as revolving 

master trusts in the reproposal) in the 

final rule in order to accommodate more 

of the practices of sponsors that 

currently rely on revolving pool 

securitizations as an important 

component of their funding. These 

revisions recognize and accommodate 

the meaningful exposure to credit risk 

currently held by sponsors of these 

revolving pool securitizations, in light 

of the heightened alignment of 

incentives between sponsors and 

investors that attaches to their structural 

features. The agencies are also making a 

number of other refinements in the final 

rule in order to align the seller’s interest 

option more closely with the mechanics 

of revolving pool securitizations as they 

are structured in the market today. 

The pari passu seller’s interest option 

in the final rule represents a special 

form of exposure to credit risk for the 

asset-backed security issued by a 

revolving pool securitization. Under this 

option, the sponsor must maintain the 

size of the seller’s interest position, 

most commonly through the ongoing 

addition of receivables to the pool or 

repayment of investor ABS interests. 

Commenters also requested that the 

agencies accommodate other revolving 

pool securitizations that are common in 

the market and rely on a seller’s interest 

that is structured in a different manner, 

which varies among the revolving pool 

securitizations used for certain asset 

classes. Commenters described two 

different structures, which the agencies 

believe should be recognized as an 

eligible form of risk retention under the 

final rule. 

The agencies have recognized a series 

subordinated seller’s interest in a 

revolving pool securitization as eligible 

risk retention in the final rule. As 

described by commenters, a series 

subordinated seller’s interest is a 

common feature of revolving pool 

securitizations for certain asset classes, 

such as equipment leasing and floorplan 

financing. In these revolving pool 

securitizations, the sponsor is obligated, 

as is the case with the pari passu seller’s 

interest, to maintain an undivided 

interest in the receivables in the 

collateral pool, in an amount equal to a 

specified percentage of the trust’s 

outstanding investor ABS interests. 

Whereas the pari passu seller’s interest 

is a trust-level interest equal to a 

minimum percentage of the combined 

outstanding investor ABS interests, the 

minimum percentage in subordinated 

seller’s interest revolving pool 

securitizations may be tied to the 

outstanding investor ABS interests of 

each separate series. While the 

sponsor’s right to receive distributions 

on the seller’s interest included in the 

reproposal was required to be pari 

passu, the sponsor’s right to receive 

distributions on its share of 

distributions in subordinated seller’s 

interest revolving pool securitizations 

may be subordinated to varying extents 

to the series’ share of credit losses. 

Importantly, commenters noted that 

notwithstanding these differences with 

the pari passu seller’s interest, the 

sponsor of a series subordinated seller’s 

interest revolving pool securitization is 

still required to maintain the minimum 

amount of securitized assets in the pool, 

if the securitization is to continue 

revolving, through the ongoing addition 

of assets to the pool if necessary. The 

sponsor has incentives to monitor the 

quality of the assets added to the pool 

in both structures. If the sponsor 

replaces repaid or defaulted assets with 

poorly underwritten assets, those assets 

will, in turn, suffer losses, and the 

sponsor will be obligated to add even 

more assets. If this cycle is perpetuated 

and the minimum asset target is 

breached, the revolving pool 

securitization will enter an early 

amortization period, and the sponsor 

will no longer have access to future 

funding from the revolving pool 

securitization. Because the 

subordination of the seller’s interest 

does not change this potential 

consequence and provides similar 

economic incentives as the pari passu 

seller’s interest for the sponsor to 

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77722 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

monitor and maintain the quality of 

securitized assets in the pool, the final 

rule recognizes this ‘‘series 

subordinated’’ form of seller’s interest as 

an eligible form of risk retention for 

revolving pool securitizations. Allowing 

the series subordinated seller’s interest 

accommodates existing market practice 

and will therefore minimize costs to 

certain revolving pool securitizations, 

while providing the intended benefit of 

aligning sponsor and investor incentives 

which will encourage higher quality 

underwriting. 

Commenters also described another 

form of seller’s interest used in 

revolving pool securitizations for certain 

asset classes, such as equipment leasing 

and floorplan financing, which are often 

collateralized by various types of 

‘‘excess’’ receivables. The transaction 

documents for revolving pool 

securitizations typically impose 

eligibility requirements on the 

receivables that are allowed to be 

included as collateral for purposes of 

calculating the total amount of 

outstanding investor ABS interests that 

may be issued by the revolving trust. 

These eligibility requirements include 

concentration limits on receivables with 

common characteristics, such as those 

originating from a particular 

manufacturer or dealer or a particular 

geographic area. The sponsor places 

assets that exceed these concentration 

limits (ineligible assets) in the revolving 

pool securitization, where they are often 

subject to the pledge of collateral to the 

holders of the ABS interests, but they 

are not included when calculating the 

amount of the seller’s interest under the 

revolving pool securitization. 

Distributions on these ineligible assets 

are typically allocated to the sponsor, 

but depending on the terms of the 

securitization, the sponsor’s claim to the 

cash flow from these assets may be 

partially or fully subordinated to the 

claims of investor ABS interests, and 

these subordination features may be at 

the trust level, at the series level, or 

some combination of both. 

While the agencies are persuaded that 

revolving pool securitizations should be 

allowed to hold these receivables 

without violating the common pool 

requirement, the final rule, consistent 

with market practice described above, 

does not allow these excess receivables 

to be included in the measurement of 

seller’s interest. Because these are assets 

that by their terms are not representative 

of the assets that stand as the principal 

repayment source for investor ABS 

interests issued by the revolving pool 

securitization, the agencies believe, in 

conformance with market practice, that 

it would be inappropriate to include 

them in the calculation of the seller’s 

interest. This accommodation for 

existing market practice allows a greater 

number of existing revolving pool 

securitization structures to meet the risk 

retention requirements, which should 

reduce the costs of compliance with the 

final rule and minimize disruption to 

existing structures. The agencies also 

recognize that some revolving pool 

securitizations make distributions on 

these receivables available to cover 

losses on eligible pool assets, which 

increases the amount of credit 

enhancement available to investors. 

The agencies are adopting the seller’s 

interest option generally as reproposed 

with certain modifications to 

incorporate more existing revolving 

pool securitizations. The Commission 

believes that there are several benefits to 

recognizing the existing seller’s interests 

in revolving pool securitizations as an 

eligible form of risk retention. Aligning 

the rule’s requirements with current 

market practice will reduce 

implementation costs for sponsors using 

the master trust structure while still 

retaining the benefits that investors 

receive through improved selection of 

underlying assets by the sponsors of 

revolving pool securitizations. 

Accommodating current practice will be 

transparent and easy for the market to 

understand and will preserve current 

levels of efficiency and help to maintain 

investors’ willingness to invest in the 

market. Accommodating current 

practice will also provide clarity to 

market participants and may encourage 

additional investor participation given 

the removal of previous uncertainty 

about potential changes to current 

practices, thereby helping to promote 

capital formation. Under this option, 

there would be a cost to sponsors of 

measuring the seller’s interest amount 

on an ongoing basis in accordance with 

the final rule, but since ongoing 

measurement is a current market 

practice, the additional cost should be 

low. Unlike more traditional 

securitization transactions collateralized 

by a static pool of assets, revolving pool 

securitizations use a single issuing 

entity to issue multiple series. These 

accommodations should allow sponsors 

of revolving pool securitizations to 

continue to use the same issuing entity 

and minimize the potential disruption 

to the market that could be caused by 

bifurcating the common pool of 

securitized assets or any other 

restructuring of the issuing entities, and 

any of their outstanding asset-backed 

securities issued prior to the applicable 

effective date of the final rule. 

As discussed above, the agencies are 

modifying the seller’s interest option to 

accommodate more of the market 

practices that currently exist. 

Accommodating more market practices 

will reduce costs for sponsors of 

revolving pool securitizations that 

otherwise would not been able to rely 

on the reproposed version of the seller’s 

interest option and thereby help to 

promote competition within this 

segment of the market. 

ii. Representative Sample 

The agencies also considered the 

alternative option of risk retention held 

through a representative sample of the 

securitized assets that was proposed in 

2011, but not included in the 2013 

reproposal. 

While some commenters were 

supportive of the original proposal’s 

inclusion of the representative sample 

option, many commenters were critical 

of the option, stating that it would be 

impractical to implement this option for 

a variety of reasons, including that it 

would be unworkable for various asset 

classes, it would be subject to 

manipulation, and its disclosure 

requirements were too burdensome. 

Some commenters on the reproposal 

asked for the representative sample to 

be reinstated, asserting that a revised 

representative sample option would be 

particularly useful for automobile loan 

and lease securitizations, and more 

generally, for securitizations with large 

pools of consumer or retail assets, such 

as student loans. However, these 

commenters did not specify the costs of 

not including such an option in the final 

rule. 

The agencies continue to believe a 

representative sample option should not 

be included in the final rule because, 

among other reasons, it would be 

difficult and potentially costly for 

investors and regulators to monitor or 

verify that exposures were indeed 

selected randomly, rather than in a 

manner that favored the sponsor. In 

order to allow sponsors to hold a 

representative sample, a number of 

material factors would need to be 

considered for the sample to be truly 

representative. However, even if many 

factors are considered, a factor could 

potentially be missed, and as a result, 

sponsors would end up holding a 

sample that differed in a material way 

from the pool assets. This could lead to 

ineffective alignment of incentives and 

therefore fail to realize one of the 

intended benefits of the rule. Due to 

these concerns, the agencies have 

decided not to include a representative 

sample option in the final rule. 

Sponsors using this structure will incur 

costs to comply with the requirements 

of the final rule because the final rule 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77723 

440The Commission believes that the 

diversification of ABS interests and the 100 percent 

liquidity support requirement make this scenario 

highly improbable. 

441Asset-Backed Alert, March 28, 2014, lists the 

20 largest ABCP conduit administrators. All but one 

of them are large banks. The non-bank is Lord 

Securities. 

does not include a representative 

sample option as one of the permissible 

forms of risk retention. 

iii. Asset-Backed Commercial Paper 

Conduits Option 

Under the reproposal, sponsors of 

ABCP conduits could either hold 5 

percent of the risk using the standard 

risk retention option, as discussed 

above, or could rely on the ABCP 

option. The proposed ABCP option 

would not have required the sponsor of 

the conduit, which is typically a special 

purpose vehicle, to retain risk as long as 

the assets held in the ABCP conduit, 

which are often ABS interests in other 

asset classes, are not purchased in the 

secondary markets, and the sponsor of 

every ABS interest held by the ABCP 

conduit complies with the credit risk 

retention requirements. Another 

condition of the proposed conduit 

option was the requirement that the 

ABCP conduit have 100 percent 

liquidity support from a regulated 

institution. 

Commenters generally repeated 

earlier requests that the agencies 

provide an exemption based on, or 

otherwise recognize, unfunded risk 

retention provided by banks in the form 

of liquidity support, program wide 

credit enhancement, unconditional 

letters of credit, and similar features, as 

satisfying the risk retention 

requirements. Commenters also 

requested that ABCP conduits relying 

on this option be permitted to use a 

broader range of transaction structures 

and purchase a wider variety of assets. 

Finally, some commenters suggested the 

elimination or modification of the 

proposed requirements to disclose fair 

value calculations and supporting 

information by conduit managers about 

an originator-seller’s failure to comply 

with risk retention requirements, stating 

that such disclosure under current 

market conditions could risk the 

collapse of the particular ABCP conduit 

and pose a contagion risk to the other 

conduits.440

The agencies are adopting the ABCP 

option substantially as reproposed 

except for certain modifications based 

on comments received to accommodate 

a greater range of current market 

practices for existing ABCP structures in 

the ABCP option. The agencies have not 

adopted commenters’ suggestion to 

permit the application of the ABCP 

option to certain types of assets not 

covered by the reproposal or transaction 

structures with less than 100 percent 

liquidity support. Restricting the option 

to ABCP conduits that hold only certain 

ABS interests is a structural safeguard 

that while possibly limiting the ability 

raise capital through ABCP conduits, 

will increase the alignment of incentives 

between sponsors of ABCP conduits and 

investors. 

Under the final rule, eligible ABCP 

conduits may only purchase ABS 

interests in an initial issuance. By 

limiting an eligible ABCP conduit to 

holding ABS interests acquired in initial 

issuances, a sponsor will be in a better 

position to potentially influence the 

terms of the deal and have an effect on 

the quality of assets underlying the ABS 

interests relative to if the ABS interests 

were acquired in the secondary market 

post issuance. However, by conditioning 

ABCP conduit eligibility to rely on the 

ABCP option on the purchase of ABS 

interests in an initial issuance, the rule 

could have a negative impact on 

secondary markets, possibly resulting in 

lower liquidity and potentially 

decreasing the efficiency in the 

secondary markets for ABS interests. 

Additionally, the agencies understand 

that ABCP conduit structures that 

primarily relied on secondary market 

purchases (arbitrage ABCP conduits) 

performed poorly during the financial 

crisis. 

Allowing the ABCP option provides 

incentive to improve underwriting 

while minimizing the impact on ABCP 

funding costs, thereby lessening the 

potential burden on capital formation as 

ABCP conduit sponsors will not need to 

use their capital to retain 5 percent of 

the ABS interest issued by the ABCP 

conduit. The risk retention option for 

ABCP conduits includes specific 

requirements for a regulated liquidity 

provider that provides liquidity support 

with contractual terms that meet certain 

requirements. We estimate that 

approximately half of existing ABCP 

conduit sponsors may need to adjust the 

terms of their existing liquidity support 

in order to comply with the 

requirements of the final rule, and 

therefore will incur costs to implement 

the liquidity support necessary to meet 

the new requirements. The liquidity 

support requirements are largely 

consistent with the exclusion from the 

definition of covered fund for certain 

ABCP conduits in the rules 

implementing Section 619 of the DoddFrank Act. As a result, the Commission 

believes ABCP conduits sponsored by 

banks, which make up the bulk of the 

ABCP market,441 already have or will 

have liquidity support that will comply 

with the final rule, and therefore the 

new requirements will not materially 

increase their costs. 

Maintaining current practice and 

requiring 100 percent liquidity coverage 

without regard to asset performance will 

be transparent and easy for investors to 

understand and implement, and help to 

maintain investor’s willingness to invest 

in ABCP. Adoption of the liquidity 

coverage requirement and removal of 

previous uncertainty about liquidity 

coverage (i.e. under what conditions 

liquidity support would be provided) 

should also provide clarity to investors 

and may encourage additional 

investment, thereby lowering the cost, 

or increasing the amount, of capital 

formation in ABCP and underlying 

asset-backed securities markets. 

However, the liquidity support could 

have the effect of lowering the yields of 

the ABS interests because investors will 

face less risk compared to less than 100 

percent liquidity support. 

Other modifications that the agencies 

are making will also permit more 

existing market practices to be used 

with the ABCP option. Accommodating 

these market practices will reduce costs 

to those ABCP conduits that were not 

covered under the reproposed version of 

the ABCP option and thereby help to 

promote competition within this 

segment of the market. 

iv. Commercial Mortgage-Backed 

Securities Option 

The agencies are adopting the CMBS 

option largely as reproposed. The 

Commission continues to believe that 

the option provides a means to satisfy 

the risk retention requirements that, for 

the most part, will allow CMBS issuers 

to continue current market practice 

relating to techniques that align 

incentives and improve underwriting 

standards. Under the final rule, a 

sponsor will be able to satisfy the risk 

retention requirements by having up to 

two third-party purchasers (provided 

that each party’s interest is pari passu 

with the other party’s interest) purchase 

an eligible horizontal residual interest 

(B-piece) in the issuing entity if it is 

backed solely by commercial real estate 

loans and servicing assets. The thirdparty purchaser(s) would be required to 

acquire and retain an eligible horizontal 

residual interest in the issuing entity in 

the same form, amount, and manner as 

the sponsor (with the same hedging, 

transfer, and other restrictions) except 

that after five years the third-party 

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77724 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

442See also footnote 424. 

443According to CRE Finance World, Autumn 

2012, Volume 14, No.3, pp. 47–50, the operating 

advisor fee rate is ‘‘modest.’’ Other costs may 

include delays in special servicer replacement due 

to the need to call for investors’ vote, and a possible 

loss of efficiency because operating advisors may be 

less knowledgeable of the special servicing market 

than B-piece buyers. 

purchaser can sell the B-piece to 

another eligible third-party purchaser. 

As discussed in Section 3.b.ii of this 

Economic Analysis, currently the Bpiece investors in CMBS often hold dual 

roles as bond investors, if the assets 

remain current on their obligations, and 

as holders of controlling interests to 

appoint special servicers, if the loans 

default and go into special servicing. 

The B-piece investors are typically real 

estate specialists who use their 

extensive knowledge about the 

underlying assets and mortgages in the 

pools to conduct extensive due 

diligence on new deals. Such due 

diligence is feasible because typically 

CMBS have much smaller number of 

underlying loans in a pool.442

Consequently, since B-piece buyers are 

taking the credit risk and have an ability 

to perform their own due diligence on 

securitized assets before purchasing the 

residual tranche, the third party holding 

risk effectively serves as an independent 

re-underwriter of the underlying loans, 

achieving a quality of re-underwriting 

consistent with the quality of 

underwriting of a sponsor that would 

retain credit risk on its own balance 

sheet. B-piece buyers also have the 

ability to affect the performance of the 

securitization when problems arise. 

Because they usually have expertise in 

commercial real estate and are holders 

of controlling interests to appoint 

special servicers (and often have special 

servicers affiliates), they facilitate 

restructuring of underperforming loans 

to maintain the structure of a CMBS. By 

providing for the continued retention of 

risk and strong incentive to the sponsor 

to limit potential moral hazard problems 

at the time the structure is put in place, 

the effect of the CMBS risk retention 

option on the moral hazard problem 

will likely be similar to the effect of one 

of the standard risk retention options. 

Allowing the third-party purchaser to 

sell the B-piece to another eligible thirdparty purchaser after a minimum 

holding period should generate 

secondary market liquidity, thereby 

lessening the original purchaser’s cost of 

retaining the risk and encourages greater 

participation in the CMBS market by 

eligible B-piece purchasers. The 

resulting secondary market transactions 

could generate additional benefits to 

CMBS investors to the extent that Bpiece buyers have differential skills 

with respect to assessing the risk at the 

time of origination, monitoring 

performance, and engaging in 

restructuring activity when performance 

issues arise. Allowing the transfer of the 

B-piece will allow the transfer of the Bpiece to a purchaser with specialized 

skills appropriate to the particular 

situations. 

Under the final rule, use of the CMBS 

option requires the appointment of an 

independent operating advisor who, 

among other obligations, has the 

authority to recommend and call a vote 

for removal of the special servicer under 

certain conditions. This requirement 

may serve to limit potential conflicts of 

interest between the investors in senior 

tranches and the B-piece buyer(s), thus 

helping to ensure that the benefits of the 

risk retention requirements are 

preserved and extended to all investors. 

There will be costs, however, related to 

the appointment of the independent 

operating advisor, including, but not 

limited to, the payments to the 

advisor.443

The primary benefit of allowing 

sponsors to maintain their current 

market practices is to effectively achieve 

the intended objectives of risk retention 

with minimized cost to the CMBS 

market. Commenters generally 

supported the CMBS option as 

reproposed, with one investor 

commenter cautioning against further 

modifications to the proposed CMBS 

option, expressing the view that CMBS 

underwriting standards were beginning 

to deteriorate. However, some comment 

letters suggested changes from the 

reproposal. 

Commenters suggested increasing the 

5 percent minimum quorum 

requirement for a vote to replace the 

special servicer to 15 percent or 20 

percent, and adding a requirement that 

no fewer than three unaffiliated 

investors participate in the vote. The 

agencies have decided to permit CMBS 

transaction parties to specify in the 

underlying transaction documents the 

quorum required for a vote to remove 

the special servicer, provided it is not 

more than 20 percent of the outstanding 

principal balance of all ABS interests in 

the issuing entity, with such quorum 

including at least three ABS interest 

holders that are not affiliated with each 

other. 

The final rule includes these 

suggested changes to address the 

concern that a 5 percent quorum could 

allow a B-piece buyer holding 5 percent 

of the CMBS deal to replace the special 

servicer alone without consent of other 

investors. As discussed in Section 3.b.ii 

of this Economic Analysis and in Part 

III.B.5 of the Supplementary 

Information, the B-piece investors in 

CMBS often have an affiliate special 

servicer and, as holders of controlling 

interests, they can appoint that affiliated 

entity if the loans default and go into 

special servicing. An affiliate special 

servicer could make decisions about 

loan restructuring in the interest of its 

affiliated B-piece holder that are 

inconsistent with the interests of all 

investors. Thus, requiring at least three 

investors that are not affiliated with 

each other for the quorum would ensure 

that the economic interest of at least 

some senior tranche investors would be 

accommodated in the selection of the 

special servicer and subsequent 

restructuring. 

Raising the maximum quorum 

requirement to 20 percent from 5 

percent in the final rule will further 

ensure that other CMBS investors will 

participate in the selection of the special 

servicer. Limiting the maximum quorum 

requirement to 20 percent also ensures 

that investors do not face an undue 

burden in coordinating with other 

dispersed investors to call a vote to 

change the special servicer. Currently, 

transaction agreements can stipulate any 

quorum threshold. If a transaction 

agreement currently stipulates a 

threshold that is too high, the 

coordination costs attributed to 

collective action could prevent 

potentially efficient changes in the 

special servicer. On the other hand, 

with less ability to influence the 

selection of the special servicer, 

combined with an inability to disinvest 

until the expiration of the sunset period, 

B-piece buyers will have less incentive 

to invest in B-pieces. Hence, relative to 

current practices, mandating a lower 

maximum quorum requirement could 

generate benefits in some cases. 

The agencies considered but did not 

adopt the suggestion to allow third party 

purchasers to hold their interests in a 

senior/subordinate structure, rather than 

pari passu, to match the risk of loss of 

each B-piece interest and the risk 

tolerances of each B-piece buyer. 

Commenters asserted that a seniorsubordinated structure would better 

allow the market to appropriately and 

efficiently price the B-piece interests in 

a manner that is commensurate with the 

risk of loss of each interest, and to 

address the different risk tolerance 

levels of each third-party purchaser. 

However, other commenters strongly 

opposed allowing third-party 

purchasers to satisfy the risk retention 

requirements through a seniorsubordinated structure, commenting 

that such a change would significantly 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77725 

444See Section 4.a.ii of this Economic Analysis. 

445Based on Commercial Mortgage Alert, out of 

61 private label U.S. CMBS deals in 2013 that had 

B-piece buyers, 50 had a single B-piece buyer, 12 

had two B-piece buyers, and none of the deals had 

more than two B-piece buyers. 

446See Joshua White and Scott Bauguess, 

Qualified Residential Mortgage: Background Data 

Analysis on Credit Risk Retention, (August 2013), 

available at http://www.sec.gov/divisions/riskfin/

whitepapers/qrm-analysis-08-2013.pdf. 

dilute and render ineffective the risk 

retention requirements. The agencies 

have decided not to allow third-party 

purchasers to satisfy the risk retention 

requirement with a senior-subordinated 

structure. As noted earlier, the purpose 

of third-party risk retention is to create 

a transaction participant that would 

serve as an independent re-underwriter 

of the underlying loans. A ‘‘senior’’ Bpiece holder in this structure might not 

be appropriately compensated for 

employing sufficient resources to reunderwrite a CMBS transaction because 

its expected return would be too low to 

compensate for the expenditure of 

resources necessary for re-underwriting. 

In addition, the pari passu requirement 

better aligns the interests of the most 

junior tranche buyer(s) with those of 

more senior noteholders whereas the 

senior/subordinated structure for the Bpiece would further separate the 

interests of most junior tranche buyer(s) 

(that in this case could hold the first loss 

tranche that might be significantly 

smaller than 5 percent) from those of the 

senior noteholders, which could 

exacerbate conflicts of interest issues in 

this area. 

Some commenters opposed the 

disclosure of the purchase price paid by 

third-party purchasers for the eligible 

horizontal residual interest. These 

commenters pointed out that such 

information has traditionally been 

viewed by all market participants as 

highly confidential and proprietary, and 

that the disclosure requirement would 

deter B-piece buyers from retaining risk. 

The Commission acknowledges that, if 

B-piece buyers are deterred from 

purchasing eligible residual horizontal 

interests, this could lower the liquidity 

of the junior tranches of CMBS and, 

thus, potentially increase the sponsors’ 

cost of capital and the cost of credit for 

borrowers. However, the agencies 

continue to believe that requiring 

disclosure of the price at which the Bpiece is sold is important to 

understanding the value of the third 

party’s risk retention (and therefore 

whether the required amount has been 

retained) and would be consistent with 

other required fair value disclosures for 

any eligible horizontal residual interest 

retained by the sponsor that allow 

investors to assess the amount of risk 

being retained.444 Hence, the ability of 

investors to quantify the amount of 

credit risk exposure of the B-piece 

buyer, and thus the level of incentive 

alignment with other investors, 

generates benefits that would not be 

possible if B-piece buyers were able to 

keep the price confidential. 

The final rule provides additional 

flexibility for the CMBS option by 

allowing up to two third-party 

purchasers to satisfy the risk retention 

requirement. This provision 

accommodates the current market 

practice 445 and should facilitate 

liquidity of the residual piece market, 

contributing to a lower cost of capital 

for sponsors and borrowers. While 

commenters generally supported 

allowing up to two third-party 

purchasers to hold risk retention, one 

commenter recommended expanding 

the number of third-party purchasers to 

allow participation by more than two Bpiece investors. The agencies do not 

believe it would be appropriate to allow 

more than two third-party purchasers in 

a single transaction. While allowing 

more than two purchasers could 

increase B-piece market liquidity and, 

in turn, reduce costs for CMBS 

sponsors, it also could dilute the 

incentives generated by the risk 

retention requirement to monitor the 

credit quality of the commercial 

mortgages in the pool, thereby 

undermining the intended benefits of 

the rule. Each B-piece investor who has 

exposure to significantly less than 5 

percent credit risk, would have not 

enough ‘‘skin in the game’’ to be 

incentivized to monitor the quality of 

underwriting as discussed in Section 

4.a.i. of this Economic Analysis. 

v. Government Sponsored Entities 

Option 

The final rule allows the full 

guarantee of the Enterprises under 

conservatorship or receivership to count 

as risk retention for purposes of the risk 

retention requirements. Because of the 

capital support provided by the U.S. 

government for the Enterprises, 

investors in Enterprise ABS are not 

exposed to credit loss, and there is no 

incremental benefit to be gained by 

requiring the Enterprises to retain risk. 

Commenters generally supported 

allowing the Enterprises’ guarantee to be 

an acceptable form of risk retention in 

accordance with the conditions 

proposed and did not suggest any 

alternatives. The agencies are adopting 

the Enterprise option as reproposed. 

This option along with the 

Enterprises’ capital support from the 

U.S. government creates a competitive 

advantage for the Enterprises over 

private-sector sponsors when 

purchasing non-QRM loans as long as 

they are conforming to the Enterprises 

underwriting standards. Recognizing the 

Enterprises’ guarantee as fulfilling their 

risk retention requirement and the 

resulting additional competitive 

advantage over sponsors of non-QRM 

conforming loans has two significant 

economic benefits. First, it will allow 

the Enterprises to facilitate the 

availability of capital to segments of the 

population that might not otherwise 

have access through private sector 

channels. Second, it will provide stable 

funding of home financing in periods 

when lenders curb their lending due to 

limited access to capital and privatesector sponsors are unable or unwilling 

to meet excess demand. 

A potential cost of recognizing the 

Enterprises’ guarantee as fulfilling their 

risk retention requirement is that it may 

incentivize them to purchase loans that 

do not meet the QRM criteria (i.e., 

expanding the Enterprises’ conforming 

loans underwriting criteria), which 

would introduce risk that the risk 

retention requirement is intended to 

mitigate. However, analysis of loans 

originated between 1997 and 2009, a 

period that spans the onset of the 

financial crisis, shows that private label 

loans had a much higher serious 

delinquency rate than Enterprise 

purchased loans, even after accounting 

for different underlying loan 

characteristics.446 Hence, this historical 

performance-based evidence suggests 

that Enterprise underwriting standards 

may offset any incentive to incur excess 

risk because of their capital support, at 

least in relation to the incentives and 

behaviors among private label sponsors 

during the same period. 

If the Enterprises’ conservatorship is 

terminated, their securitizations will no 

longer be exempt from risk retention 

requirements unless the securitized 

assets meet the QRM definition. This 

will put the Enterprises on even footing 

with private label securitizations in 

terms of risk retention, but, as was the 

case before the crisis, the Enterprises 

still carry an implicit guarantee of the 

U.S. government and, thus, will retain 

some of their funding advantage for both 

QRM and non-QRM securitizations. 

Private label securitizations may still 

have limited ability to be a significant 

source of capital to conforming nonQRM loan originations until the 

Enterprises wind down their activity or 

the implicit guarantee is eliminated. As 

is the case now, private label 

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77726 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

447 In balance sheet CLOs the originator of the 

loan is the sponsor or an affiliate of the sponsor. 

For balance sheet CLOs, economically there is no 

difference between the lead arranger option and 

standard risk retention when the sponsor is the 

originator or its affiliate. 

448Based on Bloomberg L.P. data, the largest five 

banks arranged 47 percent of the syndicated 

leveraged loans in 2013. 

449One commenter pointed out that banks and 

other highly regulated financial entities represent 

almost the entire market of originators of the loans 

that comprise the assets collateralizing CLOs. This 

commenter stated that the requirement for lead 

arrangers to hold additional exposure to a borrower 

that is unhedged until maturity of the loan is 

generally inconsistent with prudent lending 

practices and internal lending policies. Such a 

requirement also, impacts the amount of other 

banking products that such lead arrangers can 

extend to other borrowers. 

securitizations would not have to 

compete with the Enterprises for 

securitizations of non-conforming loans 

(e.g., riskier non-qualified mortgage 

(non-QM) loans or jumbo loans), which 

will still fall outside of the Enterprises 

domain if current conforming loan 

underwriting standards remain in place. 

vi. Open Market Collateralized Loan 

Obligations 

A collateralized loan obligation (CLO) 

is an asset-backed security that is 

typically collateralized by portions of 

tranches of senior, secured commercial 

loans or similar obligations of borrowers 

who are of lower credit quality or that 

do not have a third-party evaluation of 

the likelihood of timely payment of 

interest and repayment of principal. 

Commenters distinguished between two 

general types of CLOs: open market 

CLOs and balance sheet CLOs. As 

described by commenters, a balance 

sheet CLO securitizes loans already held 

by a single institution or its affiliates in 

portfolio (including assets originated by 

the institution or its affiliate). An open 

market CLO securitizes assets purchased 

on the secondary market at the direction 

of an asset manager, in accordance with 

investment guidelines. Under the final 

rule, sponsors of CLOs are required to 

retain 5 percent of risk using the 

standard form of risk retention and have 

not been provided with an exemption 

from the rule’s requirements. CLOs are 

subject to the same sunset provisions as 

other non-residential mortgage 

securitizations. 

As an alternative to this standard risk 

retention, the agencies are adopting, as 

proposed, an option for sponsors of 

open market CLOs to satisfy the risk 

retention requirement by holding only 

‘‘CLO-eligible’’ tranches for which the 

syndicated loan’s ‘‘lead arranger’’ 

retains (for the duration of the loan) at 

least 5 percent of the tranche’s value. A 

syndication’s ‘‘lead arranger’’ is defined 

as a syndicated member that holds an 

initial allocation of the overall 

syndicated credit facility equal to (at 

least) the greater of (a) 20 percent of the 

aggregate principal balance and (b) the 

largest allocation taken by any other 

member (or members affiliated with 

each other) of the syndication group. 

The agencies have defined open market 

CLOs for purposes of the lead arranger 

option being adopted. The analysis 

below considers the impact of the risk 

retention requirements and the lead 

arranger option on the market for open 

market CLOs, which was the subject of 

many comment letters.447

Under the final rule, the risk retention 

requirements for open market CLOs are 

subject to the same sunset provisions as 

other non-residential mortgage 

securitizations. These provisions require 

CLO sponsors to retain risk until the 

latest of: (1) The date on which the 

principal balance of the securitized 

assets reduces to 33 percent of the 

original unpaid principal balance as of 

the cut-off date or similar date for 

establishing the composition of the 

securitized assets collateralizing the 

asset-backed securities issued pursuant 

to the securitization transaction, (2) the 

date on which the unpaid principal 

obligations of securities has been 

reduced to 33 percent of the original 

unpaid principal obligations at the 

closing of the securitization transaction, 

or (3) two years after the date of the 

closing of the securitization transaction. 

The loans backing CLOs typically 

have maturities that can extend beyond 

the term of the CLOs, particularly when 

the loans are added to the pool after 

issuance, which could mean that loan 

balances of loans held by a CLO may not 

necessarily decrease prior to the 

maturity or redemption of the CLO. 

Hence, the final rule may effectively 

require the CLO manager (as the sponsor 

of the CLO) to retain risk beyond the 

minimum sunset period. This should 

lessen the incentive for managers to 

alter the composition of the loan 

portfolio in a way that could harm 

investors relative to what may be 

present with a shorter sunset period. 

A key difference between this lead 

arranger option and those related to, for 

example, commercial mortgage backed 

securities is that the CLO manager must 

rely on the lead arranger’s continuing 5 

percent retention of risk in the CLOeligible loans, in order for the CLO 

manager to satisfy its risk retention 

obligations. Thus, unlike a portfolio of 

commercial mortgages, the CLO 

requirement extends beyond the 

initiation date of the securitization so 

that the status of the lead arrangers’ 

continuing participation may affect the 

CLO manager. 

The agencies received many 

comments about the lead arranger 

option, and the impact of risk retention 

on the market for open market CLOs. 

These comments can be categorized into 

four main areas: (1) The impact of the 

lead arranger option on the availability 

and cost of leveraged loans; (2) the 

unwillingness or inability of arrangers 

to create CLO-eligible tranches; (3) 

alternative options for sponsors of open 

market CLOs to retain risk; and (4) 

general concerns about the impact of 

risk retention on the CLO industry and 

the syndicated loan market. 

Regarding the impact of the lead 

arranger option on borrowing costs, 

commenters asserted that the proposed 

option would be unworkable with 

existing CLO practices and therefore the 

risk retention requirements would result 

in a significant reduction in CLO 

issuances and a corresponding 

reduction in credit to commercial 

borrowers. Commenters further asserted 

that the requirement that the lead 

arranger retain at least 5 percent of an 

eligible tranche would increase the 

required capital and FDIC assessment 

charges, thereby increasing the pricing 

of CLO-eligible tranches, and adversely 

impacting borrowing costs. Moreover, 

some commenters noted that only a very 

small number of arrangers can meet the 

definition of ‘‘lead arranger’’ as 

proposed, because the syndication of 

leveraged loans is concentrated among a 

small number of banks.448 According to 

these commenters, requiring lead 

arrangers to hold a relatively large piece 

of these syndicated loans on their 

balance sheets would cause a 

substantial increase in their risk-based 

capital requirement.449 Further, 

commenters noted that the requirement 

to retain 5 percent of the eligible 

tranche, combined with the hedging and 

transfer restrictions, is inconsistent with 

sound risk management practices, 

overly burdensome in light of regulatory 

and lending limits and would reduce 

the lead arranger’s ability to extend 

credit. Commenters also stated that 

these additional costs, imposed on the 

lead arranger, would be passed on to the 

corporate borrowers, restricting access 

to and cost of capital. 

One commenter observed that only a 

handful of non-regulated entities have a 

sufficient amount of available capital to 

arrange and syndicate leveraged loans 

and satisfy the proposed risk retention 

requirements under the lead arranger 

option. According to this commenter, 

adopting the lead arranger option, as 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77727 

450See Leveraged Lending Guidance. However, as 

discussed above in Part III.B.7 of the 

Supplementary Information, the Federal banking 

agencies noted that there is evidence that increased 

activity in the leveraged loan market has coincided 

with widespread loosening of underwriting 

standards and that many banks have not fully 

implemented standards set forth in the guidance, 

see Semiannual Risk Perspective: Spring 2014, 

Office of the Comptroller of the Currency, at 5 (June 

2014), available at http://www.occ.gov/

publications/publications-by-type/otherpublications-reports/semiannual-risk-perspective/

semiannual-risk-perspective-spring-2014.pdf, 

Shared National Credits Program: 2013 Review, 

Board of Governors of the Federal Reserve System, 

Federal Deposit Insurance Corporation, Office of the 

Comptroller of the Currency (September 2013), 

available at http://www.federalreserve.gov/

newsevents/press/bcreg/bcreg20131010a1.pdf and 

‘‘Fed Scrutiny of Leveraged Loans Grows Along 

With Bubble Concern’’, Bloomberg News, October 

1, 2014, available at http://www.bloomberg.com/

news/2014-10-01/fed-scrutiny-of-leveraged-loansgrows-along-with-bubble-concern.html. 

451http://www.sec.gov/comments/s7-14-11/

s71411-535.pdf. 

proposed, would cause a severe 

contraction in CLO-related activities by 

regulated institutions and a significant 

reduction in liquidity to a critical sector 

of the U.S. economy. The Commission 

notes, however, that this conclusion 

assumes that other lenders will not 

enter the market with sufficient capital 

to compensate for the loss of bank 

capital in the event that large banks 

curtail their involvement in the CLO 

sector. For example, other commenters 

asserted that if the risk retention 

requirement caused a reduction in 

participation by open market CLOs in 

the leveraged loan market, other 

institutions would enter the market to 

fill the unmet credit needs. Ultimately, 

if this were to occur, the commenters 

asserted that non-CLO credit providers 

likely would incur higher costs than the 

CLO credit providers that have operated 

in the past, and these costs would be 

passed along to the ultimate borrowers, 

raising their cost of funding. 

Commenters’ second main area of 

concern was the practical ability and 

willingness of originators to create and 

retain CLO-eligible tranches. One 

commenter stated that the lead arranger 

option is not workable because the 

implementation difficulties associated 

with creating CLO-eligible tranches are 

substantial and observed that surveyed 

banks have indicated they would not be 

willing to take on this endeavor. In 

particular, to qualify for the option, 

CLO-eligible tranches would be required 

to carry separate voting rights, which 

the same commenter asserted would be 

administratively unworkable and 

commercially unacceptable to the other 

parties to the loan transaction. 

Commenters also expressed concern 

that it was unclear how a CLO would be 

able to monitor whether the CLOeligible loan tranche continues to meet 

the necessary criteria. Commenters 

stated that the requirement that a lead 

arranger represent that the loans 

continue to meet the rule’s criteria 

exposes the lead arranger to potential 

liability that the lead arranger cannot 

realistically bear. While the Commission 

acknowledges these concerns, the 

Commission also notes that, because 

CLOs are a major source of funding for 

leveraged loan originators, there is 

significant economic incentive for 

arrangers to use the lead arranger option 

to ensure the continued participation of 

CLO managers. 

Other commenters argued that openmarket CLOs should be exempted from 

the risk retention requirements 

altogether because the organizational 

structure of open market CLOs provides 

investors with sufficient safeguards. 

These commenters indicated that open 

market CLOs operate independently of 

originators and are not part of, and do 

not pose the same risks as, the originateto-distribute model. They also asserted 

that CLO managers’ interests are fully 

aligned with the interests of CLO 

investors because CLO managers bear 

significant risk through their deferred, 

contingent compensation structure, 

which they noted is based heavily on 

performance of the underlying assets. 

Commenters also noted that most CLO 

managers are registered investment 

advisers, with associated fiduciary 

duties to their clients. Commenters also 

noted that many CLO managers are 

subject to existing regulations that 

provide meaningful protections against 

imprudent or inferior underwriting, 

including the leveraged lending 

guidance released by the Federal 

banking agencies in 2013.450

Commenters further asserted that 

existing industry best practices mitigate 

risks, and that CLO assets are actively 

managed and often include select senior 

secured commercial loans with investor 

protection features. More generally, 

commenters asserted that: (1) unlike 

many other securitizations, CLOs are 

securitizations of liquid assets and are 

structurally transparent, (2) CLOs have 

historically performed well even during 

the financial crisis, and (3) this strong 

performance is evidence that risk 

retention is unnecessary. 

Some commenters proposed a new 

option for ‘‘qualified CLOs’’ that would 

codify many of the existing practices of 

open-market CLOs and require CLO 

managers to hold 5 percent of the equity 

tranche of at least 8 percent of the value 

of the CLO. As discussed below, the 

Commission does not believe this 

option would provide sufficient 

incentive alignment for open-market 

CLOs. Although some commenters 

stated their belief that CLO managers 

select and manage CLO assets free from 

the potential conflicts and misaligned 

incentives related to the originate-todistribute model, the Commission notes 

that, without a risk retention 

requirement, there is little economic 

incentive to discourage practices 

associated with an originate-todistribute model from developing. 

The fourth category of comments 

reflected a general concern about the 

lead arranger option and the impact of 

risk retention on the market for open 

market CLOs. One commenter expressed 

concern that designating one tranche of 

a syndicated facility the CLO-eligible 

loan tranche would significantly affect 

the pricing of other tranches due to the 

decreased liquidity of such tranches, as 

such tranches would not be available for 

securitization in the CLO market. The 

same commenter noted that the universe 

of CLO-eligible loan tranches would be 

very limited and restrict the CLO 

manager’s ability to invest in a diverse 

number of loans. Further, several 

commenters asserted that the costs of 

imposing risk retention on CLO 

managers exceeds the benefits and that 

the agencies have not performed an 

adequate economic analysis in 

connection with the lead arranger 

option. 

One study by Oliver Wyman451

claimed that as a result of the proposed 

requirements, credit spreads will 

increase from 117 to 292 basis points 

and costs to borrowers will increase 

between $2.5 billion and $3.8 billion 

per year because non-CLO lenders will 

charge a higher interest rate to leveraged 

loan borrowers than CLOs. To arrive at 

these estimates, the study assumed that 

CLO managers unaffiliated with a large 

financial institution or market 

participant will no longer be able to 

provide capital to the leveraged loan 

market and that credit would not be 

provided to borrowers through other 

channels. 

In reaching these conclusions, the 

study makes several assumptions that 

are questionable. For instance, the study 

assumes that CLO managers cannot or 

will not be able to hold 5 percent risk 

retention. However, the Commission 

believes that there may be economically 

feasible means for CLO managers to 

meet the risk retention requirements, 

particularly if there is economic 

incentive of the magnitude described in 

the study (i.e., predicted spread 

increases ranging from 100 to 200 basis 

points). Another assumption is that not 

enough lead arrangers will use the lead 

arranger option which will mean there 

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77728 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

452 Greg Nini, ‘‘Institutional Investors in 

Corporate Loans’’, University of Pennsylvania 

working paper, 2013, available at http://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=2349840. 

453The study asks the question ‘‘How much 

‘‘extra’’ yield would be needed to induce these nonCLO loan buyers to increase the amount of credit 

they are willing to supply?’’ and proceeds to 

estimate ‘‘the increase in credit quantity that nonCLO leveraged loan credit providers would have to 

supply to fully replace lost CLO capacity.’’ 

454See, e.g., Ng, S., and K. Haywood, 2009, ‘‘Rates 

Low, Firms Race to Refinance Their Debts,’’ The 

Wall Street Journal, June 26, 2009, http://

online.wsj.com/articles/SB124597520948957427. 

They observe: ‘‘Bankers and borrowers alike worry 

that the overhang could create serious problems in 

the years ahead if financial markets don’t heal 

enough to allow hundreds of non-investment-grade 

companies to refinance their debt.’’ 455See Bloomberg Business Week, January 1, 

2014, available at http://www.businessweek.com/

news/2014-01-31/leveraged-loan-trades-in-u-dot-sdot-rise-to-most-since-07-lsta-says. 

will not be enough CLO-eligible 

tranches for CLOs to be formed using 

the lead arranger option. Given that 

CLOs currently account for a significant 

portion of the leveraged loan market, 

there are significant economic 

incentives for loan arrangers to create 

CLO-eligible tranches particularly 

because, by not doing so, originators 

may not have enough demand for their 

issuances. Hence, lead arrangers may 

make CLO-eligible tranches available, 

which would create enough 

diversification and supply for CLOs to 

rely on the lead arranger option. 

The study’s third assumption relies 

on an estimate of elasticity of supply of 

credit in the leveraged loan market (i.e., 

the change in the availability of credit 

associated with a given change in the 

loan interest rate). The study proxied for 

the elasticity of supply of credit with an 

estimate of elasticity of demand for 

credit in the leveraged loan market (i.e., 

the change in the borrowers’ demand for 

credit associated with a given change in 

the loan interest rate) published in 

another (academic) study.452 However, 

the commenter’s study does not justify 

its assumption that the elasticity of 

supply should be equal to the elasticity 

of demand. Indeed, the commenter’s 

study implicitly assumes that demand is 

inelastic and would not change in 

response to the change in interest rate 

(i.e., that borrowers would demand the 

same amount of credit regardless of the 

level of interest rates). The commenter’s 

study also assumes that the credit 

supply curve would not shift in 

response to the change in interest rate 

(i.e., as a result of entrance of new 

lenders).453 Taken together, the 

Commission believes the assumptions 

in the commenter’s study contribute to 

an estimate of the cost to the leveraged 

loan and the CLO industry that is likely 

to be significantly inflated. 

More generally, there are several 

considerations that could affect the 

extent of the rule’s impact on the 

leveraged loan market, as described in 

the commenter’s study. One 

consideration is that non-CLO investors 

might invest more capital given the right 

incentives (higher yields or less risk). 

These investors include hedge funds, 

loan mutual funds, and insurance 

companies. Another possibility is that 

these investors, instead of purchasing 

leveraged loans on the secondary 

market, would join in as part of the 

syndication. Finally, CLO managers 

with lower cost of funds and capability 

to satisfy the risk retention requirements 

may replace some of the supply of credit 

lost due to exit from the market of CLO 

managers with higher cost of funds. Any 

of these possibilities would mitigate the 

loss of CLO capital as other investors 

invested more capital into the leveraged 

loan market. 

Although the Commission 

acknowledges commenters’ concerns 

about the lead arranger option, the 

Commission does not believe there is an 

economic justification for an exemption 

from the standard 5 percent risk 

retention requirement for CLOs. The 

Commission believes that the amount of 

risk retention included in the alternative 

approach suggested by commenters of a 

CLO option retaining 5 percent of the 

equity tranche of at least 8 percent of 

the value of the CLO transaction 

(effectively amounting to as low as 0.4 

percent risk retention in the entire 

securitization) would not sufficiently 

address the originate-to-distribute risks 

in the leveraged loan market. In 

particular, a CLO market absent of 

meaningful risk retention may not have 

the protections against future moral 

hazard problems that the final rule is 

designed to provide. The Commission 

acknowledges that risk retention may 

generate significant upfront costs to the 

CLO and the leveraged loan market 

relative to current practices or the 

proposed alternatives provided by 

commenters. However, the Commission 

believes that these current practices and 

the proposed alternatives would not do 

enough to align incentives between 

sponsors and investors which, in the 

long term, could impose larger costs on 

the market than the risk retention 

requirements of the final rule. 

The Commission is also sensitive to 

the claim by commenters that the CLO 

market performed well during the 

financial crisis in comparison to other 

asset classes and, in particular, to 

RMBS. However, the Commission 

believes that this claim has the benefit 

of hindsight, and that during the 

financial crisis, there were considerable 

concerns with the ability of borrowers to 

meet their financial obligations through 

their collateralized loans.454 Ultimately, 

aggressive monetary policy resulted in 

sharp declines in the interest rates 

payable on floating-rate leveraged loans, 

making it easier for borrowers to meet 

their loan obligations. The Commission 

believes that it is this extraordinary 

influence on borrowing costs, and not 

the underlying market practices of CLO 

managers, which largely explains CLO 

performance during the financial crisis. 

Hence, CLO performance during the 

financial crisis does not provide a sound 

basis for an exemption from the rule’s 

requirements. 

The Commission believes that 

commenters’ alternative suggestions do 

not create sufficient incentive 

alignment, or ‘‘skin in the game,’’ for 

sponsors to ensure that originators 

maintain high underwriting standards 

in accordance with the purposes of 

Section 15G. While the Oliver Wyman 

study claims that risk retention will 

have a large negative impact on the 

leverage loan market and the CLO 

industry, the Commission believes that 

the assumptions underlying that 

assessment are questionable. In 

particular, the study assumes that CLO 

managers, who currently hold 53 

percent 455 of the leveraged loans sold 

by originators, will no longer be able to 

purchase leveraged loans and that a 

significant proportion would otherwise 

go unfunded. The Commission 

acknowledges that this may increase 

cost to leveraged loans borrowers, but, 

for the reasons explained above, the 

Commission believes these are likely to 

be at a much lower level than the study 

suggests. Originators may sell leveraged 

loans to other purchasers, in which 

case, as discussed below, smaller CLO 

managers may be affected but there 

would not be a significant impact on the 

CLO market. 

Under current practices in the 

leveraged loan market, syndicates hold 

the revolving piece of the origination, 

which is a line of credit that allows the 

borrower to drawdown additional 

capital from the arranger. Hence, the 

revolving piece of a leveraged loan 

represents a potential future liability to 

the lead arranger that could ultimately 

increase the amount of risk retained. 

The agencies did not create an option 

for treating this future liability as 

retained risk. In this way, the final rule 

may result in the lead arranger holding 

more exposure to the borrower of the 

leveraged loan than what would be 

required to satisfy the risk retention 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77729 

456See commentaries by Wells Capital 

Management, ‘‘Global Opportunities in Bank 

Loans’’, February 2014, available at http://

www.wellscap.com/docs/expert_commentary/

global_bank_loans_0214.pdf and by Loomis, Sayles 

& Company, L.P. Investment, ‘‘The Myth of 

Overcrowding in the Bank Loan Market’’, May 

2014, available at http://www.loomissayles.com/

internet/internetdata.nsf/0/

CA96B70BA0BE8BB585257CD8004F1A03/$FILE/

The-Myth-of-Overcrowding-in-the-Bank-LoanMarket.pdf for the leveraged loan investor base 

breakdown. Statistics from both of these sources are 

based on data from Standard & Poor’s Capital IQ 

Leveraged Commentary & Data. 

requirement. Therefore, allowing the 

lead arranger to hold risk retention in 

place of the CLO manager should not 

diminish, and may increase, the 

alignment of incentives between loan 

arrangers and ultimate investors in the 

CLO, by providing strong incentives for 

the loan arranger to create loans with 

high underwriting standards. 

The impact of the lead arranger option 

on the leveraged loan market will be 

determined by the likelihood that lead 

arrangers are willing to retain risk in the 

manner required and CLO managers are 

willing to rely on this commitment. As 

commenters stated, there are frictions in 

the market that may prevent CLO 

managers from purchasing CLO-eligible 

loans or originators from creating CLOeligible tranches. CLO managers may 

not be able to ensure that the bank will 

meet the CLO-eligible tranche 

requirements for the length of the loan. 

In addition, the special voting rights 

attached to the CLO-eligible tranche 

may prevent other parties from wanting 

to create a CLO-eligible tranche. 

Large commercial banks are the 

primary source for leveraged loan 

origination and may be reluctant to 

retain ongoing exposure to leveraged 

loans because the loans are typically 

longer term and riskier than the other 

assets banks usually hold on their 

balance sheet. As such, they may not be 

willing to serve as a lead arranger for the 

purpose of creating a CLO-eligible 

tranche. Should these banks choose to 

create CLO-eligible tranches to facilitate 

additional demand for their 

originations, it is possible that they 

would charge borrowers higher rates to 

compensate for the additional capital 

charge they could incur under existing 

regulatory requirements, or because it 

would impede a redeployment of capital 

for other projects. 

CLO managers that use the lead 

arranger option will be relying on lead 

arranger commitments to hold 5 percent 

of the CLO-eligible tranche for the 

duration of the loan. A CLO manager 

relying on the lead arranger option 

would need to sell any tranches that 

cease to be CLO-eligible tranches due to 

the failure of a loan arranger to hold the 

required amount of risk, which could 

generate an otherwise unnecessary loss 

if the forced sale provides a buyer with 

leverage to negotiate a discount. 

However, a CLO manager should have 

some level of confidence in a lead 

arranger’s ongoing commitment to meet 

the requirement because there will be 

recourse against the lead arranger for 

breach of contract, as the lead arranger 

will warrant in the transaction 

documents to hold 5 percent of the 

CLO-eligible tranche for the duration of 

the loan. Any costs the CLO manager 

incurs from the forced sale of the loan 

could be part of their claim against the 

loan arranger for breach of contract. 

Moreover, failure of a lead arranger to 

keep this commitment could harm their 

reputation with respect to continued 

participation in the leveraged loan 

market because potential CLO managers 

would be less willing to engage in their 

transactions, leaving the lead arranger 

unable to sell or face higher costs in 

selling CLO-eligible loan tranches or 

any other loans, in the future. 

To accommodate potential demand 

for CLO-eligible tranches and the 

concomitant costs of the ongoing credit 

exposure from the risk retention 

requirement, lead arrangers may be 

willing to charge higher rates to 

borrowers and, as a result, continue 

generating revenue from underwriting, 

warehousing, and selling leveraged 

loans. There is strong incentive for loan 

arrangers to do so given that CLO 

purchases of leveraged loans currently 

represent about half of the total 

investment in the leveraged loan 

market.456 The prospect of CLO 

managers declining to purchase non 

CLO-eligible loan tranches should 

encourage lead arrangers to hold enough 

exposure to create CLO-eligible tranches 

in order to meet current investor 

demand. Hence, the Commission 

believes that CLO managers have 

significant influence over, and lead 

arrangers will have increased incentive 

to facilitate, the use of the lead arranger 

option and the creation of CLO-eligible 

tranches. Moreover, if non-CLO 

investors perceive loans with CLOeligible tranches as higher quality loans, 

this may create additional demand for 

CLO-eligible tranches that would lead to 

higher prices and lower interest rates for 

such loans. 

The Commission acknowledges the 

concerns about the workability of the 

option expressed in the comment letters 

and, as described above, has considered 

the attendant costs, but continues to 

believe that adopting the lead arranger 

option in the final rule will provide 

CLOs with additional meaningful 

flexibility in satisfying the risk retention 

requirements. 

If the lead arranger option is not used, 

then CLO managers will have to satisfy 

the risk retention requirement using one 

of the standard options. In this case, the 

Commission recognizes that the final 

rule may have differing impacts on CLO 

managers, which could have a negative 

effect on competition. The amount of 

capital available to managers can vary 

with the size and affiliations of the 

manager. In particular, the availability 

and cost of capital for managers with a 

relatively smaller amount of capital 

available to finance required risk 

retention may be less favorable than for 

managers with access to larger balance 

sheets or sources of capital. This could 

result in different funding costs between 

smaller and larger managers and could 

impact competition by creating an 

advantage for managers with lower 

funding costs, particularly larger 

financial institutions and banks. 

If smaller CLO managers do not have 

sufficient available capital to hold 5 

percent risk retention, then they will be 

unable to sponsor CLO transactions 

unless they are able to get funding from 

another source. A reduction in CLO 

managers may reduce the number of 

CLOs, which may lead to a decrease in 

capital formation, a decrease in price 

efficiency for leveraged loans, and a 

decrease in competition for leveraged 

loans. If this impairs the supply of 

capital to borrowers using leveraged 

loans, such borrowers could expect to 

pay higher rates or have less access to 

financing. This potential impact on 

capital formation is ameliorated to the 

extent that larger CLO managers—or 

other potential investors—are able to 

replace smaller CLO managers as buyers 

of leveraged loans. Such an outcome 

would benefit these other investors at 

the expense of smaller CLO managers. 

A number of commenters asserted 

that the final rule would force many 

smaller CLO managers to exit the CLO 

market. Because the Commission did 

not have data with respect to the cost of 

funds for each CLO manager or each 

CLO manager’s desired return on 

capital, the Commission was unable to 

directly analyze the potential cost of the 

additional capital necessary to satisfy 

the risk retention requirements or the 

relative portion of the current CLO 

market managed by those smaller CLO 

managers that would no longer sponsor 

CLOs as a result of the increased costs. 

In order to estimate the potential impact 

of the exit of smaller CLO managers 

from the market, the Commission 

identified and categorized 111 CLO 

managers known to have participated in 

the CLO market between 2009 and 2013 

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77730 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

457CLO market issuance data and the list of CLO 

managers that were analyzed are from the AssetBacked Alert database. The Commission categorized 

CLO sponsors that issued CLOs in the U.S. between 

January 1, 2009 and December 31, 2013. In order 

to estimate the possible impact of the risk retention 

requirement we examine the fraction of the CLO 

market that each group comprises. A sponsor’s 

category was determined by using the 2014 Fitch 

Ratings CLO Asset Manager Handbook, sponsors’ 

Web sites and other publicly available information. 

If it was not immediately apparent which category 

best described a manager, a conservative approach 

was taken and such manager was included in the 

category of managers with limited access to capital. 

458The second category of CLO managers would 

also include those CLO managers that maintain a 

listing of a class of securities on an exchange in a 

non-U.S. jurisdiction. 

459The Oliver Wyman estimate is based on a 

sample of the top 30 CLO managers and the 

assumption that managers that could feasibly hold 

the 5 percent risk retention make up 25 percent of 

the CLO assets under management. 

460 14.8 percent is the product of the CLO market 

share of the leveraged loan market, 50 percent, the 

CLO managers market share of those CLO managers 

that the Commission believe it would be reasonable 

to assume could exit the CLO market, 37 percent, 

and the fraction of risk-sensitive investors in such 

CLOs that would not invest through other means, 

80 percent (the percentage of risk-sensitive 

investors assumed by the Oliver Wyman study). 

461See footnote 456 for references. 

using categorizations that serve as a 

proxy for the CLO managers’ access to 

capital, whether internal or external, 

and thus their potential capital capacity 

and ability to satisfy the risk retention 

requirements.457 The first category 

included CLO managers that are not 

subject to the periodic reporting 

requirements of the Exchange Act and 

do not appear to be subsidiaries of or 

affiliated with other financial 

institutions (banks, insurance 

companies, diversified asset managers 

that managed investment vehicles other 

than CLOs, etc.), which the Commission 

believes is the set of CLO managers that 

may face the greatest burden in 

obtaining capital to finance and retain 

the 5 percent required risk retention. 

These CLO managers were responsible 

for 39 percent of the CLO market 

issuances between 2009 and 2013, 37 

percent by dollar volume, and 

represented 48 percent of all CLO 

managers analyzed. 

The second category included CLO 

managers who fall into at least one of 

the following categories (A) subject to 

the periodic reporting requirements of 

the Exchange Act,458 or (B) also the 

sponsor of asset-backed securities other 

than CLOs, or (C) a bank or insurance 

company, or (D) affiliated with, or 

otherwise related to an entity described 

in (A), (B) or (C). These CLO managers 

were responsible for 61 percent of CLO 

issuances between 2009 and 2013 by 

number or 63 percent of CLO issuance 

by dollar volume, and represented 52 

percent of the population of CLO 

managers analyzed. The Commission 

believes that the second category of CLO 

managers, given their affiliations, 

diversified business lines and 

demonstrated ability to raise capital in 

public capital markets, would have 

greater access to capital, whether 

internal or external, and would face 

fewer obstacles and lower funding costs 

to obtain the capital necessary to satisfy 

the risk retention requirements. 

If the risk retention requirements 

cause certain CLO managers to exit the 

leveraged loan market, there could be a 

commensurate decrease in the supply of 

capital unless other investors 

compensate for their exit. From the 

above analysis, the Commission believes 

it would be reasonable to estimate that 

the exit of the first category of CLO 

managers from the CLO market could 

impact current levels of capital 

formation by CLOs by 37 percent, which 

is considerably less than Oliver Wyman 

lower bound estimate of 60 percent.459

The Commission believes that a 

significantly greater impact would be 

unlikely without an exit from the 

market of entities with potentially easier 

access to capital. 

The potential impact of the loss of 

certain CLO managers will depend on 

whether the CLO investors would 

continue to supply credit to the 

leveraged loan market through 

alternative channels. If some senior CLO 

tranches become unavailable, then, 

because of their sensitivity to credit risk, 

banks and other investors whose 

investment guidelines require 

purchasing of very high quality loans 

(e.g., triple-A rated) and who buy senior 

CLO tranches may be less likely to 

provide direct investment into leveraged 

loan market, which offers higher risk 

(e.g., single-B rated) investments on 

average. In contrast, CLO investors who 

seek higher returns and tend to be less 

sensitive to credit risk may decide to 

participate directly in the leveraged loan 

market or use other intermediaries to do 

so because they have an appetite for that 

level of credit risk. Both categories of 

investors may channel their investments 

into one of multiple existing 

participants in the leveraged loan 

market. Mutual funds, private equity 

funds, private equity mezzanine loan 

funds and credit funds (entities that are 

generally formed as partnerships with 

third-party capital and invest in loans or 

make loans or otherwise extend the type 

of credit that banks are authorized to 

undertake on their own balance sheet) 

currently invest directly in the 

leveraged loan market and may increase 

their direct purchase of leveraged loans 

if smaller CLO managers exit the 

market. Thus, there are multiple 

existing sources of capital that could 

compensate for any potential exit of 

some CLO managers. 

Based on estimates of the CLO 

investor base in the Oliver Wyman 

study (Exhibit 4 of the study), 

approximately 20 percent of CLO 

tranches are rated ‘‘BBB’’ or lower and 

are held by asset managers and other 

investors such as hedge funds, pension 

funds, and structured credit funds. If 

certain CLO deals were no longer 

available, assuming that these investors 

in lower rated tranches would be able to 

find an alternative channel to invest in 

the leveraged loan market and the 

remaining 80 percent (the risk-sensitive 

investors that purchase higher quality 

tranches) would not, then the overall 

estimated impact of a 37 percent decline 

in the supply of credit from the 

potential exit of certain CLO managers 

would account for an approximately 

14.8 percent reduction in supply of 

capital to the leveraged loan market.460

This assumes CLO sponsors comprise 

approximately 50 percent of the 

leveraged loan market,461 and that any 

resulting increase in the underlying loan 

rates would not encourage the 

emergence of other capital sources. 

Because risk-sensitive CLO investors 

have other relatively low risk means of 

investing in the leveraged loan market 

(e.g., mutual funds that concentrate on 

leveraged loans), the Commission 

believes that the actual impact may be 

lower. 

vii. Qualified Tender Option Bonds 

The final rule includes two options 

for tender option bonds (TOBs). Both 

options require 100 percent liquidity 

protection and provide for a mechanism 

by which the sponsors’ incentives are 

aligned with the investors. In the first 

option, the sponsor maintains 

horizontal risk retention unless there is 

a tender option termination event 

(TOTE), in which case the sponsor’s 

interest converts to vertical risk 

retention. After a TOTE, the sponsors 

will receive a distribution pari passu 

with tender option bond holders. In a 

termination that is triggered by an event 

that is not a TOTE the sponsor will 

continue to hold horizontal risk 

retention and will receive the remaining 

balance after the distribution is paid to 

the bond holders. The second option, 

which is very similar to a representative 

sample option, allows the sponsor to 

sell the entire TOB but requires the 

sponsor to hold municipal securities 

from the same issuance with a face 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77731 

462See Section 5.b.ii of this Economic Analysis 

for a discussion of comments on a representative 

sample option. 

value of 5 percent of the deposited 

municipal security. 

Commenters suggested providing a 

full exemption for TOBs, not counting 

TOBs as a securitization, or allowing 

third-party risk retention. Commenters 

also requested an exemption or 

recognition of unfunded risk retention 

in the form of liquidity support. They 

also commented on the cost to the TOB 

market, however, no commenter 

provided data to allow us to calculate 

potential costs from requiring risk 

retention to the TOB market. Requiring 

TOBs to hold risk retention imposes a 

cost on sponsors who were not currently 

retaining exposure to credit risk in a 

form permissible under the final rule. 

After considering comments, the 

agencies have decided to adopt the 

reproposal options with some changes 

to further accommodate market 

practices. The agencies were not 

persuaded to create a structural 

exemption for TOBs, as commenters 

requested, as this would exempt future 

TOB structures, with unknown 

incentive alignment, from risk retention. 

Under the final rule, the agencies are 

accommodating the bulk of those 

structures currently issuing in the 

market. 

By accommodating current market 

practice, these options help reduce the 

cost of retaining risk but still effectively 

align the incentives between sponsors 

and investors. The first option, by 

accommodating TOB tax requirements, 

allows TOBs to hold horizontal risk 

retention. In the absence of this 

accommodation, any TOB that tried to 

retain risk using the standard horizontal 

form would be in violation of the IRS 

tax code, invalidating the tax exemption 

of the TOB structure. By allowing TOB 

sponsors to hold horizontal risk 

retention while maintaining their tax 

exemption the first option provides 

additional flexibility for TOB sponsors 

to retain risk in a manner that better 

suits their specific needs, thereby 

reducing compliance costs. At the same 

time, investor-sponsor incentive 

alignment is maintained because 

sponsors have horizontal risk retention 

for the duration of the TOB unless a 

TOTE occurs at which time the TOB is 

terminated and the sponsor shares any 

losses with the investors in a pro-rata 

manner. 

The agencies believe that the second 

option described above is appropriate in 

this specific context (as opposed to 

other ABS markets where the agencies 

do not adopt a representative sample 

option) because most TOBs are made up 

of one municipal bond, which is the 

same bond held by the sponsor. Thus, 

there are no characteristics of 

underlying assets that might make the 

representative sample different from the 

underlying assets, thereby skewing 

incentives between the sponsor and 

investor different. Consequently, the 

second option does not pose the same 

complexities and costs that make the 

representative sample option not 

feasible in other contexts. As with the 

first option, permitting this additional 

flexibility will help to reduce costs for 

TOB sponsors without jeopardizing 

investors’ interests. In addition, the 

alignment of incentives may encourage 

investors to invest in the TOB market, 

which may increase capital formation. If 

there are more investors, liquidity will 

also increase, which may lead to 

increased price efficiency and reduce 

the cost of capital within the TOB 

market. 

As mentioned above, existing TOB 

transactions typically have a 100 

percent liquidity guarantee, which the 

sponsor (or an affiliate) may be 

providing. Thus requiring the sponsor to 

retain 5 percent of the risk despite this 

liquidity guarantee will impose 

additional costs but helps to ensure that 

the sponsor is selecting high-quality 

municipal bonds and not selling off 

their risk to a third party. The 

Commission also acknowledges that 

because these options are based on 

current TOB structures it may be too 

costly for new structures to be created. 

This may impact competition by 

creating a barrier to entry for future 

novel types of TOB structures. 

viii. Alternatives 

In developing the forms of 

permissible risk retention to be included 

the final rule, the agencies considered a 

number of alternative approaches. Some 

of the alternatives were suggested by 

commenters and considered by the 

agencies following the previous rule 

proposals. 

In response to the reproposal, for 

instance, several commenters requested 

that the final rule recognize other forms 

of, or substitutes for, risk retention such 

as: third party credit support, including 

insurance policies, guarantees, liquidity 

facilities, and standby letters of credit; 

5 percent participation interest in each 

securitized asset; representations and 

warranties; ‘‘contractual’’ risk retention; 

private mortgage insurance; 

overcollateralization; subordination; 

and conditional cash flows. One 

commenter requested that the final rule, 

at a minimum, should permit such 

forms of unfunded risk retention for a 

sub-set of sponsors, such as regulated 

banks. Another commenter asserted that 

the final rule should provide more 

flexibility by allowing sponsors to 

satisfy their risk retention requirement 

through a combination of various means 

and that the rule should not mandate 

forms of risk retention for specific types 

of asset classes or specific types of 

transactions. 

The agencies have generally declined 

to recognize unfunded forms of risk 

retention for the purposes of the final 

rule, except in the case of the 

Enterprises under the conditions 

specified for their guarantees. The 

Commission acknowledges that 

recognizing unfunded forms of risk 

retention could help to reduce the costs 

of compliance, since many of these 

features are currently used, to varying 

degrees, in the securitization market. 

However, because these forms of credit 

support generally are not funded at 

closing, they may not be available to 

absorb credit losses at the time such 

losses occur. Therefore, the Commission 

believes that unfunded forms of risk 

retention fail to provide sufficient 

alignment of incentives between 

sponsors and investors and could 

impose unwarranted costs on investors 

if recognized as an eligible form of risk 

retention. 

Further, the agencies received several 

comments requesting that the final rule 

include a representative sample or 

participation interest option.462 The 

agencies considered allowing for loan 

participations as a means of satisfying 

the risk retention requirements. The 

agencies were concerned that offering 

loan participations as a standard option 

would introduce substantial additional 

complexity to the rule in order to ensure 

that these forms of retention were 

implemented in a way that ensured that 

the holder had the same economic 

exposure as the holder of an ABS 

interest. In addition, the agencies were 

concerned that permitting these types of 

interests to be held as risk retention 

could raise concerns about regulatory 

capital arbitrage. Accordingly, the 

agencies decided not to add a loan 

participation option to the menu of risk 

retention options. Since, according to 

one commenter, the option currently is 

not widely used by the market, the 

Commission believes that there may be 

little economic benefit to allowing this 

option. 

c. Allocation to the Originator 

The final rule permits the originator 

to share the risk retained by the sponsor. 

Specifically, the rule permits a sponsor 

to reduce its required risk retention 

obligations in a securitization 

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77732 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

463The amount of the retention interest held by 

each originator that is allocated credit risk in 

accordance with the final rule is required to be at 

least 20 percent, but not in excess of the percentage 

of the securitized assets it originated. 

transaction by the portion of risk 

retention obligations assumed by one or 

more of the originators of the securitized 

assets as long as the originator originates 

at least 20 percent of the securitized 

assets in the underlying asset pool. The 

originator is required to hold its 

allocated share of the risk retention 

obligation 463 in the same manner as 

would have been required of the 

sponsor, and subject to the same 

restrictions on transferring, hedging, or 

financing the retained interest. 

Comments on the allocation-tooriginator proposal focused on the 20 

percent threshold for allocation and the 

requirement that an originator to which 

risk retention was allocated share pro 

rata in all of the losses allocated to the 

type of interest (i.e., horizontal or 

vertical) it holds rather than only the 

losses on assets that it originated. Some 

of the commenters asserted that the 20 

percent minimum should be eliminated 

and that it would hurt small originators 

while another commenter supported the 

limit and asserted that it protected small 

originators. With respect to the required 

pro rata sharing by the originator, 

commenters stated that because 

securitization tranches are developed so 

that tranche holders share pari passu in 

losses, it would cause unnecessary 

complexity to limit an originator’s 

interests to the loans that it had 

originated. The agencies concluded that 

the changes to the reproposal suggested 

by the commenters are not necessary or 

appropriate. Therefore, the agencies are 

adopting the option largely as 

reproposed with minor changes. 

This option benefits sponsors by 

allowing them to reduce their costs of 

retaining risk by sharing the costs with 

willing originators. This is also a benefit 

to investors as incentives are aligned at 

the level closer to loan origination, 

which could increase investor 

confidence and improve capital 

formation. As commenters noted, the 

allocation to originator option may 

create barriers to entry for smaller 

originators who will not be able to 

afford to share in retaining risk and 

therefore find their portfolios less liquid 

or more costly for sponsors to purchase. 

This would negatively affect 

competition within the securitization 

market. However, as noted above, the 20 

percent threshold serves to make the 

allocation option available only for 

entities whose assets form a significant 

portion of a pool and who, thus, 

ordinarily could be expected to have 

some bargaining power with a sponsor. 

This will prevent sponsors from forcing 

the allocation to originator on smaller 

originators as a condition of buying the 

loans they originate that can increase 

cost of capital for such small originators 

or force such originators from the 

market thereby reducing competition. In 

addition, allowing smaller originators to 

retain a smaller fraction of credit risk of 

the pool could dilute the incentives 

generated by the risk retention 

requirement to monitor the credit 

quality of the loans in the pool, thereby 

undermining the intended benefits of 

the rule. A benefit of the adopted 

approach is that larger originators will 

be are able to help smaller sponsors that 

may have a harder time retaining risk 

and otherwise would not participate in 

the asset-backed securities market. 

Providing more sponsors with feasible 

options in meeting the requirements 

may increase capital formation and 

allocative efficiency. 

d. Hedging, Transfer and Financing 

Restrictions 

Under the final rule, a sponsor and its 

consolidated affiliates generally would 

be prohibited from hedging or 

transferring the risk they are required to 

retain, except for currency and interest 

rate hedges and some index hedging. 

Additionally, the sponsor and its 

consolidated affiliates would be 

prohibited from financing the retained 

interest on a non-recourse basis. 

While some commenters supported 

the proposed restrictions on hedging, 

others criticized the provisions as being 

overly restrictive, and certain 

commenters requested clarification as to 

the scope of the proposed restrictions. 

According to some commenters, the 

proposed restrictions were overly broad, 

raising questions about what constitutes 

permissible and impermissible hedges. 

The agencies are adopting hedging, 

transfer and financing restrictions as 

reproposed. Without the hedging and 

transfer restrictions, sponsors could 

hedge/transfer their (credit) risk 

exposure to the retained interests, 

thereby eliminating the ‘‘skin in the 

game’’ intent of the rule. Thus, the 

restriction benefits investors by 

preventing actions that could 

undermine the purpose of the final rule. 

More narrowly tailored restrictions 

could impose costs on investors by 

inadvertently excluding transactions 

that have the effect of hedging or 

transferring credit risk. On the other 

hand, the broad nature of the adopted 

restrictions could create uncertainty 

about which transactions are covered by 

the prohibition. This uncertainty may 

induce strategic responses that are 

designed to evade the rule. For example, 

derivative or cash instrument positions 

can be used to hedge risk, but it may be 

difficult to determine whether such a 

hedge is designed to evade the rule. 

Costs related to the hedging and 

transfer restrictions include direct 

administrative costs and compliance 

monitoring costs. The hedging, transfer, 

and financing restrictions cover 

sponsors and their affiliates, and, thus, 

to assure compliance a sponsor must 

track both its own portfolio and the 

portfolios of all its affiliates to verify 

that no prohibited transactions are 

included in the aggregate portfolio. 

Such tracking may present additional 

challenges for large financial 

organizations with many affiliates. 

However, because the hedging and 

transfer prohibitions cover only hedging 

against the risks of the specific pool or 

securities based on the specific pool, the 

ultimate cost of monitoring compliance 

should be minimal even for large 

organizations. 

6. General Exemptions 

In certain cases the agencies have 

determined to exempt asset classes from 

the risk retention requirements 

altogether or adopt reduced risk 

retention requirements. As discussed 

below, the Commission believes these 

exemptions are warranted because there 

is either sufficient incentive alignment 

already in place or other features to 

make further constraints unnecessary to 

address moral hazard concerns. In 

particular, the securitizations of these 

exempted asset classes have 

characteristics that help to ensure that 

the quality of the assets is high. For 

example, if the pool of assets are drawn 

from an asset class with a low 

probability of default, opportunities to 

exploit potentially misaligned 

incentives are fewer and investors may 

have a correspondingly lesser need for 

the protection accorded by risk 

retention requirements. Below the 

Commission describes the particular 

costs and benefits relevant to each of the 

asset classes that the agencies are 

exempting from risk retention. 

a. Federally Insured or Guaranteed 

Residential, Multifamily, and Health 

Care Mortgage Loan Assets 

Consistent with Section 15G, the 

agencies are adopting an exemption 

from the risk retention requirements for 

any securitization transaction that is 

collateralized solely by residential, 

multifamily, or health care facility 

mortgage loan assets if the assets are 

insured or guaranteed in whole or in 

part as to the payment of principal and 

interest by the United States or an 

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464The Federal Reserve Board Report to the 

Congress on Risk Retention, October 2010, available 

at http://www.federalreserve.gov/boarddocs/

rptcongress/securitization/riskretention.html. 

465FHA Single Family Loan Performance Trends, 

January 2014, Table 3, available at http://

portal.hud.gov/hudportal/HUD?src=/program_

offices/housing/hsgrroom/loanperformance. 

466Quarterly Report to Congress on FHA SingleFamily Mutual Mortgage Insurance Fund Programs, 

2014, Quarter 1, Exhibits A–1 and A–2 available at 

http://portal.hud.gov/hudportal/HUD?src=/

program_offices/housing/rmra/oe/rpts/rtc/

fhartcqtrly. 

467Other federal mortgage loan guarantee 

programs include programs run by the Department 

of Veterans Affairs, the Farm Service Agency (FSA), 

the Rural Housing Service (RHS), and the 

Department of Housing and Urban Development’s 

Office of Public and Indian Housing (PIH). Among 

them, for example, U.S. Department of Veterans 

Affairs guaranteed 630,000 loans in 2013 and Rural 

Housing Service guaranteed 163,000 loans in 2013, 

see 2013 VBA Performance and Accountability 

Report available at http://www.benefits.va.gov/

reports/annual_performance_reports.asp and USDA 

Rural Development Housing Obligations Fiscal Year 

2013 Year-End Report available at http://ruralhome.

org/storage/documents/rd_obligations/fy2013/

yearend/usdard-fy13-ye-obligations-combined.pdf. 

468See FHA Share of Home Purchase Activity, 

June 2012, available at http://portal.hud.gov/

hudportal/HUD?src=/program_offices/housing/

rmra/oe/rpts/fhamktsh/fhamkt. 

469 25 percent of the loan amount with a 

minimum guarantee of $36,000. 

470See Table 1 in Urban Institute Commentary, 

July 2014, ‘‘VA Loans Outperform FHA Loans. 

Why? And What Can We Learn?’’ available at 

http://www.urban.org/UploadedPDF/413182-VALoans-Outperform-FHA-Loans.pdf. 

471See the FHA Loan Performance Trends report 

available at http://portal.hud.gov/hudportal/

HUD?src=/program_offices/housing/hsgrroom/

loanperformance. 

472See footnote 471. 

473The serious delinquency rate for mortgages 

securitized through private-label RMBS is 

calculated by DERA staff based on MBSData 

dataset. 

474See FHA Share of Home Purchase Activity, 

June 2012, available at http://portal.hud.gov/

hudportal/HUD?src=/program_offices/housing/

rmra/oe/rpts/fhamktsh/fhamkt. 

agency of the United States. The 

agencies are also adopting an exemption 

from the risk retention requirements for 

any securitization transaction that 

involves the issuance of ABS if the ABS 

are insured or guaranteed as to the 

payment of principal and interest by the 

United States or an agency of the United 

States and that are collateralized solely 

by residential, multifamily, or health 

care facility mortgage loan assets, or 

interests in such assets. 

Several commenters expressed 

support for the exemption for 

securitization transactions collateralized 

solely by assets (or that involve the 

issuance of ABS) that are insured or 

guaranteed as to the payment of 

principal and interest by the United 

States or its agencies. One commenter 

urged the agencies to extend the 

government-backed exemptions to ABS 

backed by foreign governments. Another 

commenter requested that the agencies 

clarify that GSE securitizations of 

multifamily loans are exempt from the 

risk retention requirements. 

Risk retention is not currently 

mandated or practiced for these 

securitizations and, thus, this 

exemption will maintain consistency 

with current market practice. Because 

these securitizations are guaranteed by 

the United States or its agencies, and 

there is no default risk beyond what is 

otherwise priced in a U.S. Treasury 

security, there is no benefit to investors 

from sponsors retaining risk and it 

would otherwise create costs to 

sponsors where they are not necessary. 

However, the exemption will provide 

continued incentives to sponsors to use 

federally insured or guaranteed assets, 

which increases the value of the 

securities sold. This could have an 

adverse impact on the capital-raising 

ability of sponsors offering 

securitizations in the same asset classes 

where the underlying assets are not 

federally insured or guaranteed, 

requiring these sponsors to compete for 

investor capital by offering higher yields 

and thereby selling asset backed 

securities interests at lower prices. As a 

result, there may be less demand from 

sponsors and investors to securitize 

these (non-federally insured or 

guaranteed) assets under private labels, 

which would impede the capital 

formation process in public markets for 

originators in the same asset classes that 

do not qualify under these programs. 

This could, in turn, increase borrowing 

costs for underlying borrowers in these 

assets classes. 

There would be potentially significant 

effects, however, from not granting this 

exemption. In particular, these programs 

provide subsidized access to credit for 

consumers who may not otherwise 

qualify for loans underwritten by 

private issuers, and thereby promote 

social benefits in the public interest. For 

example, FHA-insured mortgages enable 

many home buyers, particularly those 

with impaired credit or who are first 

time buyers, to purchase a home with a 

low down payment that may not 

otherwise be possible because they 

would not qualify for a privately 

underwritten mortgage.464 The 

economic footprint of this program is 

large. At the end of 2013, the FHA had 

7.8 million active loans with insurance 

in force,465 and during that year (2013), 

insured 1.3 million new mortgages with 

the total loan value of $240 billion,466

larger than all other federally insured 

loan programs combined.467 In total, the 

FHA provided mortgage insurance to 

more than 15 percent of households that 

purchased houses in 2012.468

The exemption from the risk retention 

requirements for securitizations of 

federally insured or guaranteed loans 

will not provide for the incentive 

alignment that sponsors would 

otherwise have with investors in the 

securitization if they had an economic 

exposure to the performance of the 

securitization. We note, however, that 

under one large federally guaranteed 

program, the program run by the U.S. 

Department of Veterans Affairs (VA), the 

lender has some stake in how the 

borrower performs unless the lender 

sells the loan. The VA provides 

insurance in the form of a first-loss 

guarantee,469 but VA lenders have 

residual risk after the VA’s first-loss 

obligation is exhausted. We also note 

that mortgage loans guaranteed by both 

FHA and VA programs performed better 

than mortgage loans securitized through 

private-label RMBS. For instance, both 

VA-guaranteed and FHA-insured 

mortgages originated in 2006, at the 

peak of the housing boom, had a 

significantly lower serious delinquency 

rate (15 percent for VA-guaranteed 

loans,470 and between 18 percent 471

and 31 percent 472 by different estimates 

for FHA-insured loans) than mortgages 

securitized through private-label RMBS 

transactions (58 percent).473 Although 

risk retention requirements were not 

historically practiced in private label 

securitizations, and delinquency rates of 

securitizations with risk retention 

during the mortgage crisis period are 

therefore not available, the disparity in 

performance between VA- and FHAinsured loans and other loans purchased 

for private label securitizations suggests 

that the combination of underwriting 

practices, mortgage insurance 

premiums, and lenders’ residual risk 

exposure, has a material impact on the 

mitigation of the moral hazard problem 

in the securitization process. 

While the historical loan performance 

data indicate that FHA-insured 

mortgages performed better than other 

mortgages purchased by private label 

securitizations, one commenter was 

concerned that, with the exemption, the 

increase in the FHA’s share of the 

market will be difficult to shrink to a 

more rational proportion of the 

mortgage market. While the current 15 

percent market share is considerably 

greater than 4 to 6 percent market shares 

during the 2004 to 2007 period, it is 

consistent with the historical market 

shares of between 12 and 14 percent 

during the 1993 to 2002 period, and 

below the 19 percent market share 

recorded in 2009 and 2010.474 Hence, 

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77734 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

475Health Care and Education Reconciliation Act 

of 2010, Pub. L. 111–152, § 2201, 124 Stat. 1029, 

1074. 

the current FHA market share does not 

seem out of proportion relative to 

certain previous periods. Instead, the 

trend shows a strong counter cyclical 

relation with the health of the private 

market, consistent with the benefits of a 

federally insured program for home 

mortgage that provides access to capital 

when private markets are unable to do 

so. 

b. Securitizations of Assets Issued, 

Insured or Guaranteed by the United 

States or any Agency of the United 

States 

Consistent with Section 15G, the final 

rule contains exemptions from risk 

retention for any securitization 

transaction if the ABS issued in the 

transaction were (1) collateralized solely 

(excluding servicing assets) by 

obligations issued by the United States 

or an agency of the United States; (2) 

collateralized solely (excluding 

servicing assets) by assets that are fully 

insured or guaranteed as to the payment 

of principal and interest by the United 

States or an agency of the United States 

(other than residential, multifamily, or 

health care facility mortgage loan 

securitizations discussed above); or (3) 

fully guaranteed as to the timely 

payment of principal and interest by the 

United States or any agency of the 

United States. Also consistent with 

Section 15G, the final rule contains an 

exemption from risk retention for ABS 

issued or guaranteed by any state of the 

United States (including a political 

subdivision or public instrumentality of 

a state). 

One commenter requested that the 

final rule retain the full exemption for 

securities issued by a state (including a 

political subdivision or public 

instrumentality of a state), and for 

securities that meet the definition of a 

qualified scholarship funding bond. 

This commenter requested that the 

exemption for state-issued securities 

and qualified scholarship funding bonds 

be extended to both securities issued on 

a federally taxable basis and securities 

issued on a federal tax-exempt basis. 

Another commenter urged that the 

agencies clarify that all securities issued 

by housing finance agencies and other 

state government agencies and backed 

by loans financed by housing finance 

agencies are exempted. 

Risk retention is not currently 

mandated or practiced for these asset 

classes and thus, this exemption 

maintains consistency with current 

market practice. Because investors will 

be sufficiently protected from loss by 

the government guarantee that applies 

to these securities, there is no benefit to 

investors from sponsors retaining risk, 

and it would otherwise create costs to 

sponsors where they are not necessary. 

However, as with the exemption for 

federally insured mortgages, this 

exemption will incentivize sponsors to 

use federally insured or guaranteed 

assets, which will have an impact on 

competition with other assets that are 

not federally insured or guaranteed. 

c. Certain Student Loan Securitizations 

The final rule provides a separate 

exemption for securitization 

transactions that are collateralized by 

student loans that were made under the 

Federal Family Education Loan Program 

(FFELP). Under the final rule, a 

securitization transaction that is 

collateralized solely by FFELP loans 

that are guaranteed as to 100 percent of 

defaulted principal and accrued interest 

will be exempt from the risk retention 

requirements. A securitization 

transaction that is collateralized solely 

by FFELP loans that are guaranteed as 

to at least 98 percent of defaulted 

principal and accrued interest will have 

the sponsor’s risk retention requirement 

reduced to 2 percent. All other 

securitizations collateralized solely by 

FFELP loans will have the sponsor’s risk 

retention requirement reduced to 3 

percent. Because loans underlying 

FFELP student loan securitizations are 

federally guaranteed from 97 percent to 

100 percent depending on the date of 

origination, and there is little to no 

default risk beyond what is otherwise 

priced in a U.S. Treasury security, there 

is no benefit to investors from sponsors 

retaining risk and it would otherwise 

create costs to sponsors where they are 

not necessary. 

Several commenters suggested 

different ways to expand the scope of 

the exemption or add new categories of 

student loans to the exemption. Other 

commenters recommended that the 

agencies accept alternative forms of risk 

retention for FFELP loan securitizations. 

The suggested alternative forms of risk 

retention include a simplified 

representative sample method, an 

exemption for on-balance sheet 

transactions where the structure clearly 

demonstrates at least 5 percent risk 

retention, initial equity contribution, 

overcollateralization, and other 

unfunded forms of risk retention. 

The agencies believe that expansion 

of the definitions of exempted assets 

would undercut the purpose of risk 

retention of aligning incentives of 

sponsors and investors because other 

student loans would not be guaranteed 

by the U.S. government and, thus, 

would be subject to the same moral 

hazard problem described above. The 

agencies have also generally declined to 

recognize unfunded forms of risk 

retention for the purposes of the risk 

retention rule and continue to believe 

that unfunded forms of risk retention 

fail to provide sufficient alignment of 

incentives between sponsors and 

investors. 

The economic impact of this 

exemption will likely be minimal 

because FFELP was eliminated in 2010 

and student loans were no longer issued 

under the program after June 2010.475

d. Resecuritizations 

The proposed rule would have 

provided two exemptions for certain 

resecuritizations where duplicative risk 

retention requirements would not 

appear to provide any added benefit. 

The first of these exemptions would 

have applied to pass-through 

resecuritizations that met certain 

specified conditions. The second one 

would have applied only to 

resecuritizations of certain first pay 

classes of mortgage backed securities. 

Under the reproposal, sponsors of 

resecuritizations that were not 

structured to meet the terms of one of 

these two exemptions would have been 

required to meet the credit risk retention 

requirements with respect to the 

resecuritization transaction unless 

another exemption was available. 

The agencies received a number of 

comments on the proposed 

resecuritization exemptions. The 

comments did not raise specific 

objections or concerns with either of the 

two proposed exemptions, but generally 

urged the agencies to expand the 

exemptions to other types of structures, 

including those that re-tranche credit 

risk. Commenters noted that applying 

risk retention to resecuritizations of 

asset-backed securities that are already 

in the market, especially where the 

underlying interests are asset-backed 

securities compliant with the risk 

retention requirement, cannot alter the 

incentives for the original ABS sponsor 

to ensure high-quality assets. Other 

commenters stated that the lack of a 

broad resecuritization exemption would 

negatively affect markets by making it 

harder for investors to re-structure and 

sell existing ABS. A number of 

commenters stated that the agencies 

should provide an exemption for 

resecuritizations of ABS that were 

issued prior to the effective date of the 

rule. Still others expressed the view that 

the agencies could develop an 

exemption that would allow credit 

tranching in resecuritized ABS while 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77735 

limiting the scope of such exemption, 

such as by excluding actively managed 

pools, to address the agencies’ concerns 

with CDOs and similar structures. 

The agencies are adopting these 

exemptions as reproposed. For 

transactions that meet the exemptions’ 

requirements, the resecuritization 

process would neither increase nor 

reallocate the credit risk of the 

underlying asset-backed securities 

because, by definition, there is no 

tranching of the credit risk in a pass 

through security. Hence, the 

resecuritization does not alter the 

incentive alignment present in the 

original securitizations that are already 

compliant with the risk retention 

requirement. Under the final rule, 

sponsors of resecuritizations that do not 

have one of the structures described 

above would not be exempted from risk 

retention. These resecuritization 

transactions re-tranche the credit risk of 

the underlying asset-backed securities, 

and are subject to the same moral 

hazard problem that exists in the 

underlying securitizations, because 

sponsors’ discretion in the choice of 

underlying securitizations allows for the 

reallocation of credit risk. Hence, these 

resecuritizations will be subject to risk 

retention requirements to the same 

extent as the underlying asset-backed 

securities (unless the underlying 

securities qualify for an exemption). 

Thus, not exempting these 

resecuritizations is consistent with the 

purposes of the rule and lessens the 

likelihood of unwarranted costs on 

investors. 

Because the exemption would allow 

the creation of securities that may be 

used to aggregate asset-backed securities 

backed by small asset pools, the 

exemption for these types of 

resecuritization could improve access to 

credit at reasonable terms to consumers 

and businesses by allowing for the 

creation of an additional investment 

vehicle for such asset pools. This, in 

turn, would lead to increased liquidity 

of such pools and attendant decrease in 

cost of capital for some borrowers. 

However, the final rule may also have 

an adverse impact on capital formation 

and efficiency if they make certain 

resecuritization transactions costlier or 

infeasible to conduct because of two 

layers of credit risk retention. 

e. Other Exemptions and Alternatives 

The reproposal also included 

exemptions for utility legislative 

securitizations, seasoned loans, and 

securitization transactions that are 

sponsored by the FDIC acting as 

conservator or receiver. 

The agencies received no comments 

on the utility legislative securitization 

exemption, and are adopting the 

exemption as reproposed. The agencies 

continue to believe the implicit state 

guarantee in place for these 

securitizations addresses the moral 

hazard problem discussed above and 

adding the cost of risk retention would 

create costs to sponsors where they are 

not necessary as the incentive alignment 

problem is already being addressed. 

The agencies received a number of 

comments on the seasoned loan 

exemption. Commenters generally 

favored expanding the seasoned loan 

exemption, although they differed in 

how to expand the exemption. Because 

seasoned loans have had a sufficient 

period of time to prove their 

performance, adding the cost of risk 

retention would create costs to sponsors 

where they are not necessary as any risk 

associated with the underlying assets’ 

moral hazard problem will have 

manifested itself. 

Risk retention is not currently 

mandated or practiced for these asset 

classes, and thus, permitting these 

exemptions will maintain consistency 

with current market practice. As 

discussed above, because these assets 

classes have unique features that 

sufficiently protect investors from loss, 

there is no benefit to investors from 

sponsors retaining risk, and it would 

create costs to sponsors where they are 

not necessary. However, providing these 

exemptions will incentivize the creation 

of utility legislative securitizations and 

securitizations with seasoned loans, 

thus potentially lowering the cost of 

capital formation for these loans. 

In the reproposal, the agencies 

provided an exemption from risk 

retention for securitization transactions 

that are sponsored by the FDIC, acting 

as conservator or receiver. One 

commenter expressly supported this 

exemption, noting, among other things, 

that it would help the FDIC maximize 

the value of assets in conservatorship 

and receivership. The agencies are 

adopting the FDIC securitization 

exemption as reproposed. There is no 

benefit to investors from FDIC retaining 

risk on its securitizations because its 

actions are guided by sound 

underwriting practices and the quality 

of the assets is carefully monitored in 

accordance with the relevant statutory 

authority, and absence of exemption 

would otherwise create costs to FDIC 

where they are not necessary. 

In response to the reproposal, 

commenters also asked for exemptions 

for other specific asset classes such as: 

Corporate debt repackagings, legacy 

loan securitizations, securitizations of 

unsecured direct obligations of the 

sponsor, and servicer advance 

receivables. These asset classes have 

either unfunded risk retention or 

include loans created before the new 

underwriting qualifications were in 

place and they do not have features that 

mitigate the moral hazard problem. 

Thus, providing an exemption would 

impose an unwarranted cost on 

investors. 

f. Safe Harbor for Certain ForeignRelated Securitizations 

The final rule includes a safe harbor 

provision for certain, predominantly 

foreign, transactions based on the 

limited nature of the transactions’ 

connections with the United States and 

U.S. investors. Specifically, the safe 

harbor excludes from the risk retention 

requirements transactions in which, 

among other limitations, no more than 

10 percent of the value of the ABS 

interests are sold to U.S. persons and no 

more than 25 percent of the assets 

collateralizing the ABS assets are 

acquired from U.S. persons. The safe 

harbor is intended to exclude from the 

risk retention requirements transactions 

in which the effects on U.S. interests are 

sufficiently remote so as not to 

significantly impact underwriting 

standards and risk management 

practices in the United States or the 

interests of U.S. investors. 

Commenters on the proposal 

generally supported the existence of a 

safe harbor for certain foreign 

securitizations. A few commenters 

suggested increasing the 10 percent 

limit on the value of ABS interests 

permitted to be sold to or for the 

account of U.S. persons. These 

commenters also requested that the 

agencies clarify that the 10 percent limit 

applies only at the time of initial 

issuance and does not include 

secondary market transfers. Commenters 

also proposed to exclude from the 10 

percent limitation (A) securitization 

transactions with a sponsor or issuing 

entity that is a U.S. person in which no 

offers are made to U.S. persons and (B) 

asset-backed securities issuances that 

comply with Regulation S under the 

Securities Act. 

Several commenters requested that 

the rule provide for coordination of the 

rule’s risk retention requirement with 

foreign risk retention requirements, 

including by permitting a foreign 

sponsor to comply with home country 

or other applicable foreign risk retention 

rules. In this regard, some commenters 

stated that the U.S. risk retention rules 

may be incompatible with foreign risk 

retention requirements, such as the 

European Union risk retention 

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77736 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

476Section 15G allocates authority to prescribe 

the underwriting criteria for qualifying assets to the 

federal banking agencies, and the SEC is not 

promulgating this aspect of the final rule. 

Consequently, the Commission’s Economic 

Analysis does not address this aspect of the final 

rule. However, see the discussion below for a 

general discussion of the economic effects of 

providing an exemption for qualifying assets, as 

contemplated by Section 15G. 

477But see discussion of open market CLOs in 

Section 5.b.vi of this Economic Analysis. 

requirements and, accordingly, that 

sponsors required to comply with both 

U.S. and foreign risk retention 

regulations could be subject to 

conflicting rules. 

As noted in the reproposal the costs 

of the foreign transaction safe harbor 

should be small. There will be 

negligible effect of the safe harbor on 

efficiency, competition and capital 

formation in the United States 

(compared to the universal application 

of the risk retention rule) because the 

affected ABS are predominantly foreign 

with limited connection to U.S. markets. 

As noted above, the foreign transaction 

safe harbor is narrowly tailored to 

capture only those transactions in 

which the effects on U.S. interests are 

sufficiently remote so as not to 

significantly impact U.S. underwriting 

standards and risk management 

practices or the interests of U.S. 

investors. The agencies asked for 

comment on whether or not the 10 

percent proceeds trigger should be 

different. Commenters suggested the 

proceeds trigger be raised to 20 percent 

or 40 percent. The agencies are adopting 

the foreign safe harbor provision as 

reproposed. The relatively narrow scope 

of the foreign safe harbor provision may 

have negative effect on foreign sponsors 

that seek U.S. investors because they 

may need to satisfy risk retention 

requirements of two jurisdictions (their 

home country and the United States). In 

addition, the rule may reduce 

competition and investment 

opportunities for U.S. investors because 

foreign securitizers may exclude U.S. 

persons from their transactions to avoid 

triggering the risk retention 

requirements. These costs may be 

mitigated by the fact that the final rule 

provides flexibility for sponsors with 

respect to the forms of eligible risk 

retention, which may permit foreign 

sponsors seeking a material U.S. 

investor base to retain risk in a format 

that satisfies both home country and 

U.S. regulatory requirements, without 

jeopardizing protection to the U.S. 

investors in the form of risk retention. 

Moreover, raising the trigger could 

provide sponsors relying on the safe 

harbor with a competitive advantage of 

not needing to hold risk retention. The 

larger the amount of the securitization 

foreign sponsors are allowed to sell to 

U.S. persons without triggering risk 

retention, the more competition 

domestic securitization deals will have 

to face. 

7. Reduced Risk Retention 

Requirements for ABS Backed by 

Qualifying Assets 

As contemplated by Section 15G, the 

agencies are adopting exemptions for 

securitizations consisting solely of 

automobile loans, commercial real 

estate loans, commercial loans, and 

residential mortgage loans that satisfy 

certain specific underwriting standards 

that indicate a low credit risk with 

respect to the loan.476

The benefit to exempting qualifying 

assets from risk retention is that it will 

avoid tying up sponsors’ capital in 

transactions in which the underlying 

assets are subject to underwriting 

standards that indicate a low credit risk 

and thus a diminished need for risk 

retention to address the moral hazard 

problem. Avoiding this unnecessary 

restraint will leave sponsors with more 

capital available to deploy for other and 

potentially more efficient purposes. The 

economic consequences of exempting 

qualifying assets are analogous to the 

discussion associated with requiring 

stricter lending standards for a 

‘‘qualified mortgage’’ (QM) in the 

residential lending market. Also there 

will be fewer administrative, monitoring 

and compliance costs for sponsors of 

qualifying assets if there is no risk 

retention. Lower costs of securitizing 

loans may enhance competition in the 

market for qualifying auto, commercial 

real estate and commercial loans by 

allowing more firms to be profitable. 

While we believe that the qualified 

standards will result in only a small 

percentage of securitizations to be 

exempt from risk retention, we believe 

that many of these asset classes have 

existing practices that are consistent 

with the risk retention requirements that 

the agencies are adopting today.477

Further, as discussed elsewhere in this 

economic analysis, the agencies have 

made adjustments to other areas of the 

rule (e.g., CMBS option, horizontal risk 

retention) to address concerns about the 

implementation of risk retention to 

particular asset classes or structures. 

a. Blended Pools of Qualifying Assets 

The reproposal would permit 

sponsors to blend pools of qualifying 

automobile loans, qualifying 

commercial loans or QCRE loans with 

non-qualifying assets of the same class 

to receive up to a 50 percent reduction 

in the minimum required risk retention 

amount. 

While many sponsor commenters 

supported the ability to blend pools of 

qualifying and non-qualifying assets to 

obtain a reduced risk retention amount, 

these commenters requested that the 

agencies remove the 50 percent limit on 

the reduction for blended pools of 

commercial, CRE, or automobile loans. 

Investor commenters, however, 

generally opposed allowing blended 

pools of qualifying and non-qualifying 

assets. 

The agencies are adopting the 

provision as reproposed. Allowing 

blended pools with a reduced risk 

retention requirement will improve 

efficiency, competition and capital 

formation by allowing sponsors to 

securitize more loans when it is difficult 

to obtain a large enough pool of 

qualifying assets to issue an ABS 

consisting entirely of exempted assets. 

By allowing reduced risk retention on 

blended pools, sponsors hold less risk 

retention on lower quality loans than 

they would otherwise. For example, a 

sponsor that holds vertical risk retention 

and that forms of pool of 50 percent 

non-qualifying loans would be exposed 

to 2.5 percent of the credit risk of the 

non-qualifying loans compared to 5 

percent if the pool were comprised 

entirely of non-qualifying loans. Hence, 

increasing the fraction of qualifying 

loans into the pool lessens the fraction 

of credit exposure to the remaining nonqualifying loans. In the extreme, 

inclusion of 1 percent of non-qualifying 

loans would result in a sponsor being 

exposed to only 0.05 percent of the nonqualifying loans. This could erode the 

disincentives of the originate-todistribute model that the risk retention 

requirement was designed to address. In 

order to ensure sponsors hold a 

meaningful amount of risk and do not 

have incentives to underwrite and 

securitize low quality loans the limit on 

the reduction of risk retention 

requirement is 50 percent. Thus, even in 

the case of a pool of 1 percent nonqualified loans a sponsor would still 

have to retain 2.5 percent of the credit 

risk of the pool. 

b. Buyback Requirement 

Exempting certain type of loans gives 

sponsors an incentive to misrepresent 

qualifications of loans, similar to what 

was observed in the run-up to the 

financial crisis. However, the final rule 

requires that, if after issuance of a 

qualifying asset securitization, it was 

discovered that a loan did not meet the 

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478 Keys, Mukherjee, Seru and Vig, ‘‘Did 

Securitization Lead to Lax Screening? Evidence 

from Subprime Loans’’, Quarterly Journal of 

Economics, vol. 125, no. 1, pp. 307–362, February 

2010 and Nadauld and Sherlund, ‘‘The Impact of 

Securitization on the Expansion of Subprime 

Credit’’, Journal of Financial Economics, vol. 107, 

no. 2, February 2013, pp. 454–476. 

479Source: SIFMA Statistics available at http://

www.sifma.org/research/statistics.aspx. 

480See Joshua White and Scott Bauguess, 

Qualified Residential Mortgage: Background Data 

Analysis on Credit Risk Retention, (August 2013), 

available at http://www.sec.gov/divisions/riskfin/

whitepapers/qrm-analysis-08-2013.pdf. 

qualifying underwriting criteria, the 

sponsor would have to repurchase or 

cure the loan (buyback requirement). 

Commenters did not provide any 

comments on the buyback requirement 

except for the effect of the provision on 

CLOs. Some sponsor commenters 

opposed the buyback provision for 

CLOs, noting that open market CLO 

managers are thinly capitalized and 

generally would not have significant 

financial resources available to buy back 

loans in the pools they manage. The 

agencies are adopting this provision as 

reproposed. 

The benefit of this provision is that it 

helps to prevent and disincentivize 

sponsors from trying to include nonqualifying loans in the securitization 

without representing them as such for 

the purpose of avoiding risk retention. 

The buyback provision should increase 

investors’ willingness to invest because 

it makes sponsors of asset-backed 

securities responsible for correcting 

discovered underwriting mistakes and 

ensures that the actual characteristics of 

the underlying asset pool conform to the 

promised characteristics. 

c. Qualified Residential Mortgages 

The risk to financial markets from 

poor underwriting practices and 

inadequate disclosure of risks to 

investors in the RMBS securitizations is 

considerable. A body of academic 

literature has emerged since the 

financial crisis that supports the view 

that, during the early to mid-2000s, 

residential mortgage-backed 

securitizations (RMBSs) contributed to a 

significant decline in underwriting 

standards for residential mortgage loans, 

particularly in the private label 

securitization market.478 During this 

time, the volume of private label RMBS 

issuance increased significantly from 

$343 billion in 2003 to $726 billion in 

2005 and $685 billion by 2006.479 GSE 

sponsored securitizations fell during 

this same period. An analysis of 

historical performance among loans 

securitized into private-label RMBS that 

originated between 1997 and 2009 

shows that those meeting the QM 

standard sustained exceedingly high 

serious delinquency rates, greater than 

30 percent during that period.480

These high delinquency rates 

underscore the moral hazard problem 

described earlier that can arise when 

disclosures to investors do not provide 

sufficient detail to adequately evaluate 

the quality of the loans backing the 

security. This problem was exacerbated 

by the fact that the underlying RMBS 

loan pools were typically comprised of 

thousands of loans that required time 

and resources to evaluate, but with key 

features of the loans not always 

available to investors in sufficient detail 

to make those evaluations. The resulting 

information asymmetry, combined with 

the originate-to-distribute incentives 

that allowed sponsors to receive full 

compensation before investors had the 

opportunity to learn about loan quality 

and ultimate risks, generated the 

conditions that contributed to the 

financial crisis. It is these conditions 

that the risk retention rule is designed 

to address. 

The rule the agencies are adopting 

today exempts from the risk retention 

requirements any securitization 

comprised exclusively of QRMs. Section 

15G requires that asset-backed securities 

that are collateralized solely by QRMs 

be completely exempted from risk 

retention requirements and allows the 

agencies to define the terms and 

conditions under which a residential 

mortgage would qualify as a QRM. 

Section 15G mandates that the 

definition of a QRM be no broader than 

the definition of a QM, as such term is 

defined under Section 129C(b)(2) of the 

Truth in Lending Act. 

Pursuant to the statutory mandate, the 

agencies are exempting securitizations 

collateralized solely by QRMs and, 

pursuant to the discretion permitted, are 

defining QRMs as QMs. As outlined in 

the reproposal, the Commission believes 

that this definition of QRM would 

achieve a number of important benefits. 

First, since the criteria established by 

the Consumer Financial Protection 

Bureau (CFPB) to define QMs focus on 

underwriting standards, less risky 

product features, and affordability, the 

Commission believes that aligning the 

definition of QRM with QM is likely to 

promote more prudent lending and 

contribute to a sustainable, resilient and 

liquid mortgage securitization market. 

Second, the Commission believes that 

a single mortgage quality standard (as 

opposed to creating a second mortgage 

quality standard) would benefit market 

participants by simplifying the lending 

and securitization requirements and 

eligibilities applicable to the residential 

mortgage and RMBS market. Moreover, 

having a separate mortgage standard for 

the exemption from risk retention could 

impact the relevance of the QM 

standard, particularly if the definitions 

were not sufficiently different. For 

example, if the two standards resulted 

in qualified mortgages of similar risk, it 

is possible that sponsors would focus on 

securitizing only mortgages that met the 

higher QRM standard because of the 

exemption from risk retention. If so, this 

could impact access to capital for 

creditworthy borrowers who could not 

secure a QRM, because their loans 

would be less attractive to securitizers 

and impact an originator’s ability to sell 

it. Commenters suggested that this 

would hit middle income and first time 

borrowers the hardest, and have a 

detrimental impact to capital formation. 

Third, a broad definition of QRM 

avoids the potential effect of squeezing 

out certain lenders, such as community 

banks and credit unions, which may not 

have sufficient resources to hold the 

capital associated with the origination 

of non-QRMs, thus enhancing 

competition within this segment of the 

lending market. The Commission 

believes that a broad QRM definition 

will increase the ability of these lenders 

to securitize their mortgage originations 

and thus increase their ability to 

generate new loans and facilitate 

enhanced borrower access to capital. 

Finally, a broad definition of QRM 

may help encourage the re-emergence of 

private capital in securitization markets. 

The Enterprises currently have a 

competitive advantage over private label 

securitizations because the Enterprises 

benefit from lower funding costs 

attributed to the recognition of their 

explicit Federal capital support, a 

subsidy to their lending activity that is 

not available to private label 

securitizations. Moreover, the 

Enterprises’ current guarantee of their 

securitizations fulfill the risk retention 

requirements as long as they are in 

receivership and conservatorship and 

meet other conditions, and they would 

not have the same concomitant costs of 

complying with the rule as private 

parties during this time. Hence, the less 

restrictive QRM criteria should enhance 

the competitiveness of sponsors of 

private label securitizations by 

expanding the scope of loans eligible for 

securitization without triggering risk 

retention requirements. This, in turn, 

would reduce the need for borrowers to 

rely on programs offered by the 

Enterprises. 

Aligning the definition of QRM to QM 

incorporates into the definition of QRM 

certain loan product features that 

historical performance data indicates 

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77738 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

481See 79 FR 57184. 482See footnote 481. 

483Urban Institute, Table 1 reports 36 percent 

delinquency rate for Private Label Securities 

originated during the 2006–2008 period. 484All figures in this paragraph are calculated by 

DERA staff using the Asset-Backed Alert and 

Commercial Mortgage Alert databases. 

results in a lower risk of default. The 

Commission thus acknowledges that the 

QM standard does not fully address the 

loan underwriting features that are most 

likely to result in a lower risk of default, 

including down payment requirements 

and measures of borrower credit history. 

The Commission, however, believes that 

other regulatory developments may 

provide investors with additional 

information that allows them to more 

effectively assess the potential risks 

underlying securitizations as well as 

more effective recourse against sponsors 

when problems arise with the 

performance of underlying loans. In 

particular, the Commission has recently 

adopted revisions to Regulation AB481

that require in registered RMBS 

transactions disclosure of detailed loanlevel information at the time of issuance 

and on an ongoing basis. As previously 

described, for registered offerings 

covered by the revised Regulation AB, 

the loan level disclosures should 

enhance an investor’s ability to 

accurately assess the quality of the 

underlying assets. The revised 

Regulation AB also requires issuers to 

provide investors with this information 

in sufficient time prior to the first sale 

of securities so that they can analyze 

this information when making their 

investment decision and provides 

additional transactional safeguards for 

registered shelf offerings. These 

regulatory reforms, combined with the 

prudential underwriting standards 

embodied in the QM definition, should 

serve to significantly mitigate the moral 

hazard problem for registered RMBS 

securitizations. As previously 

discussed, private-label securitizations 

issued through unregistered offerings 

are not subject to the asset-level 

requirements under revised Regulation 

AB. 

The Commission is aware that 

defining QRMs broadly to equate with 

the definition of QM may result in a 

number of economic costs. Most 

notably, sponsors will not be required to 

retain an economic interest in the credit 

risk of QRM loans, and thus, there will 

be less incentivized to avoid the 

originate-to-distribute model that can 

contribute to poor quality underwriting 

and the obfuscation of risk to the 

ultimate investors in RMBS 

securitizations. Moreover, although the 

QRM exemption is based on the premise 

that well-underwritten mortgages were 

not the cause of the financial crisis, the 

criteria for QM loans do not account for 

all borrower characteristics that may 

provide additional information about 

default rates. In particular, QM loans do 

not account for certain underwriting 

and product features that historical loan 

performance indicate lower risk of 

default. For instance, borrowers’ credit 

history, down payment and loan-tovalue ratio have been shown to be 

significantly associated with lower 

borrower default rates.482 This 

introduces additional risk into 

securitizations without a risk retention 

requirement relative to a more narrowly 

defined QRM definition. 

Some commenters indicated that the 

QM-Plus alternative proposal that 

included a down payment requirement 

was unnecessarily restrictive, did not 

account for compensating factors in 

underwriting practices, and that the 

foreclosure crisis was predominantly a 

result of abusive loan terms and 

practices that are addressed by the QM 

definition. The commenters concluded 

that the QM definition adequately 

addresses product features that 

historical loan performance data 

indicate result in a lower risk of default, 

that low down payment loans have been 

used with great success to promote 

sustainable homeownership, and 

aligning the definition of QRM to QM 

strikes the right balance of improved 

standards and the need to improve 

access to affordable credit on reasonable 

terms. 

Commenters also questioned the 

estimated delinquency rates reported in 

the Commission analysis of historical 

loan performance among loans packaged 

by private label securitizations that 

would have met the current QM 

definition. These commenters claimed 

that the SEC staff study included loans 

with risky features linked to default that 

would not meet the QM definition, and 

that the period of analysis of the SEC 

staff study focused too narrowly on the 

origination years leading up to the 

financial crisis, and thus the most 

poorly underwritten mortgages. As a 

result, these commenters stated that the 

34 percent estimated serious 

delinquency rate among securitized 

private label loans found in the SEC 

staff study did not fairly reflect the 

effect of the QM definition, which when 

applied to their broader sample of 

mortgages (that included GSE purchased 

loans and non-securitized loans) was 5.8 

percent. 

The Commission recognizes that 

estimates of delinquency rates are 

sensitive to the sample of mortgages 

analyzed, and in particular, can vary 

significantly based on the time period 

and types of loans analyzed. In 

particular, as previously noted, there is 

a large difference in the historical 

performance of GSE purchased loans, 

for which GSEs’ current guarantee 

fulfills the risk retention requirements 

as long as GSEs are in receivership and 

conservatorship and meet other 

conditions, which effectively currently 

exempts such loans from risk retention 

requirements, and securitized private 

labels loans. The SEC staff study 

focused on securitized private labels 

loans to respond to previous commenter 

concern that the original proposal 

inappropriately focused on loans 

purchased by GSEs and thus excluded 

originations held in non-GSE 

securitizations. The SEC staff study also 

focused on the years leading up to the 

crisis years because this was the period 

of underwriting abuses for which the 

presence of a QM definition would have 

had the most relevance. Moreover, the 

34 percent delinquency rate reported in 

the SEC staff study is consistent with 

estimates provided in the analysis of 

another commenter when restricted to 

the same loan types and period.483

As previously discussed, some 

asymmetric information issues 

contributing to the moral hazard 

problem of the originate-to-distribute 

model are addressed by the revisions to 

Regulation AB. In particular, while 

registered RMBS backed by QRM loans 

are exempt from risk retention, issuers 

of such securities are required to 

provide loan-level information for each 

asset in the underlying pool in 

accordance with revised Regulation AB. 

Thus, the moral hazard problem is 

reduced for these issuances because 

asset-level disclosure should mitigate 

the information asymmetry problem to 

the extent that the disclosures 

adequately inform investors of the risks. 

At present, private label RMBS 

transactions comprise only a small 

fraction of the total non-agency assetbacked securities market—6.4 percent 

by dollar volume in 2013.484 Moreover, 

only 16 percent of RMBS were 

registered issues. This is far below the 

pre-crisis levels. For example, the 

issuance volume of private label RMBS 

securitizations was $801 billion in 2006, 

which accounted for 39 percent of the 

total non-agency asset-backed securities 

issuance in 2006. Of these transactions, 

only 9.3 percent were privately-issued 

offerings (e.g., resales under Rule 144A 

or private placements), transactions that 

would not be subject to asset-level 

disclosures by the revised Regulation 

AB rules. If the private label 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77739 

485See, e.g., O.E. Ergungor, ‘‘Bank Branch 

Presence and Access to Credit in Low- to ModerateIncome Neighborhoods’’ Journal of Money, Credit, 

and Banking, 2010; S. Agrawal, B. Ambrose, S. 

Chomsisengphet, and C. Liu, ‘‘The role of Soft 

Information in a Dynamic Contract Setting: 

Evidence from the Home Equity Credit Market,’’ 

Journal of Money Credit and Banking, 2011; C. 

Chang, G. Liao, Z. Yu, Z. Ni, ‘‘Information From 

Relationship Lending: Evidence from Loan Defaults 

in China,’’ working paper, 2010. 

486 DERA staff calculations based on MBSData 

dataset. The dataset provides data for the number 

of units for 31.3 percent of the loans securitized 

privately between 2000 and 2012. 

487Serious delinquency (SDQ) is defined as a 

loan having ever been 90 days late, foreclosed, or 

real estate owned. 

securitization market were to return to 

pre-crisis levels and registration 

practices, then a significant portion of 

the RMBS market would be subject to 

asset-level disclosures. For the 

remaining unregistered offerings, risk 

retention requirements would still apply 

and address the potential moral hazard 

problem to the extent that the 

underlying securitizations were not 

comprised of QRMs. 

Broadly, by aligning the definition of 

QRM to QM the agencies are fostering 

the least restrictive capital formation 

regime for residential mortgages allowed 

under the statute. This alignment allows 

for securitizations exempt from the 

requirement of risk retention that 

include loans with low down payment 

and loans without down payment or 

borrower credit history requirements. 

By not adopting these additional credit 

overlays, the agencies have sought to 

facilitate the ability of mortgage 

originators to have sponsors package 

their loans into securitizations and 

thereby generate new capital for the 

continued origination of new mortgages. 

In the near term, under prevailing tight 

mortgage lending conditions, this 

definition is intended to promote 

borrower access to capital, especially for 

low-and moderate income, minority and 

first-time home buyers, and accelerate 

the recovery of the private label RMBS 

market. 

However, aligning the definition of 

QRM to QM also provides the least 

restrictive regulatory measure available 

under the statute to mitigate the 

reemergence of the moral hazard 

problem in the RMBS market. By 

exempting from the risk retention 

requirement securitizations comprised 

of loans with characteristics that 

historically have been indicators of a 

higher probability of mortgage default, 

the same economic incentives for the 

originate-to-distribute model that 

existed prior to the onset of the financial 

crisis may persist. 

Hence the alignment of the definition 

of the two mortgage standards involves 

a tradeoff between, on the one hand, 

promoting financial market recovery 

and borrower access to capital, and, on 

the other hand, adding additional credit 

requirements that may lessen the 

likelihood of future moral hazards 

related to the lending practices in the 

housing market but also further 

constrain mortgage credit. The agencies 

have sought to address this tradeoff 

through the introduction of a periodic 

review of the QRM definition that 

allows the agencies to monitor the rule’s 

effects as the RMBS market evolves in 

the new regulatory environment. The 

agencies will review the QRM definition 

at regular intervals and in response to 

any changes made to the QM definition 

by the CFPB, and as a result of these 

reviews, may or may not decide to 

modify the definition of QRM through 

notice and comment rulemaking. 

Moreover, the agencies will commence 

a review at any time upon the request 

of any one of the agencies. By including 

this review process in the final rule, the 

agencies recognize that prevailing 

market conditions could change in a 

way that merits a stricter definition of 

QRM, and have introduced a process by 

which the alignment of QRM to QM can 

be assessed going forward. 

d. Mortgage Loans Exempt From QM 

The agencies are also adopting an 

exemption from risk retention for 

securitizations of loans originated 

through community-focused lending 

programs that are currently exempt from 

the CFPB’s ability-to-repay requirements 

and an exemption for certain three-tofour unit mortgage loans. 

Exempting securitizations of loans 

originated through community-focused 

lending programs that are currently 

exempt from the CFPB’s ability-to-repay 

requirements from risk retention will 

increase capital formation. The mission 

of many of these community-based 

lenders is to provide access to capital 

for underserved communities; requiring 

risk retention for them would impose a 

cost that might impinge on their ability 

to make loans or might increase their 

cost of capital. The borrowers that rely 

on community based lenders may also 

avoid higher borrowing costs as the 

result of this exemption. Efficiency may 

be improved to the extent community 

based underwriters have more 

information about their borrowers than 

other lenders and use soft information 

to underwrite their loans.485 We 

acknowledge, however, that 

underwriting standards may change 

allowing lower quality loans to be 

securitized. The exemption for these 

loans, as with QRM, however, will be 

subject to periodic review by the 

agencies. 

The agencies are also providing an 

exemption from the risk retention 

requirements for certain mortgage loans 

secured by three-to-four unit residential 

properties that meet the criteria for QM 

other than being a consumer credit 

transaction, as well as an exemption to 

permit sponsors to securitize these 

exempted mortgage loans with QRMs. 

The exemption for these loans, as with 

QRM, will be subject to periodic review 

by the agencies. 

Even though three-to-four unit 

mortgages comprise a relatively small 

fraction of the one-to-four residential 

mortgage market, exempting 

securitizations of such loans from risk 

retention could increase access to 

capital for these borrowers. Among 

loans acquired or guaranteed by Fannie 

Mae (Freddie Mac) between 2000 and 

2013, only 0.93 percent (0.70 percent) of 

loans by initial balance were three-tofour unit mortgages, and the total 

principal balance of such mortgages 

acquired or guaranteed by the 

Enterprises exceeded $56 billion. Threeto-four unit mortgages were slightly 

more prominent in the private-label 

securitization market, for which 1.51 

percent of loans by initial balance were 

three-to-four unit mortgages, with the 

total original principal balance of almost 

$23 billion.486

Currently, the Enterprises’ guarantee 

is an acceptable form of risk retention as 

long as they are in receivership or 

conservatorship and meet other 

conditions. Thus, under current 

conditions, three-to-four unit mortgages 

guaranteed by the Enterprises can be 

securitized without having to comply 

with the risk retention requirements. 

However, without the exemption, 

should the Enterprises in the future no 

longer be in receivership or 

conservatorship, these three-to-four unit 

mortgages would be subject to the risk 

retention requirements even if they 

otherwise met the QM criteria. The 

exemption will allow such mortgages to 

continue to be securitized with two unit 

mortgages, as has been historical 

practice, regardless of the legal status of 

the Enterprises and provided that all of 

the loans in the pool meet the QM 

criteria. In this way, the exemption will 

help to facilitate continued access to 

capital for borrowers of three-to-four 

unit mortgages. 

Based on historical data, three-to-four 

unit residential mortgages that 

otherwise satisfy the QM criteria exhibit 

comparable or lower delinquency rates 

as QM two unit residential mortgages. 

The average serious delinquency rate 487

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77740 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

488Specifically, DERA staff ran the predictive 

logit regression from the White and Bauguess (2013) 

study (see footnote 446) for privately securitized 2, 

3, and 4 unit mortgages in the MBSData database 

satisfying QM criteria and originated over the 

period 2000–2009. Adding an indicator variable 

marking three-to-four unit residential mortgages 

does not generate a statistically significant 

coefficient estimate, and does not improve the 

regression’s goodness-of-fit measure (pseudo-Rsquared). 489See 12 U.S.C. 4513. 

among such three-to-four unit mortgages 

securitized through private-label 

securitizations in 2000–2009 was 36 

percent, whereas among two unit 

mortgages it was 41 percent. Moreover, 

the difference in delinquency rates are 

not statistically different when 

controlling for other factors known to 

influence delinquency rates like credit 

score, loan-to-value ratio, debt-toincome ratio, etc.488 These results 

indicate that historical three-to-four unit 

residential mortgage delinquency rates 

are no higher than those of two unit 

residential mortgages, and thus do not 

provide any evidence that exempting 

such mortgages from risk retention 

would introduce additional risk into 

securitizations that would include such 

loans. The Commission believes that 

this equivalent performance is likely to 

continue after the implementation of 

this exemption because both two unit 

and three-to-four unit mortgages would 

be required to satisfy the same QM 

underwriting criteria. 

D. OCC Unfunded Mandates Reform Act 

of 1995 Determination 

Section 202 of the Unfunded 

Mandates Reform Act of 1995, Public 

Law 104–4 (UMRA) requires that an 

agency prepare a budgetary impact 

statement before promulgating a rule 

that includes a Federal mandate that 

may result in an expenditure by State, 

local, and tribal governments, in the 

aggregate, or by the private sector, of 

$100 million or more, adjusted for 

inflation ($152 million in 2014) in any 

one year. If a budgetary impact 

statement is required, section 205 of the 

UMRA also requires an agency to 

identify and consider a reasonable 

number of regulatory alternatives before 

promulgating a rule. 

The OCC has determined this final 

rule is likely to result in the expenditure 

by the private sector of $152 million or 

more in any one year. The OCC has 

prepared a budgetary impact analysis 

and identified and considered 

alternative approaches, including 

approaches suggested by commenters 

and discussed in the SUPPLEMENTARY

INFORMATION section above. When the 

final rule is published in the Federal 

Register, the full text of the OCC’s 

analysis will be available at: http://

www.regulations.gov, Docket ID OCC– 

2013–0010. 

E. FHFA: Considerations of Differences 

Between the Federal Home Loan Banks 

and the Enterprises 

Section 1313 of the Federal Housing 

Enterprises Financial Safety and 

Soundness Act of 1992 requires the 

Director of FHFA, when promulgating 

regulations relating to the Federal Home 

Loan Banks (Banks), to consider the 

following differences between the Banks 

and the Enterprises (Fannie Mae and 

Freddie Mac): cooperative ownership 

structure; mission of providing liquidity 

to members; affordable housing and 

community development mission; 

capital structure; and joint and several 

liability.489 The Director also may 

consider any other differences that are 

deemed appropriate. In preparing the 

portions of this final rule over which 

FHFA has joint rulemaking authority, 

the Director considered the differences 

between the Banks and the Enterprises 

as they relate to the above factors and 

determined that the rule was 

appropriate. No comments were 

received on the reproposed rule with 

respect to this issue. 

Text of the Common Rule 

(All Agencies) 

The text of the common rule appears 

below: 

PARTl—CREDIT RISK RETENTION 

Subpart A—Authority, Purpose, Scope 

and Definitions 

Sec. 

l.1 [Reserved] 

l.2 Definitions. 

Subpart B—Credit Risk Retention 

l.3 Base risk retention requirement. 

l.4 Standard risk retention. 

l.5 Revolving pool securitizations. 

l.6 Eligible ABCP conduits. 

l.7 Commercial mortgage-backed 

securities. 

l.8 Federal National Mortgage Association 

and Federal Home Loan Mortgage 

Corporation ABS. 

l.9 Open market CLOs. 

l.10 Qualified tender option bonds. 

Subpart C—Transfer of Risk Retention 

l.11 Allocation of risk retention to an 

originator. 

l.12 Hedging, transfer and financing 

prohibitions. 

Subpart D—Exceptions and Exemptions 

l.13 Exemption for qualified residential 

mortgages. 

l.14 Definitions applicable to qualifying 

commercial loans, commercial real estate 

loans, and automobile loans. 

l.15 Qualifying commercial loans, 

commercial real estate loans, and 

automobile loans. 

l.16 Underwriting standards for qualifying 

commercial loans. 

l.17 Underwriting standards for qualifying 

CRE loans. 

l.18 Underwriting standards for qualifying 

automobile loans. 

l.19 General exemptions. 

l.20 Safe harbor for certain foreign-related 

transactions. 

l.21 Additional exemptions. 

l.22 Periodic review of the QRM 

definition, exempted three-to-four unit 

residential mortgage loans, and 

community-focused residential mortgage 

exemption. 

Subpart A—Authority, Purpose, Scope 

and Definitions 

§l.1 [Reserved] 

§l.2 Definitions. 

For purposes of this part, the 

following definitions apply: 

ABS interest means: 

(1) Any type of interest or obligation 

issued by an issuing entity, whether or 

not in certificated form, including a 

security, obligation, beneficial interest 

or residual interest (other than an 

uncertificated regular interest in a 

REMIC that is held by another REMIC, 

where both REMICs are part of the same 

structure and a single REMIC in that 

structure issues ABS interests to 

investors, or a non-economic residual 

interest issued by a REMIC), payments 

on which are primarily dependent on 

the cash flows of the collateral owned 

or held by the issuing entity; and 

(2) Does not include common or 

preferred stock, limited liability 

interests, partnership interests, trust 

certificates, or similar interests that: 

(i) Are issued primarily to evidence 

ownership of the issuing entity; and 

(ii) The payments, if any, on which 

are not primarily dependent on the cash 

flows of the collateral held by the 

issuing entity; and 

(3) Does not include the right to 

receive payments for services provided 

by the holder of such right, including 

servicing, trustee services and custodial 

services. 

Affiliate of, or a person affiliated 

with, a specified person means a person 

that directly, or indirectly through one 

or more intermediaries, controls, or is 

controlled by, or is under common 

control with, the person specified. 

Appropriate Federal banking agency 

has the same meaning as in section 3 of 

the Federal Deposit Insurance Act (12 

U.S.C. 1813). 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77741 

Asset means a self-liquidating 

financial asset (including but not 

limited to a loan, lease, mortgage, or 

receivable). 

Asset-backed security has the same 

meaning as in section 3(a)(79) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(79)). 

Collateral means, with respect to any 

issuance of ABS interests, the assets that 

provide the cash flow and the servicing 

assets that support such cash flow for 

the ABS interests irrespective of the 

legal structure of issuance, including 

security interests in assets or other 

property of the issuing entity, fractional 

undivided property interests in the 

assets or other property of the issuing 

entity, or any other property interest in 

or rights to cash flow from such assets 

and related servicing assets. Assets or 

other property collateralize an issuance 

of ABS interests if the assets or property 

serve as collateral for such issuance. 

Commercial real estate loan has the 

same meaning as in §l.14. 

Commission means the Securities and 

Exchange Commission. 

Control including the terms 

‘‘controlling,’’ ‘‘controlled by’’ and 

‘‘under common control with’’: 

(1) Means the possession, direct or 

indirect, of the power to direct or cause 

the direction of the management and 

policies of a person, whether through 

the ownership of voting securities, by 

contract, or otherwise. 

(2) Without limiting the foregoing, a 

person shall be considered to control 

another person if the first person: 

(i) Owns, controls or holds with 

power to vote 25 percent or more of any 

class of voting securities of the other 

person; or 

(ii) Controls in any manner the 

election of a majority of the directors, 

trustees or persons performing similar 

functions of the other person. 

Credit risk means: 

(1) The risk of loss that could result 

from the failure of the borrower in the 

case of a securitized asset, or the issuing 

entity in the case of an ABS interest in 

the issuing entity, to make required 

payments of principal or interest on the 

asset or ABS interest on a timely basis; 

(2) The risk of loss that could result 

from bankruptcy, insolvency, or a 

similar proceeding with respect to the 

borrower or issuing entity, as 

appropriate; or 

(3) The effect that significant changes 

in the underlying credit quality of the 

asset or ABS interest may have on the 

market value of the asset or ABS 

interest. 

Creditor has the same meaning as in 

15 U.S.C. 1602(g). 

Depositor means: 

(1) The person that receives or 

purchases and transfers or sells the 

securitized assets to the issuing entity; 

(2) The sponsor, in the case of a 

securitization transaction where there is 

not an intermediate transfer of the assets 

from the sponsor to the issuing entity; 

or 

(3) The person that receives or 

purchases and transfers or sells the 

securitized assets to the issuing entity in 

the case of a securitization transaction 

where the person transferring or selling 

the securitized assets directly to the 

issuing entity is itself a trust. 

Eligible horizontal residual interest 

means, with respect to any 

securitization transaction, an ABS 

interest in the issuing entity: 

(1) That is an interest in a single class 

or multiple classes in the issuing entity, 

provided that each interest meets, 

individually or in the aggregate, all of 

the requirements of this definition; 

(2) With respect to which, on any 

payment date or allocation date on 

which the issuing entity has insufficient 

funds to satisfy its obligation to pay all 

contractual interest or principal due, 

any resulting shortfall will reduce 

amounts payable to the eligible 

horizontal residual interest prior to any 

reduction in the amounts payable to any 

other ABS interest, whether through 

loss allocation, operation of the priority 

of payments, or any other governing 

contractual provision (until the amount 

of such ABS interest is reduced to zero); 

and 

(3) That, with the exception of any 

non-economic REMIC residual interest, 

has the most subordinated claim to 

payments of both principal and interest 

by the issuing entity. 

Eligible horizontal cash reserve 

account means an account meeting the 

requirements of § l.4(b). 

Eligible vertical interest means, with 

respect to any securitization transaction, 

a single vertical security or an interest 

in each class of ABS interests in the 

issuing entity issued as part of the 

securitization transaction that 

constitutes the same proportion of each 

such class. 

Federal banking agencies means the 

Office of the Comptroller of the 

Currency, the Board of Governors of the 

Federal Reserve System, and the Federal 

Deposit Insurance Corporation. 

GAAP means generally accepted 

accounting principles as used in the 

United States. 

Issuing entity means, with respect to 

a securitization transaction, the trust or 

other entity: 

(1) That owns or holds the pool of 

assets to be securitized; and 

(2) In whose name the asset-backed 

securities are issued. 

Majority-owned affiliate of a person 

means an entity (other than the issuing 

entity) that, directly or indirectly, 

majority controls, is majority controlled 

by or is under common majority control 

with, such person. For purposes of this 

definition, majority control means 

ownership of more than 50 percent of 

the equity of an entity, or ownership of 

any other controlling financial interest 

in the entity, as determined under 

GAAP. 

Originator means a person who: 

(1) Through an extension of credit or 

otherwise, creates an asset that 

collateralizes an asset-backed security; 

and 

(2) Sells the asset directly or 

indirectly to a securitizer or issuing 

entity. 

REMIC has the same meaning as in 26 

U.S.C. 860D. 

Residential mortgage means: 

(1) A transaction that is a covered 

transaction as defined in § 1026.43(b) of 

Regulation Z (12 CFR 1026.43(b)(1)); 

(2) Any transaction that is exempt 

from the definition of ‘‘covered 

transaction’’ under § 1026.43(a) of 

Regulation Z (12 CFR 1026.43(a)); and 

(3) Any other loan secured by a 

residential structure that contains one to 

four units, whether or not that structure 

is attached to real property, including 

an individual condominium or 

cooperative unit and, if used as a 

residence, a mobile home or trailer. 

Retaining sponsor means, with 

respect to a securitization transaction, 

the sponsor that has retained or caused 

to be retained an economic interest in 

the credit risk of the securitized assets 

pursuant to subpart B of this part. 

Securitization transaction means a 

transaction involving the offer and sale 

of asset-backed securities by an issuing 

entity. 

Securitized asset means an asset that: 

(1) Is transferred, sold, or conveyed to 

an issuing entity; and 

(2) Collateralizes the ABS interests 

issued by the issuing entity. 

Securitizer means, with respect to a 

securitization transaction, either: 

(1) The depositor of the asset-backed 

securities (if the depositor is not the 

sponsor); or 

(2) The sponsor of the asset-backed 

securities. 

Servicer means any person 

responsible for the management or 

collection of the securitized assets or 

making allocations or distributions to 

holders of the ABS interests, but does 

not include a trustee for the issuing 

entity or the asset-backed securities that 

makes allocations or distributions to 

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holders of the ABS interests if the 

trustee receives such allocations or 

distributions from a servicer and the 

trustee does not otherwise perform the 

functions of a servicer. 

Servicing assets means rights or other 

assets designed to assure the servicing 

or timely distribution of proceeds to 

ABS interest holders and rights or other 

assets that are related or incidental to 

purchasing or otherwise acquiring and 

holding the issuing entity’s securitized 

assets. Servicing assets include amounts 

received by the issuing entity as 

proceeds of securitized assets, including 

proceeds of rights or other assets, 

whether as remittances by obligors or as 

other recoveries. 

Single vertical security means, with 

respect to any securitization transaction, 

an ABS interest entitling the sponsor to 

a specified percentage of the amounts 

paid on each class of ABS interests in 

the issuing entity (other than such 

single vertical security). 

Sponsor means a person who 

organizes and initiates a securitization 

transaction by selling or transferring 

assets, either directly or indirectly, 

including through an affiliate, to the 

issuing entity. 

State has the same meaning as in 

Section 3(a)(16) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(16)). 

United States or U.S. means the 

United States of America, including its 

territories and possessions, any State of 

the United States, and the District of 

Columbia. 

Wholly-owned affiliate means a 

person (other than an issuing entity) 

that, directly or indirectly, wholly 

controls, is wholly controlled by, or is 

wholly under common control with, 

another person. For purposes of this 

definition, ‘‘wholly controls’’ means 

ownership of 100 percent of the equity 

of an entity. 

Subpart B—Credit Risk Retention 

§ _.3 Base risk retention requirement. 

(a) Base risk retention requirement. 

Except as otherwise provided in this 

part, the sponsor of a securitization 

transaction (or majority-owned affiliate 

of the sponsor) shall retain an economic 

interest in the credit risk of the 

securitized assets in accordance with 

any one of §§ _.4 through __.10. Credit 

risk in securitized assets required to be 

retained and held by any person for 

purposes of compliance with this part, 

whether a sponsor, an originator, an 

originator-seller, or a third-party 

purchaser, except as otherwise provided 

in this part, may be acquired and held 

by any of such person’s majority-owned 

affiliates (other than an issuing entity). 

(b) Multiple sponsors. If there is more 

than one sponsor of a securitization 

transaction, it shall be the responsibility 

of each sponsor to ensure that at least 

one of the sponsors of the securitization 

transaction (or at least one of their 

majority-owned or wholly-owned 

affiliates, as applicable) retains an 

economic interest in the credit risk of 

the securitized assets in accordance 

with any one of §§ __.4, _.5, _.8, __.9, or 

_.10. 

§ _.4 Standard risk retention. 

(a) General requirement. Except as 

provided in §§ __.5 through __.10, the 

sponsor of a securitization transaction 

must retain an eligible vertical interest 

or eligible horizontal residual interest, 

or any combination thereof, in 

accordance with the requirements of 

this section. 

(1) If the sponsor retains only an 

eligible vertical interest as its required 

risk retention, the sponsor must retain 

an eligible vertical interest in a 

percentage of not less than 5 percent. 

(2) If the sponsor retains only an 

eligible horizontal residual interest as 

its required risk retention, the amount of 

the interest must equal at least 5 percent 

of the fair value of all ABS interests in 

the issuing entity issued as a part of the 

securitization transaction, determined 

using a fair value measurement 

framework under GAAP. 

(3) If the sponsor retains both an 

eligible vertical interest and an eligible 

horizontal residual interest as its 

required risk retention, the percentage 

of the fair value of the eligible 

horizontal residual interest and the 

percentage of the eligible vertical 

interest must equal at least five. 

(4) The percentage of the eligible 

vertical interest, eligible horizontal 

residual interest, or combination thereof 

retained by the sponsor must be 

determined as of the closing date of the 

securitization transaction. 

(b) Option to hold base amount in 

eligible horizontal cash reserve account. 

In lieu of retaining all or any part of an 

eligible horizontal residual interest 

under paragraph (a) of this section, the 

sponsor may, at closing of the 

securitization transaction, cause to be 

established and funded, in cash, an 

eligible horizontal cash reserve account 

in the amount equal to the fair value of 

such eligible horizontal residual interest 

or part thereof, provided that the 

account meets all of the following 

conditions: 

(1) The account is held by the trustee 

(or person performing similar functions) 

in the name and for the benefit of the 

issuing entity; 

(2) Amounts in the account are 

invested only in cash and cash 

equivalents; and 

(3) Until all ABS interests in the 

issuing entity are paid in full, or the 

issuing entity is dissolved: 

(i) Amounts in the account shall be 

released only to: 

(A) Satisfy payments on ABS interests 

in the issuing entity on any payment 

date on which the issuing entity has 

insufficient funds from any source to 

satisfy an amount due on any ABS 

interest; or 

(B) Pay critical expenses of the trust 

unrelated to credit risk on any payment 

date on which the issuing entity has 

insufficient funds from any source to 

pay such expenses and: 

(1) Such expenses, in the absence of 

available funds in the eligible horizontal 

cash reserve account, would be paid 

prior to any payments to holders of ABS 

interests; and 

(2) Such payments are made to parties 

that are not affiliated with the sponsor; 

and 

(ii) Interest (or other earnings) on 

investments made in accordance with 

paragraph (b)(2) of this section may be 

released once received by the account. 

(c) Disclosures. A sponsor relying on 

this section shall provide, or cause to be 

provided, to potential investors, under 

the caption ‘‘Credit Risk Retention’’, a 

reasonable period of time prior to the 

sale of the asset-backed securities in the 

securitization transaction the following 

disclosures in written form and within 

the time frames set forth in this 

paragraph (c): 

(1) Horizontal interest. With respect to 

any eligible horizontal residual interest 

held under paragraph (a) of this section, 

a sponsor must disclose: 

(i) A reasonable period of time prior 

to the sale of an asset-backed security 

issued in the same offering of ABS 

interests, 

(A) The fair value (expressed as a 

percentage of the fair value of all of the 

ABS interests issued in the 

securitization transaction and dollar 

amount (or corresponding amount in the 

foreign currency in which the ABS 

interests are issued, as applicable)) of 

the eligible horizontal residual interest 

that the sponsor expects to retain at the 

closing of the securitization transaction. 

If the specific prices, sizes, or rates of 

interest of each tranche of the 

securitization are not available, the 

sponsor must disclose a range of fair 

values (expressed as a percentage of the 

fair value of all of the ABS interests 

issued in the securitization transaction 

and dollar amount (or corresponding 

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amount in the foreign currency in which 

the ABS interests are issued, as 

applicable)) of the eligible horizontal 

residual interest that the sponsor 

expects to retain at the close of the 

securitization transaction based on a 

range of bona fide estimates or specified 

prices, sizes, or rates of interest of each 

tranche of the securitization. A sponsor 

disclosing a range of fair values based 

on a range of bona fide estimates or 

specified prices, sizes or rates of interest 

of each tranche of the securitization 

must also disclose the method by which 

it determined any range of prices, 

tranche sizes, or rates of interest. 

(B) A description of the material terms 

of the eligible horizontal residual 

interest to be retained by the sponsor; 

(C) A description of the valuation 

methodology used to calculate the fair 

values or range of fair values of all 

classes of ABS interests, including any 

portion of the eligible horizontal 

residual interest retained by the 

sponsor; 

(D) All key inputs and assumptions or 

a comprehensive description of such 

key inputs and assumptions that were 

used in measuring the estimated total 

fair value or range of fair values of all 

classes of ABS interests, including the 

eligible horizontal residual interest to be 

retained by the sponsor. 

(E) To the extent applicable to the 

valuation methodology used, the 

disclosure required in paragraph 

(c)(1)(i)(D) of this section shall include, 

but should not be limited to, 

quantitative information about each of 

the following: 

(1) Discount rates; 

(2) Loss given default (recovery); 

(3) Prepayment rates; 

(4) Default rates; 

(5) Lag time between default and 

recovery; and 

(6) The basis of forward interest rates 

used. 

(F) The disclosure required in 

paragraphs (c)(1)(i)(C) and (D) of this 

section shall include, at a minimum, 

descriptions of all inputs and 

assumptions that either could have a 

material impact on the fair value 

calculation or would be material to a 

prospective investor’s ability to evaluate 

the sponsor’s fair value calculations. To 

the extent the disclosure required in this 

paragraph (c)(1) includes a description 

of a curve or curves, the description 

shall include a description of the 

methodology that was used to derive 

each curve and a description of any 

aspects or features of each curve that 

could materially impact the fair value 

calculation or the ability of a 

prospective investor to evaluate the 

sponsor’s fair value calculation. To the 

extent a sponsor uses information about 

the securitized assets in its calculation 

of fair value, such information shall not 

be as of a date more than 60 days prior 

to the date of first use with investors; 

provided that for a subsequent issuance 

of ABS interests by the same issuing 

entity with the same sponsor for which 

the securitization transaction distributes 

amounts to investors on a quarterly or 

less frequent basis, such information 

shall not be as of a date more than 135 

days prior to the date of first use with 

investors; provided further, that the 

balance or value (in accordance with the 

transaction documents) of the 

securitized assets may be increased or 

decreased to reflect anticipated 

additions or removals of assets the 

sponsor makes or expects to make 

between the cut-off date or similar date 

for establishing the composition of the 

asset pool collateralizing such assetbacked security and the closing date of 

the securitization. 

(G) A summary description of the 

reference data set or other historical 

information used to develop the key 

inputs and assumptions referenced in 

paragraph (c)(1)(i)(D) of this section, 

including loss given default and default 

rates; 

(ii) A reasonable time after the closing 

of the securitization transaction: 

(A) The fair value (expressed as a 

percentage of the fair value of all of the 

ABS interests issued in the 

securitization transaction and dollar 

amount (or corresponding amount in the 

foreign currency in which the ABS are 

issued, as applicable)) of the eligible 

horizontal residual interest the sponsor 

retained at the closing of the 

securitization transaction, based on 

actual sale prices and finalized tranche 

sizes; 

(B) The fair value (expressed as a 

percentage of the fair value of all of the 

ABS interests issued in the 

securitization transaction and dollar 

amount (or corresponding amount in the 

foreign currency in which the ABS are 

issued, as applicable)) of the eligible 

horizontal residual interest that the 

sponsor is required to retain under this 

section; and 

(C) To the extent the valuation 

methodology or any of the key inputs 

and assumptions that were used in 

calculating the fair value or range of fair 

values disclosed prior to sale and 

required under paragraph (c)(1)(i) of this 

section materially differs from the 

methodology or key inputs and 

assumptions used to calculate the fair 

value at the time of closing, descriptions 

of those material differences. 

(iii) If the sponsor retains risk through 

the funding of an eligible horizontal 

cash reserve account: 

(A) The amount to be placed (or that 

is placed) by the sponsor in the eligible 

horizontal cash reserve account at 

closing, and the fair value (expressed as 

a percentage of the fair value of all of 

the ABS interests issued in the 

securitization transaction and dollar 

amount (or corresponding amount in the 

foreign currency in which the ABS 

interests are issued, as applicable)) of 

the eligible horizontal residual interest 

that the sponsor is required to fund 

through the eligible horizontal cash 

reserve account in order for such 

account, together with other retained 

interests, to satisfy the sponsor’s risk 

retention requirement; 

(B) A description of the material terms 

of the eligible horizontal cash reserve 

account; and 

(C) The disclosures required in 

paragraphs (c)(1)(i) and (ii) of this 

section. 

(2) Vertical interest. With respect to 

any eligible vertical interest retained 

under paragraph (a) of this section, the 

sponsor must disclose: 

(i) A reasonable period of time prior 

to the sale of an asset-backed security 

issued in the same offering of ABS 

interests, 

(A) The form of the eligible vertical 

interest; 

(B) The percentage that the sponsor is 

required to retain as a vertical interest 

under this section; and 

(C) A description of the material terms 

of the vertical interest and the amount 

that the sponsor expects to retain at the 

closing of the securitization transaction. 

(ii) A reasonable time after the closing 

of the securitization transaction, the 

amount of the vertical interest the 

sponsor retained at closing, if that 

amount is materially different from the 

amount disclosed under paragraph 

(c)(2)(i) of this section. 

(d) Record maintenance. A sponsor 

must retain the certifications and 

disclosures required in paragraphs (a) 

and (c) of this section in its records and 

must provide the disclosure upon 

request to the Commission and its 

appropriate Federal banking agency, if 

any, until three years after all ABS 

interests are no longer outstanding. 

§l.5 Revolving pool securitizations. 

(a) Definitions. For purposes of this 

section, the following definitions apply: 

Revolving pool securitization means 

an issuing entity that is established to 

issue on multiple issuance dates more 

than one series, class, subclass, or 

tranche of asset-backed securities that 

are collateralized by a common pool of 

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securitized assets that will change in 

composition over time, and that does 

not monetize excess interest and fees 

from its securitized assets. 

Seller’s interest means an ABS 

interest or ABS interests: 

(1) Collateralized by the securitized 

assets and servicing assets owned or 

held by the issuing entity, other than the 

following that are not considered a 

component of seller’s interest: 

(i) Servicing assets that have been 

allocated as collateral only for a specific 

series in connection with administering 

the revolving pool securitization, such 

as a principal accumulation or interest 

reserve account; and 

(ii) Assets that are not eligible under 

the terms of the securitization 

transaction to be included when 

determining whether the revolving pool 

securitization holds aggregate 

securitized assets in specified 

proportions to aggregate outstanding 

investor ABS interests issued; and 

(2) That is pari passu with each series 

of investor ABS interests issued, or 

partially or fully subordinated to one or 

more series in identical or varying 

amounts, with respect to the allocation 

of all distributions and losses with 

respect to the securitized assets prior to 

early amortization of the revolving 

securitization (as specified in the 

securitization transaction documents); 

and 

(3) That adjusts for fluctuations in the 

outstanding principal balance of the 

securitized assets in the pool. 

(b) General requirement. A sponsor 

satisfies the risk retention requirements 

of §l.3 with respect to a securitization 

transaction for which the issuing entity 

is a revolving pool securitization if the 

sponsor maintains a seller’s interest of 

not less than 5 percent of the aggregate 

unpaid principal balance of all 

outstanding investor ABS interests in 

the issuing entity. 

(c) Measuring the seller’s interest. In 

measuring the seller’s interest for 

purposes of meeting the requirements of 

paragraph (b) of this section: 

(1) The unpaid principal balance of 

the securitized assets for the numerator 

of the 5 percent ratio shall not include 

assets of the types excluded from the 

definition of seller’s interest in 

paragraph (a) of this section; 

(2) The aggregate unpaid principal 

balance of outstanding investor ABS 

interests in the denominator of the 5 

percent ratio may be reduced by the 

amount of funds held in a segregated 

principal accumulation account for the 

repayment of outstanding investor ABS 

interests, if: 

(i) The terms of the securitization 

transaction documents prevent funds in 

the principal accumulation account 

from being applied for any purpose 

other than the repayment of the unpaid 

principal of outstanding investor ABS 

interests; and 

(ii) Funds in that account are invested 

only in the types of assets in which 

funds held in an eligible horizontal cash 

reserve account pursuant to §l.4 are 

permitted to be invested; 

(3) If the terms of the securitization 

transaction documents set minimum 

required seller’s interest as a proportion 

of the unpaid principal balance of 

outstanding investor ABS interests for 

one or more series issued, rather than as 

a proportion of the aggregate 

outstanding investor ABS interests in all 

outstanding series combined, the 

percentage of the seller’s interest for 

each such series must, when combined 

with the percentage of any minimum 

seller’s interest set by reference to the 

aggregate outstanding investor ABS 

interests, equal at least 5 percent; 

(4) The 5 percent test must be 

determined and satisfied at the closing 

of each issuance of ABS interests to 

investors by the issuing entity, and 

(i) At least monthly at a seller’s 

interest measurement date specified 

under the securitization transaction 

documents, until no ABS interest in the 

issuing entity is held by any person not 

a wholly-owned affiliate of the sponsor; 

or 

(ii) If the revolving pool securitization 

fails to meet the 5 percent test as of any 

date described in paragraph (c)(4)(i) of 

this section, and the securitization 

transaction documents specify a cure 

period, the 5 percent test must be 

determined and satisfied within the 

earlier of the cure period, or one month 

after the date described in paragraph 

(c)(4)(i). 

(d) Measuring outstanding investor 

ABS interests. In measuring the amount 

of outstanding investor ABS interests for 

purposes of this section, ABS interests 

held for the life of such ABS interests 

by the sponsor or its wholly-owned 

affiliates may be excluded. 

(e) Holding and retention of the 

seller’s interest; legacy trusts. 

(1) Notwithstanding § l.12(a), the 

seller’s interest, and any offsetting 

horizontal retention interest retained 

pursuant to paragraph (g) of this section, 

must be retained by the sponsor or by 

one or more wholly-owned affiliates of 

the sponsor, including one or more 

depositors of the revolving pool 

securitization. 

(2) If one revolving pool securitization 

issues collateral certificates representing 

a beneficial interest in all or a portion 

of the securitized assets held by that 

securitization to another revolving pool 

securitization, which in turn issues ABS 

interests for which the collateral 

certificates are all or a portion of the 

securitized assets, a sponsor may satisfy 

the requirements of paragraphs (b) and 

(c) of this section by retaining the 

seller’s interest for the assets 

represented by the collateral certificates 

through either of the revolving pool 

securitizations, so long as both 

revolving pool securitizations are 

retained at the direction of the same 

sponsor or its wholly-owned affiliates. 

(3) If the sponsor retains the seller’s 

interest associated with the collateral 

certificates at the level of the revolving 

pool securitization that issues those 

collateral certificates, the proportion of 

the seller’s interest required by 

paragraph (b) of this section retained at 

that level must equal the proportion that 

the principal balance of the securitized 

assets represented by the collateral 

certificates bears to the principal 

balance of the securitized assets in the 

revolving pool securitization that issues 

the ABS interests, as of each 

measurement date required by 

paragraph (c) of this section. 

(f) Offset for pool-level excess funding 

account. The 5 percent seller’s interest 

required on each measurement date by 

paragraph (c) of this section may be 

reduced on a dollar-for-dollar basis by 

the balance, as of such date, of an excess 

funding account in the form of a 

segregated account that: 

(1) Is funded in the event of a failure 

to meet the minimum seller’s interest 

requirements or other requirement to 

maintain a minimum balance of 

securitized assets under the 

securitization transaction documents by 

distributions otherwise payable to the 

holder of the seller’s interest; 

(2) Is invested only in the types of 

assets in which funds held in a 

horizontal cash reserve account 

pursuant to § l.4 are permitted to be 

invested; and 

(3) In the event of an early 

amortization, makes payments of 

amounts held in the account to holders 

of investor ABS interests in the same 

manner as payments to holders of 

investor ABS interests of amounts 

received on securitized assets. 

(g) Combined seller’s interests and 

horizontal interest retention. The 5 

percent seller’s interest required on each 

measurement date by paragraph (c) of 

this section may be reduced to a 

percentage lower than 5 percent to the 

extent that, for all series of investor ABS 

interests issued after the applicable 

effective date of this §l.5, the sponsor, 

or notwithstanding § l.12(a) a whollyowned affiliate of the sponsor, retains, 

at a minimum, a corresponding 

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percentage of the fair value of ABS 

interests issued in each series, in the 

form of one or more of the horizontal 

residual interests meeting the 

requirements of paragraphs (h) or (i). 

(h) Residual ABS interests in excess 

interest and fees. The sponsor may take 

the offset described in paragraph (g) of 

this section for a residual ABS interest 

in excess interest and fees, whether 

certificated or uncertificated, in a single 

or multiple classes, subclasses, or 

tranches, that meets, individually or in 

the aggregate, the requirements of this 

paragraph (h); 

(1) Each series of the revolving pool 

securitization distinguishes between the 

series’ share of the interest and fee cash 

flows and the series’ share of the 

principal repayment cash flows from the 

securitized assets collateralizing the 

revolving pool securitization, which 

may according to the terms of the 

securitization transaction documents, 

include not only the series’ ratable share 

of such cash flows but also excess cash 

flows available from other series; 

(2) The residual ABS interest’s claim 

to any part of the series’ share of the 

interest and fee cash flows for any 

interest payment period is subordinated 

to all accrued and payable interest due 

on the payment date to more senior ABS 

interests in the series for that period, 

and further reduced by the series’ share 

of losses, including defaults on 

principal of the securitized assets 

collateralizing the revolving pool 

securitization (whether incurred in that 

period or carried over from prior 

periods) to the extent that such 

payments would have been included in 

amounts payable to more senior 

interests in the series; 

(3) The revolving pool securitization 

continues to revolve, with one or more 

series, classes, subclasses, or tranches of 

asset-backed securities that are 

collateralized by a common pool of 

assets that change in composition over 

time; and 

(4) For purposes of taking the offset 

described in paragraph (g) of this 

section, the sponsor determines the fair 

value of the residual ABS interest in 

excess interest and fees, and the fair 

value of the series of outstanding 

investor ABS interests to which it is 

subordinated and supports using the fair 

value measurement framework under 

GAAP, as of: 

(i) The closing of the securitization 

transaction issuing the supported ABS 

interests; and 

(ii) The seller’s interest measurement 

dates described in paragraph (c)(4) of 

this section, except that for these 

periodic determinations the sponsor 

must update the fair value of the 

residual ABS interest in excess interest 

and fees for the numerator of the 

percentage ratio, but may at the 

sponsor’s option continue to use the fair 

values determined in (h)(4)(i) for the 

outstanding investor ABS interests in 

the denominator. 

(i) Offsetting eligible horizontal 

residual interest. The sponsor may take 

the offset described in paragraph (g) of 

this section for ABS interests that would 

meet the definition of eligible horizontal 

residual interests in §l.2 but for the 

sponsor’s simultaneous holding of 

subordinated seller’s interests, residual 

ABS interests in excess interests and 

fees, or a combination of the two, if: 

(1) The sponsor complies with all 

requirements of paragraphs (b) through 

(e) of this section for its holdings of 

subordinated seller’s interest, and 

paragraph (h) for its holdings of residual 

ABS interests in excess interests and 

fees, as applicable; 

(2) For purposes of taking the offset 

described in paragraph (g) of this 

section, the sponsor determines the fair 

value of the eligible horizontal residual 

interest as a percentage of the fair value 

of the outstanding investor ABS 

interests in the series supported by the 

eligible horizontal residual interest, 

determined using the fair value 

measurement framework under GAAP: 

(i) As of the closing of the 

securitization transaction issuing the 

supported ABS interests; and 

(ii) Without including in the 

numerator of the percentage ratio any 

fair value based on: 

(A) The subordinated seller’s interest 

or residual ABS interest in excess 

interest and fees; 

(B) the interest payable to the sponsor 

on the eligible horizontal residual 

interest, if the sponsor is including the 

value of residual ABS interest in excess 

interest and fees pursuant to paragraph 

(h) of this section in taking the offset in 

paragraph (g) of this section; and, 

(C) the principal payable to the 

sponsor on the eligible horizontal 

residual interest, if the sponsor is 

including the value of the seller’s 

interest pursuant to paragraphs (b) 

through (f) of this section and 

distributions on that seller’s interest are 

available to reduce charge-offs that 

would otherwise be allocated to reduce 

principal payable to the offset eligible 

horizontal residual interest. 

(j) Specified dates. A sponsor using 

data about the revolving pool 

securitization’s collateral, or ABS 

interests previously issued, to determine 

the closing-date percentage of a seller’s 

interest, residual ABS interest in excess 

interest and fees, or eligible horizontal 

residual interest pursuant to this § __.5 

may use such data prepared as of 

specified dates if: 

(1) The sponsor describes the 

specified dates in the disclosures 

required by paragraph (k) of this section; 

and 

(2) The dates are no more than 60 

days prior to the date of first use with 

investors of disclosures required for the 

interest by paragraph (k) of this section, 

or for revolving pool securitizations that 

make distributions to investors on a 

quarterly or less frequent basis, no more 

than 135 days prior to the date of first 

use with investors of such disclosures. 

(k) Disclosure and record 

maintenance. (1) Disclosure. A sponsor 

relying on this section shall provide, or 

cause to be provided, to potential 

investors, under the caption ‘‘Credit 

Risk Retention’’ the following disclosure 

in written form and within the time 

frames set forth in this paragraph (k): 

(i) A reasonable period of time prior 

to the sale of an asset-backed security, 

a description of the material terms of the 

seller’s interest, and the percentage of 

the seller’s interest that the sponsor 

expects to retain at the closing of the 

securitization transaction, measured in 

accordance with the requirements of 

this § __.5, as a percentage of the 

aggregate unpaid principal balance of all 

outstanding investor ABS interests 

issued, or as a percentage of the 

aggregate unpaid principal balance of 

outstanding investor ABS interests for 

one or more series issued, as required by 

the terms of the securitization 

transaction; 

(ii) A reasonable time after the closing 

of the securitization transaction, the 

amount of seller’s interest the sponsor 

retained at closing, if that amount is 

materially different from the amount 

disclosed under paragraph (k)(1)(i) of 

this section; and 

(iii) A description of the material 

terms of any horizontal residual 

interests offsetting the seller’s interest in 

accordance with paragraphs (g), (h), and 

(i) of this section; and 

(iv) Disclosure of the fair value of 

those horizontal residual interests 

retained by the sponsor for the series 

being offered to investors and described 

in the disclosures, as a percentage of the 

fair value of the outstanding investor 

ABS interests issued, described in the 

same manner and within the same 

timeframes required for disclosure of 

the fair values of eligible horizontal 

residual interests specified in §l.4(c). 

(2) Adjusted data. Disclosures 

required by this paragraph (k) to be 

made a reasonable period of time prior 

to the sale of an asset-backed security of 

the amount of seller’s interest, residual 

ABS interest in excess interest and fees, 

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77746 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

or eligible horizontal residual interest 

may include adjustments to the amount 

of securitized assets for additions or 

removals the sponsor expects to make 

before the closing date and adjustments 

to the amount of outstanding investor 

ABS interests for expected increases and 

decreases of those interests under the 

control of the sponsor. 

(3) Record maintenance. A sponsor 

must retain the disclosures required in 

paragraph (k)(1) of this section in its 

records and must provide the disclosure 

upon request to the Commission and its 

appropriate Federal banking agency, if 

any, until three years after all ABS 

interests are no longer outstanding. 

(l) Early amortization of all 

outstanding series. A sponsor that 

organizes a revolving pool securitization 

that relies on this § __.5 to satisfy the 

risk retention requirements of § __.3, 

does not violate the requirements of this 

part if its seller’s interest falls below the 

level required by § __. 5 after the 

revolving pool securitization 

commences early amortization, 

pursuant to the terms of the 

securitization transaction documents, of 

all series of outstanding investor ABS 

interests, if: 

(1) The sponsor was in full 

compliance with the requirements of 

this section on all measurement dates 

specified in paragraph (c) of this section 

prior to the commencement of early 

amortization; 

(2) The terms of the seller’s interest 

continue to make it pari passu with or 

subordinate in identical or varying 

amounts to each series of outstanding 

investor ABS interests issued with 

respect to the allocation of all 

distributions and losses with respect to 

the securitized assets; 

(3) The terms of any horizontal 

interest relied upon by the sponsor 

pursuant to paragraph (g) to offset the 

minimum seller’s interest amount 

continue to require the interests to 

absorb losses in accordance with the 

terms of paragraph (h) or (i) of this 

section, as applicable; and 

(4) The revolving pool securitization 

issues no additional ABS interests after 

early amortization is initiated to any 

person not a wholly-owned affiliate of 

the sponsor, either at the time of 

issuance or during the amortization 

period. 

§ll.6 Eligible ABCP conduits. 

(a) Definitions. For purposes of this 

section, the following additional 

definitions apply: 

100 percent liquidity coverage means 

an amount equal to the outstanding 

balance of all ABCP issued by the 

conduit plus any accrued and unpaid 

interest without regard to the 

performance of the ABS interests held 

by the ABCP conduit and without 

regard to any credit enhancement. 

ABCP means asset-backed commercial 

paper that has a maturity at the time of 

issuance not exceeding 397 days, 

exclusive of days of grace, or any 

renewal thereof the maturity of which is 

likewise limited. 

ABCP conduit means an issuing entity 

with respect to ABCP. 

Eligible ABCP conduit means an 

ABCP conduit, provided that: 

(1) The ABCP conduit is bankruptcy 

remote or otherwise isolated for 

insolvency purposes from the sponsor of 

the ABCP conduit and from any 

intermediate SPV; 

(2) The ABS interests acquired by the 

ABCP conduit are: 

(i) ABS interests collateralized solely 

by assets originated by an originatorseller and by servicing assets; 

(ii) Special units of beneficial interest 

(or similar ABS interests) in a trust or 

special purpose vehicle that retains 

legal title to leased property underlying 

leases originated by an originator-seller 

that were transferred to an intermediate 

SPV in connection with a securitization 

collateralized solely by such leases and 

by servicing assets; 

(iii) ABS interests in a revolving pool 

securitization collateralized solely by 

assets originated by an originator-seller 

and by servicing assets; or 

(iv) ABS interests described in 

paragraph (2)(i), (ii), or (iii) of this 

definition that are collateralized, in 

whole or in part, by assets acquired by 

an originator-seller in a business 

combination that qualifies for business 

combination accounting under GAAP, 

and, if collateralized in part, the 

remainder of such assets are assets 

described in paragraph (2)(i), (ii), or (iii) 

of this definition; and 

(v) Acquired by the ABCP conduit in 

an initial issuance by or on behalf of an 

intermediate SPV: 

(A) Directly from the intermediate 

SPV, 

(B) From an underwriter of the ABS 

interests issued by the intermediate 

SPV, or 

(C) From another person who 

acquired the ABS interests directly from 

the intermediate SPV; 

(3) The ABCP conduit is collateralized 

solely by ABS interests acquired from 

intermediate SPVs as described in 

paragraph (2) of this definition and 

servicing assets; and 

(4) A regulated liquidity provider has 

entered into a legally binding 

commitment to provide 100 percent 

liquidity coverage (in the form of a 

lending facility, an asset purchase 

agreement, a repurchase agreement, or 

other similar arrangement) to all the 

ABCP issued by the ABCP conduit by 

lending to, purchasing ABCP issued by, 

or purchasing assets from, the ABCP 

conduit in the event that funds are 

required to repay maturing ABCP issued 

by the ABCP conduit. With respect to 

the 100 percent liquidity coverage, in 

the event that the ABCP conduit is 

unable for any reason to repay maturing 

ABCP issued by the issuing entity, the 

liquidity provider shall be obligated to 

pay an amount equal to any shortfall, 

and the total amount that may be due 

pursuant to the 100 percent liquidity 

coverage shall be equal to 100 percent 

of the amount of the ABCP outstanding 

at any time plus accrued and unpaid 

interest (amounts due pursuant to the 

required liquidity coverage may not be 

subject to credit performance of the ABS 

interests held by the ABCP conduit or 

reduced by the amount of credit support 

provided to the ABCP conduit and 

liquidity support that only funds 

performing loans or receivables or 

performing ABS interests does not meet 

the requirements of this section). 

Intermediate SPV means a special 

purpose vehicle that: 

(1) (i) Is a direct or indirect whollyowned affiliate of the originator-seller; 

or 

(ii) Has nominal equity owned by a 

trust or corporate service provider that 

specializes in providing independent 

ownership of special purpose vehicles, 

and such trust or corporate service 

provider is not affiliated with any other 

transaction parties; 

(2) Is bankruptcy remote or otherwise 

isolated for insolvency purposes from 

the eligible ABCP conduit and from 

each originator-seller and each majorityowned affiliate in each case that, 

directly or indirectly, sells or transfers 

assets to such intermediate SPV; 

(3) Acquires assets from the 

originator-seller that are originated by 

the originator-seller or acquired by the 

originator-seller in the acquisition of a 

business that qualifies for business 

combination accounting under GAAP or 

acquires ABS interests issued by 

another intermediate SPV of the 

originator-seller that are collateralized 

solely by such assets; and 

(4) Issues ABS interests collateralized 

solely by such assets, as applicable. 

Originator-seller means an entity that 

originates assets and sells or transfers 

those assets, directly or through a 

majority-owned affiliate, to an 

intermediate SPV, and includes (except 

for the purposes of identifying the 

sponsorship and affiliation of an 

intermediate SPV pursuant to this 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77747 

seller that, directly or indirectly, 

majority controls, is majority controlled 

by or is under common majority control 

with, the originator-seller. For purposes 

of this definition, majority control 

means ownership of more than 50 

percent of the equity of an entity, or 

ownership of any other controlling 

financial interest in the entity, as 

determined under GAAP. 

Regulated liquidity provider means: 

(1) A depository institution (as 

defined in section 3 of the Federal 

Deposit Insurance Act (12 U.S.C. 1813)); 

(2) A bank holding company (as 

defined in 12 U.S.C. 1841), or a 

subsidiary thereof; 

(3) A savings and loan holding 

company (as defined in 12 U.S.C. 

1467a), provided all or substantially all 

of the holding company’s activities are 

permissible for a financial holding 

company under 12 U.S.C. 1843(k), or a 

subsidiary thereof; or 

(4) A foreign bank whose home 

country supervisor (as defined in 

§ 211.21 of the Federal Reserve Board’s 

Regulation K (12 CFR 211.21)) has 

adopted capital standards consistent 

with the Capital Accord of the Basel 

Committee on Banking Supervision, as 

amended, and that is subject to such 

standards, or a subsidiary thereof. 

(b) In general. An ABCP conduit 

sponsor satisfies the risk retention 

requirement of § l.3 with respect to the 

issuance of ABCP by an eligible ABCP 

conduit in a securitization transaction 

if, for each ABS interest the ABCP 

conduit acquires from an intermediate 

SPV: 

(1) An originator-seller of the 

intermediate SPV retains an economic 

interest in the credit risk of the assets 

collateralizing the ABS interest acquired 

by the eligible ABCP conduit in the 

amount and manner required under 

§ l.4 or § l.5; and 

(2) The ABCP conduit sponsor: 

(i) Approves each originator-seller 

permitted to sell or transfer assets, 

directly or indirectly, to an intermediate 

SPV from which an eligible ABCP 

conduit acquires ABS interests; 

(ii) Approves each intermediate SPV 

from which an eligible ABCP conduit is 

permitted to acquire ABS interests; 

(iii) Establishes criteria governing the 

ABS interests, and the securitized assets 

underlying the ABS interests, acquired 

by the ABCP conduit; 

(iv) Administers the ABCP conduit by 

monitoring the ABS interests acquired 

by the ABCP conduit and the assets 

supporting those ABS interests, 

arranging for debt placement, compiling 

monthly reports, and ensuring 

compliance with the ABCP conduit 

documents and with the ABCP 

conduit’s credit and investment policy; 

and 

(v) Maintains and adheres to policies 

and procedures for ensuring that the 

requirements in this paragraph (b) of 

this section have been met. 

(c) Originator-seller compliance with 

risk retention. The use of the risk 

retention option provided in this section 

by an ABCP conduit sponsor does not 

relieve the originator-seller that 

sponsors ABS interests acquired by an 

eligible ABCP conduit from such 

originator-seller’s obligation to comply 

with its own risk retention obligations 

under this part. 

(d) Disclosures—(1) Periodic 

disclosures to investors. An ABCP 

conduit sponsor relying upon this 

section shall provide, or cause to be 

provided, to each purchaser of ABCP, 

before or contemporaneously with the 

first sale of ABCP to such purchaser and 

at least monthly thereafter, to each 

holder of commercial paper issued by 

the ABCP conduit, in writing, each of 

the following items of information, 

which shall be as of a date not more 

than 60 days prior to date of first use 

with investors: 

(i) The name and form of organization 

of the regulated liquidity provider that 

provides liquidity coverage to the 

eligible ABCP conduit, including a 

description of the material terms of such 

liquidity coverage, and notice of any 

failure to fund. 

(ii) With respect to each ABS interest 

held by the ABCP conduit: 

(A) The asset class or brief description 

of the underlying securitized assets; 

(B) The standard industrial category 

code (SIC Code) for the originator-seller 

that will retain (or has retained) 

pursuant to this section an interest in 

the securitization transaction; and 

(C) A description of the percentage 

amount of risk retention pursuant to the 

rule by the originator-seller, and 

whether it is in the form of an eligible 

horizontal residual interest, vertical 

interest, or revolving pool securitization 

seller’s interest, as applicable. 

(2) Disclosures to regulators regarding 

originator-sellers. An ABCP conduit 

sponsor relying upon this section shall 

provide, or cause to be provided, upon 

request, to the Commission and its 

appropriate Federal banking agency, if 

any, in writing, all of the information 

required to be provided to investors in 

paragraph (d)(1) of this section, and the 

name and form of organization of each 

originator-seller that will retain (or has 

retained) pursuant to this section an 

interest in the securitization transaction. 

(e) Sale or transfer of ABS interests 

between eligible ABCP conduits. At any 

time, an eligible ABCP conduit that 

acquired an ABS interest in accordance 

with the requirements set forth in this 

section may transfer, and another 

eligible ABCP conduit may acquire, 

such ABS interest, if the following 

conditions are satisfied: 

(1) The sponsors of both eligible 

ABCP conduits are in compliance with 

this section; and 

(2) The same regulated liquidity 

provider has entered into one or more 

legally binding commitments to provide 

100 percent liquidity coverage to all the 

ABCP issued by both eligible ABCP 

conduits. 

(f) Duty to comply. (1) The ABCP 

conduit sponsor shall be responsible for 

compliance with this section. 

(2) An ABCP conduit sponsor relying 

on this section: 

(i) Shall maintain and adhere to 

policies and procedures that are 

reasonably designed to monitor 

compliance by each originator-seller 

which is satisfying a risk retention 

obligation in respect of ABS interests 

acquired by an eligible ABCP conduit 

with the requirements of paragraph 

(b)(1) of this section; and 

(ii) In the event that the ABCP conduit 

sponsor determines that an originatorseller no longer complies with the 

requirements of paragraph (b)(1) of this 

section, shall: 

(A) Promptly notify the holders of the 

ABCP, and upon request, the 

Commission and its appropriate Federal 

banking agency, if any, in writing of: 

(1) The name and form of organization 

of any originator-seller that fails to 

retain risk in accordance with paragraph 

(b)(1) of this section and the amount of 

ABS interests issued by an intermediate 

SPV of such originator-seller and held 

by the ABCP conduit; 

(2) The name and form of organization 

of any originator-seller that hedges, 

directly or indirectly through an 

intermediate SPV, its risk retention in 

violation of paragraph (b)(1) of this 

section and the amount of ABS interests 

issued by an intermediate SPV of such 

originator-seller and held by the ABCP 

conduit; and 

(3) Any remedial actions taken by the 

ABCP conduit sponsor or other party 

with respect to such ABS interests; and 

(B) Take other appropriate steps 

pursuant to the requirements of 

paragraphs (b)(2)(iv) and (v) of this 

section which may include, as 

appropriate, curing any breach of the 

requirements in this section, or 

removing from the eligible ABCP 

conduit any ABS interest that does not 

comply with the requirements in this 

section. 

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77748 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

§l.7 Commercial mortgage-backed 

securities. 

(a) Definitions. For purposes of this 

section, the following definition shall 

apply: 

Special servicer means, with respect 

to any securitization of commercial real 

estate loans, any servicer that, upon the 

occurrence of one or more specified 

conditions in the servicing agreement, 

has the right to service one or more 

assets in the transaction. 

(b) Third-party purchaser. A sponsor 

may satisfy some or all of its risk 

retention requirements under § __.3 

with respect to a securitization 

transaction if a third party (or any 

majority-owned affiliate thereof) 

purchases and holds for its own account 

an eligible horizontal residual interest 

in the issuing entity in the same form, 

amount, and manner as would be held 

by the sponsor under § __.4 and all of 

the following conditions are met: 

(1) Number of third-party purchasers. 

At any time, there are no more than two 

third-party purchasers of an eligible 

horizontal residual interest. If there are 

two third-party purchasers, each thirdparty purchaser’s interest must be pari 

passu with the other third-party 

purchaser’s interest. 

(2) Composition of collateral. The 

securitization transaction is 

collateralized solely by commercial real 

estate loans and servicing assets. 

(3) Source of funds. (i) Each thirdparty purchaser pays for the eligible 

horizontal residual interest in cash at 

the closing of the securitization 

transaction. 

(ii) No third-party purchaser obtains 

financing, directly or indirectly, for the 

purchase of such interest from any other 

person that is a party to, or an affiliate 

of a party to, the securitization 

transaction (including, but not limited 

to, the sponsor, depositor, or servicer 

other than a special servicer affiliated 

with the third-party purchaser), other 

than a person that is a party to the 

transaction solely by reason of being an 

investor. 

(4) Third-party review. Each thirdparty purchaser conducts an 

independent review of the credit risk of 

each securitized asset prior to the sale 

of the asset-backed securities in the 

securitization transaction that includes, 

at a minimum, a review of the 

underwriting standards, collateral, and 

expected cash flows of each commercial 

real estate loan that is collateral for the 

asset-backed securities. 

(5) Affiliation and control rights. (i) 

Except as provided in paragraph 

(b)(5)(ii) of this section, no third-party 

purchaser is affiliated with any party to 

the securitization transaction 

(including, but not limited to, the 

sponsor, depositor, or servicer) other 

than investors in the securitization 

transaction. 

(ii) Notwithstanding paragraph 

(b)(5)(i) of this section, a third-party 

purchaser may be affiliated with: 

(A) The special servicer for the 

securitization transaction; or 

(B) One or more originators of the 

securitized assets, as long as the assets 

originated by the affiliated originator or 

originators collectively comprise less 

than 10 percent of the unpaid principal 

balance of the securitized assets 

included in the securitization 

transaction at the cut-off date or similar 

date for establishing the composition of 

the securitized assets collateralizing the 

asset-backed securities issued pursuant 

to the securitization transaction. 

(6) Operating Advisor. The underlying 

securitization transaction documents 

shall provide for the following: 

(i) The appointment of an operating 

advisor (the Operating Advisor) that: 

(A) Is not affiliated with other parties 

to the securitization transaction; 

(B) Does not directly or indirectly 

have any financial interest in the 

securitization transaction other than in 

fees from its role as Operating Advisor; 

and 

(C) Is required to act in the best 

interest of, and for the benefit of, 

investors as a collective whole; 

(ii) Standards with respect to the 

Operating Advisor’s experience, 

expertise and financial strength to fulfill 

its duties and responsibilities under the 

applicable transaction documents over 

the life of the securitization transaction; 

(iii) The terms of the Operating 

Advisor’s compensation with respect to 

the securitization transaction; 

(iv) When the eligible horizontal 

residual interest has been reduced by 

principal payments, realized losses, and 

appraisal reduction amounts (which 

reduction amounts are determined in 

accordance with the applicable 

transaction documents) to a principal 

balance of 25 percent or less of its initial 

principal balance, the special servicer 

for the securitized assets must consult 

with the Operating Advisor in 

connection with, and prior to, any 

material decision in connection with its 

servicing of the securitized assets, 

including, without limitation: 

(A) Any material modification of, or 

waiver with respect to, any provision of 

a loan agreement (including a mortgage, 

deed of trust, or other security 

agreement); 

(B) Foreclosure upon or comparable 

conversion of the ownership of a 

property; or 

(C) Any acquisition of a property. 

(v) The Operating Advisor shall have 

adequate and timely access to 

information and reports necessary to 

fulfill its duties under the transaction 

documents, including all reports made 

available to holders of ABS interests and 

third-party purchasers, and shall be 

responsible for: 

(A) Reviewing the actions of the 

special servicer; 

(B) Reviewing all reports provided by 

the special servicer to the issuing entity 

or any holder of ABS interests; 

(C) Reviewing for accuracy and 

consistency with the transaction 

documents calculations made by the 

special servicer; and 

(D) Issuing a report to investors 

(including any third-party purchasers) 

and the issuing entity on a periodic 

basis concerning: 

(1) Whether the Operating Advisor 

believes, in its sole discretion exercised 

in good faith, that the special servicer is 

operating in compliance with any 

standard required of the special servicer 

in the applicable transaction 

documents; and 

(2) Which, if any, standards the 

Operating Advisor believes, in its sole 

discretion exercised in good faith, the 

special servicer has failed to comply. 

(vi)(A) The Operating Advisor shall 

have the authority to recommend that 

the special servicer be replaced by a 

successor special servicer if the 

Operating Advisor determines, in its 

sole discretion exercised in good faith, 

that: 

(1) The special servicer has failed to 

comply with a standard required of the 

special servicer in the applicable 

transaction documents; and 

(2) Such replacement would be in the 

best interest of the investors as a 

collective whole; and 

(B) If a recommendation described in 

paragraph (b)(6)(vi)(A) of this section is 

made, the special servicer shall be 

replaced upon the affirmative vote of a 

majority of the outstanding principal 

balance of all ABS interests voting on 

the matter, with a minimum of a 

quorum of ABS interests voting on the 

matter. For purposes of such vote, the 

applicable transaction documents shall 

specify the quorum and may not specify 

a quorum of more than the holders of 20 

percent of the outstanding principal 

balance of all ABS interests in the 

issuing entity, with such quorum 

including at least three ABS interest 

holders that are not affiliated with each 

other. 

(7) Disclosures. The sponsor provides, 

or causes to be provided, to potential 

investors a reasonable period of time 

prior to the sale of the asset-backed 

securities as part of the securitization 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77749 

transaction and, upon request, to the 

Commission and its appropriate Federal 

banking agency, if any, the following 

disclosure in written form under the 

caption ‘‘Credit Risk Retention’’: 

(i) The name and form of organization 

of each initial third-party purchaser that 

acquired an eligible horizontal residual 

interest at the closing of a securitization 

transaction; 

(ii) A description of each initial thirdparty purchaser’s experience in 

investing in commercial mortgagebacked securities; 

(iii) Any other information regarding 

each initial third-party purchaser or 

each initial third-party purchaser’s 

retention of the eligible horizontal 

residual interest that is material to 

investors in light of the circumstances of 

the particular securitization transaction; 

(iv) The fair value (expressed as a 

percentage of the fair value of all of the 

ABS interests issued in the 

securitization transaction and dollar 

amount (or corresponding amount in the 

foreign currency in which the ABS 

interests are issued, as applicable)) of 

the eligible horizontal residual interest 

that will be retained (or was retained) by 

each initial third-party purchaser, as 

well as the amount of the purchase price 

paid by each initial third-party 

purchaser for such interest; 

(v) The fair value (expressed as a 

percentage of the fair value of all of the 

ABS interests issued in the 

securitization transaction and dollar 

amount (or corresponding amount in the 

foreign currency in which the ABS 

interests are issued, as applicable)) of 

the eligible horizontal residual interest 

in the securitization transaction that the 

sponsor would have retained pursuant 

to §l.4 if the sponsor had relied on 

retaining an eligible horizontal residual 

interest in that section to meet the 

requirements of § l.3 with respect to 

the transaction; 

(vi) A description of the material 

terms of the eligible horizontal residual 

interest retained by each initial thirdparty purchaser, including the same 

information as is required to be 

disclosed by sponsors retaining 

horizontal interests pursuant to §l.4; 

(vii) The material terms of the 

applicable transaction documents with 

respect to the Operating Advisor, 

including without limitation: 

(A) The name and form of 

organization of the Operating Advisor; 

(B) A description of any material 

conflict of interest or material potential 

conflict of interest between the 

Operating Advisor and any other party 

to the transaction; 

(C) The standards required by 

paragraph (b)(6)(ii) of this section and a 

description of how the Operating 

Advisor satisfies each of the standards; 

and 

(D) The terms of the Operating 

Advisor’s compensation under 

paragraph (b)(6)(iii) of this section; and 

(viii) The representations and 

warranties concerning the securitized 

assets, a schedule of any securitized 

assets that are determined not to comply 

with such representations and 

warranties, and what factors were used 

to make the determination that such 

securitized assets should be included in 

the pool notwithstanding that the 

securitized assets did not comply with 

such representations and warranties, 

such as compensating factors or a 

determination that the exceptions were 

not material. 

(8) Hedging, transfer and pledging— 

(i) General rule. Except as set forth in 

paragraph (b)(8)(ii) of this section, each 

third-party purchaser and its affiliates 

must comply with the hedging and 

other restrictions in §l.12 as if it were 

the retaining sponsor with respect to the 

securitization transaction and had 

acquired the eligible horizontal residual 

interest pursuant to §l.4; provided 

that, the hedging and other restrictions 

in §l.12 shall not apply on or after the 

date that each CRE loan (as defined in 

§ l.14) that serves as collateral for 

outstanding ABS interests has been 

defeased. For purposes of this section, a 

loan is deemed to be defeased if: 

(A) cash or cash equivalents of the 

types permitted for an eligible 

horizontal cash reserve account 

pursuant to § l.4 whose maturity 

corresponds to the remaining debt 

service obligations, have been pledged 

to the issuing entity as collateral for the 

loan and are in such amounts and 

payable at such times as necessary to 

timely generate cash sufficient to make 

all remaining debt service payments due 

on such loan; and 

(B) the issuing entity has an obligation 

to release its lien on the loan. 

(ii) Exceptions—(A) Transfer by initial 

third-party purchaser or sponsor. An 

initial third-party purchaser that 

acquired an eligible horizontal residual 

interest at the closing of a securitization 

transaction in accordance with this 

section, or a sponsor that acquired an 

eligible horizontal residual interest at 

the closing of a securitization 

transaction in accordance with this 

section, may, on or after the date that is 

five years after the date of the closing of 

the securitization transaction, transfer 

that interest to a subsequent third-party 

purchaser that complies with paragraph 

(b)(8)(ii)(C) of this section. The initial 

third-party purchaser shall provide the 

sponsor with complete identifying 

information for the subsequent thirdparty purchaser. 

(B) Transfer by subsequent third-party 

purchaser. At any time, a subsequent 

third-party purchaser that acquired an 

eligible horizontal residual interest 

pursuant to this section may transfer its 

interest to a different third-party 

purchaser that complies with paragraph 

(b)(8)(ii)(C) of this section. The 

transferring third-party purchaser shall 

provide the sponsor with complete 

identifying information for the acquiring 

third-party purchaser. 

(C) Requirements applicable to 

subsequent third-party purchasers. A 

subsequent third-party purchaser is 

subject to all of the requirements of 

paragraphs (b)(1), (b)(3) through (5), and 

(b)(8) of this section applicable to thirdparty purchasers, provided that 

obligations under paragraphs (b)(1), 

(b)(3) through (5), and (b)(8) of this 

section that apply to initial third-party 

purchasers at or before the time of 

closing of the securitization transaction 

shall apply to successor third-party 

purchasers at or before the time of the 

transfer of the eligible horizontal 

residual interest to the successor thirdparty purchaser. 

(c) Duty to comply. (1) The retaining 

sponsor shall be responsible for 

compliance with this section by itself 

and for compliance by each initial or 

subsequent third-party purchaser that 

acquired an eligible horizontal residual 

interest in the securitization transaction. 

(2) A sponsor relying on this section: 

(i) Shall maintain and adhere to 

policies and procedures to monitor each 

third-party purchaser’s compliance with 

the requirements of paragraphs (b)(1), 

(b)(3) through (5), and (b)(8) of this 

section; and 

(ii) In the event that the sponsor 

determines that a third-party purchaser 

no longer complies with one or more of 

the requirements of paragraphs (b)(1), 

(b)(3) through (5), or (b)(8) of this 

section, shall promptly notify, or cause 

to be notified, the holders of the ABS 

interests issued in the securitization 

transaction of such noncompliance by 

such third-party purchaser. 

§l.8 Federal National Mortgage 

Association and Federal Home Loan 

Mortgage Corporation ABS. 

(a) In general. A sponsor satisfies its 

risk retention requirement under this 

part if the sponsor fully guarantees the 

timely payment of principal and interest 

on all ABS interests issued by the 

issuing entity in the securitization 

transaction and is: 

(1) The Federal National Mortgage 

Association or the Federal Home Loan 

Mortgage Corporation operating under 

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the conservatorship or receivership of 

the Federal Housing Finance Agency 

pursuant to section 1367 of the Federal 

Housing Enterprises Financial Safety 

and Soundness Act of 1992 (12 U.S.C. 

4617) with capital support from the 

United States; or 

(2) Any limited-life regulated entity 

succeeding to the charter of either the 

Federal National Mortgage Association 

or the Federal Home Loan Mortgage 

Corporation pursuant to section 1367(i) 

of the Federal Housing Enterprises 

Financial Safety and Soundness Act of 

1992 (12 U.S.C. 4617(i)), provided that 

the entity is operating with capital 

support from the United States. 

(b) Certain provisions not applicable. 

The provisions of §l.12(b), (c), and (d) 

shall not apply to a sponsor described 

in paragraph (a)(1) or (2) of this section, 

its affiliates, or the issuing entity with 

respect to a securitization transaction 

for which the sponsor has retained 

credit risk in accordance with the 

requirements of this section. 

(c) Disclosure. A sponsor relying on 

this section shall provide to investors, 

in written form under the caption 

‘‘Credit Risk Retention’’ and, upon 

request, to the Federal Housing Finance 

Agency and the Commission, a 

description of the manner in which it 

has met the credit risk retention 

requirements of this part. 

§l.9 Open market CLOs. 

(a) Definitions. For purposes of this 

section, the following definitions shall 

apply: 

CLO means a special purpose entity 

that: 

(i) Issues debt and equity interests, 

and 

(ii) Whose assets consist primarily of 

loans that are securitized assets and 

servicing assets. 

CLO-eligible loan tranche means a 

term loan of a syndicated facility that 

meets the criteria set forth in paragraph 

(c) of this section. 

CLO manager means an entity that 

manages a CLO, which entity is 

registered as an investment adviser 

under the Investment Advisers Act of 

1940, as amended (15 U.S.C. 80b-1 et 

seq.), or is an affiliate of such a 

registered investment adviser and itself 

is managed by such registered 

investment adviser. 

Commercial borrower means an 

obligor under a corporate credit 

obligation (including a loan). 

Initial loan syndication transaction 

means a transaction in which a loan is 

syndicated to a group of lenders. 

Lead arranger means, with respect to 

a CLO-eligible loan tranche, an 

institution that: 

(i) Is active in the origination, 

structuring and syndication of 

commercial loan transactions (as 

defined in § l.14) and has played a 

primary role in the structuring, 

underwriting and distribution on the 

primary market of the CLO-eligible loan 

tranche. 

(ii) Has taken an allocation of the 

funded portion of the syndicated credit 

facility under the terms of the 

transaction that includes the CLOeligible loan tranche of at least 20 

percent of the aggregate principal 

balance at origination, and no other 

member (or members affiliated with 

each other) of the syndication group that 

funded at origination has taken a greater 

allocation; and 

(iii) Is identified in the applicable 

agreement governing the CLO-eligible 

loan tranche; represents therein to the 

holders of the CLO-eligible loan tranche 

and to any holders of participation 

interests in such CLO-eligible loan 

tranche that such lead arranger satisfies 

the requirements of paragraph (i) of this 

definition and, at the time of initial 

funding of the CLO-eligible tranche, will 

satisfy the requirements of paragraph (ii) 

of this definition; further represents 

therein (solely for the purpose of 

assisting such holders to determine the 

eligibility of such CLO-eligible loan 

tranche to be held by an open market 

CLO) that in the reasonable judgment of 

such lead arranger, the terms of such 

CLO-eligible loan tranche are consistent 

with the requirements of paragraphs 

(c)(2) and (3) of this section; and 

covenants therein to such holders that 

such lead arranger will fulfill the 

requirements of paragraph (c)(1) of this 

section. 

Open market CLO means a CLO: 

(i) Whose assets consist of senior, 

secured syndicated loans acquired by 

such CLO directly from the sellers 

thereof in open market transactions and 

of servicing assets, 

(ii) That is managed by a CLO 

manager, and 

(iii) That holds less than 50 percent of 

its assets, by aggregate outstanding 

principal amount, in loans syndicated 

by lead arrangers that are affiliates of the 

CLO or the CLO manager or originated 

by originators that are affiliates of the 

CLO or the CLO manager. 

Open market transaction means: 

(i) Either an initial loan syndication 

transaction or a secondary market 

transaction in which a seller offers 

senior, secured syndicated loans to 

prospective purchasers in the loan 

market on market terms on an arm’s 

length basis, which prospective 

purchasers include, but are not limited 

to, entities that are not affiliated with 

the seller, or 

(ii) A reverse inquiry from a 

prospective purchaser of a senior, 

secured syndicated loan through a 

dealer in the loan market to purchase a 

senior, secured syndicated loan to be 

sourced by the dealer in the loan 

market. 

Secondary market transaction means 

a purchase of a senior, secured 

syndicated loan not in connection with 

an initial loan syndication transaction 

but in the secondary market. 

Senior, secured syndicated loan 

means a loan made to a commercial 

borrower that: 

(i) Is not subordinate in right of 

payment to any other obligation for 

borrowed money of the commercial 

borrower, 

(ii) Is secured by a valid first priority 

security interest or lien in or on 

specified collateral securing the 

commercial borrower’s obligations 

under the loan, and 

(iii) The value of the collateral subject 

to such first priority security interest or 

lien, together with other attributes of the 

obligor (including, without limitation, 

its general financial condition, ability to 

generate cash flow available for debt 

service and other demands for that cash 

flow), is adequate (in the commercially 

reasonable judgment of the CLO 

manager exercised at the time of 

investment) to repay the loan and to 

repay all other indebtedness of equal 

seniority secured by such first priority 

security interest or lien in or on the 

same collateral, and the CLO manager 

certifies, on or prior to each date that it 

acquires a loan constituting part of a 

new CLO-eligible tranche, that it has 

policies and procedures to evaluate the 

likelihood of repayment of loans 

acquired by the CLO and it has followed 

such policies and procedures in 

evaluating each CLO-eligible loan 

tranche. 

(b) In general. A sponsor satisfies the 

risk retention requirements of §l.3 

with respect to an open market CLO 

transaction if: 

(1) The open market CLO does not 

acquire or hold any assets other than 

CLO-eligible loan tranches that meet the 

requirements of paragraph (c) of this 

section and servicing assets; 

(2) The governing documents of such 

open market CLO require that, at all 

times, the assets of the open market CLO 

consist of senior, secured syndicated 

loans that are CLO-eligible loan tranches 

and servicing assets; 

(3) The open market CLO does not 

invest in ABS interests or in credit 

derivatives other than hedging 

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transactions that are servicing assets to 

hedge risks of the open market CLO; 

(4) All purchases of CLO-eligible loan 

tranches and other assets by the open 

market CLO issuing entity or through a 

warehouse facility used to accumulate 

the loans prior to the issuance of the 

CLO’s ABS interests are made in open 

market transactions on an arms-length 

basis; 

(5) The CLO manager of the open 

market CLO is not entitled to receive 

any management fee or gain on sale at 

the time the open market CLO issues its 

ABS interests. 

(c) CLO-eligible loan tranche. To 

qualify as a CLO-eligible loan tranche, a 

term loan of a syndicated credit facility 

to a commercial borrower must have the 

following features: 

(1) A minimum of 5 percent of the 

face amount of the CLO-eligible loan 

tranche is retained by the lead arranger 

thereof until the earliest of the 

repayment, maturity, involuntary and 

unscheduled acceleration, payment 

default, or bankruptcy default of such 

CLO-eligible loan tranche, provided that 

such lead arranger complies with 

limitations on hedging, transferring and 

pledging in § l.12 with respect to the 

interest retained by the lead arranger. 

(2) Lender voting rights within the 

credit agreement and any intercreditor 

or other applicable agreements 

governing such CLO-eligible loan 

tranche are defined so as to give holders 

of the CLO-eligible loan tranche consent 

rights with respect to, at minimum, any 

material waivers and amendments of 

such applicable documents, including 

but not limited to, adverse changes to 

the calculation or payments of amounts 

due to the holders of the CLO-eligible 

tranche, alterations to pro rata 

provisions, changes to voting 

provisions, and waivers of conditions 

precedent; and 

(3) The pro rata provisions, voting 

provisions, and similar provisions 

applicable to the security associated 

with such CLO-eligible loan tranches 

under the CLO credit agreement and any 

intercreditor or other applicable 

agreements governing such CLO-eligible 

loan tranches are not materially less 

advantageous to the holder(s) of such 

CLO-eligible tranche than the terms of 

other tranches of comparable seniority 

in the broader syndicated credit facility. 

(d) Disclosures. A sponsor relying on 

this section shall provide, or cause to be 

provided, to potential investors a 

reasonable period of time prior to the 

sale of the asset-backed securities in the 

securitization transaction and at least 

annually with respect to the information 

required by paragraph (d)(1) of this 

section and, upon request, to the 

Commission and its appropriate Federal 

banking agency, if any, the following 

disclosure in written form under the 

caption ‘‘Credit Risk Retention’’: 

(1) Open market CLOs. A complete 

list of every asset held by an open 

market CLO (or before the CLO’s 

closing, in a warehouse facility in 

anticipation of transfer into the CLO at 

closing), including the following 

information: 

(i) The full legal name, Standard 

Industrial Classification (SIC) category 

code, and legal entity identifier (LEI) 

issued by a utility endorsed or 

otherwise governed by the Global LEI 

Regulatory Oversight Committee or the 

Global LEI Foundation (if an LEI has 

been obtained by the obligor) of the 

obligor of the loan or asset; 

(ii) The full name of the specific loan 

tranche held by the CLO; 

(iii) The face amount of the entire 

loan tranche held by the CLO, and the 

face amount of the portion thereof held 

by the CLO; 

(iv) The price at which the loan 

tranche was acquired by the CLO; and 

(v) For each loan tranche, the full 

legal name of the lead arranger subject 

to the sales and hedging restrictions of 

§ l.12; and 

(2) CLO manager. The full legal name 

and form of organization of the CLO 

manager. 

§l.10 Qualified tender option bonds. 

(a) Definitions. For purposes of this 

section, the following definitions shall 

apply: 

Municipal security or municipal 

securities shall have the same meaning 

as the term ‘‘municipal securities’’ in 

Section 3(a)(29) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(29)) and any rules promulgated 

pursuant to such section. 

Qualified tender option bond entity 

means an issuing entity with respect to 

tender option bonds for which each of 

the following applies: 

(i) Such entity is collateralized solely 

by servicing assets and by municipal 

securities that have the same municipal 

issuer and the same underlying obligor 

or source of payment (determined 

without regard to any third-party credit 

enhancement), and such municipal 

securities are not subject to substitution. 

(ii) Such entity issues no securities 

other than: 

(A) A single class of tender option 

bonds with a preferred variable return 

payable out of capital that meets the 

requirements of paragraph (b) of this 

section, and 

(B) One or more residual equity 

interests that, in the aggregate, are 

entitled to all remaining income of the 

issuing entity. 

(C) The types of securities referred to 

in paragraphs (ii)(A) and (B) of this 

definition must constitute asset-backed 

securities. 

(iii) The municipal securities held as 

assets by such entity are issued in 

compliance with Section 103 of the 

Internal Revenue Code of 1986, as 

amended (the ‘‘IRS Code’’, 26 U.S.C. 

103), such that the interest payments 

made on those securities are excludable 

from the gross income of the owners 

under Section 103 of the IRS Code. 

(iv) The terms of all of the securities 

issued by the entity are structured so 

that all holders of such securities who 

are eligible to exclude interest received 

on such securities will be able to 

exclude that interest from gross income 

pursuant to Section 103 of the IRS Code 

or as ‘‘exempt-interest dividends’’ 

pursuant to Section 852(b)(5) of the IRS 

Code (26 U.S.C. 852(b)(5)) in the case of 

regulated investment companies under 

the Investment Company Act of 1940, as 

amended. 

(v) Such entity has a legally binding 

commitment from a regulated liquidity 

provider as defined in §l.6(a), to 

provide a 100 percent guarantee or 

liquidity coverage with respect to all of 

the issuing entity’s outstanding tender 

option bonds. 

(vi) Such entity qualifies for monthly 

closing elections pursuant to IRS 

Revenue Procedure 2003–84, as 

amended or supplemented from time to 

time. 

Tender option bond means a security 

which has features which entitle the 

holders to tender such bonds to the 

issuing entity for purchase at any time 

upon no more than 397 days’ notice, for 

a purchase price equal to the 

approximate amortized cost of the 

security, plus accrued interest, if any, at 

the time of tender. 

(b) Risk retention options. 

Notwithstanding anything in this 

section, the sponsor with respect to an 

issuance of tender option bonds may 

retain an eligible vertical interest or 

eligible horizontal residual interest, or 

any combination thereof, in accordance 

with the requirements of §l.4. In order 

to satisfy its risk retention requirements 

under this section, the sponsor with 

respect to an issuance of tender option 

bonds by a qualified tender option bond 

entity may retain: 

(1) An eligible vertical interest or an 

eligible horizontal residual interest, or 

any combination thereof, in accordance 

with the requirements of §l.4; or 

(2) An interest that meets the 

requirements set forth in paragraph (c) 

of this section; or 

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(3) A municipal security that meets 

the requirements set forth in paragraph 

(d) of this section; or 

(4) Any combination of interests and 

securities described in paragraphs (b)(1) 

through (b)(3) of this section such that 

the sum of the percentages held in each 

form equals at least five. 

(c) Tender option termination event. 

The sponsor with respect to an issuance 

of tender option bonds by a qualified 

tender option bond entity may retain an 

interest that upon issuance meets the 

requirements of an eligible horizontal 

residual interest but that upon the 

occurrence of a ‘‘tender option 

termination event’’ as defined in Section 

4.01(5) of IRS Revenue Procedure 2003– 

84, as amended or supplemented from 

time to time will meet the requirements 

of an eligible vertical interest. 

(d) Retention of a municipal security 

outside of the qualified tender option 

bond entity. The sponsor with respect to 

an issuance of tender option bonds by 

a qualified tender option bond entity 

may satisfy its risk retention 

requirements under this Section by 

holding municipal securities from the 

same issuance of municipal securities 

deposited in the qualified tender option 

bond entity, the face value of which 

retained municipal securities is equal to 

5 percent of the face value of the 

municipal securities deposited in the 

qualified tender option bond entity. 

(e) Disclosures. The sponsor shall 

provide, or cause to be provided, to 

potential investors a reasonable period 

of time prior to the sale of the assetbacked securities as part of the 

securitization transaction and, upon 

request, to the Commission and its 

appropriate Federal banking agency, if 

any, the following disclosure in written 

form under the caption ‘‘Credit Risk 

Retention’’: 

(1) The name and form of organization 

of the qualified tender option bond 

entity; 

(2) A description of the form and 

subordination features of such retained 

interest in accordance with the 

disclosure obligations in § l.4(c); 

(3) To the extent any portion of the 

retained interest is claimed by the 

sponsor as an eligible horizontal 

residual interest (including any interest 

held in compliance with §l.10(c)), the 

fair value of that interest (expressed as 

a percentage of the fair value of all of 

the ABS interests issued in the 

securitization transaction and as a dollar 

amount); 

(4) To the extent any portion of the 

retained interest is claimed by the 

sponsor as an eligible vertical interest 

(including any interest held in 

compliance with § l.10(c)), the 

percentage of ABS interests issued 

represented by the eligible vertical 

interest; and 

(5) To the extent any portion of the 

retained interest claimed by the sponsor 

is a municipal security held outside of 

the qualified tender option bond entity, 

the name and form of organization of 

the qualified tender option bond entity, 

the identity of the issuer of the 

municipal securities, the face value of 

the municipal securities deposited into 

the qualified tender option bond entity, 

and the face value of the municipal 

securities retained by the sponsor or its 

majority-owned affiliates and subject to 

the transfer and hedging prohibition. 

(f) Prohibitions on Hedging and 

Transfer. The prohibitions on transfer 

and hedging set forth in § l.12, apply 

to any interests or municipal securities 

retained by the sponsor with respect to 

an issuance of tender option bonds by 

a qualified tender option bond entity 

pursuant to of this section. 

Subpart C—Transfer of Risk Retention 

§l.11 Allocation of risk retention to an 

originator. 

(a) In general. A sponsor choosing to 

retain an eligible vertical interest or an 

eligible horizontal residual interest 

(including an eligible horizontal cash 

reserve account), or combination thereof 

under §l.4, with respect to a 

securitization transaction may offset the 

amount of its risk retention 

requirements under § l.4 by the 

amount of the eligible interests, 

respectively, acquired by an originator 

of one or more of the securitized assets 

if: 

(1) At the closing of the securitization 

transaction: 

(i) The originator acquires the eligible 

interest from the sponsor and retains 

such interest in the same manner and 

proportion (as between horizontal and 

vertical interests) as the sponsor under 

§ l.4, as such interest was held prior to 

the acquisition by the originator; 

(ii) The ratio of the percentage of 

eligible interests acquired and retained 

by the originator to the percentage of 

eligible interests otherwise required to 

be retained by the sponsor pursuant to 

§ l.4, does not exceed the ratio of: 

(A) The unpaid principal balance of 

all the securitized assets originated by 

the originator; to 

(B) The unpaid principal balance of 

all the securitized assets in the 

securitization transaction; 

(iii) The originator acquires and 

retains at least 20 percent of the 

aggregate risk retention amount 

otherwise required to be retained by the 

sponsor pursuant to §l.4; and 

(iv) The originator purchases the 

eligible interests from the sponsor at a 

price that is equal, on a dollar-for-dollar 

basis, to the amount by which the 

sponsor’s required risk retention is 

reduced in accordance with this section, 

by payment to the sponsor in the form 

of: 

(A) Cash; or 

(B) A reduction in the price received 

by the originator from the sponsor or 

depositor for the assets sold by the 

originator to the sponsor or depositor for 

inclusion in the pool of securitized 

assets. 

(2) Disclosures. In addition to the 

disclosures required pursuant to 

§ l.4(c), the sponsor provides, or causes 

to be provided, to potential investors a 

reasonable period of time prior to the 

sale of the asset-backed securities as 

part of the securitization transaction 

and, upon request, to the Commission 

and its appropriate Federal banking 

agency, if any, in written form under the 

caption ‘‘Credit Risk Retention’’, the 

name and form of organization of any 

originator that will acquire and retain 

(or has acquired and retained) an 

interest in the transaction pursuant to 

this section, including a description of 

the form and amount (expressed as a 

percentage and dollar amount (or 

corresponding amount in the foreign 

currency in which the ABS interests are 

issued, as applicable)) and nature (e.g., 

senior or subordinated) of the interest, 

as well as the method of payment for 

such interest under paragraph (a)(1)(iv) 

of this section. 

(3) Hedging, transferring and 

pledging. The originator and each of its 

affiliates complies with the hedging and 

other restrictions in §l.12 with respect 

to the interests retained by the 

originator pursuant to this section as if 

it were the retaining sponsor and was 

required to retain the interest under 

subpart B of this part. 

(b) Duty to comply. (1) The retaining 

sponsor shall be responsible for 

compliance with this section. 

(2) A retaining sponsor relying on this 

section: 

(i) Shall maintain and adhere to 

policies and procedures that are 

reasonably designed to monitor the 

compliance by each originator that is 

allocated a portion of the sponsor’s risk 

retention obligations with the 

requirements in paragraphs (a)(1) and 

(3) of this section; and 

(ii) In the event the sponsor 

determines that any such originator no 

longer complies with any of the 

requirements in paragraphs (a)(1) and 

(3) of this section, shall promptly notify, 

or cause to be notified, the holders of 

the ABS interests issued in the 

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securitization transaction of such 

noncompliance by such originator. 

§l.12 Hedging, transfer and financing 

prohibitions. 

(a) Transfer. Except as permitted by 

§ l.7(b)(8), and subject to §l.5, a 

retaining sponsor may not sell or 

otherwise transfer any interest or assets 

that the sponsor is required to retain 

pursuant to subpart B of this part to any 

person other than an entity that is and 

remains a majority-owned affiliate of the 

sponsor and each such majority-owned 

affiliate shall be subject to the same 

restrictions. 

(b) Prohibited hedging by sponsor and 

affiliates. A retaining sponsor and its 

affiliates may not purchase or sell a 

security, or other financial instrument, 

or enter into an agreement, derivative or 

other position, with any other person if: 

(1) Payments on the security or other 

financial instrument or under the 

agreement, derivative, or position are 

materially related to the credit risk of 

one or more particular ABS interests 

that the retaining sponsor (or any of its 

majority-owned affiliates) is required to 

retain with respect to a securitization 

transaction pursuant to subpart B of this 

part or one or more of the particular 

securitized assets that collateralize the 

asset-backed securities issued in the 

securitization transaction; and 

(2) The security, instrument, 

agreement, derivative, or position in any 

way reduces or limits the financial 

exposure of the sponsor (or any of its 

majority-owned affiliates) to the credit 

risk of one or more of the particular ABS 

interests that the retaining sponsor (or 

any of its majority-owned affiliates) is 

required to retain with respect to a 

securitization transaction pursuant to 

subpart B of this part or one or more of 

the particular securitized assets that 

collateralize the asset-backed securities 

issued in the securitization transaction. 

(c) Prohibited hedging by issuing 

entity. The issuing entity in a 

securitization transaction may not 

purchase or sell a security or other 

financial instrument, or enter into an 

agreement, derivative or position, with 

any other person if: 

(1) Payments on the security or other 

financial instrument or under the 

agreement, derivative or position are 

materially related to the credit risk of 

one or more particular ABS interests 

that the retaining sponsor for the 

transaction (or any of its majorityowned affiliates) is required to retain 

with respect to the securitization 

transaction pursuant to subpart B of this 

part; and 

(2) The security, instrument, 

agreement, derivative, or position in any 

way reduces or limits the financial 

exposure of the retaining sponsor (or 

any of its majority-owned affiliates) to 

the credit risk of one or more of the 

particular ABS interests that the sponsor 

(or any of its majority-owned affiliates) 

is required to retain pursuant to subpart 

B of this part. 

(d) Permitted hedging activities. The 

following activities shall not be 

considered prohibited hedging activities 

under paragraph (b) or (c) of this 

section: 

(1) Hedging the interest rate risk 

(which does not include the specific 

interest rate risk, known as spread risk, 

associated with the ABS interest that is 

otherwise considered part of the credit 

risk) or foreign exchange risk arising 

from one or more of the particular ABS 

interests required to be retained by the 

sponsor (or any of its majority-owned 

affiliates) under subpart B of this part or 

one or more of the particular securitized 

assets that underlie the asset-backed 

securities issued in the securitization 

transaction; or 

(2) Purchasing or selling a security or 

other financial instrument or entering 

into an agreement, derivative, or other 

position with any third party where 

payments on the security or other 

financial instrument or under the 

agreement, derivative, or position are 

based, directly or indirectly, on an 

index of instruments that includes assetbacked securities if: 

(i) Any class of ABS interests in the 

issuing entity that were issued in 

connection with the securitization 

transaction and that are included in the 

index represents no more than 10 

percent of the dollar-weighted average 

(or corresponding weighted average in 

the currency in which the ABS interests 

are issued, as applicable) of all 

instruments included in the index; and 

(ii) All classes of ABS interests in all 

issuing entities that were issued in 

connection with any securitization 

transaction in which the sponsor (or any 

of its majority-owned affiliates) is 

required to retain an interest pursuant to 

subpart B of this part and that are 

included in the index represent, in the 

aggregate, no more than 20 percent of 

the dollar-weighted average (or 

corresponding weighted average in the 

currency in which the ABS interests are 

issued, as applicable) of all instruments 

included in the index. 

(e) Prohibited non-recourse financing. 

Neither a retaining sponsor nor any of 

its affiliates may pledge as collateral for 

any obligation (including a loan, 

repurchase agreement, or other 

financing transaction) any ABS interest 

that the sponsor is required to retain 

with respect to a securitization 

transaction pursuant to subpart B of this 

part unless such obligation is with full 

recourse to the sponsor or affiliate, 

respectively. 

(f) Duration of the hedging and 

transfer restrictions—(1) General rule. 

Except as provided in paragraph (f)(2) of 

this section, the prohibitions on sale 

and hedging pursuant to paragraphs (a) 

and (b) of this section shall expire on or 

after the date that is the latest of: 

(i) The date on which the total unpaid 

principal balance (if applicable) of the 

securitized assets that collateralize the 

securitization transaction has been 

reduced to 33 percent of the total 

unpaid principal balance of the 

securitized assets as of the cut-off date 

or similar date for establishing the 

composition of the securitized assets 

collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction; 

(ii) The date on which the total 

unpaid principal obligations under the 

ABS interests issued in the 

securitization transaction has been 

reduced to 33 percent of the total 

unpaid principal obligations of the ABS 

interests at closing of the securitization 

transaction; or 

(iii) Two years after the date of the 

closing of the securitization transaction. 

(2) Securitizations of residential 

mortgages. (i) If all of the assets that 

collateralize a securitization transaction 

subject to risk retention under this part 

are residential mortgages, the 

prohibitions on sale and hedging 

pursuant to paragraphs (a) and (b) of 

this section shall expire on or after the 

date that is the later of: 

(A) Five years after the date of the 

closing of the securitization transaction; 

or 

(B) The date on which the total 

unpaid principal balance of the 

residential mortgages that collateralize 

the securitization transaction has been 

reduced to 25 percent of the total 

unpaid principal balance of such 

residential mortgages at the cut-off date 

or similar date for establishing the 

composition of the securitized assets 

collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction. 

(ii) Notwithstanding paragraph 

(f)(2)(i) of this section, the prohibitions 

on sale and hedging pursuant to 

paragraphs (a) and (b) of this section 

shall expire with respect to the sponsor 

of a securitization transaction described 

in paragraph (f)(2)(i) of this section on 

or after the date that is seven years after 

the date of the closing of the 

securitization transaction. 

(3) Conservatorship or receivership of 

sponsor. A conservator or receiver of the 

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sponsor (or any other person holding 

risk retention pursuant to this part) of a 

securitization transaction is permitted to 

sell or hedge any economic interest in 

the securitization transaction if the 

conservator or receiver has been 

appointed pursuant to any provision of 

federal or State law (or regulation 

promulgated thereunder) that provides 

for the appointment of the Federal 

Deposit Insurance Corporation, or an 

agency or instrumentality of the United 

States or of a State as conservator or 

receiver, including without limitation 

any of the following authorities: 

(i) 12 U.S.C. 1811; 

(ii) 12 U.S.C. 1787; 

(iii) 12 U.S.C. 4617; or 

(iv) 12 U.S.C. 5382. 

(4) Revolving pool securitizations. The 

provisions of paragraphs (f)(1) and (2) 

are not available to sponsors of 

revolving pool securitizations with 

respect to the forms of risk retention 

specified in § l.5. 

Subpart D—Exceptions and 

Exemptions 

§l.13 Exemption for qualified residential 

mortgages. 

(a) Definitions. For purposes of this 

section, the following definitions shall 

apply: 

Currently performing means the 

borrower in the mortgage transaction is 

not currently thirty (30) days or more 

past due, in whole or in part, on the 

mortgage transaction. 

Qualified residential mortgage means 

a ‘‘qualified mortgage’’ as defined in 

section 129C of the Truth in Lending 

Act (15 U.S.C.1639c) and regulations 

issued thereunder, as amended from 

time to time. 

(b) Exemption. A sponsor shall be 

exempt from the risk retention 

requirements in subpart B of this part 

with respect to any securitization 

transaction, if: 

(1) All of the assets that collateralize 

the asset-backed securities are qualified 

residential mortgages or servicing assets; 

(2) None of the assets that 

collateralize the asset-backed securities 

are asset-backed securities; 

(3) As of the cut-off date or similar 

date for establishing the composition of 

the securitized assets collateralizing the 

asset-backed securities issued pursuant 

to the securitization transaction, each 

qualified residential mortgage 

collateralizing the asset-backed 

securities is currently performing; and 

(4)(i) The depositor with respect to 

the securitization transaction certifies 

that it has evaluated the effectiveness of 

its internal supervisory controls with 

respect to the process for ensuring that 

all assets that collateralize the assetbacked security are qualified residential 

mortgages or servicing assets and has 

concluded that its internal supervisory 

controls are effective; and 

(ii) The evaluation of the effectiveness 

of the depositor’s internal supervisory 

controls must be performed, for each 

issuance of an asset-backed security in 

reliance on this section, as of a date 

within 60 days of the cut-off date or 

similar date for establishing the 

composition of the asset pool 

collateralizing such asset-backed 

security; and 

(iii) The sponsor provides, or causes 

to be provided, a copy of the 

certification described in paragraph 

(b)(4)(i) of this section to potential 

investors a reasonable period of time 

prior to the sale of asset-backed 

securities in the issuing entity, and, 

upon request, to the Commission and its 

appropriate Federal banking agency, if 

any. 

(c) Repurchase of loans subsequently 

determined to be non-qualified after 

closing. A sponsor that has relied on the 

exemption provided in paragraph (b) of 

this section with respect to a 

securitization transaction shall not lose 

such exemption with respect to such 

transaction if, after closing of the 

securitization transaction, it is 

determined that one or more of the 

residential mortgage loans 

collateralizing the asset-backed 

securities does not meet all of the 

criteria to be a qualified residential 

mortgage provided that: 

(1) The depositor complied with the 

certification requirement set forth in 

paragraph (b)(4) of this section; 

(2) The sponsor repurchases the 

loan(s) from the issuing entity at a price 

at least equal to the remaining aggregate 

unpaid principal balance and accrued 

interest on the loan(s) no later than 90 

days after the determination that the 

loans do not satisfy the requirements to 

be a qualified residential mortgage; and 

(3) The sponsor promptly notifies, or 

causes to be notified, the holders of the 

asset-backed securities issued in the 

securitization transaction of any loan(s) 

included in such securitization 

transaction that is (or are) required to be 

repurchased by the sponsor pursuant to 

paragraph (c)(2) of this section, 

including the amount of such 

repurchased loan(s) and the cause for 

such repurchase. 

§l.14 Definitions applicable to qualifying 

commercial loans, qualifying commercial 

real estate loans, and qualifying automobile 

loans. 

The following definitions apply for 

purposes of §§ l.15 through l.18: 

Appraisal Standards Board means the 

board of the Appraisal Foundation that 

develops, interprets, and amends the 

Uniform Standards of Professional 

Appraisal Practice (USPAP), 

establishing generally accepted 

standards for the appraisal profession. 

Automobile loan: 

(1) Means any loan to an individual 

to finance the purchase of, and that is 

secured by a first lien on, a passenger 

car or other passenger vehicle, such as 

a minivan, van, sport-utility vehicle, 

pickup truck, or similar light truck for 

personal, family, or household use; and 

(2) Does not include any: 

(i) Loan to finance fleet sales; 

(ii) Personal cash loan secured by a 

previously purchased automobile; 

(iii) Loan to finance the purchase of 

a commercial vehicle or farm equipment 

that is not used for personal, family, or 

household purposes; 

(iv) Lease financing; 

(v) Loan to finance the purchase of a 

vehicle with a salvage title; or 

(vi) Loan to finance the purchase of a 

vehicle intended to be used for scrap or 

parts. 

Combined loan-to-value (CLTV) ratio 

means, at the time of origination, the 

sum of the principal balance of a firstlien mortgage loan on the property, plus 

the principal balance of any junior-lien 

mortgage loan that, to the creditor’s 

knowledge, would exist at the closing of 

the transaction and that is secured by 

the same property, divided by: 

(1) For acquisition funding, the lesser 

of the purchase price or the estimated 

market value of the real property based 

on an appraisal that meets the 

requirements set forth in 

§ l.17(a)(2)(ii); or 

(2) For refinancing, the estimated 

market value of the real property based 

on an appraisal that meets the 

requirements set forth in 

§ l.17(a)(2)(ii). 

Commercial loan means a secured or 

unsecured loan to a company or an 

individual for business purposes, other 

than any: 

(1) Loan to purchase or refinance a 

one-to-four family residential property; 

(2) Commercial real estate loan. 

Commercial real estate (CRE) loan 

means: 

(1) A loan secured by a property with 

five or more single family units, or by 

nonfarm nonresidential real property, 

the primary source (50 percent or more) 

of repayment for which is expected to 

be: 

(i) The proceeds of the sale, 

refinancing, or permanent financing of 

the property; or 

(ii) Rental income associated with the 

property; 

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(2) Loans secured by improved land if 

the obligor owns the fee interest in the 

land and the land is leased to a third 

party who owns all improvements on 

the land, and the improvements are 

nonresidential or residential with five or 

more single family units; and 

(3) Does not include: 

(i) A land development and 

construction loan (including 1- to 4- 

family residential or commercial 

construction loans); 

(ii) Any other land loan; or 

(iii) An unsecured loan to a 

developer. 

Debt service coverage (DSC) ratio 

means: 

(1) For qualifying leased CRE loans, 

qualifying multi-family loans, and other 

CRE loans: 

(i) The annual NOI less the annual 

replacement reserve of the CRE property 

at the time of origination of the CRE 

loan(s) divided by 

(ii) The sum of the borrower’s annual 

payments for principal and interest 

(calculated at the fully-indexed rate) on 

any debt obligation. 

(2) For commercial loans: 

(i) The borrower’s EBITDA as of the 

most recently completed fiscal year 

divided by 

(ii) The sum of the borrower’s annual 

payments for principal and interest on 

all debt obligations. 

Debt to income (DTI) ratio means the 

borrower’s total debt, including the 

monthly amount due on the automobile 

loan, divided by the borrower’s monthly 

income. 

Earnings before interest, taxes, 

depreciation, and amortization 

(EBITDA) means the annual income of 

a business before expenses for interest, 

taxes, depreciation and amortization are 

deducted, as determined in accordance 

with GAAP. 

Environmental risk assessment means 

a process for determining whether a 

property is contaminated or exposed to 

any condition or substance that could 

result in contamination that has an 

adverse effect on the market value of the 

property or the realization of the 

collateral value. 

First lien means a lien or 

encumbrance on property that has 

priority over all other liens or 

encumbrances on the property. 

Junior lien means a lien or 

encumbrance on property that is lower 

in priority relative to other liens or 

encumbrances on the property. 

Leverage ratio means the borrower’s 

total debt divided by the borrower’s 

EBITDA. 

Loan-to-value (LTV) ratio means, at 

the time of origination, the principal 

balance of a first-lien mortgage loan on 

the property divided by: 

(1) For acquisition funding, the lesser 

of the purchase price or the estimated 

market value of the real property based 

on an appraisal that meets the 

requirements set forth in 

§ __.17(a)(2)(ii); or 

(2) For refinancing, the estimated 

market value of the real property based 

on an appraisal that meets the 

requirements set forth in 

§ __.17(a)(2)(ii). 

Model year means the year 

determined by the manufacturer and 

reflected on the vehicle’s Motor Vehicle 

Title as part of the vehicle description. 

Net operating income (NOI) refers to 

the income a CRE property generates for 

the owner after all expenses have been 

deducted for federal income tax 

purposes, except for depreciation, debt 

service expenses, and federal and state 

income taxes, and excluding any 

unusual and nonrecurring items of 

income. 

Operating affiliate means an affiliate 

of a borrower that is a lessor or similar 

party with respect to the commercial 

real estate securing the loan. 

Payments-in-kind means payments of 

accrued interest that are not paid in 

cash when due, and instead are paid by 

increasing the principal balance of the 

loan or by providing equity in the 

borrowing company. 

Purchase money security interest 

means a security interest in property 

that secures the obligation of the obligor 

incurred as all or part of the price of the 

property. 

Purchase price means the amount 

paid by the borrower for the vehicle net 

of any incentive payments or 

manufacturer cash rebates. 

Qualified tenant means: 

(1) A tenant with a lease who has 

satisfied all obligations with respect to 

the property in a timely manner; or 

(2) A tenant who originally had a 

lease that subsequently expired and 

currently is leasing the property on a 

month-to-month basis, has occupied the 

property for at least three years prior to 

the date of origination, and has satisfied 

all obligations with respect to the 

property in a timely manner. 

Qualifying leased CRE loan means a 

CRE loan secured by commercial 

nonfarm real property, other than a 

multi-family property or a hotel, inn, or 

similar property: 

(1) That is occupied by one or more 

qualified tenants pursuant to a lease 

agreement with a term of no less than 

one (1) month; and 

(2) Where no more than 20 percent of 

the aggregate gross revenue of the 

property is payable from one or more 

tenants who: 

(i) Are subject to a lease that will 

terminate within six months following 

the date of origination; or 

(ii) Are not qualified tenants. 

Qualifying multi-family loan means a 

CRE loan secured by any residential 

property (excluding a hotel, motel, inn, 

hospital, nursing home, or other similar 

facility where dwellings are not leased 

to residents): 

(1) That consists of five or more 

dwelling units (including apartment 

buildings, condominiums, cooperatives 

and other similar structures) primarily 

for residential use; and 

(2) Where at least 75 percent of the 

NOI is derived from residential rents 

and tenant amenities (including income 

from parking garages, health or swim 

clubs, and dry cleaning), and not from 

other commercial uses. 

Rental income means: 

(1) Income derived from a lease or 

other occupancy agreement between the 

borrower or an operating affiliate of the 

borrower and a party which is not an 

affiliate of the borrower for the use of 

real property or improvements serving 

as collateral for the applicable loan; and 

(2) Other income derived from hotel, 

motel, dormitory, nursing home, 

assisted living, mini-storage warehouse 

or similar properties that are used 

primarily by parties that are not 

affiliates or employees of the borrower 

or its affiliates. 

Replacement reserve means the 

monthly capital replacement or 

maintenance amount based on the 

property type, age, construction and 

condition of the property that is 

adequate to maintain the physical 

condition and NOI of the property. 

Salvage title means a form of vehicle 

title branding, which notes that the 

vehicle has been severely damaged and/ 

or deemed a total loss and 

uneconomical to repair by an insurance 

company that paid a claim on the 

vehicle. 

Total debt, with respect to a borrower, 

means: 

(1) In the case of an automobile loan, 

the sum of: 

(i) All monthly housing payments 

(rent- or mortgage-related, including 

property taxes, insurance and home 

owners association fees); and 

(ii) Any of the following that is 

dependent upon the borrower’s income 

for payment: 

(A) Monthly payments on other debt 

and lease obligations, such as credit 

card loans or installment loans, 

including the monthly amount due on 

the automobile loan; 

(B) Estimated monthly amortizing 

payments for any term debt, debts with 

other than monthly payments and debts 

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not in repayment (such as deferred 

student loans, interest-only loans); and 

(C) Any required monthly alimony, 

child support or court-ordered 

payments; and 

(2) In the case of a commercial loan, 

the outstanding balance of all long-term 

debt (obligations that have a remaining 

maturity of more than one year) and the 

current portion of all debt that matures 

in one year or less. 

Total liabilities ratio means the 

borrower’s total liabilities divided by 

the sum of the borrower’s total liabilities 

and equity, less the borrower’s 

intangible assets, with each component 

determined in accordance with GAAP. 

Trade-in allowance means the amount 

a vehicle purchaser is given as a credit 

at the purchase of a vehicle for the fair 

exchange of the borrower’s existing 

vehicle to compensate the dealer for 

some portion of the vehicle purchase 

price, not to exceed the highest trade-in 

value of the existing vehicle, as 

determined by a nationally recognized 

automobile pricing agency and based on 

the manufacturer, year, model, features, 

mileage, and condition of the vehicle, 

less the payoff balance of any 

outstanding debt collateralized by the 

existing vehicle. 

Uniform Standards of Professional 

Appraisal Practice (USPAP) means 

generally accepted standards for 

professional appraisal practice issued by 

the Appraisal Standards Board of the 

Appraisal Foundation. 

§l.15 Qualifying commercial loans, 

commercial real estate loans, and 

automobile loans. 

(a) General exception for qualifying 

assets. Commercial loans, commercial 

real estate loans, and automobile loans 

that are securitized through a 

securitization transaction shall be 

subject to a 0 percent risk retention 

requirement under subpart B, provided 

that the following conditions are met: 

(1) The assets meet the underwriting 

standards set forth in §§l.16 

(qualifying commercial loans), l.17 

(qualifying CRE loans), or l.18 

(qualifying automobile loans) of this 

part, as applicable; 

(2) The securitization transaction is 

collateralized solely by loans of the 

same asset class and by servicing assets; 

(3) The securitization transaction does 

not permit reinvestment periods; and 

(4) The sponsor provides, or causes to 

be provided, to potential investors a 

reasonable period of time prior to the 

sale of asset-backed securities of the 

issuing entity, and, upon request, to the 

Commission, and to its appropriate 

Federal banking agency, if any, in 

written form under the caption ‘‘Credit 

Risk Retention’’, a description of the 

manner in which the sponsor 

determined the aggregate risk retention 

requirement for the securitization 

transaction after including qualifying 

commercial loans, qualifying CRE loans, 

or qualifying automobile loans with 0 

percent risk retention. 

(b) Risk retention requirement. For 

any securitization transaction described 

in paragraph (a) of this section, the 

percentage of risk retention required 

under §l.3(a) is reduced by the 

percentage evidenced by the ratio of the 

unpaid principal balance of the 

qualifying commercial loans, qualifying 

CRE loans, or qualifying automobile 

loans (as applicable) to the total unpaid 

principal balance of commercial loans, 

CRE loans, or automobile loans (as 

applicable) that are included in the pool 

of assets collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction (the qualifying 

asset ratio); provided that: 

(1) The qualifying asset ratio is 

measured as of the cut-off date or 

similar date for establishing the 

composition of the securitized assets 

collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction; 

(2) If the qualifying asset ratio would 

exceed 50 percent, the qualifying asset 

ratio shall be deemed to be 50 percent; 

and 

(3) The disclosure required by 

paragraph (a)(4) of this section also 

includes descriptions of the qualifying 

commercial loans, qualifying CRE loans, 

and qualifying automobile loans 

(qualifying assets) and descriptions of 

the assets that are not qualifying assets, 

and the material differences between the 

group of qualifying assets and the group 

of assets that are not qualifying assets 

with respect to the composition of each 

group’s loan balances, loan terms, 

interest rates, borrower credit 

information, and characteristics of any 

loan collateral. 

(c) Exception for securitizations of 

qualifying assets only. Notwithstanding 

other provisions of this section, the risk 

retention requirements of subpart B of 

this part shall not apply to 

securitization transactions where the 

transaction is collateralized solely by 

servicing assets and either qualifying 

commercial loans, qualifying CRE loans, 

or qualifying automobile loans. 

(d) Record maintenance. A sponsor 

must retain the disclosures required in 

paragraphs (a) and (b) of this section 

and the certifications required in 

§§ l.16(a)(8), l.17(a)(10), and 

l.18(a)(8), as applicable, in its records 

until three years after all ABS interests 

issued in the securitization are no 

longer outstanding. The sponsor must 

provide the disclosures and 

certifications upon request to the 

Commission and the sponsor’s 

appropriate Federal banking agency, if 

any. 

§l.16 Underwriting standards for 

qualifying commercial loans. 

(a) Underwriting, product and other 

standards. (1) Prior to origination of the 

commercial loan, the originator: 

(i) Verified and documented the 

financial condition of the borrower: 

(A) As of the end of the borrower’s 

two most recently completed fiscal 

years; and 

(B) During the period, if any, since the 

end of its most recently completed fiscal 

year; 

(ii) Conducted an analysis of the 

borrower’s ability to service its overall 

debt obligations during the next two 

years, based on reasonable projections; 

(iii) Determined that, based on the 

previous two years’ actual performance, 

the borrower had: 

(A) A total liabilities ratio of 50 

percent or less; 

(B) A leverage ratio of 3.0 or less; and 

(C) A DSC ratio of 1.5 or greater; 

(iv) Determined that, based on the two 

years of projections, which include the 

new debt obligation, following the 

closing date of the loan, the borrower 

will have: 

(A) A total liabilities ratio of 50 

percent or less; 

(B) A leverage ratio of 3.0 or less; and 

(C) A DSC ratio of 1.5 or greater. 

(2) Prior to, upon or promptly 

following the inception of the loan, the 

originator: 

(i) If the loan is originated on a 

secured basis, obtains a perfected 

security interest (by filing, title notation 

or otherwise) or, in the case of real 

property, a recorded lien, on all of the 

property pledged to collateralize the 

loan; and 

(ii) If the loan documents indicate the 

purpose of the loan is to finance the 

purchase of tangible or intangible 

property, or to refinance such a loan, 

obtains a first lien on the property. 

(3) The loan documentation for the 

commercial loan includes covenants 

that: 

(i) Require the borrower to provide to 

the servicer of the commercial loan the 

borrower’s financial statements and 

supporting schedules on an ongoing 

basis, but not less frequently than 

quarterly; 

(ii) Prohibit the borrower from 

retaining or entering into a debt 

arrangement that permits payments-inkind; 

(iii) Impose limits on: 

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(A) The creation or existence of any 

other security interest or lien with 

respect to any of the borrower’s property 

that serves as collateral for the loan; 

(B) The transfer of any of the 

borrower’s assets that serve as collateral 

for the loan; and 

(C) Any change to the name, location 

or organizational structure of the 

borrower, or any other party that 

pledges collateral for the loan; 

(iv) Require the borrower and any 

other party that pledges collateral for 

the loan to: 

(A) Maintain insurance that protects 

against loss on the collateral for the 

commercial loan at least up to the 

amount of the loan, and that names the 

originator or any subsequent holder of 

the loan as an additional insured or loss 

payee; 

(B) Pay taxes, charges, fees, and 

claims, where non-payment might give 

rise to a lien on any collateral; 

(C) Take any action required to perfect 

or protect the security interest and first 

lien (as applicable) of the originator or 

any subsequent holder of the loan in 

any collateral for the commercial loan or 

the priority thereof, and to defend any 

collateral against claims adverse to the 

lender’s interest; 

(D) Permit the originator or any 

subsequent holder of the loan, and the 

servicer of the loan, to inspect any 

collateral for the commercial loan and 

the books and records of the borrower; 

and 

(E) Maintain the physical condition of 

any collateral for the commercial loan. 

(4) Loan payments required under the 

loan agreement are: 

(i) Based on level monthly payments 

of principal and interest (at the fully 

indexed rate) that fully amortize the 

debt over a term that does not exceed 

five years from the date of origination; 

and 

(ii) To be made no less frequently 

than quarterly over a term that does not 

exceed five years. 

(5) The primary source of repayment 

for the loan is revenue from the business 

operations of the borrower. 

(6) The loan was funded within the 

six (6) months prior to the cut-off date 

or similar date for establishing the 

composition of the securitized assets 

collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction. 

(7) At the cut-off date or similar date 

for establishing the composition of the 

securitized assets collateralizing the 

asset-backed securities issued pursuant 

to the securitization transaction, all 

payments due on the loan are 

contractually current. 

(8)(i) The depositor of the assetbacked security certifies that it has 

evaluated the effectiveness of its 

internal supervisory controls with 

respect to the process for ensuring that 

all qualifying commercial loans that 

collateralize the asset-backed security 

and that reduce the sponsor’s risk 

retention requirement under § l.15 

meet all of the requirements set forth in 

paragraphs (a)(1) through (7) of this 

section and has concluded that its 

internal supervisory controls are 

effective; 

(ii) The evaluation of the effectiveness 

of the depositor’s internal supervisory 

controls referenced in paragraph (a)(8)(i) 

of this section shall be performed, for 

each issuance of an asset-backed 

security, as of a date within 60 days of 

the cut-off date or similar date for 

establishing the composition of the asset 

pool collateralizing such asset-backed 

security; and 

(iii) The sponsor provides, or causes 

to be provided, a copy of the 

certification described in paragraph 

(a)(8)(i) of this section to potential 

investors a reasonable period of time 

prior to the sale of asset-backed 

securities in the issuing entity, and, 

upon request, to its appropriate Federal 

banking agency, if any. 

(b) Cure or buy-back requirement. If a 

sponsor has relied on the exception 

provided in § l.15 with respect to a 

qualifying commercial loan and it is 

subsequently determined that the loan 

did not meet all of the requirements set 

forth in paragraphs (a)(1) through (7) of 

this section, the sponsor shall not lose 

the benefit of the exception with respect 

to the commercial loan if the depositor 

complied with the certification 

requirement set forth in paragraph (a)(8) 

of this section and: 

(1) The failure of the loan to meet any 

of the requirements set forth in 

paragraphs (a)(1) through (7) of this 

section is not material; or 

(2) No later than 90 days after the 

determination that the loan does not 

meet one or more of the requirements of 

paragraphs (a)(1) through (7) of this 

section, the sponsor: 

(i) Effectuates cure, establishing 

conformity of the loan to the unmet 

requirements as of the date of cure; or 

(ii) Repurchases the loan(s) from the 

issuing entity at a price at least equal to 

the remaining principal balance and 

accrued interest on the loan(s) as of the 

date of repurchase. 

(3) If the sponsor cures or repurchases 

pursuant to paragraph (b)(2) of this 

section, the sponsor must promptly 

notify, or cause to be notified, the 

holders of the asset-backed securities 

issued in the securitization transaction 

of any loan(s) included in such 

securitization transaction that is 

required to be cured or repurchased by 

the sponsor pursuant to paragraph (b)(2) 

of this section, including the principal 

amount of such loan(s) and the cause for 

such cure or repurchase. 

§l.17 Underwriting standards for 

qualifying CRE loans. 

(a) Underwriting, product and other 

standards. (1) The CRE loan must be 

secured by the following: 

(i) An enforceable first lien, 

documented and recorded appropriately 

pursuant to applicable law, on the 

commercial real estate and 

improvements; 

(ii)(A) An assignment of: 

(1) Leases and rents and other 

occupancy agreements related to the 

commercial real estate or improvements 

or the operation thereof for which the 

borrower or an operating affiliate is a 

lessor or similar party and all payments 

under such leases and occupancy 

agreements; and 

(2) All franchise, license and 

concession agreements related to the 

commercial real estate or improvements 

or the operation thereof for which the 

borrower or an operating affiliate is a 

lessor, licensor, concession granter or 

similar party and all payments under 

such other agreements, whether the 

assignments described in this paragraph 

(a)(1)(ii)(A)(2) are absolute or are stated 

to be made to the extent permitted by 

the agreements governing the applicable 

franchise, license or concession 

agreements; 

(B) An assignment of all other 

payments due to the borrower or due to 

any operating affiliate in connection 

with the operation of the property 

described in paragraph (a)(1)(i) of this 

section; and 

(C) The right to enforce the 

agreements described in paragraph 

(a)(1)(ii)(A) of this section and the 

agreements under which payments 

under paragraph (a)(1)(ii)(B) of this 

section are due against, and collect 

amounts due from, each lessee, 

occupant or other obligor whose 

payments were assigned pursuant to 

paragraphs (a)(1)(ii)(A) or (B) of this 

section upon a breach by the borrower 

of any of the terms of, or the occurrence 

of any other event of default (however 

denominated) under, the loan 

documents relating to such CRE loan; 

and 

(iii) A security interest: 

(A) In all interests of the borrower and 

any applicable operating affiliate in all 

tangible and intangible personal 

property of any kind, in or used in the 

operation of or in connection with, 

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1 12 CFR part 34, subpart C (OCC); 12 CFR part 

208, subpart E, and 12 CFR part 225, subpart G 

(Board); and 12 CFR part 323 (FDIC). 

2See USPAP, Standard 1. 

pertaining to, arising from, or 

constituting, any of the collateral 

described in paragraphs (a)(1)(i) or (ii) of 

this section; and 

(B) In the form of a perfected security 

interest if the security interest in such 

property can be perfected by the filing 

of a financing statement, fixture filing, 

or similar document pursuant to the law 

governing the perfection of such 

security interest; 

(2) Prior to origination of the CRE 

loan, the originator: 

(i) Verified and documented the 

current financial condition of the 

borrower and each operating affiliate; 

(ii) Obtained a written appraisal of the 

real property securing the loan that: 

(A) Had an effective date not more 

than six months prior to the origination 

date of the loan by a competent and 

appropriately State-certified or Statelicensed appraiser; 

(B) Conforms to generally accepted 

appraisal standards as evidenced by the 

USPAP and the appraisal requirements 1

of the Federal banking agencies; and 

(C) Provides an ‘‘as is’’ opinion of the 

market value of the real property, which 

includes an income approach; 2

(iii) Qualified the borrower for the 

CRE loan based on a monthly payment 

amount derived from level monthly 

payments consisting of both principal 

and interest (at the fully-indexed rate) 

over the term of the loan, not exceeding 

25 years, or 30 years for a qualifying 

multi-family property; 

(iv) Conducted an environmental risk 

assessment to gain environmental 

information about the property securing 

the loan and took appropriate steps to 

mitigate any environmental liability 

determined to exist based on this 

assessment; 

(v) Conducted an analysis of the 

borrower’s ability to service its overall 

debt obligations during the next two 

years, based on reasonable projections 

(including operating income projections 

for the property); 

(vi)(A) Determined that based on the 

two years’ actual performance 

immediately preceding the origination 

of the loan, the borrower would have 

had: 

(1) A DSC ratio of 1.5 or greater, if the 

loan is a qualifying leased CRE loan, net 

of any income derived from a tenant(s) 

who is not a qualified tenant(s); 

(2) A DSC ratio of 1.25 or greater, if 

the loan is a qualifying multi-family 

property loan; or 

(3) A DSC ratio of 1.7 or greater, if the 

loan is any other type of CRE loan; 

(B) If the borrower did not own the 

property for any part of the last two 

years prior to origination, the 

calculation of the DSC ratio, for 

purposes of paragraph (a)(2)(vi)(A) of 

this section, shall include the property’s 

operating income for any portion of the 

two-year period during which the 

borrower did not own the property; 

(vii) Determined that, based on two 

years of projections, which include the 

new debt obligation, following the 

origination date of the loan, the 

borrower will have: 

(A) A DSC ratio of 1.5 or greater, if the 

loan is a qualifying leased CRE loan, net 

of any income derived from a tenant(s) 

who is not a qualified tenant(s); 

(B) A DSC ratio of 1.25 or greater, if 

the loan is a qualifying multi-family 

property loan; or 

(C) A DSC ratio of 1.7 or greater, if the 

loan is any other type of CRE loan. 

(3) The loan documentation for the 

CRE loan includes covenants that: 

(i) Require the borrower to provide 

the borrower’s financial statements and 

supporting schedules to the servicer on 

an ongoing basis, but not less frequently 

than quarterly, including information on 

existing, maturing and new leasing or 

rent-roll activity for the property 

securing the loan, as appropriate; and 

(ii) Impose prohibitions on: 

(A) The creation or existence of any 

other security interest with respect to 

the collateral for the CRE loan described 

in paragraphs (a)(1)(i) and (a)(1)(ii)(A) of 

this section, except as provided in 

paragraph (a)(4) of this section; 

(B) The transfer of any collateral for 

the CRE loan described in paragraph 

(a)(1)(i) or (a)(1)(ii)(A) of this section or 

of any other collateral consisting of 

fixtures, furniture, furnishings, 

machinery or equipment other than any 

such fixture, furniture, furnishings, 

machinery or equipment that is obsolete 

or surplus; and 

(C) Any change to the name, location 

or organizational structure of any 

borrower, operating affiliate or other 

pledgor unless such borrower, operating 

affiliate or other pledgor shall have 

given the holder of the loan at least 30 

days advance notice and, pursuant to 

applicable law governing perfection and 

priority, the holder of the loan is able 

to take all steps necessary to continue 

its perfection and priority during such 

30-day period. 

(iii) Require each borrower and each 

operating affiliate to: 

(A) Maintain insurance that protects 

against loss on collateral for the CRE 

loan described in paragraph (a)(1)(i) of 

this section for an amount no less than 

the replacement cost of the property 

improvements, and names the originator 

or any subsequent holder of the loan as 

an additional insured or lender loss 

payee; 

(B) Pay taxes, charges, fees, and 

claims, where non-payment might give 

rise to a lien on collateral for the CRE 

loan described in paragraphs (a)(1)(i) 

and (ii) of this section; 

(C) Take any action required to: 

(1) Protect the security interest and 

the enforceability and priority thereof in 

the collateral described in paragraphs 

(a)(1)(i) and (a)(1)(ii)(A) of this section 

and defend such collateral against 

claims adverse to the originator’s or any 

subsequent holder’s interest; and 

(2) Perfect the security interest of the 

originator or any subsequent holder of 

the loan in any other collateral for the 

CRE loan to the extent that such security 

interest is required by this section to be 

perfected; 

(D) Permit the originator or any 

subsequent holder of the loan, and the 

servicer, to inspect any collateral for the 

CRE loan and the books and records of 

the borrower or other party relating to 

any collateral for the CRE loan; 

(E) Maintain the physical condition of 

collateral for the CRE loan described in 

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

(F) Comply with all environmental, 

zoning, building code, licensing and 

other laws, regulations, agreements, 

covenants, use restrictions, and proffers 

applicable to collateral for the CRE loan 

described in paragraph (a)(1)(i) of this 

section; 

(G) Comply with leases, franchise 

agreements, condominium declarations, 

and other documents and agreements 

relating to the operation of collateral for 

the CRE loan described in paragraph 

(a)(1)(i) of this section, and to not 

modify any material terms and 

conditions of such agreements over the 

term of the loan without the consent of 

the originator or any subsequent holder 

of the loan, or the servicer; and 

(H) Not materially alter collateral for 

the CRE loan described in paragraph 

(a)(1)(i) of this section without the 

consent of the originator or any 

subsequent holder of the loan, or the 

servicer. 

(4) The loan documentation for the 

CRE loan prohibits the borrower and 

each operating affiliate from obtaining a 

loan secured by a junior lien on 

collateral for the CRE loan described in 

paragraph (a)(1)(i) or (a)(1)(ii)(A) of this 

section, unless: 

(i) The sum of the principal amount 

of such junior lien loan, plus the 

principal amount of all other loans 

secured by collateral described in 

paragraph (a)(1)(i) or (a)(1)(ii)(A) of this 

section, does not exceed the applicable 

CLTV ratio in paragraph (a)(5) of this 

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section, based on the appraisal at 

origination of such junior lien loan; or 

(ii) Such loan is a purchase money 

obligation that financed the acquisition 

of machinery or equipment and the 

borrower or operating affiliate (as 

applicable) pledges such machinery and 

equipment as additional collateral for 

the CRE loan. 

(5) At origination, the applicable loanto-value ratios for the loan are: 

(i) LTV less than or equal to 65 

percent and CLTV less than or equal to 

70 percent; or 

(ii) LTV less than or equal to 60 

percent and CLTV less than or equal to 

65 percent, if an appraisal used to meet 

the requirements set forth in paragraph 

(a)(2)(ii) of this section used a direct 

capitalization rate, and that rate is less 

than or equal to the sum of: 

(A) The 10-year swap rate, as reported 

in the Federal Reserve’s H.15 Report (or 

any successor report) as of the date 

concurrent with the effective date of 

such appraisal; and 

(B) 300 basis points. 

(iii) If the appraisal required under 

paragraph (a)(2)(ii) of this section 

included a direct capitalization method 

using an overall capitalization rate, that 

rate must be disclosed to potential 

investors in the securitization. 

(6) All loan payments required to be 

made under the loan agreement are: 

(i) Based on level monthly payments 

of principal and interest (at the fully 

indexed rate) to fully amortize the debt 

over a term that does not exceed 25 

years, or 30 years for a qualifying 

multifamily loan; and 

(ii) To be made no less frequently 

than monthly over a term of at least ten 

years. 

(7) Under the terms of the loan 

agreement: 

(i) Any maturity of the note occurs no 

earlier than ten years following the date 

of origination; 

(ii) The borrower is not permitted to 

defer repayment of principal or payment 

of interest; and 

(iii) The interest rate on the loan is: 

(A) A fixed interest rate; 

(B) An adjustable interest rate and the 

borrower, prior to or concurrently with 

origination of the CRE loan, obtained a 

derivative that effectively results in a 

fixed interest rate; or 

(C) An adjustable interest rate and the 

borrower, prior to or concurrently with 

origination of the CRE loan, obtained a 

derivative that established a cap on the 

interest rate for the term of the loan, and 

the loan meets the underwriting criteria 

in paragraphs (a)(2)(vi) and (vii) of this 

section using the maximum interest rate 

allowable under the interest rate cap. 

(8) The originator does not establish 

an interest reserve at origination to fund 

all or part of a payment on the loan. 

(9) At the cut-off date or similar date 

for establishing the composition of the 

securitized assets collateralizing the 

asset-backed securities issued pursuant 

to the securitization transaction, all 

payments due on the loan are 

contractually current. 

(10)(i) The depositor of the assetbacked security certifies that it has 

evaluated the effectiveness of its 

internal supervisory controls with 

respect to the process for ensuring that 

all qualifying CRE loans that 

collateralize the asset-backed security 

and that reduce the sponsor’s risk 

retention requirement under § __.15 

meet all of the requirements set forth in 

paragraphs (a)(1) through (9) of this 

section and has concluded that its 

internal supervisory controls are 

effective; 

(ii) The evaluation of the effectiveness 

of the depositor’s internal supervisory 

controls referenced in paragraph 

(a)(10)(i) of this section shall be 

performed, for each issuance of an assetbacked security, as of a date within 60 

days of the cut-off date or similar date 

for establishing the composition of the 

asset pool collateralizing such assetbacked security; 

(iii) The sponsor provides, or causes 

to be provided, a copy of the 

certification described in paragraph 

(a)(10)(i) of this section to potential 

investors a reasonable period of time 

prior to the sale of asset-backed 

securities in the issuing entity, and, 

upon request, to its appropriate Federal 

banking agency, if any; and 

(11) Within two weeks of the closing 

of the CRE loan by its originator or, if 

sooner, prior to the transfer of such CRE 

loan to the issuing entity, the originator 

shall have obtained a UCC lien search 

from the jurisdiction of organization of 

the borrower and each operating 

affiliate, that does not report, as of the 

time that the security interest of the 

originator in the property described in 

paragraph (a)(1)(iii) of this section was 

perfected, other higher priority liens of 

record on any property described in 

paragraph (a)(1)(iii) of this section, other 

than purchase money security interests. 

(b) Cure or buy-back requirement. If a 

sponsor has relied on the exception 

provided in § ___.15 with respect to a 

qualifying CRE loan and it is 

subsequently determined that the CRE 

loan did not meet all of the 

requirements set forth in paragraphs 

(a)(1) through (9) and (a)(11) of this 

section, the sponsor shall not lose the 

benefit of the exception with respect to 

the CRE loan if the depositor complied 

with the certification requirement set 

forth in paragraph (a)(10) of this section, 

and: 

(1) The failure of the loan to meet any 

of the requirements set forth in 

paragraphs (a)(1) through (9) and (a)(11) 

of this section is not material; or; 

(2) No later than 90 days after the 

determination that the loan does not 

meet one or more of the requirements of 

paragraphs (a)(1) through (9) or (a)(11) 

of this section, the sponsor: 

(i) Effectuates cure, restoring 

conformity of the loan to the unmet 

requirements as of the date of cure; or 

(ii) Repurchases the loan(s) from the 

issuing entity at a price at least equal to 

the remaining principal balance and 

accrued interest on the loan(s) as of the 

date of repurchase. 

(3) If the sponsor cures or repurchases 

pursuant to paragraph (b)(2) of this 

section, the sponsor must promptly 

notify, or cause to be notified, the 

holders of the asset-backed securities 

issued in the securitization transaction 

of any loan(s) included in such 

securitization transaction that is 

required to be cured or repurchased by 

the sponsor pursuant to paragraph (b)(2) 

of this section, including the principal 

amount of such repurchased loan(s) and 

the cause for such cure or repurchase. 

§ __.18 Underwriting standards for 

qualifying automobile loans. 

(a) Underwriting, product and other 

standards. (1) Prior to origination of the 

automobile loan, the originator: 

(i) Verified and documented that 

within 30 days of the date of 

origination: 

(A) The borrower was not currently 30 

days or more past due, in whole or in 

part, on any debt obligation; 

(B) Within the previous 24 months, 

the borrower has not been 60 days or 

more past due, in whole or in part, on 

any debt obligation; 

(C) Within the previous 36 months, 

the borrower has not: 

(1) Been a debtor in a proceeding 

commenced under Chapter 7 

(Liquidation), Chapter 11 

(Reorganization), Chapter 12 (Family 

Farmer or Family Fisherman plan), or 

Chapter 13 (Individual Debt 

Adjustment) of the U.S. Bankruptcy 

Code; or 

(2) Been the subject of any federal or 

State judicial judgment for the 

collection of any unpaid debt; 

(D) Within the previous 36 months, 

no one-to-four family property owned 

by the borrower has been the subject of 

any foreclosure, deed in lieu of 

foreclosure, or short sale; or 

(E) Within the previous 36 months, 

the borrower has not had any personal 

property repossessed; 

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(ii) Determined and documented that 

the borrower has at least 24 months of 

credit history; and 

(iii) Determined and documented that, 

upon the origination of the loan, the 

borrower’s DTI ratio is less than or equal 

to 36 percent. 

(A) For the purpose of making the 

determination under paragraph 

(a)(1)(iii) of this section, the originator 

must: 

(1) Verify and document all income of 

the borrower that the originator includes 

in the borrower’s effective monthly 

income (using payroll stubs, tax returns, 

profit and loss statements, or other 

similar documentation); and 

(2) On or after the date of the 

borrower’s written application and prior 

to origination, obtain a credit report 

regarding the borrower from a consumer 

reporting agency that compiles and 

maintain files on consumers on a 

nationwide basis (within the meaning of 

15 U.S.C. 1681a(p)) and verify that all 

outstanding debts reported in the 

borrower’s credit report are 

incorporated into the calculation of the 

borrower’s DTI ratio under paragraph 

(a)(1)(iii) of this section; 

(2) An originator will be deemed to 

have met the requirements of paragraph 

(a)(1)(i) of this section if: 

(i) The originator, no more than 30 

days before the closing of the loan, 

obtains a credit report regarding the 

borrower from a consumer reporting 

agency that compiles and maintains 

files on consumers on a nationwide 

basis (within the meaning of 15 U.S.C. 

1681a(p)); 

(ii) Based on the information in such 

credit report, the borrower meets all of 

the requirements of paragraph (a)(1)(i) of 

this section, and no information in a 

credit report subsequently obtained by 

the originator before the closing of the 

loan contains contrary information; and 

(iii) The originator obtains electronic 

or hard copies of the credit report. 

(3) At closing of the automobile loan, 

the borrower makes a down payment 

from the borrower’s personal funds and 

trade-in allowance, if any, that is at least 

equal to the sum of: 

(i) The full cost of the vehicle title, 

tax, and registration fees; 

(ii) Any dealer-imposed fees; 

(iii) The full cost of any additional 

warranties, insurance or other products 

purchased in connection with the 

purchase of the vehicle; and 

(iv) 10 percent of the vehicle purchase 

price. 

(4) The originator records a first lien 

securing the loan on the purchased 

vehicle in accordance with State law. 

(5) The terms of the loan agreement 

provide a maturity date for the loan that 

does not exceed the lesser of: 

(i) Six years from the date of 

origination; or 

(ii) 10 years minus the difference 

between the current model year and the 

vehicle’s model year. 

(6) The terms of the loan agreement: 

(i) Specify a fixed rate of interest for 

the life of the loan; 

(ii) Provide for a level monthly 

payment amount that fully amortizes 

the amount financed over the loan term; 

(iii) Do not permit the borrower to 

defer repayment of principal or payment 

of interest; and 

(iv) Require the borrower to make the 

first payment on the automobile loan 

within 45 days of the loan’s contract 

date. 

(7) At the cut-off date or similar date 

for establishing the composition of the 

securitized assets collateralizing the 

asset-backed securities issued pursuant 

to the securitization transaction, all 

payments due on the loan are 

contractually current; and 

(8)(i) The depositor of the assetbacked security certifies that it has 

evaluated the effectiveness of its 

internal supervisory controls with 

respect to the process for ensuring that 

all qualifying automobile loans that 

collateralize the asset-backed security 

and that reduce the sponsor’s risk 

retention requirement under § l.15 

meet all of the requirements set forth in 

paragraphs (a)(1) through (7) of this 

section and has concluded that its 

internal supervisory controls are 

effective; 

(ii) The evaluation of the effectiveness 

of the depositor’s internal supervisory 

controls referenced in paragraph (a)(8)(i) 

of this section shall be performed, for 

each issuance of an asset-backed 

security, as of a date within 60 days of 

the cut-off date or similar date for 

establishing the composition of the asset 

pool collateralizing such asset-backed 

security; and 

(iii) The sponsor provides, or causes 

to be provided, a copy of the 

certification described in paragraph 

(a)(8)(i) of this section to potential 

investors a reasonable period of time 

prior to the sale of asset-backed 

securities in the issuing entity, and, 

upon request, to its appropriate Federal 

banking agency, if any. 

(b) Cure or buy-back requirement. If a 

sponsor has relied on the exception 

provided in § ___.15 with respect to a 

qualifying automobile loan and it is 

subsequently determined that the loan 

did not meet all of the requirements set 

forth in paragraphs (a)(1) through (7) of 

this section, the sponsor shall not lose 

the benefit of the exception with respect 

to the automobile loan if the depositor 

complied with the certification 

requirement set forth in paragraph (a)(8) 

of this section, and: 

(1) The failure of the loan to meet any 

of the requirements set forth in 

paragraphs (a)(1) through (7) of this 

section is not material; or 

(2) No later than ninety (90) days after 

the determination that the loan does not 

meet one or more of the requirements of 

paragraphs (a)(1) through (7) of this 

section, the sponsor: 

(i) Effectuates cure, establishing 

conformity of the loan to the unmet 

requirements as of the date of cure; or 

(ii) Repurchases the loan(s) from the 

issuing entity at a price at least equal to 

the remaining principal balance and 

accrued interest on the loan(s) as of the 

date of repurchase. 

(3) If the sponsor cures or repurchases 

pursuant to paragraph (b)(2) of this 

section, the sponsor must promptly 

notify, or cause to be notified, the 

holders of the asset-backed securities 

issued in the securitization transaction 

of any loan(s) included in such 

securitization transaction that is 

required to be cured or repurchased by 

the sponsor pursuant to paragraph (b)(2) 

of this section, including the principal 

amount of such loan(s) and the cause for 

such cure or repurchase. 

§ __.19 General exemptions. 

(a) Definitions. For purposes of this 

section, the following definitions shall 

apply: 

Community-focused residential 

mortgage means a residential mortgage 

exempt from the definition of ‘‘covered 

transaction’’ under § 1026.43(a)(3)(iv) 

and (v) of the CFPB’s Regulation Z (12 

CFR 1026.43(a)). 

First pay class means a class of ABS 

interests for which all interests in the 

class are entitled to the same priority of 

payment and that, at the time of closing 

of the transaction, is entitled to 

repayments of principal and payments 

of interest prior to or pro-rata with all 

other classes of securities collateralized 

by the same pool of first-lien residential 

mortgages, until such class has no 

principal or notional balance remaining. 

Inverse floater means an ABS interest 

issued as part of a securitization 

transaction for which interest or other 

income is payable to the holder based 

on a rate or formula that varies inversely 

to a reference rate of interest. 

Qualifying three-to-four unit 

residential mortgage loan means a 

mortgage loan that is: 

(i) Secured by a dwelling (as defined 

in 12 CFR 1026.2(a)(19)) that is owner 

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occupied and contains three-to-four 

housing units; 

(ii) Is deemed to be for business 

purposes for purposes of Regulation Z 

under 12 CFR part 1026, Supplement I, 

paragraph 3(a)(5)(i); and 

(iii) Otherwise meets all of the 

requirements to qualify as a qualified 

mortgage under § 1026.43(e) and (f) of 

Regulation Z (12 CFR 1026.43(e) and (f)) 

as if the loan were a covered transaction 

under that section. 

(b) This part shall not apply to: 

(1) U.S. Government-backed 

securitizations. Any securitization 

transaction that: 

(i) Is collateralized solely by 

residential, multifamily, or health care 

facility mortgage loan assets that are 

insured or guaranteed (in whole or in 

part) as to the payment of principal and 

interest by the United States or an 

agency of the United States, and 

servicing assets; or 

(ii) Involves the issuance of assetbacked securities that: 

(A) Are insured or guaranteed as to 

the payment of principal and interest by 

the United States or an agency of the 

United States; and 

(B) Are collateralized solely by 

residential, multifamily, or health care 

facility mortgage loan assets or interests 

in such assets, and servicing assets. 

(2) Certain agricultural loan 

securitizations. Any securitization 

transaction that is collateralized solely 

by loans or other assets made, insured, 

guaranteed, or purchased by any 

institution that is subject to the 

supervision of the Farm Credit 

Administration, including the Federal 

Agricultural Mortgage Corporation, and 

servicing assets; 

(3) State and municipal 

securitizations. Any asset-backed 

security that is a security issued or 

guaranteed by any State, or by any 

political subdivision of a State, or by 

any public instrumentality of a State 

that is exempt from the registration 

requirements of the Securities Act of 

1933 by reason of section 3(a)(2) of that 

Act (15 U.S.C. 77c(a)(2)); and 

(4) Qualified scholarship funding 

bonds. Any asset-backed security that 

meets the definition of a qualified 

scholarship funding bond, as set forth in 

section 150(d)(2) of the Internal 

Revenue Code of 1986 (26 U.S.C. 

150(d)(2)). 

(5) Pass-through resecuritizations. 

Any securitization transaction that: 

(i) Is collateralized solely by servicing 

assets, and by asset-backed securities: 

(A) For which credit risk was retained 

as required under subpart B of this part; 

or 

(B) That were exempted from the 

credit risk retention requirements of this 

part pursuant to subpart D of this part; 

(ii) Is structured so that it involves the 

issuance of only a single class of ABS 

interests; and 

(iii) Provides for the pass-through of 

all principal and interest payments 

received on the underlying asset-backed 

securities (net of expenses of the issuing 

entity) to the holders of such class. 

(6) First-pay-class securitizations. Any 

securitization transaction that: 

(i) Is collateralized solely by servicing 

assets, and by first-pay classes of assetbacked securities collateralized by firstlien residential mortgages on properties 

located in any state: 

(A) For which credit risk was retained 

as required under subpart B of this part; 

or 

(B) That were exempted from the 

credit risk retention requirements of this 

part pursuant to subpart D of this part; 

(ii) Does not provide for any ABS 

interest issued in the securitization 

transaction to share in realized principal 

losses other than pro rata with all other 

ABS interests issued in the 

securitization transaction based on the 

current unpaid principal balance of 

such ABS interests at the time the loss 

is realized; 

(iii) Is structured to reallocate 

prepayment risk; 

(iv) Does not reallocate credit risk 

(other than as a consequence of 

reallocation of prepayment risk); and 

(v) Does not include any inverse 

floater or similarly structured ABS 

interest. 

(7) Seasoned loans. (i) Any 

securitization transaction that is 

collateralized solely by servicing assets, 

and by seasoned loans that meet the 

following requirements: 

(A) The loans have not been modified 

since origination; and 

(B) None of the loans have been 

delinquent for 30 days or more. 

(ii) For purposes of this paragraph, a 

seasoned loan means: 

(A) With respect to asset-backed 

securities collateralized by residential 

mortgages, a loan that has been 

outstanding and performing for the 

longer of: 

(1) A period of five years; or 

(2) Until the outstanding principal 

balance of the loan has been reduced to 

25 percent of the original principal 

balance. 

(3) Notwithstanding paragraphs 

(b)(7)(ii)(A)(1) and (2) of this section, 

any residential mortgage loan that has 

been outstanding and performing for a 

period of at least seven years shall be 

deemed a seasoned loan. 

(B) With respect to all other classes of 

asset-backed securities, a loan that has 

been outstanding and performing for the 

longer of: 

(1) A period of at least two years; or 

(2) Until the outstanding principal 

balance of the loan has been reduced to 

33 percent of the original principal 

balance. 

(8) Certain public utility 

securitizations. (i) Any securitization 

transaction where the asset-back 

securities issued in the transaction are 

secured by the intangible property right 

to collect charges for the recovery of 

specified costs and such other assets, if 

any, of an issuing entity that is wholly 

owned, directly or indirectly, by an 

investor owned utility company that is 

subject to the regulatory authority of a 

State public utility commission or other 

appropriate State agency. 

(ii) For purposes of this paragraph: 

(A) Specified cost means any cost 

identified by a State legislature as 

appropriate for recovery through 

securitization pursuant to specified cost 

recovery legislation; and 

(B) Specified cost recovery legislation 

means legislation enacted by a State 

that: 

(1) Authorizes the investor owned 

utility company to apply for, and 

authorizes the public utility commission 

or other appropriate State agency to 

issue, a financing order determining the 

amount of specified costs the utility will 

be allowed to recover; 

(2) Provides that pursuant to a 

financing order, the utility acquires an 

intangible property right to charge, 

collect, and receive amounts necessary 

to provide for the full recovery of the 

specified costs determined to be 

recoverable, and assures that the charges 

are non-bypassable and will be paid by 

customers within the utility’s historic 

service territory who receive utility 

goods or services through the utility’s 

transmission and distribution system, 

even if those customers elect to 

purchase these goods or services from a 

third party; and 

(3) Guarantees that neither the State 

nor any of its agencies has the authority 

to rescind or amend the financing order, 

to revise the amount of specified costs, 

or in any way to reduce or impair the 

value of the intangible property right, 

except as may be contemplated by 

periodic adjustments authorized by the 

specified cost recovery legislation. 

(c) Exemption for securitizations of 

assets issued, insured or guaranteed by 

the United States. This part shall not 

apply to any securitization transaction if 

the asset-backed securities issued in the 

transaction are: 

(1) Collateralized solely by obligations 

issued by the United States or an agency 

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77762 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

of the United States and servicing 

assets; 

(2) Collateralized solely by assets that 

are fully insured or guaranteed as to the 

payment of principal and interest by the 

United States or an agency of the United 

States (other than those referred to in 

paragraph (b)(1)(i) of this section) and 

servicing assets; or 

(3) Fully guaranteed as to the timely 

payment of principal and interest by the 

United States or any agency of the 

United States; 

(d) Federal Deposit Insurance 

Corporation securitizations. This part 

shall not apply to any securitization 

transaction that is sponsored by the 

Federal Deposit Insurance Corporation 

acting as conservator or receiver under 

any provision of the Federal Deposit 

Insurance Act or of Title II of the DoddFrank Wall Street Reform and Consumer 

Protection Act. 

(e) Reduced requirement for certain 

student loan securitizations. The 5 

percent risk retention requirement set 

forth in § l.4 shall be modified as 

follows: 

(1) With respect to a securitization 

transaction that is collateralized solely 

by student loans made under the 

Federal Family Education Loan Program 

(‘‘FFELP loans’’) that are guaranteed as 

to 100 percent of defaulted principal 

and accrued interest, and servicing 

assets, the risk retention requirement 

shall be 0 percent; 

(2) With respect to a securitization 

transaction that is collateralized solely 

by FFELP loans that are guaranteed as 

to at least 98 percent but less than 100 

percent of defaulted principal and 

accrued interest, and servicing assets, 

the risk retention requirement shall be 

2 percent; and 

(3) With respect to any other 

securitization transaction that is 

collateralized solely by FFELP loans, 

and servicing assets, the risk retention 

requirement shall be 3 percent. 

(f) Community-focused lending 

securitizations. (1) This part shall not 

apply to any securitization transaction if 

the asset-backed securities issued in the 

transaction are collateralized solely by 

community-focused residential 

mortgages and servicing assets. 

(2) For any securitization transaction 

that includes both community-focused 

residential mortgages and residential 

mortgages that are not exempt from risk 

retention under this part, the percent of 

risk retention required under §l.4(a) is 

reduced by the ratio of the unpaid 

principal balance of the communityfocused residential mortgages to the 

total unpaid principal balance of 

residential mortgages that are included 

in the pool of assets collateralizing the 

asset-backed securities issued pursuant 

to the securitization transaction (the 

community-focused residential 

mortgage asset ratio); provided that: 

(i) The community-focused residential 

mortgage asset ratio is measured as of 

the cut-off date or similar date for 

establishing the composition of the pool 

assets collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction; and 

(ii) If the community-focused 

residential mortgage asset ratio would 

exceed 50 percent, the communityfocused residential mortgage asset ratio 

shall be deemed to be 50 percent. 

(g) Exemptions for securitizations of 

certain three-to-four unit mortgage 

loans. A sponsor shall be exempt from 

the risk retention requirements in 

subpart B of this part with respect to 

any securitization transaction if: 

(1)(i) The asset-backed securities 

issued in the transaction are 

collateralized solely by qualifying threeto-four unit residential mortgage loans 

and servicing assets; or 

(ii) The asset-backed securities issued 

in the transaction are collateralized 

solely by qualifying three-to-four unit 

residential mortgage loans, qualified 

residential mortgages as defined in 

§ l.13, and servicing assets. 

(2) The depositor with respect to the 

securitization provides the certifications 

set forth in §l.13(b)(4) with respect to 

the process for ensuring that all assets 

that collateralize the asset-backed 

securities issued in the transaction are 

qualifying three-to-four unit residential 

mortgage loans, qualified residential 

mortgages, or servicing assets; and 

(3) The sponsor of the securitization 

complies with the repurchase 

requirements in § l.13(c) with respect 

to a loan if, after closing, it is 

determined that the loan does not meet 

all of the criteria to be either a qualified 

residential mortgage or a qualifying 

three-to-four unit residential mortgage 

loan, as appropriate. 

(h) Rule of construction. 

Securitization transactions involving the 

issuance of asset-backed securities that 

are either issued, insured, or guaranteed 

by, or are collateralized by obligations 

issued by, or loans that are issued, 

insured, or guaranteed by, the Federal 

National Mortgage Association, the 

Federal Home Loan Mortgage 

Corporation, or a Federal home loan 

bank shall not on that basis qualify for 

exemption under this part. 

§l.20 Safe harbor for certain foreignrelated transactions. 

(a) Definitions. For purposes of this 

section, the following definition shall 

apply: 

U.S. person means: 

(i) Any of the following: 

(A) Any natural person resident in the 

United States; 

(B) Any partnership, corporation, 

limited liability company, or other 

organization or entity organized or 

incorporated under the laws of any State 

or of the United States; 

(C) Any estate of which any executor 

or administrator is a U.S. person (as 

defined under any other clause of this 

definition); 

(D) Any trust of which any trustee is 

a U.S. person (as defined under any 

other clause of this definition); 

(E) Any agency or branch of a foreign 

entity located in the United States; 

(F) Any non-discretionary account or 

similar account (other than an estate or 

trust) held by a dealer or other fiduciary 

for the benefit or account of a U.S. 

person (as defined under any other 

clause of this definition); 

(G) Any discretionary account or 

similar account (other than an estate or 

trust) held by a dealer or other fiduciary 

organized, incorporated, or (if an 

individual) resident in the United 

States; and 

(H) Any partnership, corporation, 

limited liability company, or other 

organization or entity if: 

(1) Organized or incorporated under 

the laws of any foreign jurisdiction; and 

(2) Formed by a U.S. person (as 

defined under any other clause of this 

definition) principally for the purpose 

of investing in securities not registered 

under the Act; and 

(ii) ‘‘U.S. person(s)’’ does not include: 

(A) Any discretionary account or 

similar account (other than an estate or 

trust) held for the benefit or account of 

a person not constituting a U.S. person 

(as defined in paragraph (i) of this 

section) by a dealer or other professional 

fiduciary organized, incorporated, or (if 

an individual) resident in the United 

States; 

(B) Any estate of which any 

professional fiduciary acting as executor 

or administrator is a U.S. person (as 

defined in paragraph (i) of this section) 

if: 

(1) An executor or administrator of 

the estate who is not a U.S. person (as 

defined in paragraph (i) of this section) 

has sole or shared investment discretion 

with respect to the assets of the estate; 

and 

(2) The estate is governed by foreign 

law; 

(C) Any trust of which any 

professional fiduciary acting as trustee 

is a U.S. person (as defined in paragraph 

(i) of this section), if a trustee who is not 

a U.S. person (as defined in paragraph 

(i) of this section) has sole or shared 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77763 

investment discretion with respect to 

the trust assets, and no beneficiary of 

the trust (and no settlor if the trust is 

revocable) is a U.S. person (as defined 

in paragraph (i) of this section); 

(D) An employee benefit plan 

established and administered in 

accordance with the law of a country 

other than the United States and 

customary practices and documentation 

of such country; 

(E) Any agency or branch of a U.S. 

person (as defined in paragraph (i) of 

this section) located outside the United 

States if: 

(1) The agency or branch operates for 

valid business reasons; and 

(2) The agency or branch is engaged 

in the business of insurance or banking 

and is subject to substantive insurance 

or banking regulation, respectively, in 

the jurisdiction where located; 

(F) The International Monetary Fund, 

the International Bank for 

Reconstruction and Development, the 

Inter-American Development Bank, the 

Asian Development Bank, the African 

Development Bank, the United Nations, 

and their agencies, affiliates and 

pension plans, and any other similar 

international organizations, their 

agencies, affiliates and pension plans. 

(b) In general. This part shall not 

apply to a securitization transaction if 

all the following conditions are met: 

(1) The securitization transaction is 

not required to be and is not registered 

under the Securities Act of 1933 (15 

U.S.C. 77a et seq.); 

(2) No more than 10 percent of the 

dollar value (or equivalent amount in 

the currency in which the ABS interests 

are issued, as applicable) of all classes 

of ABS interests in the securitization 

transaction are sold or transferred to 

U.S. persons or for the account or 

benefit of U.S. persons; 

(3) Neither the sponsor of the 

securitization transaction nor the 

issuing entity is: 

(i) Chartered, incorporated, or 

organized under the laws of the United 

States or any State; 

(ii) An unincorporated branch or 

office (wherever located) of an entity 

chartered, incorporated, or organized 

under the laws of the United States or 

any State; or 

(iii) An unincorporated branch or 

office located in the United States or 

any State of an entity that is chartered, 

incorporated, or organized under the 

laws of a jurisdiction other than the 

United States or any State; and 

(4) If the sponsor or issuing entity is 

chartered, incorporated, or organized 

under the laws of a jurisdiction other 

than the United States or any State, no 

more than 25 percent (as determined 

based on unpaid principal balance) of 

the assets that collateralize the ABS 

interests sold in the securitization 

transaction were acquired by the 

sponsor or issuing entity, directly or 

indirectly, from: 

(i) A majority-owned affiliate of the 

sponsor or issuing entity that is 

chartered, incorporated, or organized 

under the laws of the United States or 

any State; or 

(ii) An unincorporated branch or 

office of the sponsor or issuing entity 

that is located in the United States or 

any State. 

(c) Evasions prohibited. In view of the 

objective of these rules and the policies 

underlying Section 15G of the Exchange 

Act, the safe harbor described in 

paragraph (b) of this section is not 

available with respect to any transaction 

or series of transactions that, although 

in technical compliance with 

paragraphs (a) and (b) of this section, is 

part of a plan or scheme to evade the 

requirements of section 15G and this 

Part. In such cases, compliance with 

section 15G and this part is required. 

§l.21 Additional exemptions. 

(a) Securitization transactions. The 

federal agencies with rulewriting 

authority under section 15G(b) of the 

Exchange Act (15 U.S.C. 78o-11(b)) with 

respect to the type of assets involved 

may jointly provide a total or partial 

exemption of any securitization 

transaction as such agencies determine 

may be appropriate in the public 

interest and for the protection of 

investors. 

(b) Exceptions, exemptions, and 

adjustments. The Federal banking 

agencies and the Commission, in 

consultation with the Federal Housing 

Finance Agency and the Department of 

Housing and Urban Development, may 

jointly adopt or issue exemptions, 

exceptions or adjustments to the 

requirements of this part, including 

exemptions, exceptions or adjustments 

for classes of institutions or assets in 

accordance with section 15G(e) of the 

Exchange Act (15 U.S.C. 78o-11(e)). 

§l.22 Periodic review of the QRM 

definition, exempted three-to-four unit 

residential mortgage loans, and communityfocused residential mortgage exemption 

(a) The Federal banking agencies and 

the Commission, in consultation with 

the Federal Housing Finance Agency 

and the Department of Housing and 

Urban Development, shall commence a 

review of the definition of qualified 

residential mortgage in § __.13, a review 

of the community-focused residential 

mortgage exemption in § ___.19(f), and a 

review of the exemption for qualifying 

three-to-four unit residential mortgage 

loans in § ll.19(g): 

(1) No later than four years after the 

effective date of the rule (as it relates to 

securitizers and originators of assetbacked securities collateralized by 

residential mortgages), five years 

following the completion of such initial 

review, and every five years thereafter; 

and 

(2) At any time, upon the request of 

any Federal banking agency, the 

Commission, the Federal Housing 

Finance Agency or the Department of 

Housing and Urban Development, 

specifying the reason for such request, 

including as a result of any amendment 

to the definition of qualified mortgage or 

changes in the residential housing 

market. 

(b) The Federal banking agencies, the 

Commission, the Federal Housing 

Finance Agency and the Department of 

Housing and Urban Development shall 

publish in the Federal Register notice of 

the commencement of a review and, in 

the case of a review commenced under 

paragraph (a)(2) of this section, the 

reason an agency is requesting such 

review. After completion of any review, 

but no later than six months after the 

publication of the notice announcing 

the review, unless extended by the 

agencies, the agencies shall jointly 

publish a notice disclosing the 

determination of their review. If the 

agencies determine to amend the 

definition of qualified residential 

mortgage, the agencies shall complete 

any required rulemaking within 12 

months of publication in the Federal 

Register of such notice disclosing the 

determination of their review, unless 

extended by the agencies. 

End of Common Rule 

List of Subjects 

12 CFR Part 43 

Automobile loans, Banks and 

banking, Commercial loans, Commercial 

real estate, Credit risk, Mortgages, 

National banks, Reporting and 

recordkeeping requirements, Risk 

retention, Securitization. 

12 CFR Part 244 

Auto loans, Banks and banking, Bank 

holding companies, Commercial loans, 

Commercial real estate, Credit risk, Edge 

and agreement corporations, Foreign 

banking organizations, Mortgages, 

Nonbank financial companies, 

Reporting and recordkeeping 

requirements, Risk retention, Savings 

and loan holding companies, 

Securitization, State member banks. 

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77764 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

12 CFR Part 373 

Automobile loans, Banks and 

banking, Commercial loans, Commercial 

real estate, Credit risk, Mortgages, 

Reporting and recordkeeping 

requirements, Risk retention, Savings 

associations, Securitization. 

12 CFR Part 1234 

Government sponsored enterprises, 

Mortgages, Securities. 

17 CFR Part 246 

Reporting and recordkeeping 

requirements, Securities. 

24 CFR Part 267 

Mortgages. 

Adoption of the Common Rule Text 

The adoption of the common rule, as 

modified by agency-specific text, is set 

forth below: 

Department of the Treasury 

Office of the Comptroller of the 

Currency 

12 CFR Chapter I 

Authority and Issuance 

For the reasons stated in the common 

preamble and under the authority of 12 

U.S.C. 93a, 1464, 5412(b)(2)(B), and 15 

U.S.C. 78o-11, the Office of the 

Comptroller of the Currency is adopting 

the text of the common rule as set forth 

at the end of the Supplementary 

Information as part 43, chapter I of title 

12, Code of Federal Regulations, and 

further amends part 43 as follows: 

PART 43—CREDIT RISK RETENTION 

■ 1. The authority citation for part 43 is 

added to read as follows: 

Authority: 12 U.S.C. 1 et seq., 93a, 161, 

1464, 1818, 5412(b)(2)(B), and 15 U.S.C. 78o11. 

■ 2. Section 43.1 is added to read as 

follows: 

§ 43.1 Authority, purpose, scope, and 

reservation of authority. 

(a) Authority. This part is issued 

under the authority of 12 U.S.C. 1 et 

seq., 93a, 161, 1464, 1818, 5412(b)(2)(B), 

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

(b) Purpose. (1) This part requires 

securitizers to retain an economic 

interest in a portion of the credit risk for 

any asset that the securitizer, through 

the issuance of an asset-backed security, 

transfers, sells, or conveys to a third 

party. This part specifies the 

permissible types, forms, and amounts 

of credit risk retention, and it 

establishes certain exemptions for 

securitizations collateralized by assets 

that meet specified underwriting 

standards. 

(2) Nothing in this part shall be read 

to limit the authority of the OCC to take 

supervisory or enforcement action, 

including action to address unsafe or 

unsound practices or conditions, or 

violations of law. 

(c) Scope. This part applies to any 

securitizer that is a national bank, a 

Federal savings association, a Federal 

branch or agency of a foreign bank, or 

a subsidiary thereof. 

(d) Compliance dates. Compliance 

with this part is required: 

(1) With respect to any securitization 

transaction collateralized by residential 

mortgages, on and after December 24, 

2015; and 

(2) With respect to any other 

securitization transaction, on and after 

December 24, 2016. 

Federal Reserve System 

12 CFR Chapter II 

Authority and Issuance 

For the reasons set forth in the 

Supplementary Information, the Board 

of Governors of the Federal Reserve 

System is adopting the text of the 

common rule as set forth at the end of 

the Supplementary Information as part 

244 to chapter II of title 12, Code of 

Federal Regulations, and further amends 

part 244 as follows: 

PART 244—CREDIT RISK RETENTION 

(REGULATION RR) 

■ 3. The authority citation for part 244 

is added to read as follows: 

Authority: 12 U.S.C. 221 et seq., 1461 et 

seq., 1818, 1841 et seq., 3103 et seq., and 15 

U.S.C. 78o–11. 

■ 4. The part heading for part 244 is 

revised to read as set forth above. 

■ 5. Section 244.1 is added to read as 

follows: 

§ 244.1 Authority, purpose, and scope. 

(a) Authority. (1) In general. This part 

(Regulation RR) is issued by the Board 

of Governors of the Federal Reserve 

System under section 15G of the 

Securities Exchange Act of 1934, as 

amended (Exchange Act) (15 U.S.C. 

78o–11), as well as under the Federal 

Reserve Act, as amended (12 U.S.C. 221 

et seq.); section 8 of the Federal Deposit 

Insurance Act (FDI Act), as amended (12 

U.S.C. 1818); the Bank Holding 

Company Act of 1956, as amended (BHC 

Act) (12 U.S.C. 1841 et seq.); the Home 

Owners’ Loan Act of 1933 (HOLA) (12 

U.S.C. 1461 et seq.); section 165 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank 

Act) (12 U.S.C. 5365); and the 

International Banking Act of 1978, as 

amended (12 U.S.C. 3101 et seq.). 

(2) Nothing in this part shall be read 

to limit the authority of the Board to 

take action under provisions of law 

other than 15 U.S.C. 78o–11, including 

action to address unsafe or unsound 

practices or conditions, or violations of 

law or regulation, under section 8 of the 

FDI Act. 

(b) Purpose. This part requires any 

securitizer to retain an economic 

interest in a portion of the credit risk for 

any asset that the securitizer, through 

the issuance of an asset-backed security, 

transfers, sells, or conveys to a third 

party in a transaction within the scope 

of section 15G of the Exchange Act. This 

part specifies the permissible types, 

forms, and amounts of credit risk 

retention, and establishes certain 

exemptions for securitizations 

collateralized by assets that meet 

specified underwriting standards or that 

otherwise qualify for an exemption. 

(c) Scope. (1) This part applies to any 

securitizer that is: 

(i) A state member bank (as defined in 

12 CFR 208.2(g)); or 

(ii) Any subsidiary of a state member 

bank. 

(2) Section 15G of the Exchange Act 

and the rules issued thereunder apply to 

any securitizer that is: 

(i) A bank holding company (as 

defined in 12 U.S.C. 1842); 

(ii) A foreign banking organization (as 

defined in 12 CFR 211.21(o)); 

(iii) An Edge or agreement corporation 

(as defined in 12 CFR 211.1(c)(2) and 

(3)); 

(iv) A nonbank financial company 

that the Financial Stability Oversight 

Council has determined under section 

113 of the Dodd–Frank Wall Street 

Reform and Consumer Protection Act 

(the Dodd–Frank Act) (12 U.S.C. 5323) 

shall be supervised by the Board and for 

which such determination is still in 

effect; or 

(v) A savings and loan holding 

company (as defined in 12 U.S.C. 

1467a); and 

(vi) Any subsidiary of the foregoing. 

(3) Compliance with this part is 

required: 

(i) With respect to any securitization 

transaction collateralized by residential 

mortgages on December 24, 2015; and 

(ii) With respect to any other 

securitization transaction on December 

24, 2016. 

Federal Deposit Insurance Corporation 

12 CFR Chapter III 

Authority and Issuance 

For the reasons set forth in the 

Supplementary Information, the Federal 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 77765 

Deposit Insurance Corporation adds the 

text of the common rule as set forth at 

the end of the Supplementary 

Information as part 373 to chapter III of 

title 12, Code of Federal Regulations, 

and further amends part 373 as follows: 

PART 373—CREDIT RISK RETENTION 

■ 6. The authority citation for part 373 

is added to read as follows: 

Authority: 12 U.S.C. 1811 et seq. and 3103 

et seq., and 15 U.S.C. 78o–11. 

■ 7. Section 373.1 is added to read as 

follows: 

§ 373.1 Purpose and scope. 

(a) Authority. (1) In general. This part 

is issued by the Federal Deposit 

Insurance Corporation (FDIC) under 

section 15G of the Securities Exchange 

Act of 1934, as amended (Exchange Act) 

(15 U.S.C. 78o–11), as well as the 

Federal Deposit Insurance Act (12 

U.S.C. 1811 et seq.) and the 

International Banking Act of 1978, as 

amended (12 U.S.C. 3101 et seq.). 

(2) Nothing in this part shall be read 

to limit the authority of the FDIC to take 

action under provisions of law other 

than 15 U.S.C. 78o–11, including to 

address unsafe or unsound practices or 

conditions, or violations of law or 

regulation under section 8 of the Federal 

Deposit Insurance Act (12 U.S.C. 1818). 

(b) Purpose. This part requires 

securitizers to retain an economic 

interest in a portion of the credit risk for 

any asset that the securitizer, through 

the issuance of an asset-backed security, 

transfers, sells, or conveys to a third 

party in a transaction within the scope 

of section 15G of the Exchange Act. This 

part specifies the permissible types, 

forms, and amounts of credit risk 

retention, and it establishes certain 

exemptions for securitizations 

collateralized by assets that meet 

specified underwriting standards or that 

otherwise qualify for an exemption. 

(c) Scope. This part applies to any 

securitizer that is: 

(1) A state nonmember bank (as 

defined in 12 U.S.C. 1813(e)(2)); 

(2) An insured state branch of a 

foreign bank (as defined in 12 CFR 

347.202); 

(3) A state savings association (as 

defined in 12 U.S.C. 1813(b)(3)); or 

(4) Any subsidiary of an entity 

described in paragraph (c)(1), (2), or (3) 

of this section. 

Federal Housing Finance Agency 

12 CFR Chapter XII 

Authority and Issuance 

For the reasons stated in the 

Supplementary Information, and under 

the authority of 12 U.S.C. 4526, the 

Federal Housing Finance Agency is 

adopting the text of the common rule as 

set forth at the end of the 

Supplementary Information as part 1234 

of subchapter B of chapter XII of title 12 

of the Code of Federal Regulations, and 

further amends part 1234 as follows: 

PART 1234—CREDIT RISK RETENTION 

■ 8. The authority citation for part 1234 

is added to read as follows: 

Authority: 12 U.S.C. 4511(b), 4526, 4617; 

15 U.S.C. 78o–11(b)(2). 

■ 9. Section 1234.1 is added to read as 

follows: 

§ 1234.1 Purpose, scope and reservation 

of authority. 

(a) Purpose. This part requires 

securitizers to retain an economic 

interest in a portion of the credit risk for 

any residential mortgage asset that the 

securitizer, through the issuance of an 

asset-backed security, transfers, sells, or 

conveys to a third party in a transaction 

within the scope of section 15G of the 

Exchange Act. This part specifies the 

permissible types, forms, and amounts 

of credit risk retention, and it 

establishes certain exemptions for 

securitizations collateralized by assets 

that meet specified underwriting 

standards or that otherwise qualify for 

an exemption. 

(b) Scope. (1) Effective December 24, 

2015, this part will apply to any 

securitizer that is an entity regulated by 

the Federal Housing Finance Agency 

with respect to a securitization 

transaction collateralized by residential 

mortgages. 

(2) Effective December 24, 2016, this 

part will apply to any securitizer that is 

an entity regulated by the Federal 

Housing Finance Agency with respect to 

a securitization transaction 

collateralized by assets other than 

residential mortgages. 

(c) Reservation of authority. Nothing 

in this part shall be read to limit the 

authority of the Director of the Federal 

Housing Finance Agency to take 

supervisory or enforcement action, 

including action to address unsafe or 

unsound practices or conditions, or 

violations of law. 

■ 10. Amend § 1234.14 as follows: 

■ a. Revise the section heading; 

■ b. In the introductory text, remove the 

reference ‘‘§§ 1234.15 through 1234.18’’ 

and add in its place the reference 

‘‘§§ 1234.15 and 1234.17’’; 

■ c. Remove the definitions of 

‘‘Automobile loan’’, ‘‘Commercial loan’’, 

‘‘Debt to income (DTI) ratio’’, ‘‘Earnings 

before interest, taxes, depreciation, and 

amortization (EBITDA)’’, ‘‘Leverage 

Ratio’’, ‘‘Model year’’, ‘‘Payments-inkind’’, ‘‘Purchase price’’, ‘‘Salvage title’’, 

‘‘Total debt’’, ‘‘Total liabilities ratio’’, 

and ‘‘Trade-in allowance’’; and 

■ d. Revise the definition of ‘‘Debt 

service coverage (DSC) ratio’’. 

The revisions read as follows: 

§ 1234.14 Definitions applicable to 

qualifying commercial real estate loans. 

* * * * * 

Debt service coverage (DSC) ratio 

means the ratio of: 

(1) The annual NOI less the annual 

replacement reserve of the CRE property 

at the time of origination of the CRE 

loan(s); to 

(2) The sum of the borrower’s annual 

payments for principal and interest 

(calculated at the fully indexed rate) on 

any debt obligation. 

* * * * * 

■ 11. Revise § 1234.15 to read as 

follows: 

§ 1234.15 Qualifying commercial real 

estate loans. 

(a) General exception. Commercial 

real estate loans that are securitized 

through a securitization transaction 

shall be subject to a 0 percent risk 

retention requirement under subpart B 

of this part, provided that the following 

conditions are met: 

(1) The CRE assets meet the 

underwriting standards set forth in 

§ 1234.17; 

(2) The securitization transaction is 

collateralized solely by CRE loans and 

by servicing assets; 

(3) The securitization transaction does 

not permit reinvestment periods; and 

(4) The sponsor provides, or causes to 

be provided, to potential investors a 

reasonable period of time prior to the 

sale of asset-backed securities of the 

issuing entity, and, upon request, to the 

Commission, and to the FHFA, in 

written form under the caption ‘‘Credit 

Risk Retention’’ a description of the 

manner in which the sponsor 

determined the aggregate risk retention 

requirement for the securitization 

transaction after including qualifying 

CRE loans with 0 percent risk retention. 

(b) Risk retention requirement. For 

any securitization transaction described 

in paragraph (a) of this section, the 

percentage of risk retention required 

under § 1234.3(a) is reduced by the 

percentage evidenced by the ratio of the 

unpaid principal balance of the 

qualifying CRE loans to the total unpaid 

principal balance of CRE loans that are 

included in the pool of assets 

collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction (the qualifying 

asset ratio); provided that; 

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77766 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations 

(1) The qualifying asset ratio is 

measured as of the cut-off date or 

similar date for establishing the 

composition of the securitized assets 

collateralizing the asset-backed 

securities issued pursuant to the 

securitization transaction; 

(2) If the qualifying asset ratio would 

exceed 50 percent, the qualifying asset 

ratio shall be deemed to be 50 percent; 

and 

(3) The disclosure required by 

paragraph (a)(4) of this section also 

includes descriptions of the qualifying 

CRE loans and descriptions of the CRE 

loans that are not qualifying CRE loans, 

and the material differences between the 

group of qualifying CRE loans and CRE 

loans that are not qualifying loans with 

respect to the composition of each 

group’s loan balances, loan terms, 

interest rates, borrower credit 

information, and characteristics of any 

loan collateral. 

(c) Exception for securitizations of 

qualifying CRE only. Notwithstanding 

other provisions of this section, the risk 

retention requirements of subpart B of 

this part shall not apply to 

securitization transactions where the 

transaction is collateralized solely by 

servicing assets and qualifying CRE 

loans. 

(d) Record maintenance. A regulated 

entity must retain the disclosures 

required in paragraphs (a) and (b) of this 

section and the certification required in 

§ 1234.17(a)(10) of this part, in its 

records until three years after all ABS 

interests issued in the securitization are 

no longer outstanding. The regulated 

entity must provide the disclosures and 

certifications upon request to the 

Commission and the FHFA. 

§§ 1234.16 and 1234.18 [Removed and 

Reserved] 

■ 12. Remove and reserve §§ 1234.16 

and 1234.18. 

Securities and Exchange Commission 

17 CFR Chapter II 

Authority and Issuance 

For the reasons stated in the 

Supplementary Information, the 

Securities and Exchange Commission is 

adopting the text of the common rule as 

set forth at the end of the 

Supplementary Information as part 246, 

title 17, chapter II of the Code of Federal 

Regulations, under the authority set 

forth in Sections 7, 10, 19(a), and 28 of 

the Securities Act and Sections 3, 13, 

15, 15G, 23 and 36 of the Exchange Act, 

and further amends part 246 as follows: 

PART 246—CREDIT RISK RETENTION 

■ 13. The authority citation for part 246 

is added to read as follows: 

Authority: 15 U.S.C. 77g, 77j, 77s, 77z–3, 

78c, 78m, 78o, 78o–11, 78w, 78mm. 

■ 14. Section 246.1 is added to read as 

follows: 

§ 246.1 Purpose, scope, and authority. 

(a) Authority and purpose. This part 

(Regulation RR) is issued by the 

Securities and Exchange Commission 

(‘‘Commission’’) jointly with the Board 

of Governors of the Federal Reserve 

System, the Federal Deposit Insurance 

Corporation, the Office of the 

Comptroller of the Currency, and, in the 

case of the securitization of any 

residential mortgage asset, together with 

the Secretary of Housing and Urban 

Development and the Federal Housing 

Finance Agency, pursuant to Section 

15G of the Securities Exchange Act of 

1934 (15 U.S.C. 78o–11). The 

Commission also is issuing this part 

pursuant to its authority under Sections 

7, 10, 19(a), and 28 of the Securities Act 

and Sections 3, 13, 15, 23, and 36 of the 

Exchange Act. This part requires 

securitizers to retain an economic 

interest in a portion of the credit risk for 

any asset that the securitizer, through 

the issuance of an asset-backed security, 

transfers, sells, or conveys to a third 

party. This part specifies the 

permissible types, forms, and amounts 

of credit risk retention, and establishes 

certain exemptions for securitizations 

collateralized by assets that meet 

specified underwriting standards or 

otherwise qualify for an exemption. 

(b) The authority of the Commission 

under this part shall be in addition to 

the authority of the Commission to 

otherwise enforce the federal securities 

laws, including, without limitation, the 

antifraud provisions of the securities 

laws. 

Department of Housing and Urban 

Development 

24 CFR Chapter II 

Authority and Issuance 

For the reasons stated in the 

preamble, HUD is adopting the text of 

the common rule as set forth at the end 

of the Supplementary Information as 24 

CFR part 267, and further amends part 

267 as follows: 

PART 267—CREDIT RISK RETENTION 

■ 15. The authority citation for part 267 

is added to read as follows: 

Authority: 15 U.S.C. 78–o–11; 42 U.S.C. 

3535(d). 

■ 16. Section 267.1 is added to read as 

follows: 

§ 267.1 Credit risk retention exceptions 

and exemptions for HUD programs. 

The credit risk retention regulations 

codified at 12 CFR part 43 (Office of the 

Comptroller of the Currency); 12 CFR 

part 244 (Federal Reserve System); 12 

CFR part 373 (Federal Deposit Insurance 

Corporation); 17 CFR part 246 

(Securities and Exchange Commission); 

and 12 CFR part 1234 (Federal Housing 

Finance Agency) include exceptions 

and exemptions in subpart D of each of 

these codified regulations for certain 

transactions involving programs and 

entities under the jurisdiction of the 

Department of Housing and Urban 

Development. 

Dated: October 21, 2014. 

Thomas J. Curry, 

Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System, October 23, 2014. 

Robert deV. Frierson, 

Secretary of the Board. 

Dated at Washington, DC, this 21st day of 

October, 2014. 

By order of the Board of Directors. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

Dated: October 22, 2014. 

By the Securities and Exchange 

Commission. 

Kevin M. O’Neill, 

Deputy Secretary. 

Dated: October 21, 2014. 

Melvin L. Watt, 

Director, Federal Housing Finance Agency. 

By the Department of Housing and Urban 

Development. 

Julia ́n Castro, 

Secretary. 

[FR Doc. 2014–29256 Filed 12–23–14; 8:45 am] 

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P; 

8010–01–P; 8070–01–P 

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