Document ID: SEC-2011-0596-0001
Agency: sec
Document Type: Proposed Rule
Title: Credit Risk Retention
Posted Date: 2011-04-29T04:00Z

[Federal Register Volume 76, Number 83 (Friday, April 29, 2011)]
[Proposed Rules]
[Pages 24090-24186]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8364]

[[Page 24089]]

Vol. 76

Friday,

No. 83

April 29, 2011

Part II

Department of the Treasury
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Office of the Comptroller of the Currency

12 CFR Part 43

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Federal Reserve System
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12 CFR Part 244

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Federal Deposit Insurance Corporation
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12 CFR Part 373

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Federal Housing Finance Agency
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12 CFR Part 1234

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Securities and Exchange Commission
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17 CFR Part 246

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Department of Housing and Urban Development
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24 CFR Part 267

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Credit Risk Retention; Proposed Rule

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

[[Page 24090]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 43

[Docket No. OCC-2011-0002]
RIN 1557-AD40
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FEDERAL RESERVE SYSTEM

12 CFR Part 244

[Docket No. 2011-1411]
RIN 7100-AD-70
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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 373

RIN 3064-AD74
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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1234

RIN 2590-AA43
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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 246

[Release No. 34-64148; File No. S7-14-11]
RIN 3235-AK96
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 267

RIN 2501-AD53

Credit Risk Retention

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); U.S. Securities and Exchange 
Commission (Commission); Federal Housing Finance Agency (FHFA); and 
Department of Housing and Urban Development (HUD).

ACTION: Proposed rule.

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SUMMARY: The OCC, Board, FDIC, Commission, FHFA, and HUD (the Agencies) 
are proposing rules to implement the credit risk retention requirements 
of section 15G of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
11), as added by section 941 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. Section 15G generally requires the securitizer 
of asset-backed securities to retain not less than five percent of the 
credit risk of the assets collateralizing the asset-backed securities. 
Section 15G includes a variety of exemptions from these requirements, 
including an exemption for asset-backed securities that are 
collateralized exclusively by residential mortgages that qualify as 
``qualified residential mortgages,'' as such term is defined by the 
Agencies by rule.

DATES: Comments must be received by June 10, 2011.

ADDRESSES: Interested parties are encouraged to submit written comments 
jointly to all of the Agencies. Commenters are encouraged to use the 
title ``Credit Risk Retention'' to facilitate the organization and 
distribution of comments among the Agencies. Commenters are also 
encouraged to identify the number of the specific request for comment 
to which they are responding.
    Office of the Comptroller of the Currency: Because paper mail in 
the Washington, DC, area and at the OCC is subject to delay, commenters 
are encouraged to submit comments by the Federal eRulemaking Portal or 
e-mail, if possible. Please use the title ``Credit Risk Retention'' to 
facilitate the organization and distribution of the comments. You may 
submit comments by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
http://www.regulations.gov, under the ``More Search Options'' tab click 
next to the ``Advanced Docket Search'' option where indicated, select 
``Comptroller of the Currency'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2011-0002'' 
to submit or view public comments and to view supporting and related 
materials for this proposed rule. The ``How to Use This Site'' link on 
the Regulations.gov home page provides information on using 
Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.
     E-mail: regs.comments@occ.treas.gov.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket Number OCC-2011-0002'' in your comment. In general, OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, e-mail addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this proposed rulemaking by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov, under the ``More Search Options'' tab click next 
to the ``Advanced Document Search'' option where indicated, select 
``Comptroller of the Currency'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2011-0002'' 
to view public comments for this rulemaking action.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and submit to security screening 
in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.
    Board of Governors of the Federal Reserve System: You may submit 
comments, identified by Docket No. R-1411, by any of the following 
methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Jennifer J. Johnson, Secretary, Board of 
Governors of the

[[Page 24091]]

Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 
9 a.m. and 5 p.m. on weekdays.
    Federal Deposit Insurance Corporation: You may submit comments, 
identified by RIN number, by any of the following methods:
     Agency Web Site: http://www.FDIC.gov/regulations/laws/federal/notices.html. Follow instructions for submitting comments on 
the Agency Web Site.
     E-mail: Comments@FDIC.gov. Include the RIN number on the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street) on business days between 7 a.m. and 5 p.m.
    Instructions: All comments received must include the agency name 
and RIN for this rulemaking and will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html, including any 
personal information provided.
    Securities and Exchange Commission: You may submit comments by the 
following method:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-14-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
     All submissions should refer to File Number S7-14-11. This 
file number should be included on the subject line if e-mail is used. 
To help us process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. All comments received will be posted without change; we 
do not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.
    Federal Housing Finance Agency: You may submit your written 
comments on the proposed rulemaking, identified by RIN number 2590-
AA43, by any of the following methods:
     E-mail: Comments to Alfred M. Pollard, General Counsel, 
may be sent by e-mail at RegComments@fhfa.gov. Please include ``RIN 
2590-AA43'' in the subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at RegComments@fhfa.gov to ensure timely receipt by the 
Agency. Please include ``RIN 2590-AA43'' in the subject line of the 
message.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA43, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552.
     Hand Delivery/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA43, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. A hand-delivered package should be logged at the 
Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.
    All comments received by the deadline will be posted for public 
inspection without change, including any personal information you 
provide, such as your name and address, on the FHFA website at http://www.fhfa.gov. Copies of all comments timely received will be available 
for public inspection and copying at the address above on government-
business days between the hours of 10 a.m. and 3 p.m. To make an 
appointment to inspect comments please call the Office of General 
Counsel at (202) 414-6924.
    Department of Housing and Urban Development: Interested persons are 
invited to submit comments regarding this rule to the Regulations 
Division, Office of General Counsel, Department of Housing and Urban 
Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-
0500. Communications must refer to the following docket number [FR-
5504-P-01] and title of this rule. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
     Submission of Comments by Mail. Comments may be submitted 
by mail to the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
10276, Washington, DC 20410-0500.
     Electronic Submission of Comments. Interested persons may 
submit comments electronically through the Federal eRulemaking Portal 
at www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov website can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.
     Note: To receive consideration as public comments, 
comments must be submitted through one of the two methods specified 
above. Again, all submissions must refer to the docket number and title 
of the rule.
     No Facsimile Comments. Facsimile (FAX) comments are not 
acceptable.
     Public Inspection of Public Comments. All properly 
submitted comments and communications submitted to HUD will be 
available for public inspection and copying between 8 a.m. and 5 p.m. 
weekdays at the above address. Due to security measures at the HUD 
Headquarters building, an appointment to review the public comments 
must be scheduled in advance by calling the Regulations Division at 
202-708-3055 (this is not a toll-free number). Individuals with speech 
or hearing impairments may access this number via TTY by calling the 
Federal Information Relay Service at 800-877-8339. Copies of all 
comments submitted are available for inspection and downloading at 
http://www.regulations.gov.

[[Page 24092]]

FOR FURTHER INFORMATION CONTACT: OCC: Chris Downey, Risk Specialist, 
Financial Markets Group, (202) 874-4660; Kevin Russell, Director, 
Retail Credit Risk, (202) 874-5170; Darrin Benhart, Director, 
Commercial Credit Risk, (202) 874-5670; or Jamey Basham, Assistant 
Director, or Carl Kaminski, Senior Attorney, Legislative and Regulatory 
Activities Division, (202) 874-5090, Office of the Comptroller of the 
Currency, 250 E Street, SW., Washington, DC 20219.
    Board: Benjamin W. McDonough, Counsel, (202) 452-2036; April C. 
Snyder, Counsel, (202) 452-3099; Sebastian R. Astrada, Attorney, (202) 
452-3594; or Flora H. Ahn, Attorney, (202) 452-2317, Legal Division; 
Thomas R. Boemio, Manager, (202) 452-2982; Donald N. Gabbai, Senior 
Supervisory Financial Analyst, (202) 452-3358; or Sviatlana A. Phelan, 
Financial Analyst, (202) 912-4306, Division of Banking Supervision and 
Regulation; Andreas Lehnert, Deputy Director, Office of Financial 
Stability Policy and Research, (202) 452-3325; or Brent Lattin, 
Counsel, (202) 452-3367, Division of Consumer and Community Affairs, 
Board of Governors of the Federal Reserve System, 20th and C Streets, 
NW., Washington, DC 20551.
    FDIC: Beverlea S. Gardner, Special Assistant to the Chairman, (202) 
898-3640; Mark L. Handzlik, Counsel, (202) 898-3990; Phillip E. Sloan, 
Counsel, (703) 562-6137; or Petrina R. Dawson, Counsel, (703) 562-2688, 
Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
    Commission: Jay Knight, Attorney-Advisor in the Office of 
Rulemaking, or Katherine Hsu, Chief of the Office of Structured 
Finance, Division of Corporation Finance, at (202) 551-3753, U.S. 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-3628.
    FHFA: Patrick J. Lawler, Associate Director and Chief Economist, 
Patrick.Lawler@fhfa.gov, (202) 414-3746; Austin Kelly, Associate 
Director for Housing Finance Research, Austin.Kelly@fhfa.gov, (202) 
343-1336; Phillip Millman, Principal Capital Markets Specialist, 
Phillip.Millman@fhfa.gov, (202) 343-1507; or Thomas E. Joseph, Senior 
Attorney Advisor, Thomas.Joseph@fhfa.gov, (202) 414-3095; Federal 
Housing Finance Agency, Third Floor, 1700 G Street, NW., Washington, DC 
20552. The telephone number for the Telecommunications Device for the 
Hearing Impaired is (800) 877-8339.
    HUD: Robert C. Ryan, Deputy Assistant Secretary for Risk Management 
and Regulatory Affairs, Office of Housing, Department of Housing and 
Urban Development, 451 7th Street, SW., Room 9106, Washington, DC 
20410; telephone number 202-402-5216 (this is not a 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
II. General Definitions and Scope
    A. Asset-Backed Securities, Securitization Transaction and ABS 
Interests
    B. Securitizer, Sponsor, and Depositor
    C. Originator
III. General Risk Retention Requirement
    A. Minimum 5 Percent Risk Retention Required
    B. Permissible Forms of Risk Retention
    1. Vertical Risk Retention
    2. Horizontal Risk Retention
    3. L-Shaped Risk Retention
    4. Revolving Asset Master Trusts (Seller's Interest)
    5. Representative Sample
    6. Asset-Backed Commercial Paper Conduits
    7. Commercial Mortgage-Backed Securities
    8. Treatment of Government-Sponsored Enterprises
    9. Premium Capture Cash Reserve Account
    C. Allocation to the Originator
    D. Hedging, Transfer, and Financing Restrictions
IV. Qualified Residential Mortgages
    A. Overall Approach to Defining Qualified Residential Mortgages
    B. Exemption for QRMs
    C. Eligibility Criteria
    1. Eligible Loans, First Lien, No Subordinate Liens, Original 
Maturity and Written Application Requirements
    2. Borrower Credit History
    3. Payment Terms
    4. Loan-to-Value Ratio
    5. Down Payment
    6. Qualifying Appraisal
    7. Ability To Repay
    8. Points and Fees
    9. Assumability Prohibition
    D. Repurchase of Loans Subsequently Determined To Be Non-
Qualified After Closing
    E. Request for Comment on Possible Alternative Approach
V. Reduced Risk Retention Requirements for ABS Backed by Qualifying 
Commercial Real Estate, Commercial, or Automobile Loans
    A. Asset Classes
    B. ABS Collateralized Exclusively by Qualifying CRE Loans, 
Commercial Loans, or Automobile Loans
    C. Qualifying Commercial Loans
    1. Ability To Repay
    2. Risk Management and Monitoring Requirements
    D. Qualifying CRE Loans
    1. Ability To Repay
    2. Loan-to-Value Requirement
    3. Valuation of the Collateral
    4. Risk Management and Monitoring Requirements
    E. Qualifying Automobile Loans
    1. Ability to Repay
    2. Loan Terms
    3. Reviewing Credit History
    4. Loan-to-Value
    F. Buy-Back Requirements for ABS Issuances Collateralized by 
Qualifying Commercial, CRE or Automobile Loans
VI. General Exemptions
    A. Exemption for Federally Insured or Guaranteed Residential, 
Multifamily and Health Care Mortgage Assets
    B. Other Exemptions
    C. Exemption for Certain Resecuritization Transactions
    D. Additional Exemptions
    E. Safe Harbor for Certain Foreign-Related Transactions
VII. Solicitation of Comments on Use of Plain Language
VIII. Administrative Law Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Commission Economic Analysis
    D. Executive Order 12866 Determination
    E. OCC Unfunded Mandates Reform Act of 1995 Determination
    F. Commission: Small Business Regulatory Enforcement Fairness 
Act
    G. FHFA: Considerations of Differences Between the Federal Home 
Loan Banks and the Enterprises

I. Introduction

    The Agencies are requesting comment on proposed rules (proposal or 
proposed rules) to implement the requirements of section 941(b) of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act, or 
Dodd-Frank Act),\1\ which is codified as new section 15G of the 
Securities Exchange Act of 1934 (the Exchange Act).\2\ Section 15G of 
the Exchange Act, as added by section 941(b) of the Dodd-Frank Act, 
generally requires the Board, the FDIC, the OCC (collectively, referred 
to as the Federal banking agencies), the Commission, and, in the case 
of the securitization of any ``residential mortgage asset,'' together 
with HUD and FHFA, to jointly prescribe regulations that (i) require a 
securitizer to retain not less than five percent of the credit risk of 
any asset that the securitizer, through the issuance of an asset-backed 
security (ABS), transfers, sells, or conveys to a third party, and (ii) 
prohibit a securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to retain 
under section 15G and the Agencies' implementing rules.\3\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 15 U.S.C. 78o-11.
    \3\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).

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[[Page 24093]]

    Section 15G of the Exchange Act exempts certain types of 
securitization transactions from these risk retention requirements and 
authorizes the Agencies to exempt or establish a lower risk retention 
requirement for other types of securitization transactions. For 
example, section 15G specifically provides that a securitizer shall not 
be required to retain any part of the credit risk for an asset that is 
transferred, sold, or conveyed through the issuance of ABS by the 
securitizer, if all of the assets that collateralize the ABS are 
qualified residential mortgages (QRMs), as that term is jointly defined 
by the Agencies.\4\ In addition, section 15G states that the Agencies 
must permit a securitizer to retain less than five percent of the 
credit risk of commercial mortgages, commercial loans, and automobile 
loans that are transferred, sold, or conveyed through the issuance of 
ABS by the securitizer if the loans meet underwriting standards 
established by the Federal banking agencies.\5\
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    \4\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B).
    \5\ See id. at sec. 78o-11(c)(1)(B)(ii) and (2).
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    As shown in tables A, B, C, and D below, the securitization markets 
are an important source of credit to U.S. households and businesses and 
state and local governments.\6\
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    \6\ Data are through September 2010. All data from Asset Backed 
Alert except: CMBS data from Commercial Mortgage Alert, CLO data 
from Securities Industry and Financial Markets Association. The 
tables do not include any data on securities issued or guaranteed by 
the Federal National Mortgage Association or the Federal Home Loan 
Mortgage Corporation.
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BILLING CODE 4810-33-P

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[GRAPHIC] [TIFF OMITTED] TP29AP11.000

[[Page 24095]]

[GRAPHIC] [TIFF OMITTED] TP29AP11.001

BILLING CODE 4810-33-C

                                      Table D--Total U.S. Asset and Mortgage Backed Securitizations Issued per Year
                                                                  [Dollars in millions]
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                                                                                                                                              Total 2002
                                              2002      2003       2004        2005        2006        2007       2008      2009      2010       3Q2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Auto......................................    95,484    86,350      72,881     103,717      82,000      66,773    35,469    53,944    43,104     639,724
CLO.......................................    30,388    22,584      32,192      69,441     171,906     138,827    27,489     2,033  ........     494,860
CMBS......................................    89,900   107,354     136,986     245,883     305,714     319,863    33,583    38,750    27,297   1,305,329
Credit Cards..............................    73,004    67,385      51,188      62,916      72,518      94,470    61,628    46,581     6,149     535,839
Equipment.................................     7,062     9,022       6,288       9,030       8,404       6,066     3,014     7,240     5,010      61,137
Floorplan.................................     3,000     6,315      11,848      12,670      12,173       6,925     1,000     4,959     8,619      67,510
Other.....................................   135,384   196,769     330,161     444,137     516,175     165,515    19,872    10,652    24,936   1,843,601
RMBS......................................   287,916   396,288     503,911     724,115     723,257     641,808    28,612    48,082    39,830   3,393,819
Student Loan..............................    25,367    40,067      45,759      62,212      65,745   5,812,212    28,199    20,839    13,899     360,210
                                           -------------------------------------------------------------------------------------------------------------
    Total.................................   747,506   932,134   1,191,216   1,734,122   1,957,891   1,498,370   238,868   233,079   168,843  ..........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: 2010 Data are through the month of September.

    When properly structured, securitization provides economic benefits 
that lower the cost of credit to households and businesses.\7\ However, 
when incentives are not properly aligned and there is a lack of 
discipline in the origination process, securitization can result in 
harm to investors, consumers, financial institutions, and the financial 
system. During the financial crisis, securitization displayed 
significant vulnerabilities to informational and incentive problems 
among various parties involved in the process.\8\
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    \7\ Securitization 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 short-term bank deposits. 
Securitization also allows the structuring of securities with 
differing maturity and credit risk profiles that may appeal to a 
broad range of investors from a single pool of assets. Moreover, 
securitization that involves the transfer of credit risk allows 
financial institutions that primarily originate loans to particular 
classes of borrowers, or in particular geographic areas, to limit 
concentrated exposure to these idiosyncratic risks on their balance 
sheets. See generally Report to the Congress on Risk Retention, 
Board of Governors of the Federal Reserve System, at 8 (October 
2010), available at http://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf (Board Report).
    \8\ See Board Report at 8-9.
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    For example, as noted in the legislative history of section 15G, 
under the ``originate to distribute'' model, loans were made expressly 
to be sold into securitization pools, with lenders often not expecting 
to bear the credit risk of borrower default.\9\ In addition, 
participants in the securitization chain may be able to affect the 
value of the ABS in opaque ways, both before and after the sale of the 
securities, particularly if those assets are resecuritized into complex 
instruments

[[Page 24096]]

such as collateralized debt obligations (CDOs) and CDOs-squared.\10\ 
Moreover, some lenders using an ``originate-to-distribute'' business 
model loosened their underwriting standards knowing that the loans 
could be sold through a securitization and retained little or no 
continuing exposure to the quality of those assets.\11\
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    \9\ See S. Rep. No. 111-176, at 128 (2010).
    \10\ See id.
    \11\ See id.
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    The risk retention requirements added by section 15G are intended 
to help address problems in the securitization markets by requiring 
that securitizers, as a general matter, retain an economic interest in 
the credit risk of the assets they securitize. As indicated in the 
legislative history of section 15G, ``When securitizers retain a 
material amount of risk, they have `skin in the game,' aligning their 
economic interest with those of investors in asset-backed securities.'' 
\12\ By requiring that the securitizer retain a portion of the credit 
risk of the assets being securitized, section 15G provides securitizers 
an incentive to monitor and ensure the quality of the assets underlying 
a securitization transaction, and thereby helps align the interests of 
the securitizer with the interests of investors. Additionally, in 
circumstances where the assets collateralizing the ABS meet 
underwriting and other standards that should ensure the assets pose low 
credit risk, the statute provides or permits an exemption.\13\
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    \12\ See id. at 129.
    \13\ See 15 U.S.C. 78o-11(c)(1)(B)(ii), (e)(1)-(2).
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    The credit risk retention requirements of section 15G are an 
important part of the legislative and regulatory efforts to address 
weaknesses and failures in the securitization process and the 
securitization markets. Section 15G complements other parts of the 
Dodd-Frank Act intended to improve the securitization markets. These 
include, among others, provisions that strengthen the regulation and 
supervision of nationally recognized statistical rating agencies 
(NRSROs) and improve the transparency of credit ratings; \14\ provide 
for issuers of registered ABS offerings to perform a review of the 
assets underlying the ABS and disclose the nature of the review; \15\ 
and require issuers of ABS to disclose the history of the repurchase 
requests they received and repurchases they made related to their 
outstanding ABS.\16\
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    \14\ See, e.g., sections 932, 935, 936, 938, and 943 of the 
Dodd-Frank Act.
    \15\ See section 945 of the Dodd-Frank Act.
    \16\ See section 943 of the Dodd-Frank Act.
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    In developing the proposed rules, the Agencies have taken into 
account the diversity of assets that are securitized, the structures 
historically used in securitizations, and the manner in which 
securitizers may have retained exposure to the credit risk of the 
assets they securitize.\17\ As described in detail below, the proposed 
rules provide several options securitizers may choose from in meeting 
the risk retention requirements of section 15G, including, but not 
limited to, retention of a five percent ``vertical'' slice of each 
class of interests issued in the securitization or retention of a five 
percent ``horizontal'' first-loss interest in the securitization, as 
well as other risk retention options that take into account the manners 
in which risk retention often has occurred in credit card receivable 
and automobile loan and lease securitizations and in connection with 
the issuance of asset-backed commercial paper. The proposed rules also 
include a special ``premium capture'' mechanism designed to prevent a 
securitizer from structuring an ABS transaction in a manner that would 
allow the securitizer to effectively negate or reduce its retained 
economic exposure to the securitized assets by immediately monetizing 
the excess spread created by the securitization transaction.\18\ In 
designing these options and the proposed rules in general, the Agencies 
have sought to ensure that the amount of credit risk retained is 
meaningful--consistent with the purposes of section 15G--while reducing 
the potential for the proposed rules to negatively affect the 
availability and costs of credit to consumers and businesses.
---------------------------------------------------------------------------

    \17\ Both the language and legislative history of section 15G 
indicate that Congress expected the agencies to be mindful of the 
heterogeneity of securitization markets. See, e.g., 15 U.S.C. 78o-
11(c)(1)(E), (c)(2), (e); S. Rep. No. 111-76, at 130 (2010) (``The 
Committee believes that implementation of risk retention obligations 
should recognize the differences in securitization practices for 
various asset classes.'')
    \18\ ``Excess spread'' is the difference between the gross yield 
on the pool of securitized assets less the cost of financing those 
assets (weighted average coupon paid on the investor certificates), 
charge-offs, servicing costs, and any other trust expenses (such as 
insurance premiums, if any).
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    As required by section 15G, the proposed rules provide a complete 
exemption from the risk retention requirements for ABS that are 
collateralized solely by QRMs and establish the terms and conditions 
under which a residential mortgage would qualify as a QRM. In 
developing the proposed definition of a QRM, the Agencies carefully 
considered the terms and purposes of section 15G, public input, and the 
potential impact of a broad or narrow definition of QRMs on the housing 
and housing finance markets.
    As discussed in greater detail in Part V of this Supplementary 
Information, the proposed rules would generally prohibit QRMs from 
having product features that contributed significantly to the high 
levels of delinquencies and foreclosures since 2007--such as terms 
permitting negative amortization, interest-only payments, or 
significant interest rate increases--and also would establish 
underwriting standards designed to ensure that QRMs are of very high 
credit quality consistent with their exemption from risk retention 
requirements. These underwriting standards include, among other things, 
maximum front-end and back-end debt-to-income ratios of 28 percent and 
36 percent, respectively; \19\ a maximum loan-to-value (LTV) ratio of 
80 percent in the case of a purchase transaction (with a lesser 
combined LTV permitted for refinance transactions); a 20 percent down 
payment requirement in the case of a purchase transaction; and credit 
history restrictions.
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    \19\ A front-end debt-to-income ratio measures how much of the 
borrower's gross (pretax) monthly income is represented by the 
borrower's required payment on the first-lien mortgage, including 
real estate taxes and insurance. A back-end debt-to-income ratio 
measures how much of a borrower's gross (pretax) monthly income 
would go toward monthly mortgage and nonmortgage debt service 
obligations.
---------------------------------------------------------------------------

    The proposed rules also would not require a securitizer to retain 
any portion of the credit risk associated with a securitization 
transaction if the ABS issued are exclusively collateralized by 
commercial loans, commercial mortgages, or automobile loans that meet 
underwriting standards included in the proposed rules for the 
individual asset class. As for QRMs, these underwriting standards are 
designed to be robust and ensure that the loans backing the ABS are of 
very low credit risk. In this Supplementary Information, the Agencies 
refer to these assets (including QRMs) as ``qualified assets.''
    The Agencies recognize that many prudently underwritten residential 
and mortgage loans, commercial loans, and automobile loans may not 
satisfy all the underwriting and other criteria in the proposed rules 
for qualified assets. Securitizers of ABS backed by such prudently 
underwritten loans would, as a general matter, be required to retain 
credit risk under the rule. However, as noted above, the Agencies have 
sought to structure the proposed risk retention requirements in a 
flexible manner that would allow the securitization markets for non-
qualified assets to function in a

[[Page 24097]]

manner that both facilitates the flow of credit to consumers and 
businesses on economically viable terms and is consistent with the 
protection of investors.
    Section 15G allocates the authority for writing rules to implement 
its provisions among the Agencies in various ways. As a general matter, 
the Agencies collectively are responsible for adopting joint rules to 
implement the risk retention requirements of section 15G for 
securitizations that are backed by residential mortgage assets and for 
defining what constitutes a QRM for purposes of the exemption for QRM-
backed ABS.\20\ The Federal banking agencies and the Commission, 
however, are responsible for adopting joint rules that implement 
section 15G for securitizations backed by all other types of 
assets,\21\ and also are the agencies authorized to adopt rules in 
several specific areas under section 15G.\22\ In addition, the Federal 
banking agencies are responsible for establishing, by rule, the 
underwriting standards for non-QRM residential mortgages, commercial 
mortgages, commercial loans and automobile loans that would qualify ABS 
backed by these types of loans for a less than five percent risk 
retention requirement.\23\ Accordingly, when used in this proposal, the 
term ``Agencies'' shall be deemed to refer to the appropriate Agencies 
that have rulewriting authority with respect to the asset class, 
securitization transaction, or other matter discussed. The Secretary of 
the Treasury, as Chairperson of the Financial Stability Oversight 
Council, coordinated the development of these joint proposed rules in 
accordance with the requirements of section 15G.\24\
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    \20\ See id. at sec. 78o-11(b)(2), (e)(4)(A) and (B).
    \21\ See id. at sec. 78o-11(b)(1).
    \22\ See, e.g. id. at sec. 78o-11(b)(1)(E) (relating to the risk 
retention requirements for ABS collateralized by commercial 
mortgages); (b)(1)(G)(ii) (relating to additional exemptions for 
assets issued or guaranteed by the United States or an agency of the 
United States); (d) (relating to the allocation of risk retention 
obligations between a securitizer and an originator); and (e)(1) 
(relating to additional exemptions, exceptions or adjustments for 
classes of institutions or assets).
    \23\ See id. at sec. 78o-11(b)(2)(B). Therefore, pursuant to 
section 15G, only the Federal banking agencies are proposing the 
underwriting definitions in Sec.  --.16 (except the asset class 
definitions of automobile loan, commercial loan, and commercial real 
estate loan, which are being proposed by the Federal banking 
agencies and the Commission), and the underwriting standards in 
Sec. Sec.  --.18(b)(1)-(6), --.19(b)(1)-(9), and --.20(b)(1)-(8) of 
the proposed rules. At the final rule stage, FHFA proposes to adopt 
only those provisions of the common rules that address the types of 
asset securitization transactions in which its regulated entities 
could be authorized to engage under existing law. The remaining 
provisions, such as those addressing underwriting standards for non-
residential commercial loans and auto loans, would be designated as 
[reserved], and the provisions adopted would be numbered and 
otherwise designated so as to correspond to the equivalent 
provisions appearing in the regulations of the other Agencies.
    \24\ See id. at 78o-11(h).
---------------------------------------------------------------------------

    For ease of reference, the proposed rules of the Agencies are 
referenced using a common designation of Sec.  --.1 to Sec.  --.23 
(excluding the title and part designations for each Agency). With the 
exception of HUD, each Agency will codify the rules, when adopted in 
final form, within each of their respective titles of the Code of 
Federal Regulations.\25\ Section --.1 of each Agency's proposed rules 
identifies the entities or transactions that would be subject to such 
Agency's rules.\26\
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    \25\ Specifically, the agencies propose to codify the rules as 
follows: 12 CFR part 43 (OCC); 12 CFR part 244 (Regulation RR) 
(Board); 12 CFR part 373 (FDIC); 17 CFR part 246 (Commission); 12 
CFR part 1234 (FHFA). As required by section 15G, HUD has jointly 
prescribed the proposed rules for a securitization that is backed by 
any residential mortgage asset and for purposes of defining a 
qualified residential mortgage. HUD's codification in 24 CFR part 
267 indicates that the proposed rules include exceptions and 
exemptions in Subpart D of each of these rules for certain 
transactions involving programs and entities under the jurisdiction 
of HUD.
    \26\ The joint proposed rules being adopted by the Agencies 
would apply to all sponsors that fall within the scope of 15G, 
including state and federal savings associations and savings and 
loan holding companies. These entities are currently regulated and 
supervised by the Office of Thrift Supervision (OTS), which is not 
among the Federal banking agencies with rulemaking authority under 
section 15G. Authority of the OTS under the Home Owners' Loan Act 
(12 U.S.C. 1461 et seq.) with respect to such entities will transfer 
from the OTS to the Board, FDIC, and OCC on the transfer date 
provided in section 311 of the Dodd-Frank Act. This transfer will 
take place well before the effective date of the Federal banking 
agencies' final rules under section 15G. Accordingly, the final 
rules issued by the appropriate Federal banking agency would include 
the relevant set of these entities in the agency's Purpose, 
Authority, and Scope section (Sec.  --.1).
---------------------------------------------------------------------------

    In light of the joint nature of the Agencies' rulewriting authority 
under section 15G, the appropriate Agencies will jointly approve any 
written interpretations, written responses to requests for no-action 
letters and legal opinions, or other written interpretive guidance 
concerning the scope or terms of section 15G and the final rules issued 
thereunder that are intended to be relied on by the public 
generally.\27\ Similarly, the appropriate Agencies will jointly approve 
any exemptions, exceptions, or adjustments to the final rules.\28\ For 
these purposes, the phrase ``appropriate Agencies'' refers to the 
Agencies with rulewriting authority for the asset class, securitization 
transaction, or other matter addressed by the interpretation, guidance, 
exemption, exceptions, or adjustments. The Agencies expect to 
coordinate with each other to facilitate the processing, review and 
action on requests for such written interpretations or guidance, or 
additional exemptions, exceptions or adjustments.
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    \27\ These items would not include staff comment letters and 
informal written guidance provided to specific institutions or 
matters raised in a report of examination or inspection of a 
supervised institution, which are not intended to be relied on by 
the public generally.
    \28\ See 15 U.S.C. 78o-11(c)(1)(G)(i) and (e)(1); proposed rules 
at Sec.  --.22.
---------------------------------------------------------------------------

II. General Definitions and Scope

    Section --.2 of the proposed rules defines terms used throughout 
the proposed rules. Certain of these definitions are discussed in this 
part of the Supplementary Information. Other terms are discussed 
together with the section of the proposed rules where they are used. 
For example, certain definitions that relate solely to the exemptions 
for securitizations based on QRMs and certain qualifying commercial, 
commercial real estate, and automobile loans, are contained in, and are 
discussed in the context of, those sections (see subpart C of the 
proposed rules).

A. Asset-Backed Securities, Securitization Transaction and ABS 
Interests

    The proposed risk retention rules would apply to securitizers in 
securitizations that involve the issuance of ``asset-backed 
securities'' as defined in section 3(a)(77) of the Exchange Act, which 
also was added to the Exchange Act by section 941 of the Dodd-Frank 
Act.\29\ Section 3(a)(77) of the Exchange Act generally defines an 
``asset-backed security'' to mean ``a fixed-income or other security 
collateralized by any type of self-liquidating financial asset 
(including a loan, lease, mortgage, or other secured or unsecured 
receivable) that allows the holder of the security to receive payments 
that depend primarily on cash flow from the asset.'' \30\ The proposed 
rules incorporate by reference this definition of asset-backed security 
from the Exchange Act.\31\ Consistent with this definition, the 
proposed rules also define the term ``asset'' to mean a self-
liquidating financial asset, including loans, leases, or other

[[Page 24098]]

receivables.\32\ The proposal defines the term ``securitized asset'' to 
mean an asset that is transferred, sold, or conveyed to an issuing 
entity and that collateralizes the ABS interests issued by the issuing 
entity.\33\
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    \29\ See section 941(a) of the Dodd-Frank Act.
    \30\ See 15 U.S.C. Sec.  78c(a)(77). The term also (i) includes 
any other security that the Commission, by rule, determines to be an 
asset-backed security for purposes of section 15G of the Exchange 
Act; and (ii) does not include a security that is issued by a 
finance subsidiary and held by the parent company of the finance 
subsidiary or a company that is controlled by such parent company 
provided that none of the securities issued by the finance 
subsidiary are held by an entity that is not controlled by the 
parent company.
    \31\ See proposed rules at Sec.  --.2 (definition of ``asset-
backed security'').
    \32\ See proposed rules at Sec.  --.2 (definition of ``asset''). 
Because the term ``asset-backed security'' for purposes of section 
15G includes only those securities that are collateralized by self-
liquidating financial assets, ``synthetic'' securitizations are not 
within the scope of the proposed rules.
    \33\ See proposed rules at Sec.  --.2. Assets or other property 
collateralize an issuance of ABS interests if the assets or property 
serves as collateral for such issuance. Assets or other property 
serve as collateral for an ABS issuance if they provide the cash 
flow for the ABS interests issued by the issuing entity (regardless 
of the legal structure of the issuance), and may include security 
interests in assets or other property of the issuing entity, 
fractional undivided property interests in the assets or other 
property of the issuing entity, or any other property interest in 
such assets or other property. The term collateral includes leases 
that may convert to cash proceeds from the disposition of the 
physical property underlying the assets. The cash flow from an asset 
includes any proceeds of a foreclosure on, or sale of, the asset. 
See proposed rules at Sec.  --.2 (definition of ``collateral'' for 
an ABS transaction).
---------------------------------------------------------------------------

    Section 15G does not appear to distinguish between transactions 
that are registered with the Commission under the Securities Act of 
1933 (the ``Securities Act'') and those that are exempt from 
registration under the Securities Act. For example, section 15G 
provides authority for exempting from the risk retention requirements 
certain securities that are exempt from registration under the 
Securities Act.\34\ In addition, the statutory definition of asset-
backed security is broader than the definition of asset-backed security 
in the Commission's Regulation AB,\35\ which governs the disclosure 
requirements for ABS offerings that are registered under the Securities 
Act.\36\ The definition of asset-backed security for purposes of 
section 15G also includes securities that are typically sold in 
transactions that are exempt from registration under the Securities 
Act, such as CDOs, as well as securities issued or guaranteed by a 
government sponsored entity (GSE), such as the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac). In light of the foregoing, the proposed risk 
retention requirements would apply to securitizers of ABS offerings 
whether or not the offering is registered with the Commission under the 
Securities Act.
---------------------------------------------------------------------------

    \34\ See, e.g., 15 U.S.C. 78o-11(c)(1)(G) (authorizing 
exemptions from the risk retention requirements certain transactions 
that are typically exempt from Securities Act registration); 15 
U.S.C. 78o-11(e)(3)(B)(providing for certain exemptions for certain 
assets, or securitizations based on assets, which are insured or 
guaranteed by the United States).
    \35\ 17 CFR 229.1100 through 17 CFR 229.1123.
    \36\ See 15 U.S.C. 78b.
---------------------------------------------------------------------------

    As discussed further below, the proposed rules generally apply the 
risk retention requirements to the securitizer in each ``securitization 
transaction,'' which is defined as a transaction involving the offer 
and sale of ABS by an issuing entity.\37\ Applying the risk retention 
requirements to the securitizer of each issuance of ABS ensures that 
the requirements apply in the aggregate to all ABS issued by an issuing 
entity, including an issuing entity--such as a master trust--that 
issues ABS periodically.
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    \37\ An ``issuing entity'' is defined to mean, with respect to a 
securitization transaction, the trust or other entity created at the 
direction of the sponsor that owns or holds the pool of assets to be 
securitized, and in whose name the ABS are issued. See proposed 
rules at Sec.  --.2.
---------------------------------------------------------------------------

    The proposed rules use the term ``ABS interest'' to refer to all 
types of interests or obligations issued by an issuing entity, whether 
or not in certificated form, including a security, obligation, 
beneficial interest or residual interest, the payments on which are 
primarily dependent on the cash flows on the collateral held by the 
issuing entity. The term, however, does not include common or preferred 
stock, limited liability interests, partnership interests, trust 
certificates, or similar interests in an issuing entity that are issued 
primarily to evidence ownership of the issuing entity, and the 
payments, if any, on which are not primarily dependent on the cash 
flows of the collateral held by the issuing entity.\38\
---------------------------------------------------------------------------

    \38\ See proposed rules at Sec.  --.2. In securitization 
transactions where ABS interests are issued and some or all of the 
cash proceeds of the transaction are retained by the issuing entity 
to purchase, during a limited time period after the closing of the 
securitization, self-liquidating financial assets to support the 
securitization, the terms ``asset,'' ``collateral,'' and 
``securitized assets'' should be construed to include such cash 
proceeds as well as the assets purchased with such proceeds and any 
assets transferred to the issuing entity on the closing date. 
Accordingly, the terms ``asset-backed security'' and ``ABS 
interest'' should also be construed to include securities and other 
interests backed by such proceeds. Such securitization transactions 
are commonly referred to as including a ``pre-funding account.''
---------------------------------------------------------------------------

B. Securitizer, Sponsor, and Depositor

    Section 15G generally provides for the Agencies to apply the risk 
retention requirements of the statute to a ``securitizer'' of ABS. 
Section 15G(a)(3) in turn provides that the term ``securitizer'' with 
respect to an issuance of ABS includes both ``(A) an issuer of an 
asset-backed security; or (B) a person who organizes and initiates an 
asset-backed securities transaction by selling or transferring assets, 
either directly or indirectly, including through an affiliate, to the 
issuer.''\39\
---------------------------------------------------------------------------

    \39\ See 15 U.S.C. 78o-11(a)(3).
---------------------------------------------------------------------------

    The Agencies note that the second prong of this definition (i.e., 
the person who organizes and initiates the ABS transaction by selling 
or transferring assets, either directly or indirectly, including 
through an affiliate, to the issuer) is substantially identical to the 
definition of a ``sponsor'' of a securitization transaction in the 
Commission's Regulation AB governing disclosures for ABS offerings 
registered under the Securities Act.\40\ In light of this, the proposed 
rules provide that a ``sponsor'' of an ABS transaction is a 
``securitizer'' for the purposes of section 15G, and define the term 
``sponsor'' in a manner consistent with the definition of that term in 
the Commission's Regulation AB.\41\
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    \40\ See 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.'')
    \41\ See proposed rules at Sec.  ----.2. Consistent with the 
Commission's definition of sponsor, the Agencies interpret the term 
``issuer'' as used in section 15G(a)(3)(B) to refer to the issuing 
entity that issues the ABS.
---------------------------------------------------------------------------

    The proposal would, as a general matter, require that a sponsor of 
a securitization transaction retain the credit risk of the securitized 
assets in the form and amount required by the proposed rules. The 
Agencies believe that proposing to apply the risk retention requirement 
to the sponsor of the ABS--as permitted by section 15G--is appropriate 
in light of the active and direct role that a sponsor typically has in 
arranging a securitization transaction and selecting the assets to be 
securitized.\42\ In circumstances where two or more entities each meet 
the definition of sponsor for a single securitization transaction, the 
proposed rules would require that one of the sponsors retain a portion 
of the credit risk of the underlying assets in accordance with the 
requirements of this proposal.\43\ Each sponsor in the transaction, 
however, would remain responsible for ensuring that at least one

[[Page 24099]]

sponsor complied with the requirements.
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    \42\ For example, in the context of collateralized loan 
obligations (CLOs), the CLO manager generally acts as the sponsor by 
selecting the commercial loans to be purchased by an agent bank for 
inclusion in the CLO collateral pool, and then manages the 
securitized assets once deposited in the CLO structure.
    \43\ See proposed rules at Sec.  --.3(a). Because the term 
sponsor is used throughout the proposed rules, the term is 
separately defined in Sec.  --.2 of the proposed rules. The 
definition of ``sponsor'' in Sec.  --.2 is identical to the sponsor 
part of the proposed rules' definition of a ``securitizer.''
---------------------------------------------------------------------------

    As noted above, the definition of ``securitizer'' in section 
15G(a)(3)(A) includes the ``issuer of an asset-backed security.'' The 
term ``issuer'' when used in the federal securities laws may have 
different meanings depending on the context in which it is used. For 
example, for several purposes under the federal securities laws, 
including the Securities Act \44\ and the Exchange Act \45\ and the 
rules promulgated under these Acts,\46\ the term ``issuer'' when used 
with respect to an ABS transaction is defined to mean the entity--the 
depositor--that deposits the assets that collateralize the ABS with the 
issuing entity. The Agencies interpret the reference in section 
15G(a)(3)(A) to an ``issuer of an asset-backed security'' as referring 
to the ``depositor'' of the ABS, consistent with how that term has been 
defined and used under the federal securities laws in connection with 
ABS.\47\ As noted above, the proposed rules generally would apply the 
risk retention requirements of section 15G to a sponsor of a 
securitization transaction (and not the depositor for the 
securitization transaction).
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    \44\ Section 2(a)(4) of Securities Act (15 U.S.C. 77b(a)(4)) 
defines the term ``issuer'' in part to include every person who 
issues or proposes to issue any security, except that with respect 
to certificates of deposit, voting-trust certificates, or collateral 
trust certificates, or with respect to certificates of interest or 
shares in an unincorporated investment trust not having a board of 
directors (or persons performing similar functions), the term issuer 
means the person or persons performing the acts and assuming the 
duties of depositor or manager pursuant to the provisions of the 
trust or other agreement or instrument under which the securities 
are issued.
    \45\ See Exchange Act sec. 3(a)(8) (15 U.S.C. 78c(a)(8) 
(defining ``issuer'' under the Exchange Act).
    \46\ See, e.g., Securities Act Rule 191 (17 CFR 230.191) and 
Exchange Act Rule 3b-19 (17 CFR 240.3b-19).
    \47\ For asset-backed securities transactions where there is not 
an intermediate transfer of the assets from the sponsor to the 
issuing entity, the term depositor refers to the sponsor. For asset-
backed securities transactions where the person transferring or 
selling the pool assets is itself a trust (such as in an issuance 
trust structure), the depositor of the issuing entity is the 
depositor of that trust. See proposed rules at Sec.  --.2. 
Securities Act Rule 191 and Exchange Act Rule 3b-19 also note that 
the person acting as the depositor in its capacity as depositor to 
the issuing entity is a different ``issuer'' from that person in 
respect of its own securities in order to make clear--for example--
that any applicable exemptions from Securities Act registration that 
person may have with respect to its own securities are not 
applicable to the asset-backed securities. That distinction does not 
appear relevant here.
---------------------------------------------------------------------------

C. Originator

    As permitted by section 15G, Sec.  --.13 of the proposed rules 
permit a sponsor to allocate its risk retention obligations to the 
originator(s) of the securitized assets in certain circumstances and 
subject to certain conditions. The proposed rules define the term 
originator in the same manner as section 15G, that is, as a person who, 
through the extension of credit or otherwise, creates a financial asset 
that collateralizes an asset-backed security, and sells the asset 
directly or indirectly to a securitizer (i.e., a sponsor or depositor). 
Because this definition refers to the person that ``creates'' a loan or 
other receivable, only the original creditor under a loan or 
receivable--and not a subsequent purchaser or transferee--is an 
``originator'' of the loan or receivable for purposes of section 
15G.\48\
---------------------------------------------------------------------------

    \48\ See 15 U.S.C. 78o-11(a)(3).
---------------------------------------------------------------------------

Request for Comment
    1. Do the proposed rules appropriately implement the terms 
``securitizer'' and ``originator'' as used in section 15G and 
consistent with its purpose?
    2. Are there other terms, beyond those defined in Sec.  --.2 of the 
proposed rules, that the Agencies should define?
    3(a). As a general matter, is it appropriate to impose the risk 
retention requirements on the sponsor of an ABS transaction, rather 
than the depositor for the transaction? 3(b). If not, why?
    4(a). With respect to the terms defined, would you define any of 
the terms differently? 4(b). If so, which ones would you define 
differently, and how would you define them? For example, credit risk is 
defined to mean, among other things, the risk of loss that could result 
from failure of the issuing entity to make required payments or from 
bankruptcy of the issuing entity.
    5. Is it appropriate for the definition of credit risk to include 
risk of non-payment by the issuing entity unrelated to the assets, such 
as risk that the issuing entity is not bankruptcy remote?
    6. Are all of the definitions in Sec.  --.2 of the proposed rules 
necessary? For instance, is a definition of ``asset'' necessary?
    7(a). As proposed, where two or more entities each meet the 
definition of sponsor for a single securitization transaction, the 
proposed rules would require that one of the sponsors retain a portion 
of the credit risk of the underlying assets in accordance with the 
requirements of the rules. Is this the best approach to take when there 
are multiple sponsors in a single securitization transaction? 7(b). If 
not, what is a better approach and why? For example, should all 
sponsors be required to retain credit risk in some proportional amount, 
should the sponsor selling the greatest number of assets or with a 
particular attribute be required to retain the risk, or should the 
proposed rules only allow a sponsor that has transferred a minimum 
percentage (e.g., 10 percent, 20 percent, or 50 percent) of the total 
assets into the trust to retain the risk?
    8(a). Should the proposed rules allow for allocation of risk to a 
sponsor (among multiple sponsors in a single transaction) similar to 
the proposed rules' parameters for allocation of risk among multiple 
originators? 8(b). Why or why not?
    9. A securitization transaction is proposed to be defined as a 
transaction involving the offer and sale of asset-backed securities by 
an issuing entity. In a single securitization transaction, there may be 
intermediate steps; however, the proposed rules would only require the 
sponsor to retain risk for the securitization transaction as a 
whole.\49\ Should the rules provide additional guidance for when a 
transaction with intermediate steps constitutes one or more 
securitization transactions that each should be subject to the rules' 
risk retention requirements?
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    \49\ For example, in auto lease securitizations, the auto leases 
and car titles are originated in the name of a separate trust to 
avoid the administrative expenses of retitling the physical property 
underlying the leases. The separate trust will issue to the issuing 
entity for the asset-backed security a collateral certificate, often 
called a ``special unit of beneficial interest'' (SUBI). The issuing 
entity will then issue the asset-backed securities backed by the 
SUBI certificate.
---------------------------------------------------------------------------

III. General Risk Retention Requirement

A. Minimum 5 Percent Risk Retention Required

    Section 15G of the Exchange Act generally requires that the 
Agencies jointly prescribe regulations that require a securitizer to 
retain not less than five percent of the credit risk for any asset that 
the securitizer, through the issuance of an ABS, transfers, sells, or 
conveys to a third party, unless an exemption from the risk retention 
requirements for the securities or transaction is otherwise available 
(e.g., if the ABS is collateralized exclusively by QRMs). Consistent 
with the statute, the proposed rules generally would require that a 
sponsor retain an economic interest equal to at least five percent of 
the aggregate credit risk of the assets collateralizing an issuance of 
ABS (the ``base'' risk retention requirement).\50\

[[Page 24100]]

This exposure should provide a sponsor with an incentive to monitor and 
control the quality of the assets being securitized and help align the 
interests of the sponsor with those of investors in the ABS. As 
discussed in Part III.D of this Supplementary Information, the sponsor 
also would be prohibited from hedging or otherwise transferring this 
retained interest.
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    \50\ See proposed rules at Sec.  --.3 through Sec.  --.11. We 
note that the proposed rules, in some instances, permit a sponsor to 
allow another person to retain the required amount of credit risk 
(e.g., originators, third-party purchasers in commercial mortgage-
backed securities transactions, and originator-sellers in asset-
backed commercial paper conduit securitizations). However, in such 
circumstances the proposal includes limitations and conditions 
designed to ensure that the purposes of section 15G continue to be 
fulfilled. Further, we note that even when a sponsor would be 
permitted to allow another person to retain risk, the sponsor would 
still remain responsible under the rule for compliance with the risk 
retention requirements.
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    As required by section 15G, the proposed risk retention 
requirements would apply to all ABS transactions that are within the 
scope of section 15G, regardless of whether the sponsor is an insured 
depository institution, a bank holding company or subsidiary thereof, a 
registered broker-dealer, or other type of federally supervised 
financial institution. Thus, for example, it would apply to 
securitization transactions by any nonbank entity that is not an 
insured depository institution (such as an independent mortgage firm), 
as well as by Fannie Mae and Freddie Mac.
    The Agencies note that the five percent risk retention requirement 
established by the proposed rules would be a regulatory minimum. The 
sponsor, originator, or other party to a securitization may retain, or 
be required to retain, additional exposure to the credit risk of assets 
that the sponsor, originator, or other party helps securitize beyond 
that required by the proposed rules, either on its own initiative or in 
response to the demands of private market participants. Moreover, the 
proposed rules would require that a sponsor, in certain circumstances, 
fund a premium capture cash reserve account in connection with a 
securitization transaction (see Part III.B.9 of this Supplementary 
Information). Any amount a sponsor might be required to place in a 
premium capture cash reserve account would be in addition to the five 
percent ``base'' risk retention requirement of the proposed rules.
Request for Comment
    10. The Agencies request comment on whether the minimum five 
percent risk retention requirement established by the proposed rules 
for non-exempt ABS transactions is appropriate, or whether a higher 
risk retention requirement should be established for all non-exempt ABS 
transactions or for any particular classes or types of non-exempt ABS.
    11. If a higher minimum requirement should be established, what 
minimum should be established and what factors should the Agencies take 
into account in determining that higher minimum? For example, should 
the amount of credit risk be based on expected losses, or a market-
based test based on the interest rate spread relative to a benchmark 
index?
    12(a). Would the minimum five percent risk retention requirement, 
as proposed to be implemented, have a significant adverse effect on 
liquidity or pricing in the securitization markets for certain types of 
assets (such as, for example, prudently underwritten residential 
mortgage loans that do not satisfy all of the requirements to be a 
QRM)? 12(b). If so, what markets would be adversely affected and how? 
What adjustments to the proposed rules (e.g., the minimum risk 
retention amount, the manner in which credit exposure is measured for 
purposes of applying the risk retention requirement, or the form of 
risk retention) could be made to the proposed rules to address these 
concerns in a manner consistent with the purposes of section 15G? 
Please provide details and supporting data.

B. Permissible Forms of Risk Retention

    As recognized in recent studies and reports on securitization and 
risk retention that have examined historical market practices, there 
are several ways in which a sponsor or other entity may have retained 
exposure to the credit risk of securitized assets.\51\ These include 
(i) a ``vertical'' slice of the ABS interests, whereby the sponsor or 
other entity retains a specified pro rata piece of every class of 
interests issued in the transaction; (ii) a ``horizontal'' first-loss 
position, whereby the sponsor or other entity retains a subordinate 
interest in the issuing entity that bears losses on the assets before 
any other classes of interests; (iii) a ``seller's interest'' in 
securitizations structured using a master trust collateralized by 
revolving assets whereby the sponsor or other entity holds a separate 
interest that is pari passu with the investors' interest in the pool of 
receivables (unless and until the occurrence of an early amortization 
event); or (iv) a representative sample, whereby the sponsor retains a 
representative sample of the assets to be securitized that exposes the 
sponsor to credit risk that is equivalent to that of the securitized 
assets. These examples are not exclusive.
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    \51\ See Board Report; see also Macroeconomic Effects of Risk 
Retention Requirements, Chairman of the Financial Stability 
Oversight Counsel (January 2011), available at http://www.treasury.gov/initiatives/wsr/Documents/Section 946 Risk 
Retention Study (FINAL).pdf.
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    The various forms of risk retention have developed, in part, due to 
the diversity of assets that are securitized and the structures 
commonly used in securitizing different types of assets. For example, 
due to the revolving nature of credit card accounts and the fact that 
multiple series of ABS collateralized by credit card receivables 
typically are issued using a single master trust structure, sponsors of 
ABS transactions collateralized by credit card receivables often have 
maintained exposure to the credit risk of the underlying loans through 
use of a seller's interest. On the other hand, sponsors of ABS backed 
by automobile loans where the originator of the loan is often a finance 
company affiliated with the sponsor will often retain a portion of the 
loans that would ordinarily be securitized, thus providing the sponsor 
some continuing exposure to the credit risk of those loans. In 
connection with the securitization of commercial mortgage-backed 
securities (``CMBS''), a form of horizontal risk retention often has 
been employed, with the horizontal first-loss position being initially 
held by a third-party purchaser that specifically negotiates for the 
purchase of the first-loss position and conducts its own credit 
analysis of each commercial loan backing the CMBS.\52\ Sponsors across 
a wide range of asset classes may initially hold a horizontal piece of 
the securitization (such as a residual interest). Different forms of 
risk retention also may have different accounting implications for a 
sponsor or other entity.\53\ Historically, whether or

[[Page 24101]]

how a sponsor retained exposure to the credit risk of the assets it 
securitized was determined by a variety of factors including the rating 
requirements of the NRSROs, investor preferences or demands, accounting 
considerations, and whether there was a market for the type of interest 
that might ordinarily be retained (at least initially by the sponsor).
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    \52\ Section 15G(c)(1)(E) allows the Federal banking agencies 
and the Commission to determine that with respect to CMBS, a form of 
retention that satisfies the requirements includes retention of a 
first-loss position by a third-party purchaser that meets certain 
criteria. See 15 U.S.C. 78o-11(c)(1)(E).
    \53\ The determination whether a legal entity established to 
issue ABS must be included in the consolidated financial statements 
of the sponsor or another participant in the securitization chain is 
primarily addressed by the following generally accepted accounting 
principles issued by the Financial Accounting Standards Board 
(FASB): Accounting Standards Codification Topic 860, Transfers and 
Servicing (ASC 860, commonly called FAS 166); and FASB Accounting 
Standards Codification Topic 810, Consolidation (ASC 810, commonly 
called FAS 167). ASC 860 addresses whether securitizations and other 
transfers of financial assets are treated as sales or financings. 
ASC 810 addresses whether legal entities often used in 
securitization and other structured finance transactions should be 
included in the consolidated financial statements of any one of the 
parties involved in the transaction. Together, this guidance 
determines the extent to which an originator, sponsor, or another 
company is required to maintain securitized assets and corresponding 
liabilities on their balance sheets.
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    Section 15G expressly provides the Agencies the authority to 
determine the permissible forms through which the required amount of 
risk retention must be held.\54\ Consistent with this flexibility, 
Subpart B of the proposed rules would provide sponsors with multiple 
options to satisfy the risk retention requirements of section 15G. The 
options in the proposed rules are designed to take into account the 
heterogeneity of securitization markets and practices, and to reduce 
the potential for the proposed rules to negatively affect the 
availability and costs of credit to consumers and businesses. However, 
importantly, each of the permitted forms of risk retention included in 
the proposed rules is subject to terms and conditions that are intended 
to help ensure that the sponsor (or other eligible entity) retains an 
economic exposure equivalent to at least five percent of the credit 
risk of the securitized assets. Thus, the forms of risk retention would 
help to ensure that the purposes of section 15G are fulfilled. In 
addition, as discussed further in Part III.D of this Supplementary 
Information below, the proposed rules would prohibit a sponsor from 
transferring, selling or hedging the risk that the sponsor is required 
to retain, thereby preventing sponsors from circumventing the 
requirements of the rules by selling or transferring the risk after the 
securitization transaction has been completed. The proposed rules also 
include disclosure requirements that are an integral part of and 
specifically tailored to each of the permissible forms of risk 
retention. The disclosure requirements are integral to the proposed 
rules because they would provide investors with material information 
concerning the sponsor's retained interests in a securitization 
transaction, such as the amount and form of interest retained by 
sponsors, and the assumptions used in determining the aggregate value 
of ABS to be issued (which generally affects the amount of risk 
required to be retained). Further, the disclosures are also integral to 
the rule because they would provide investors and the Agencies with an 
efficient mechanism to monitor compliance with the risk retention 
requirements of the proposed rules.\55\
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    \54\ See 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.'').
    \55\ The Agencies note that a variation of the vertical, 
horizontal, seller's interest and representative sample options 
described below are forms of eligible risk retention in the proposed 
European Union capital requirement directive relating to 
securitizations. See ``Call for Technical Advice on the 
Effectiveness of a Minimum Retention Requirement for 
Securitizations,'' Committee of European Bank Supervisors (October 
30, 2009) (CEBS proposal).
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Request for Comment
    13. Is the proposed menu of options approach to risk retention, 
which would allow a sponsor to choose the form of risk retention 
(subject to all applicable terms and conditions), appropriate?
    14(a). Should the Agencies mandate that sponsors use a particular 
form of risk retention (e.g., a vertical slice or a horizontal slice) 
for all or specific types of asset classes or specific types of 
transactions? 14(b). If so, which forms should be required for with 
which asset classes and why?
    15. Does the proposed menu approach achieve the objectives of the 
statute to provide securitizers an incentive to monitor and control the 
underwriting quality of securitized assets and help align incentives 
among originators, sponsors, and investors?
    16. Is each of the proposed forms of risk retention appropriate? In 
particular, the Agencies seek comment on the potential effectiveness of 
the proposed forms of risk retention in achieving the purposes of 
section 15G, their potential effect on securitization markets, and any 
operational or other problems these forms may present.
    17. Are there any kinds of securitizations for which a particular 
form of risk retention is not appropriate?
    18. How effective would each of the proposed risk retention options 
be in creating incentives to monitor and control the quality of assets 
that are securitized and in aligning the interests among the parties in 
a securitization transaction?
    19(a). Are there other forms of risk retention that the Agencies 
should permit? 19(b). If so, please provide a detailed description of 
the form(s), how such form(s) could be implemented, and whether such 
form(s) would be appropriate for all, or just certain, classes of 
assets.
    20. Should the proposed rules require disclosure as to why the 
sponsor chose a particular risk retention option?
    21(a). Are there ways that sponsors could avoid the risk retention 
requirements in an effort to reduce or eliminate their risk retention 
requirements? 21(b). If so, how should we modify the proposed rules to 
address this potential?
    22. Are the methodologies proposed for calculating the required 
five percent exposure under each of the options appropriate?
    23(a). Are there other ways that the minimum five percent 
requirement should be calculated? 23(b). Would such calculation methods 
be difficult to enforce? 23(c). If so, how can we address those 
difficulties? 23(d). Are there other alternatives?
1. Vertical Risk Retention
    As proposed, a sponsor may satisfy its risk retention requirements 
with respect to a securitization transaction by retaining at least five 
percent of each class of ABS interests issued as part of the 
securitization transaction.\56\ A sponsor using this approach must 
retain at least five percent of each class of ABS interests issued in 
the securitization transaction regardless of the nature of the class of 
ABS interests (e.g., senior or subordinated) and regardless of whether 
the class of interests has a par value, was issued in certificated 
form, or was sold to unaffiliated investors. For example, if four 
classes of ABS interests were issued by an issuing entity as part of a 
securitization--a senior AAA-rated class, a subordinated class, an 
interest-only class, and a residual interest--a sponsor using this 
approach with respect to the transaction would have to retain at least 
five percent of each such class or interest.\57\ The proposed rules do 
not specify a method of measuring the amount of each class, because the 
amount retained, regardless of method of measurement, should equal at 
least five percent of the par value (if any), fair value, and number of 
shares or units of each class.
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    \56\ See proposed rules at Sec.  --.4.
    \57\ As noted previously, the proposed definition of ABS 
interests does not include common or preferred stock, limited 
liability interests, partnership interests, trust certificates or 
similar interests that are issued primarily to evidence ownership of 
the issuing entity and the payments, if any, on which are not 
primarily dependent on the cash flows of the assets of the issuing 
entity. See proposed rules at Sec.  --.2 (definition of ``ABS 
interests'').
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    Under the vertical risk retention option, by holding a five percent 
vertical slice in an ABS issuance, a sponsor is exposed to five percent 
of the credit risk that each class of investors has to the underlying 
collateral. This provides the sponsor an interest in the entire 
structure of the securitization transaction.

[[Page 24102]]

    Under the proposed rules, a sponsor that elects to retain risk 
through the vertical slice option would be required to provide, or 
cause to be provided, to potential investors a reasonable time prior to 
the sale of the asset-backed securities in the securitization 
transaction and, upon request, to the Commission and to its appropriate 
Federal banking agency (if any), the amount (expressed as a percentage 
and a dollar amount) of each class of ABS interests in the issuing 
entity that the sponsor will retain (or did retain) at closing as well 
as the amount (expressed, again, as a percentage and dollar amount) 
that the sponsor is required to retain under the proposed rules. This 
disclosure would allow investors to know what risk the sponsor will 
actually retain in the transaction and compare this amount to the risk 
that the sponsor is required to retain under the proposed rules. In 
addition, the proposed rules would require a sponsor to disclose, or 
cause to be disclosed, the material assumptions and methodologies it 
used to determine the aggregate dollar amount of ABS interests issued 
by the issuing entity in the securitization transaction, including 
those pertaining to any estimated cash flows and the discount rate 
used. Disclosure of these assumptions and methodologies should help 
investors and the Agencies monitor the sponsor's compliance with its 
risk retention requirements because the five percent risk retention 
requirement is based on the aggregate amount of each class of ABS 
interests issued as part of the transaction.\58\
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    \58\ For similar reasons, disclosure of such assumptions and 
methodologies would be required under the other risk retention 
options where the amount of the sponsor's required amount of risk 
retention is based on the amount of interests issued by the issuing 
entity or the amount of the collateral underlying such interests. 
Depending on the circumstances, a sponsor may have an incentive to 
inflate the value of the underlying collateral and the ABS supported 
by such collateral (for example, to increase the proceeds from the 
securitization transaction) or to underestimate the value of such 
collateral and ABS (for example, to reduce the sponsor's risk 
retention requirement). The material assumptions relating to 
estimated cash flows likely would include those relating to the 
estimated default rate, prepayment rate, the time between default 
and recoveries on the underlying assets, as well as interest rate 
projections for assets with variable interest rates.
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Request for Comment
    24. Are the disclosures proposed sufficient to provide investors 
with all material information concerning the sponsor's retained 
interest in a securitization transaction, as well as to enable 
investors and the Agencies to monitor the sponsor's compliance with the 
rule?
    25(a). Should additional disclosures be required? 25(b). If so, 
what should be required and why?
    26. Are there any additional factors, such as cost considerations, 
that the Agencies should consider in formulating an appropriate 
vertical risk retention option?
2. Horizontal Risk Retention
    As proposed, the second risk retention option permits a sponsor to 
satisfy its risk retention obligations by retaining an ``eligible 
horizontal residual interest'' in the issuing entity in an amount that 
is equal to at least five percent of the par value of all ABS interests 
in the issuing entity that are issued as part of the securitization 
transaction.\59\ As discussed below, the eligible horizontal residual 
interest would expose the sponsor to a five percent first-loss exposure 
to the credit risk of the entire pool of securitized assets.
---------------------------------------------------------------------------

    \59\ See proposed rules at Sec.  --.4.
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    The proposed rules include a number of terms and conditions 
governing the structure of an eligible horizontal residual interest in 
order to ensure that the interest would be a ``first-loss'' 
position,\60\ and could not be reduced in principal amount (other than 
through the absorption of losses) more quickly than more senior 
interests and, thus, would remain available to absorb losses on the 
securitized assets. Specifically, an interest qualifies as an 
``eligible horizontal residual interest'' under the proposed rules only 
if it is an ABS interest that is allocated all losses on the 
securitized assets until the par value of the class is reduced to zero 
and has the most subordinated claim to payments of both principal and 
interest by the issuing entity.\61\
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    \60\ As discussed in Part III.B.9 of this Supplemental 
Information, if a sponsor is required to establish and fund a 
premium capture cash reserve account in connection with a 
securitization transaction, such account would first bear losses on 
the securitized assets (even before an eligible horizontal residual 
interest) until the account was depleted.
    \61\ See proposed rules at Sec.  --.2 (definition of ``eligible 
horizontal residual interest'').
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    Moreover, until all other ABS interests in the issuing entity are 
paid in full, the eligible horizontal residual interest generally 
cannot receive any payments of principal made on a securitized asset. 
However, the interest may receive its proportionate share of scheduled 
payments of principal received on the securitized assets in accordance 
with the relevant transaction documents. For example, so long as any 
other ABS interests are outstanding, a sponsor, through its ownership 
of the eligible horizontal residual interest, would be prohibited from 
receiving any prepayments of principal made on the underlying assets 
because these are, by definition, unscheduled payments. This sponsor 
also would be prohibited from receiving principal payments made on the 
underlying assets derived from proceeds from the sale of, or 
foreclosure on, an underlying asset. The prohibition of unscheduled 
payments to the eligible horizontal residual interest is designed to 
ensure that unscheduled payments would not accelerate the payoff of the 
eligible horizontal residual interest before other ABS interests. Such 
acceleration would reduce the capacity of the eligible horizontal 
residual interest to absorb losses on the securitized assets as well as 
the duration of the sponsor's interest in the securitized assets. The 
proposed rules would, however, permit the eligible horizontal residual 
interest to receive its pro rata share of scheduled principal payments 
on the underlying assets.\62\
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    \62\ Thus, an eligible horizontal residual interest with a par 
value of five percent of the aggregate par value of all ABS 
interests could, subject to its most subordinate place in the 
payments waterfall, (i) initially be entitled to receive up to five 
percent of scheduled principal payments received on the securitized 
assets, and (ii) if losses reduced the par value of the interest to 
three percent, receive no more than three percent of scheduled 
principal payments received on the securitized assets.
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    Similar to the vertical slice risk retention option, under the 
proposed rules, a sponsor using the horizontal risk retention option 
would be required to provide, or cause to be provided, to potential 
investors a reasonable period of time prior to the sale of ABS 
interests in the issuing entity and, upon request, to the Commission 
and its appropriate Federal banking agency (if any): the amount 
(expressed as a percentage and dollar amount) of the eligible 
horizontal residual interest that will be retained (or was retained) by 
the sponsor at closing, and the amount (expressed as a percentage and 
dollar amount) of the eligible horizontal residual interest required to 
be retained by the sponsor in connection with the securitization 
transaction; a description of the material terms of the eligible 
horizontal residual interest, such as when such interest is allocated 
losses or may receive payments; and the material assumptions and 
methodologies used in determining the aggregate dollar amount of ABS 
interests issued by the issuing entity in the securitization 
transaction, including those pertaining to any estimated cash flows and 
the discount rate used.
    In lieu of holding an eligible horizontal residual interest, the 
proposed rules would allow a sponsor to cause to be established and 
funded, in cash, a reserve account at closing

[[Page 24103]]

(horizontal cash reserve account) in an amount equal to at least five 
percent of the par value of all the ABS interests issued as part of the 
transaction (i.e., the same dollar amount as would be required if the 
sponsor held an eligible horizontal residual interest).\63\ This 
horizontal cash reserve account would have to be held by the trustee 
(or person performing functions similar to a trustee) for the benefit 
of the issuing entity. The proposed rules include several important 
restrictions and limitations on such a horizontal cash reserve account. 
These limitations and restrictions are intended to ensure that a 
sponsor that establishes a horizontal cash reserve account would be 
exposed to the same amount and type of first-loss credit risk on the 
underlying assets as would be the case if the sponsor held an eligible 
horizontal residual interest.
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    \63\ See proposed rules at Sec.  --.4(b).
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    Specifically, the proposed rules would provide that, until all ABS 
interests in the issuing entity are paid in full or the issuing entity 
is dissolved, the horizontal cash reserve account must be used to 
satisfy payments on ABS interests on any payment date when the issuing 
entity has insufficient funds from any source (including any premium 
capture cash reserve account established under Sec.  --.12 of the 
proposed rules) to satisfy an amount due on any ABS interest.\64\ Thus, 
the amounts in the account would bear first loss on the securitized 
assets in the same way as an eligible horizontal residual interest. In 
addition, until all ABS interests in the issuing entity are paid in 
full or the issuing entity is dissolved, the proposed rules would 
prohibit any other amounts from being withdrawn or distributed from the 
account, with only two exceptions. The first exception would allow 
amounts in the account to be released to the sponsor (or any other 
person) due to receipt by the issuing entity of scheduled payments of 
principal on the securitized assets, provided that the issuing entity 
distributes such payments of principal in accordance with the 
transaction documents and the amount released from the horizontal cash 
reserve account on any date does not exceed the product of: (i) The 
amount of scheduled payments of principal on the securitized assets 
received by the issuing entity and for which the release is being made; 
and (ii) the ratio of the current balance in the horizontal cash 
reserve account to the aggregate remaining principal balance of all ABS 
interests in the issuing entity. This limitation is intended to ensure 
that, like an eligible horizontal residual interest, a horizontal cash 
reserve account would not be depleted by unscheduled payments of 
principal on the underlying assets. The second exception would be that 
the sponsor would be permitted to receive interest payments (but not 
principal payments) received by the horizontal cash reserve account on 
its permitted investments.\65\
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    \64\ See proposed rules at Sec.  --.4(b)(3)(i).
    \65\ Under the proposed rules, amounts in a horizontal cash 
reserve account may only be invested in (i) United States Treasury 
securities with remaining maturities of 1 year or less; and (ii) 
deposits in one or more insured depository institutions (as defined 
in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)) 
that are fully insured by federal deposit insurance. See proposed 
rules at Sec.  --.4(b)(2).
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    A sponsor electing to establish and fund a horizontal cash reserve 
account would be required to provide disclosures similar to those 
required with respect to an eligible horizontal residual interest, 
except that these disclosures have been modified to reflect the 
different nature of the account.
Request for Comment
    27. Do the conditions and limitations in the proposed rules 
effectively limit the ability of the sponsor to structure away its risk 
exposure?
    28(a). Is the restriction on certain payments to the sponsor with 
respect to the eligible horizontal residual interest appropriate and 
sufficient? 28(b). Why or why not?
    29(a). Is the proposed approach to measuring the size of horizontal 
risk retention (five percent of the par value of all ABS interests in 
the issuing entity that are issued as part of the securitization 
transaction) appropriate? 29(b). Would a different measurement be 
better? Please provide details and data supporting any alternative 
measurements.
    30. Are the disclosures proposed sufficient to provide investors 
with all material information concerning the sponsor's retained 
interest in a securitization transaction, as well as enable investors 
and the Agencies to monitor whether the sponsor has complied with the 
rule?
    31(a). Should additional disclosures be required? 31(b). If so, 
what should be required and why?
    32. Are there any additional factors, such as accounting or cost 
considerations that the Agencies should consider with respect to 
horizontal risk retention?
    33. Should a sponsor be prohibited from utilizing the horizontal 
risk retention option if the sponsor (or an affiliate) acts as servicer 
for the securitized assets?
    34. Are the terms and conditions of the horizontal cash reserve 
account appropriate?
    35. Do the terms and conditions ensure that such an account will 
expose the sponsor to the same type and amount of credit risk and have 
the same incentive effects as an eligible horizontal residual interest?
    36(a). Should the eligible horizontal residual interest be required 
to be structured as a ``Z bond'' such that it pays no interest while 
principal is being paid down on more senior interests? 36(b). Why or 
why not?
3. L-Shaped Risk Retention
    The next risk retention option in the proposed rules would allow a 
sponsor, subject to certain conditions, to use an equal combination of 
vertical risk retention and horizontal risk retention as a means of 
retaining the required five percent exposure to the credit risk of the 
securitized assets. This form of risk retention is referred to as an 
``L-Shaped'' form of risk retention because it combines both vertical 
and horizontal forms. Specifically, Sec.  --.6 of the proposed rules 
would allow a sponsor to meet its risk retention obligations under the 
rules by retaining:
    (i) Not less than 2.5 percent of each class of ABS interests in the 
issuing entity issued as part of the securitization transaction (the 
vertical component); and
    (ii) An eligible horizontal residual interest in the issuing entity 
in an amount equal to at least 2.564 percent of the par value of all 
ABS interests in the issuing entity issued as part of the 
securitization transaction, other than those interests required to be 
retained as part of the vertical component (the horizontal 
component).\66\
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    \66\ As under the horizontal risk retention option itself, a 
sponsor would have the option of establishing and funding, in cash, 
a horizontal cash reserve account at the closing of the 
securitization transaction in this amount rather than holding an 
eligible horizontal residual interest. See proposed rules at Sec.  
--.4(b). Any such horizontal cash reserve account would be subject 
to the same restrictions and limitations as under the horizontal 
risk retention option.
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    The amount of the horizontal component is calibrated to avoid 
double counting that portion of an eligible horizontal residual 
interest that the sponsor is required to hold as part of the vertical 
component. This calibration also ensures that the combined amount of 
the vertical component and the horizontal component would be five 
percent of the aggregate transaction. For example, in a securitization 
transaction structured with three classes of interests: A certificated 
senior class whose par value is equal to $950, an

[[Page 24104]]

uncertificated subordinated class of $24 and an uncertificated eligible 
horizontal residual interest whose par value is equal to $26, a sponsor 
would be required to retain $23.75 of the senior class ($950*2.5%), 
$0.60 of the subordinated class ($24*2.5%) and $25.65 of the eligible 
horizontal residual interest (($26*2.5%) + ($1000 - ($23.75 + $0.60 + 
$0.65))*2.564%) for a total of $50 in risk retention requirements. 
Because the required size of the sponsor's retained eligible horizontal 
residual interest ($25.65) is less than the amount of the eligible 
horizontal residual interest, retention of the entire horizontal 
residual interest by the sponsor complies with the minimum L-shape 
retention requirements for the securitization.\67\
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    \67\ This example is provided for simple illustration only.
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    The proposal would require that a sponsor hold 50 percent of its 
required risk retention amount in the form of a vertical component and 
50 percent in the form of a horizontal component in order to help 
ensure that each component is large enough to affect the sponsor's 
incentives and to help align the incentives of the sponsor and 
investors. In addition, requiring that each component represent 50 
percent of the total minimum risk retention requirement should assist 
investors and the Agencies with monitoring compliance with the proposed 
rules.
    Because a sponsor using the L-shape risk retention option would 
retain both a vertical and a horizontal component, the proposed rules 
would require that the sponsor provide the disclosures required under 
the vertical risk retention option, as well as those required under the 
horizontal risk retention option.
Request for Comment
    37. Are the disclosures proposed sufficient to provide investors 
with all material information concerning the sponsor's retained 
interest in a securitization transaction, as well as enable investors 
and the Agencies to monitor whether the sponsor has complied with the 
rule?
    38(a). Should additional disclosures be required? 38(b). If so, 
what should be required and why?
    39. Are there any additional factors, such as cost considerations, 
that the Agencies should consider with respect to L-shape risk 
retention?
    40(a). Should the Agencies permit or require that a higher 
proportion of the risk retention held by a sponsor under this option be 
composed of a vertical component or a horizontal component? 40(b). What 
implications might such changes have on the effectiveness of the option 
in helping achieving the purposes of section 15G?
4. Revolving Asset Master Trusts (Seller's Interest)
    Securitizations backed by revolving lines of credit, such as credit 
card accounts or dealer floorplan loans, often are structured using a 
revolving master trust, which allows the trust to issue more than one 
series of ABS backed by a single pool of the revolving assets.\68\ In 
these types of transactions, the sponsor typically holds an interest 
known as a ``seller's interest.'' This interest is pari passu with the 
investors' interest in the receivables backing the ABS interests of the 
issuing entity until the occurrence of an early amortization event. A 
seller's interest is a direct, shared interest with all of the 
investors in the performance of the underlying assets and, thus, 
exposes the sponsor to the credit risk of the pool or receivables.
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    \68\ In a master trust securitization, assets (e.g., credit card 
receivables or dealer floorplan financings) may be added to the pool 
in connection with future issuances of the securities backed by the 
pool.
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    In light of and to accommodate those types of securitizations, the 
proposed rules would allow a sponsor of a revolving asset master trust 
that is collateralized by loans or other extensions of credit that 
arise under revolving accounts to meet its base risk retention 
requirement by retaining a seller's interest in an amount not less than 
five percent of the unpaid principal balance of all the assets held by 
the issuing entity.\69\ The proposed rules define a ``revolving asset 
master trust'' as an issuing entity that (i) is a master trust; and 
(ii) is established to issue more than one series of ABS, all of which 
are collateralized by a single pool of revolving securitized assets 
that are expected to change in composition over time. The proposed 
rules also define a ``seller's interest'' as an ABS interest (i) in all 
of the assets that are held by the issuing entity and that do not 
collateralize any other ABS interests issued by the entity; (ii) that 
is pari passu with all other ABS interests issued by the issuing entity 
with respect to the allocation of all payments and losses prior to an 
early amortization event (as defined in the transaction documents); and 
(iii) that adjusts for fluctuations in the outstanding principal 
balances of the securitized assets. The definitions of a seller's 
interest and a revolving asset master trust are intended to be 
consistent with market practices and, with respect to seller's 
interest, designed to ensure that any seller's interest retained by a 
sponsor under the proposal would expose the sponsor to the credit risk 
of the underlying assets.
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    \69\ See proposed rules at Sec.  --.7.
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    Under the proposed rules, a sponsor using the seller's interest 
option would be required to provide, or cause to be provided, in 
writing to potential investors a reasonable period of time prior to the 
sale of the asset-backed securities in the securitization transaction 
and, upon request, to the Commission and its appropriate Federal 
banking agency (if any) the amount (expressed as a percentage and 
dollar amount) of the seller's interest that the sponsor will retain 
(or has retained) in the transaction at closing and the amount 
(expressed as a percentage and dollar amount) that the sponsor is 
required to retain pursuant to Sec.  --.7 of the rule; a description of 
the material terms of the seller's interest; and the material 
assumptions and methodology used in determining the aggregate dollar 
amount of ABS interests issued by the issuing entity in the 
securitization transaction, including those pertaining to any estimated 
cash flows and the discount rate used.
Request for Comment
    41(a). Should a sponsor of a revolving asset master trust be 
permitted to satisfy its base risk retention requirement by retaining 
the seller's interest, as proposed? 41(b). Why or why not?
    42(a). Are there additional or different conditions that should be 
placed on this option? 42(b). If so, please explain in detail what 
other conditions would be appropriate.
    43. Are there alternative methods of structuring risk retention for 
revolving asset master trust securitization transactions that should be 
permitted? Provide detailed descriptions and data or other support for 
any alternatives.
    44. Are the proposed disclosures sufficient to provide investors 
with all material information concerning the sponsor's retained 
interest in a securitization transaction, as well as enable investors 
and the Agencies to monitor whether the sponsor has complied with the 
rule?
    45(a). Should additional disclosures be required? 45(b). If so, 
what should be required and why?
    46. Should a seller's interest form of risk retention be applied to 
any other types of securitization transactions? If so, explain in 
detail and provide data or other support for application to other types 
of securitization transactions.
5. Representative Sample
    The next proposed risk retention option permits a sponsor of a

[[Page 24105]]

securitization transaction to meet its risk retention requirements by 
retaining a randomly selected representative sample of assets that is 
equivalent, in all material respects, to the assets that are 
transferred to the issuing entity and securitized, subject to certain 
conditions.\70\ This method of risk retention has been used in 
connection with securitizations involving automobile loans where the 
underlying loans are not originated purely for distribution, but are 
securitized by the sponsor as part of a broader funding strategy. By 
retaining a randomly selected representative sample of assets, the 
sponsor retains exposure to substantially the same type of credit risk 
as investors in the ABS. Therefore, this structure provides a sponsor 
incentives to monitor and control the quality of the underwriting of 
the securitized assets and helps align the sponsor's incentives with 
those of investors in the ABS.
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    \70\ See proposed rules at Sec.  --.8.
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    Consistent with other risk retention options, a sponsor using the 
representative sample approach would be required to retain at least 
five percent of the credit risk of the assets the sponsor identifies 
for securitization. Therefore, the unpaid principal balance of all the 
assets in the representative sample would be required to equal at least 
five percent of the aggregate unpaid principal balance of all the 
assets in the pool of assets initially identified for securitization 
(including those that end up in the representative sample). For 
example, if the assets that are identified for securitization have an 
aggregate unpaid principal balance of $100 million, the aggregate 
unpaid principal balance of the assets in the representative sample 
would be required to equal at least $5 million.\71\
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    \71\ Stated otherwise, the unpaid principal balance of the 
assets comprising the representative sample must be no less than 5/
95ths (5.264 percent) of the aggregate unpaid principal balance of 
all the assets that ultimately are securitized in the securitization 
transaction. The proposed rules use this approach to defining the 
minimum size of a representative sample. See proposed rules at Sec.  
--.8(b)(1)(i).
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    To ensure that a sponsor that retains a representative sample 
remains exposed to substantially the same aggregate credit risks as 
investors in the ABS, the proposal would require the sponsor to 
construct a representative sample according to a specific process. As 
an initial step, the sponsor would need to designate a pool of at least 
1,000 separate assets for securitization (the ``designated pool''). The 
representative sample would be required to be drawn exclusively from 
the designated pool. Also, the designated pool would be prohibited from 
containing any assets other than those that are either securitized or 
selected for the representative sample. In the second step, the sponsor 
must use a random selection process to identify those loans from within 
the designated pool that will be included in the representative sample. 
This random selection process may not take account of any 
characteristic of the assets other than their unpaid principal balance.
    After the sponsor randomly selects a representative sample from the 
designated pool, it would be required to assess that sample to ensure 
that, for each material characteristic of the assets, including the 
average unpaid principal balance, in the designated pool the mean of 
any quantitative characteristic, and the proportion of any 
characteristic that is categorical in nature, of the sample of assets 
randomly selected from the designated pool is within a 95 percent two-
tailed confidence interval of the mean or proportion, respectively, of 
the same characteristic of all the assets in the designated pool.\72\
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    \72\ Depending on the type of assets involved in the 
securitization, the material characteristics other than the unpaid 
principal balance of the assets might include, for example, the 
geographical location of the property securing the loan, the debt-
to-income ratio(s) of the borrower (DTI ratio), and the interest 
rate payable on the loan. Characteristics such as the DTI ratio and 
the interest rate payable on the loan would be considered 
quantitative characteristics, and characteristics such as the 
geographic location of the property securing the loan would be 
considered categorical characteristics. Assuming the factors above 
are material, a sponsor using the representative sample option would 
be required to test the mean of the DTI ratio of loans in the 
representative sample against the mean of the DTI ratio of all 
assets in the designated pool (including the ones selected for the 
random sample). In addition, the sponsor would be required to test 
the proportion of the number of assets from one geographic location 
in the representative sample to the total number of assets in the 
representative sample against the proportion of the number of assets 
from the same geographic location in the designated pool to the 
total number of assets in the designated pool.
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    Without these statistical tests, a sample could be biased towards, 
for example, assets with a larger dollar value or assets with a lower 
expected risk of default. In summary, this process is designed to 
ensure that the assets randomly selected from the designated pool are, 
in fact, representative of the securitized pool. If this process does 
not produce a sample with equivalent material characteristics (as 
measured by the required two-tailed confidence level), the sponsor must 
repeat it as necessary in order to achieve an equivalent result or rely 
on another permissible option for retaining credit risk. The proposal 
permits this re-selection and testing process.
    The proposal contains a variety of safeguards to ensure that the 
sponsor has constructed the representative sample in conformance with 
the requirements described above. For example, the sponsor would be 
required to have in place, and adhere to, policies and procedures for 
(i) identifying and documenting the material characteristics of the 
assets in the designated pool; (ii) selecting assets randomly from the 
designated pool for inclusion in the representative sample; (iii) 
testing the randomly selected sample of assets in the designated pool; 
(iv) maintaining, until all ABS interests are paid in full, 
documentation that clearly identifies the assets included in the 
representative sample; and (v) prohibiting, until all ABS interests are 
paid in full, assets in the representative sample from being included 
in the designated pool of any other securitization transaction.
    In addition, prior to the sale of the asset-backed securities as 
part of the securitization transaction, the sponsor would be required 
to obtain an agreed upon procedures report from an independent, public 
accounting firm. At a minimum, the independent, public accounting firm 
must report on whether the sponsor has the policies and procedures 
mentioned above.\73\ Once an acceptable agreed upon procedures report 
has been obtained, the sponsor may rely on such report for subsequent 
securitizations. However, if the sponsor's policies and procedures 
change in any material respect, a new agreed upon procedures report 
would be required. Under the proposal, the independent public 
accounting firm providing the agreed upon procedures report must report 
on the following minimum items:
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    \73\ See proposed rules at Sec.  --.8(d)(2)(i)-(v).
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    (i) Policies and procedures that require the sponsor to identify 
and document the material characteristics of assets included in a 
designated pool of assets that meets the requirements of the proposal;
    (ii) Policies and procedures that require the sponsor to select 
assets randomly in accordance with the proposal;
    (iii) Policies and procedures that require the sponsor to test the 
randomly-selected sample of assets in accordance with the proposal of 
this section;
    (iv) Policies and procedures that require the sponsor to maintain, 
until all ABS interests are paid in full, documentation that identifies 
the assets in the representative sample established in accordance with 
the proposal; and

[[Page 24106]]

    (v) Policies and procedures that require the sponsor to prohibit, 
until all ABS interests are paid in full, assets in the representative 
sample from being included in the designated pool of any other 
securitization transaction.
    Because the performance of the assets included in the 
representative sample could differ from the performance of the 
securitized assets if the two sets of assets were serviced under 
different standards or procedures, the proposal provides that, until 
such time as all ABS interests in the issuing entity have been fully 
paid or the issuing entity has been dissolved, servicing of the assets 
included in the representative sample must be conducted by the same 
entity and under the same contractual standards as the servicing of the 
securitized assets. In addition, the individuals responsible for 
servicing the assets comprising the representative sample or the 
securitized assets must not be able to determine whether an asset is 
held by the sponsor or held by the issuing entity.
    A sponsor would also be required to comply with the hedging, 
transfer and sale restrictions in section --.14 with respect to the 
assets in the representative sample. Additionally, the sponsor would be 
prohibited from removing any assets from the representative sample and, 
until all ABS interests are repaid, causing or permitting the assets in 
the representative sample to be included in any other designated pool 
or representative sample established in connection with any other 
securitization transaction.\74\
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    \74\ See proposed rules at Sec.  --.8(f).
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    To help ensure that potential investors and the Agencies can 
monitor and assess the sponsor's compliance with these requirements, 
the proposal would require the sponsor to provide, or cause to be 
provided, the following disclosures to potential investors a reasonable 
period of time prior to the sale of asset-backed securities as part of 
the securitization transaction and to provide, or cause to be provided, 
the same information, upon request, to the Commission and its 
appropriate Federal banking agency (if any):
    (i) The amount (expressed as a percentage of the designated pool 
and dollar amount) of assets included in the representative sample to 
be retained by the sponsor;
    (ii) The amount (expressed as a percentage of the designated pool 
and dollar amount) of assets required to be included in the 
representative sample and retained by the sponsor;
    (iii) A description of the material characteristics of the 
designated pool and the representative sample, including, but not 
limited to, the average unpaid principal balance of the assets in the 
designated pool and the representative sample, the means of the 
quantitative characteristics and proportions of characteristics that 
are categorical in nature with respect to each of the material 
characteristics of the assets in the designated pool and the 
representative sample, of appropriate introductory and explanatory 
information to introduce the characteristics, the methodology used in 
determining or calculating the characteristics, and any terms or 
abbreviations used; \75\
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    \75\ See, e.g., disclosure of pool characteristics required in 
registered transactions in the Commission's Regulation AB, Item 
1111(b).
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    (iv) A description of the policies and procedures that the sponsor 
used for ensuring that the process for identifying the representative 
sample complies with the proposal and that the representative sample 
has equivalent material characteristics to those of the pool of 
securitized assets;
    (v) Confirmation that an agreed upon procedures report was obtained 
as required by the proposal; and
    (vi) The material assumptions and methodology used in determining 
the aggregate dollar amount of ABS interests issued by the issuing 
entity in the securitization transaction, including those pertaining to 
any estimated cash flows and the discount rate used.
    Further, after the sale of the ABS, the sponsor would be required 
to provide, or cause to be provided, to investors at the end of each 
distribution period (as specified in the governing transaction 
documents) a comparison of the performance of the pool of securitized 
assets for the related distribution period with the performance of the 
assets in the representative sample for the related distribution 
period. A sponsor selecting the representative sample option also would 
be required to provide investors disclosure concerning the assets in 
the representative sample in the same form, level, and manner as it 
provides, pursuant to rule or otherwise, concerning the securitized 
assets. Therefore, if loan-level disclosure concerning the securitized 
assets was required, by rule or otherwise, to be provided to investors, 
the same level of disclosure would also be required concerning the 
representative sample.
Request for Comment
    47. Should we include the representative sample alternative as a 
risk retention option?
    48. Are the mechanisms that we have proposed adequate to ensure 
monitoring of the randomization process if such an alternative were 
permitted?
    49. Is the requirement that the designated pool contain at least 
1000 assets appropriate, or should a greater number of assets be 
required or a lesser number be permitted?
    50. Are there material characteristics other than the average 
unpaid principal balance of all the assets that should be identified in 
the rule for purposes of the equivalent risk determination and 
disclosure requirements?
    51. Are there any better ways to ensure an adequate randomization 
process and the equivalence of the representative sample to the pool of 
securitized assets? For example, would it be appropriate and sufficient 
if the sponsor were required to use a third party to conduct the random 
selection with no subsequent testing to determine if the sample 
constructed has material characteristics equivalent to those of the 
securitized assets?
    52(a). Alternatively, would it be adequate if the sponsor was 
required to provide a third-party opinion that the selection process 
was random and that retained exposures are equivalent (i.e., share a 
similar risk profile) to the securitized exposures? 52(b). Would this 
opinion resemble a credit rating, thereby raising concerns about undue 
reliance on credit ratings? 52(c). If this approach were adopted, 
should the Agencies impose any standards of performance to be followed 
by such a third party, or that such third party have certain 
characteristics?
    53. If the Agencies adopt a representative sample option, should 
the same disclosures be required regarding the securitized assets 
subject to risk retention that are required for the assets in the pool 
at the time of securitization and on an ongoing basis?
    54. Should the retained exposures, as proposed, be subject to the 
same servicing standards as the securitized exposures?
    55. Are the disclosures proposed sufficient to provide investors 
with all material information concerning the sponsor's retained 
interest in a securitization transaction, as well as enable investors 
and the Agencies to monitor whether the sponsor has complied with the 
rule?
    56(a). Should additional disclosures be required? 56(b). If so, 
what should be required and why?

[[Page 24107]]

    57(a). Is the condition that a sponsor obtain an agreed upon 
procedures report from an independent, public accounting firm 
appropriate? 57(b). If not, is there another mechanism that should be 
included in the option that helps ensure that the sponsor has 
constructed the representative sample in conformance with the 
requirements of the rule?
    58(a). Is the requirement that the sponsor determine equivalency 
with a 95 percent two-tailed confidence appropriate? 58(b). If not, 
what measurement of equivalency do you recommend and why?
6. Asset-Backed Commercial Paper Conduits
    The next risk retention option under the proposed rules is an 
option specifically designed for structures involving asset-backed 
commercial paper (ABCP) that is supported by receivables originated by 
one or more originators and that is issued by a conduit that meets 
certain conditions.\76\ This option is designed to take account of the 
special structures through which this type of ABCP typically is issued, 
as well as the manner in which exposure to the credit risk of the 
underlying assets typically is retained by participants in the 
securitization chain for this type of ABCP.
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    \76\ See proposed rules at Sec.  --.9.
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    ABCP is a type of liability that is typically issued by a special 
purpose vehicle (or conduit) sponsored by a financial institution or 
other sponsor. The commercial paper issued by the conduit is 
collateralized by a pool of assets, which may change over the life of 
the entity. Depending on the type of ABCP program being conducted, the 
assets collateralizing the ABCP may consist of a wide range of assets 
including auto loans, commercial loans, trade receivables, credit card 
receivables, student loans, and other securities. Like other types of 
commercial paper, the term of ABCP typically is short, and the 
liabilities are ``rolled,'' or refinanced, at regular intervals. Thus, 
ABCP conduits generally fund longer-term assets with shorter-term 
liabilities.
    As proposed, this risk retention option in Sec.  ----.9 of the 
proposed rules would be available only for short-term ABCP 
collateralized by receivables or loans and supported by a liquidity 
facility that provides 100 percent liquidity coverage from a regulated 
institution. This risk retention option would not be available to 
entities or ABCP programs that operate as securities or arbitrage 
programs.\77\ ABCP conduits that purchase loans or receivables from one 
originator or multiple originators are commonly referred to as single-
seller ABCP programs and multi-seller ABCP programs, respectively. In 
each of these programs, the sponsor of the ABCP conduit approves the 
originators whose loans or receivables will collateralize the ABCP 
issued by the conduit. An ``originator-seller'' will sell the eligible 
loans or receivables to an intermediate, bankruptcy remote SPV 
established by the originator-seller. The credit risk of the 
receivables transferred to the intermediate SPV then typically is 
separated into two classes--a senior interest that is purchased by the 
ABCP conduit and a residual interest that absorbs first losses on the 
receivables and is retained by the originator-seller. The residual 
interest retained by the originator-seller typically is sized so that 
it is sufficiently large to absorb all losses on the underlying 
receivables.
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    \77\ Structured investment vehicles (SIVs) and securities 
arbitrage ABCP programs both purchase securities (rather than 
receivables and loans from originators). SIVs typically lack 
liquidity facilities covering all of these liabilities issued by the 
SIV, while securities arbitrage ABCP programs typically have such 
liquidity support.
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    The ABCP conduit, in turn, issues short-term ABCP that is 
collateralized by the senior interests purchased from the intermediate 
SPVs (which itself is supported by the subordination provided by the 
residual interest retained by the originator-seller). The sponsor of 
these types of ABCP conduit, which is usually a bank or other regulated 
financial institution, also typically provides (or arranges for another 
regulated financial institution to provide) 100 percent liquidity 
coverage on the ABCP issued by the conduit. This liquidity support 
typically requires the support provider to provide funding to, or 
purchase assets from, the ABCP conduit in the event that the conduit 
lacks the funds necessary to repay maturing ABCP issued by the conduit.
    The proposal includes several conditions designed to ensure that 
this option is available only to the type of single-seller or multi-
seller ABCP conduits described above. For example, this option is 
available only with respect to ABCP issued by an ``eligible ABCP 
conduit,'' as defined by the proposal. The proposal defines an eligible 
ABCP conduit as an issuing entity that issues ABCP and that meets each 
of the following criteria.\78\ First, the issuing entity must be 
bankruptcy remote or otherwise isolated for insolvency purposes from 
the sponsor and any intermediate SPV. Second, the ABS issued by an 
intermediate SPV to the issuing entity must be collateralized solely by 
assets originated by a single originator-seller.\79\ Third, all the 
interests issued by an intermediate SPV must be transferred to one or 
more ABCP conduits or retained by the originator-seller. Fourth, a 
regulated liquidity provider must have entered into a legally binding 
commitment to provide 100 percent liquidity coverage (in the form of a 
lending facility, an asset purchase agreement, a repurchase agreement, 
or similar arrangement) to all the ABCP issued by the issuing entity by 
lending to, or purchasing assets from, the issuing entity in the event 
that funds are required to repay maturing ABCP issued by the issuing 
entity.\80\
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    \78\ See proposed rules at Sec.  --.2 (definition of ``eligible 
ABCP conduit'').
    \79\ Under the proposal, an originator-seller would mean an 
entity that creates assets through one or more extensions of credit 
and sells those assets (and no other assets) to an intermediate SPV, 
which in turn sells interests collateralized by those assets to one 
or more ABCP conduits. The proposal defines an intermediate SPV as a 
special purpose vehicle that is bankruptcy remote or otherwise 
isolated for insolvency purposes that purchases assets from an 
originator-seller and that issues interests collateralized by such 
assets to one or more ABCP conduits. See proposed rules at Sec.  
--.2 (definitions of ``originator-seller'' and ``intermediate 
SPV'').
    \80\ The proposal defines a regulated liquidity provider as a 
depository institution (as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813)); a bank holding company (as 
defined in 12 U.S.C. 1841) or a subsidiary thereof; a savings and 
loan holding company (as defined in 12 U.S.C. 1467a) provided all or 
substantially all of the holding company's activities are 
permissible for a financial holding company under 12 U.S.C. 1843(k) 
or a subsidiary thereof; or a foreign bank (or a subsidiary thereof) 
whose home country supervisor (as defined in Sec.  211.21 of the 
Federal Reserve Board's Regulation K (12 CFR 211.21)) has adopted 
capital standards consistent with the Capital Accord of the Basel 
Committee on Banking Supervision, as amended, provided the foreign 
bank is subject to such standards. See http://www.bis.org/bcbs/index.htm for more information about the Basel Capital Accord.
---------------------------------------------------------------------------

    Under the proposed risk retention option applicable to ABCP conduit 
structures, the sponsor of an eligible ABCP conduit would be permitted 
to satisfy its base risk retention obligations under the rule if each 
originator-seller that transfers assets to collateralize the ABCP 
issued by the conduit retains the same amount and type of credit risk 
as would be required under the horizontal risk retention option as if 
the originator-seller was the sponsor of the intermediate SPV. 
Specifically, the proposal provides that a sponsor of an ABCP 
securitization transaction would satisfy its base risk retention 
requirement with respect to the issuance of ABCP by an eligible ABCP 
conduit if each originator-seller retains an eligible horizontal 
residual interest in each intermediate SPV established by or on

[[Page 24108]]

behalf of that originator-seller for purposes of issuing interests to 
the eligible ABCP conduit. The eligible horizontal residual interest 
retained by the originator-seller must equal at least five percent of 
the par value of all interests issued by the intermediate SPV. 
Accordingly, each originator-seller would be required to retain credit 
exposure to the receivables sold by that originator-seller to support 
issuance of the ABCP.
    The eligible horizontal residual interest retained by the 
originator-seller would be subject to the same terms and conditions as 
apply under the horizontal risk retention option. Thus, for example, if 
an originator-seller transfers $100 of receivables to an intermediate 
SPV, which then issues senior interests and an eligible horizontal 
residual interest with an aggregate par value of $100, the originator-
seller must retain an eligible horizontal residual interest with a par 
value of $5 or more.\81\ Importantly, the originator-seller also would 
be prohibited from selling, transferring, and hedging the eligible 
horizontal residual interest that it is required to retain. This option 
is designed to accommodate the special structure and features of these 
types of ABCP programs.
---------------------------------------------------------------------------

    \81\ As noted above, this would be the minimum amount of credit 
risk that must be retained as part of a securitization transaction.
---------------------------------------------------------------------------

    Although the proposal would allow the originator-sellers (rather 
than the sponsor) to retain the required eligible horizontal residual 
interest, the proposal also imposes certain obligations directly on the 
sponsor in recognition of the key role the sponsor plays in organizing 
and operating an eligible ABCP conduit. Most importantly, the proposal 
provides that the sponsor of an eligible ABCP conduit that issues ABCP 
in reliance on this option would be responsible for compliance with the 
requirements of this risk retention option. The proposal also would 
require that the sponsor maintain policies and procedures to monitor 
the originator-sellers' compliance with the requirements of the 
proposal. In the event that the sponsor determines that an originator-
seller no longer complies with the requirements of the rule (for 
example, because the originator-seller has sold the interest it was 
required to retain), the sponsor would be required to promptly notify, 
or cause to be notified, the investors in the securitization 
transaction of such noncompliance.
    In addition, consistent with market practice, the proposal would 
require that the sponsor:
    (i) Establish the eligible ABCP conduit;
    (ii) Approve the originator-sellers permitted to sell or transfer 
assets, indirectly through an intermediate SPV, to the ABCP conduit;
    (iii) Establish criteria governing the assets the originator-
sellers are permitted to sell or transfer to an intermediate SPV;
    (iv) Approve all interests in an intermediate SPV to be purchased 
by the eligible ABCP conduit;
    (v) Administer the ABCP conduit by monitoring the interests 
acquired by the conduit and the assets collateralizing those interests, 
arranging for debt placement, compiling monthly reports, and ensuring 
compliance with the conduit documents and with the conduit's credit and 
investment policy; and
    (vi) Maintain, and adhere to, policies and procedures for ensuring 
that the requirements of the rule have been met.\82\
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    \82\ The sponsor of an ABCP conduit satisfies the definition of 
``sponsor'' under the proposed rules. If the conduit does not 
satisfy the conditions for an ``eligible ABCP conduit,'' the sponsor 
must retain credit risk in accordance with another risk retention 
option included in the proposal (unless an exemption for the 
transaction exists).
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    The sponsor also would have to provide, or cause to be provided, to 
potential purchasers a reasonable period of time prior to the sale of 
any ABCP from the conduit, and to the Commission and its appropriate 
Federal banking agency, if any, upon request, the name and form of 
organization of each originator-seller that will retain (or has 
retained) an interest in the securitization transaction pursuant to 
Sec.  --.9 of the proposed rules (including a description of the form, 
amount, and nature of such interest), and of each regulated liquidity 
provider that provides liquidity support to the eligible ABCP conduit 
(including a description of the form, amount, and nature of such 
liquidity coverage).
    Section 15G permits the Agencies to allow an originator (rather 
than a sponsor) to retain the required amount and form of credit risk 
and to reduce the amount of risk retention required of the sponsor by 
the amount retained by the originator.\83\ In developing the proposed 
risk retention option for eligible ABCP conduits, the Agencies have 
considered the factors set forth in section 15G(d)(2) of the Exchange 
Act.\84\ The terms of the proposed option for eligible ABCP conduits 
include conditions designed to ensure that the interests in the 
intermediate SPVs sold to an eligible ABCP conduit have low credit 
risk, and to ensure that originator-sellers have incentives to monitor 
the quality of the assets that are sold to an intermediate SPV and 
collateralize the ABCP issued by the conduit. In addition, the proposal 
is designed to effectuate the risk retention requirements of section 
15G of the Exchange Act in a manner that facilitates reasonable access 
to credit by consumers and businesses through the issuance of ABCP 
backed by consumer and business receivables. Finally, as noted above, 
an originator-seller would be subject to the same restrictions on 
transferring the retained eligible horizontal residual interest to a 
third party as would apply to sponsors under the rule.
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    \83\ See 15 U.S.C. 78o-11(1)(c)(G)(iv) and (d) (permitting the 
Commission and the Federal banking agencies to allow the allocation 
of risk retention from a sponsor to an originator).
    \84\ 15 U.S.C. 78o-11(d)(2). These factors are whether the 
assets sold to the securitizer have terms, conditions, and 
characteristics that reflect low credit risk; whether the form or 
volume of transactions in securitization markets creates incentives 
for imprudent origination of the type of loan or asset to be sold to 
the securitizer; and the potential impact of the risk retention 
obligations on the access of consumers and businesses to credit on 
reasonable terms, which may not include the transfer of credit risk 
to a third party.
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Request for Comment
    59. Is the proposed risk retention option for eligible ABCP 
conduits appropriate?
    60(a). Have the Agencies appropriately defined the terms (such as 
an eligible ABCP conduit, intermediate SPV and originator-seller) that 
govern use of this option? 60(b). Is the foregoing description of ABCP 
structures accurate? 60(c) Are there additional ABCP structures that 
are not easily adaptable to the risk retention options proposed? 60(d). 
If so, should the proposed ABCP option be revised to include these 
structures and if so, how?
    61. Should the proposed option for securitizations structured using 
ABCP conduits require financial disclosure regarding the liquidity 
provider?
    62(a). Also, should other entities be permitted to be liquidity 
providers for purposes of the rule? For example, should the rule permit 
an insurance company to be an eligible liquidity provider if the 
company is in the business of providing credit protection (such as a 
bond insurer or re-insurer) and is subject to supervision by a State 
insurance regulator or is a foreign insurance company subject to 
comparable regulation to that imposed by U.S. insurance companies?
    62(b). Why or why not?

[[Page 24109]]

    63. In addition, the Agencies seek confirmation that the terms of 
this option effectively prevent structures such as SIVs and ABCP 
programs that operate as arbitrage programs from using this option.
    64. Should the rule, as proposed, allow the liquidity provider to 
be a depository institution holding company or a subsidiary of a 
depository institution instead of just the depository institution?
    65. Are the disclosures proposed sufficient to provide investors 
with all material information concerning the originator-seller that 
will retain an interest in the securitization transaction and of each 
regulated liquidity provider that provides liquidity support to the 
eligible ABCP conduit, as well as enable investors and the Agencies to 
monitor whether the sponsor has complied with the rule?
    66(a). Should additional disclosures be required? 66(b). If so, 
what should be required and why? 66(c). For example, should a sponsor 
be required to disclose the material assumptions and methodology used 
in determining the aggregate dollar amount of interests issued by each 
intermediate SPV? 66(d). Would such a disclosure be beneficial to 
investors? 66(e). In light of the broad range of asset classes that 
underlie ABCP conduits, would such a disclosure pose any operational or 
other challenges for sponsors of ABCP conduits?
    67(a). Should we, as proposed, require that the ABCP be for a term 
of 270 days or less? 67(b). Should we allow for a longer term, such as 
up to one year?
7. Commercial Mortgage-Backed Securities
    Section 15G(c)(1)(E) of the Exchange Act provides that, with 
respect to securitizations involving commercial mortgages, the 
regulations prescribed by the Agencies may provide for ``retention of 
the first-loss position by a third-party purchaser that specifically 
negotiates for the purchase of such first loss position, holds adequate 
financial resources to back losses, provides due diligence on all 
individual assets in the pool before the issuance of the asset-backed 
securities, and meets the same standards for risk retention as the 
Federal banking agencies and the Commission require of the 
securitizer[.]'' \85\ In light of this provision, the Agencies are 
proposing to permit a sponsor of ABS that is collateralized by 
commercial real estate loans to meet its risk retention requirements if 
a third-party purchaser acquires an eligible horizontal residual 
interest in the issuing entity in the same form, amount, and manner as 
the sponsor would have been required to retain under the horizontal 
risk retention option and certain additional conditions are met.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78o-11(c)(1)(E)(iv).
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    The allocation of a first-loss position to a third-party purchaser 
has been common practice in CMBS transactions for a number of 
years.\86\ The third-party purchaser has been commonly referred to in 
the CMBS marketplace as a ``B-piece buyer'' \87\ because the CMBS 
tranche or tranches purchased by this investor were either unrated by 
the credit rating agencies or assigned a below-investment grade credit 
rating. Typically a B-piece buyer purchases at a discount to face value 
the most subordinate tranche in the cash flow waterfall of the CMBS 
transaction. In order to manage its risk, the B-piece buyer often is 
involved early in the securitization process and has significant 
influence over the selection of pool assets. For example, the B-piece 
buyer often performs ``due diligence'' on the pool assets, which often 
means a review of the loans in the pool at the property and loan level. 
As a result of this review, a B-piece buyer may request that specific 
loans be removed from the pool prior to securitization.
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    \86\ See, e.g., Board Report.
    \87\ We note that under the proposal there is no requirement 
that the tranche or tranches purchased by the third-party purchaser 
be assigned any particular credit rating.
---------------------------------------------------------------------------

    Additionally, a B-piece buyer is often designated as the 
``controlling class'' under the terms of the pooling and servicing 
agreement governing the CMBS transaction, and in accordance with its 
rights as the controlling class, a B-piece buyer often names itself, or 
an affiliated company, as the ``special servicer'' in the transaction. 
Such servicer typically is the servicer authorized to service loans in 
default or having other non-payment issues. The control of special 
servicing rights by the B-piece buyer has the potential to create 
conflicts of interest with the senior certificate holders to the 
securitization. For example, the control of special servicing rights 
would allow the B-piece buyer to directly or indirectly manage any loan 
modifications. While some CMBS transactions required an ``operating 
advisor'' to oversee the servicing activities of the special servicer, 
in many instances this operating advisor works on behalf of the 
controlling class (i.e., the B-piece buyer unless and until losses 
reduced its junior tranche to zero). To help better address the 
potential conflict created by special servicer arrangements involving 
B-piece buyers, newly issued CMBS for which investors received 
financing through the Term-Asset Backed Securities Lending Facility 
(``TALF'') were required to have an independent operating advisor that 
acted on behalf of the investors as a collective whole, had 
consultative rights over major decisions of the special servicer, and 
had the ability to recommend replacement of the special servicer.\88\ 
These operating advisor requirements also were coupled with enhanced 
disclosures to investors regarding major decisions by the B-piece buyer 
and special servicer. Aspects of these TALF requirements have been 
incorporated into recent CMBS transactions undertaken after the closing 
of the TALF to new financings.
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    \88\ The TALF was a special lending facility established by the 
Federal Reserve and the Treasury Department in response to the 
financial crisis to assist the financial markets in accommodating 
the credit needs of consumers and businesses of all sizes by 
facilitating the issuance of ABS collateralized by a variety of 
consumer and business loans. The TALF also was intended to improve 
the market conditions for ABS more generally. Additional information 
concerning the TALF is available on the public Web sites of the 
Board (see http://www.federalreserve.gov/monetarypolicy/bst_lendingother.htm ) and the Federal Reserve Bank of New York (see 
http://www.newyorkfed.org/markets/talf.html).
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    In light of the specific provisions of Section 15G(c)(1)(E) and the 
historical market practice of third-party purchasers acquiring first-
loss positions in CMBS transactions, the Agencies' proposal would allow 
a sponsor to meet its risk retention requirements under the rule if a 
third-party purchaser retains the necessary exposure to the credit risk 
of the underlying assets provided six conditions are met. These 
conditions are designed to help ensure that the form, amount, and 
manner of the third-party purchaser's risk retention are consistent 
with the purposes of section 15G of the Exchange Act. This option would 
be available only for securitization transactions where commercial real 
estate loans constitute at least 95 percent of the unpaid principal 
balance of the assets being securitized.\89\
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    \89\ See proposed rules at Sec.  --.10(a). ``Commercial real 
estate loan'' is defined in Sec.  --.16 of the proposed rules to 
mean a loan secured by a property with five or more single family 
units, or by nonfarm nonresidential real property, the primary 
source (fifty (50) percent or more) of repayment for which is 
expected to be derived from the proceeds of the sale, refinancing, 
or permanent financing of the property; or rental income associated 
with the property other than rental income derived from any 
affiliate of the borrower. A commercial real estate loan does not 
include a land development and construction loan (including 1- to 4-
family residential or commercial construction loans); any other land 
loan; a loan to a real estate investment trust (REIT); or an 
unsecured loan to a developer.
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    The first condition requires that the third-party purchaser retain 
an eligible

[[Page 24110]]

horizontal residual interest in the securitization in the same form, 
amount, and manner as would be required of the sponsor under the 
horizontal risk retention option (proposed Sec.  --.5).\90\ 
Accordingly, the interest acquired by the third-party purchaser must be 
the most junior interest in the issuing entity, and must be subject to 
the same limits on payments as would apply if the eligible horizontal 
residual interest were held by the sponsor pursuant to the horizontal 
risk retention option.
---------------------------------------------------------------------------

    \90\ See proposed rules at Sec.  --.10.
---------------------------------------------------------------------------

    The second condition would require that the third-party purchaser 
pay for the first-loss subordinated interest in cash at the closing of 
the securitization without financing being provided, directly or 
indirectly, from any other person that is a party to the securitization 
transaction (including, but not limited to, the sponsor, depositor, or 
an unaffiliated servicer), other than a person that is a party solely 
by reason of being an investor.\91\ This would prohibit the third-party 
purchaser or an affiliate of the third-party purchase from obtaining 
financing from any such person as well as from any affiliate of any 
such person. These requirements should help ensure that the third-party 
purchaser has sufficient financial resources to fund the acquisition of 
the first-loss subordinated interest and absorb losses on the 
underlying assets to which it would be exposed through this 
interest.\92\
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    \91\ See proposed rules at Sec.  --.10.
    \92\ This requirement is consistent with section 
15G(b)(1)(E)(ii) of the Exchange Act, which provides that the 
Agencies may consider whether a third-party purchaser of CMBS 
``holds adequate financial resources to back losses.''
---------------------------------------------------------------------------

    The third condition relates to the third-party purchaser's review 
of the assets collateralizing the ABS. This proposed condition would 
require that the third-party purchaser perform a review of the credit 
risk of each asset in the pool prior to the sale of the asset-backed 
securities. This review must include, at a minimum, a review of the 
underwriting standards, collateral, and expected cash flows of each 
commercial loan in the pool.
    The fourth condition is intended to address the potential conflicts 
of interest that can arise when a third-party purchaser serves as the 
``controlling class'' of a CMBS transaction. This condition would 
prohibit a third-party purchaser from (i) being affiliated with any 
other party to the securitization transaction (other than investors); 
or (ii) having control rights in the securitization (including, but not 
limited to acting as servicer or special servicer) that are not 
collectively shared by all other investors in the securitization. The 
proposed prohibition of control rights related to servicing, would be 
subject to an exception, however, if the underlying securitization 
transaction documents provide for the appointment of an independent 
operating advisor (Operating Advisor) with certain powers and 
responsibilities.\93\ Under the proposal, an ``Operating Advisor'' 
would be defined as a party that (i) is not affiliated with any other 
party to the securitization, (ii) does not directly or indirectly have 
any financial interest in the securitization other than in fees from 
its role as Operating Advisor, and (iii) is required to act in the best 
interest of, and for the benefit of, investors as a collective whole.
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    \93\ See proposed rules at Sec.  --.10(a)(4)(i). The proposal 
also includes a de minimis exception to the general prohibition on 
affiliation with other parties to the securitization transaction. 
Under this de minimis exception, the third-party purchaser would be 
permitted to be affiliated with one or more originators of the 
securitized assets so long as the assets contributed by such 
originator(s) collectively comprise less than 10 percent of the 
assets in the pool (as measured by dollar volume). See proposed 
rules at Sec.  --.10(a)(4)(ii).
---------------------------------------------------------------------------

    The Agencies believe that the introduction of an independent 
Operating Advisor would minimize the ability of third-party purchasers 
to manipulate cash flows through special servicing. In approving loans 
for inclusion in the securitization, the third-party purchaser will be 
mindful of the limits on its ability to offset the consequences of poor 
underwriting through servicing tactics if a loan becomes troubled, 
thereby providing stronger incentive for the third-party purchaser to 
be diligent in assessing credit quality of the pool assets at the time 
of securitization. For these types of securitization transactions, the 
third-party purchaser's review of each loan can serve as an effective 
check on the underwriting quality and credit risk of the underlying 
loans and the reliability of key information utilized.
    Further, in order for a third-party purchaser to have servicing 
rights in connection with the securitization transaction, the 
securitization transaction documents must require that the Operating 
Advisor have certain powers and responsibilities in order to ensure 
that the Operating Advisor can effectively fulfill its advisory role in 
the transaction.\94\ For example, as proposed, the transaction 
documents must require that, if the third-party purchaser or an 
affiliate acts as servicer, the servicer consult with the Operating 
Advisor in connection with, and prior to, any major decision in 
connection with the servicing of the securitized assets. Major 
decisions would include, without limitation, any material modification 
of, or waiver with respect to, any provision of a loan agreement, any 
foreclosure upon or comparable conversion of the ownership of a 
property, and any acquisition of a property.
---------------------------------------------------------------------------

    \94\ See proposed rules at Sec.  --.10(a)(4)(B)-(E).
---------------------------------------------------------------------------

    The securitization transaction documents must also provide that the 
Operating Advisor is responsible for reviewing the actions of any 
servicer that is, or is, affiliated with the third-party purchaser and 
for issuing a report to investors and the issuing entity, on a periodic 
basis, concerning whether the Operating Advisor believes, in its sole 
discretion exercised in good faith, the servicer is in compliance with 
any standards required of the servicer as provided in the applicable 
transaction documents, and if not, the standard(s) with which the 
servicer is out of compliance. In addition, the securitization 
transaction documents must also provide that the Operating Advisor has 
the authority to recommend that a servicer that is, or is affiliated 
with, the third-party purchaser be replaced by a successor servicer if 
the Operating Advisor determines, in its sole discretion exercised in 
good faith, that the servicer has failed to comply with any standard 
required of the servicer as provided in the applicable transaction 
documents and that such replacement would be in the best interest of 
the investors as a collective whole. The relevant transaction documents 
must provide that, if such a recommendation is made, the servicer that 
is, or affiliated with, the third-party purchaser must be replaced 
unless a majority of each class of certificate holders eligible to vote 
on the matter votes to retain the servicer.
    Consistent with other disclosure requirements under the proposed 
rules, the fifth proposed condition requires that the sponsor provide, 
or cause to be provided, potential purchasers certain information 
concerning the third-party purchaser and other information concerning 
the transaction. Specifically, the proposal would require that a 
sponsor disclose to potential investors a reasonable time before the 
sale of asset-backed securities and, upon request, to the Commission 
and its appropriate Federal banking agency (if any) the name and form 
of organization of the third-party purchaser, a description of the 
third-party purchaser's experience in investing in CMBS, and any other 
information regarding the third-party purchaser or the third-party 
purchaser's retention of the eligible horizontal residual interest that 
is material to

[[Page 24111]]

investors in light of the circumstances of the particular 
securitization transaction.
    Additionally, a sponsor would be required to disclose the amount of 
the eligible horizontal residual interest that the third-party 
purchaser will retain (or has retained) in the transaction (expressed 
as a percentage of ABS interests in the issuing entity and as a dollar 
amount); the purchase price paid for such interest; the material terms 
of such interest; and the amount of the interest that the sponsor would 
have been required to retain if the sponsor had retained an interest in 
the transaction pursuant to the horizontal menu option. The material 
assumptions and methodology used in determining the aggregate amount of 
ABS interests of the issuing entity, including any estimated cash flows 
and the discount rate used, also must be included in the disclosure. 
The proposed rules would require that the sponsor provide, or cause to 
be provided, to potential investors the representations and warranties 
concerning the securitized assets, the schedule of any securitized 
assets that are determined not to comply with such representations and 
warranties, and what factors were used to make the determination that a 
securitized asset should be included in the pool notwithstanding that 
it did not comply with such representations and warranties, such as 
compensating factors or a determination that the exceptions(s) were not 
material.
    Finally, the sixth condition would require that any third-party 
purchaser acquiring an eligible horizontal residual interest under this 
option comply with the hedging, transfer and other restrictions 
applicable to such interest under the proposed rules if the third-party 
purchaser was a sponsor who had acquired the interest under the 
horizontal risk retention option.
    Although the third-party purchaser may retain the credit risk 
required under Sec.  --.3 of the proposed rules, the proposal provides 
that the sponsor remains responsible for compliance with the 
requirements described above. Therefore, consistent with the menu 
option available to eligible ABCP conduits, the proposal would require 
that the sponsor maintain and adhere to policies and procedures to 
monitor the third-party purchaser's compliance with these requirements. 
In the event that the sponsor determines that the third-party purchaser 
no longer complies with the requirements of the rule (for example, 
because the third-party purchaser has sold the interest it was required 
to retain), the sponsor must promptly notify the investors in the 
securitization transaction of such noncompliance.
Request for Comment
    68(a). Should the rules allow a third-party purchaser to retain the 
required amount of risk in a CMBS transaction as described above?
    68(b). Why or why not?
    69(a). Should a third-party purchaser option be available to other 
asset classes besides CMBS? Would expanding this option to other asset 
classes fulfill the purposes of section 15G? 69(b). If so, would any 
adjustments or requirements be necessary?
    70. Should the use of this option be conditioned, as proposed, on a 
requirement that the third-party purchaser separately examine the 
assets in the pool and/or not sell or hedge the interest it is required 
to retain?
    71(a). Should the use of this option be conditioned, as proposed, 
on the requirement that the sponsor disclose the actual purchase price 
paid by the third-party purchaser for the eligible horizontal residual 
interest? 71(b). Why or why not?
    72. Is any disclosure concerning the financial resources of the 
third-party purchaser necessary in light of the requirement that the 
third-party purchaser fund the acquisition of the eligible horizontal 
residual interest in cash without direct or indirect financing from a 
party to the transaction?
    73(a). Should the rule specify the particular types of information 
about a third-party purchaser that should be disclosed, rather than 
requiring disclosure of any other information regarding the third-party 
purchaser that is material to investors in light of the circumstances 
of the particular securitization transaction? 73(b). Should the 
specific types of information about a third-party purchaser be in 
addition to any other information regarding the third-party purchaser 
that is material to investors in light of the circumstances of the 
particular securitization transaction?
    74. Are the conditions relating to servicing, including those 
related to an Operating Advisor, appropriate or should they be modified 
or supplemented?
    75(a). Should the Agencies require any other disclosure relating to 
representations and warranties concerning the assets for CMBS?
    76(a). We are aware of at least one industry group developing model 
representations and warranties for CMBS.\95\ Should the rule require 
that a blackline of the representations and warranties for the 
securitization transaction against an industry-accepted standard for 
model representations and warranties be provided to investors at a 
reasonable time prior to sale? 76(b). Would this provide more 
information regarding the adequacy of the representation and warranties 
being provided? 76(c). Would this be a costly requirement? 76(d). Could 
investors easily create their own blacklines if needed?
---------------------------------------------------------------------------

    \95\ See, e.g., comment letter to the Commission from CRE 
Finance Council dated January 19, 2011, available at http://www.sec.gov/comments/df-title-ix/asset-backed-securities/assetbackedsecurities-37.pdf.
---------------------------------------------------------------------------

    77. Are the disclosures proposed sufficient to provide investors 
with all material information concerning the third-party purchaser's 
retained interest in the securitization transaction, as well as to 
enable investors and the Agencies to monitor whether the sponsor has 
complied with the rule?
    78(a). Should additional disclosures be required? 78(b). If so, 
what should be required and why?
8. Treatment of Government-Sponsored Enterprises
    Section --.11 of the proposed rules would govern the credit risk 
retention requirements for the Federal National Mortgage Association 
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 
Mac) (jointly, the ``Enterprises'') while operating under the 
conservatorship or receivership of FHFA, as well as for any limited-
life regulated entity succeeding to the charter of either Fannie Mae or 
Freddie Mac pursuant to section 1367 of the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (Safety and Soundness 
Act).\96\ The primary business of the Enterprises under their 
respective charter acts is to pool conventional mortgage loans and to 
issue securities backed by these mortgages that are fully guaranteed as 
to the timely payment of principal and interest by the issuing 
Enterprise.\97\ Because of these activities, Fannie Mae or Freddie Mac 
(or a successor limited-life regulated entity) would be the sponsor of 
the asset-backed securities that it issues for purposes of section 15G.
---------------------------------------------------------------------------

    \96\ 12 U.S.C. 4617.
    \97\ See 12 U.S.C. 1451, et seq. (Freddie Mac); 12 U.S.C. 1716, 
et seq. (Fannie Mae).
---------------------------------------------------------------------------

    In considering how to address in the proposal the risk retention 
requirements of section 15G with respect to the mortgage-backed 
securities issued, and fully guaranteed as to timely payment of 
principal and interest, by the Enterprises or a successor limited-life 
regulated entity, the Agencies considered several factors. Because 
Fannie Mae and Freddie Mac fully guarantee the timely payment of

[[Page 24112]]

principal and interest on the mortgage-backed securities they issue, 
the Enterprises are exposed to the entire credit risk of the mortgages 
that collateralize those securities.\98\
---------------------------------------------------------------------------

    \98\ The charters of Fannie Mae and Freddie Mac also place 
limitations on the types of mortgages that the Enterprises may 
guarantee and securitize.
---------------------------------------------------------------------------

    Both Fannie Mae and Freddie Mac have been operating under the 
conservatorship of FHFA since September 6, 2008. As conservator, FHFA 
has assumed all powers formerly held by each Enterprise's officers, 
directors, and shareholders. In addition, FHFA, as conservator, is 
authorized to take such actions as may be necessary to restore each 
Enterprise to a sound and solvent condition and that are appropriate to 
preserve and conserve the assets and property of each Enterprise.\99\ 
The primary goals of the conservatorships are to help restore 
confidence in the Enterprises, enhance their capacity to fulfill their 
mission, mitigate the systemic risk that contributed directly to 
instability in financial markets, and maintain the Enterprises' 
secondary mortgage market role until their future is determined through 
legislation. To these ends, FHFA's conservatorship of the Enterprises 
is directed toward minimizing losses, limiting risk exposure, and 
ensuring that the Enterprises price their services to adequately 
address their costs and risk. Any limited-life regulated entity 
established by FHFA to succeed to the charter of an Enterprise also 
would operate under the direction and control of FHFA, acting as 
receiver of the related Enterprise.\100\
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    \99\ See 12 U.S.C. 4617(b)(2)(D).
    \100\ See 12 U.S.C. 4617(i). The affairs of a limited-life 
regulated entity must be wound up not later than two years after its 
establishment, subject to the potential for a maximum of three one-
year extensions at the discretion of the Director of FHFA.
---------------------------------------------------------------------------

    Concurrently with being placed in conservatorship under section 
1367 of the Safety and Soundness Act, each Enterprise entered into a 
Senior Preferred Stock Purchase Agreement (PSPA) with the United States 
Department of the Treasury (Treasury). Under each PSPA, Treasury 
purchased senior preferred stock of each Enterprise. In addition, if 
FHFA determines that the Enterprise's liabilities have exceeded its 
assets under generally accepted accounting principles (GAAP), Treasury 
will contribute cash capital to that Enterprise in an amount equal to 
the difference between its liabilities and assets. In exchange for this 
cash contribution, the liquidation preference of the senior preferred 
stock purchased from each Enterprise under the respective PSPA 
increases in an equivalent amount. The senior preferred stock of each 
Enterprise purchased by Treasury is senior to all other preferred 
stock, common stock or other capital stock issued by the Enterprise, 
and dividends on the aggregate liquidation preference of the senior 
preferred stock purchased by Treasury are payable at a rate of 10 
percent per annum.\101\ Under each PSPA, Treasury's commitment to each 
Enterprise is the greater of (1) $200 billion, or (2) $200 billion plus 
the cumulative amount of the Enterprise's net worth deficit as of the 
end of any calendar quarter in 2010, 2011 and 2012, less any positive 
net worth as of December 31, 2012.\102\ Accordingly, the PSPAs provide 
support to the relevant Enterprise should the Enterprise have a net 
worth deficit as a result of the Enterprise's guaranty of timely 
payment on the asset-backed securities it issues. By their terms, the 
PSPA with an Enterprise may not be assigned or transferred, or inure to 
the benefit of, any limited-life regulated entity established with 
respect to the Enterprise without the prior written consent of 
Treasury.
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    \101\ Under the PSPAs, the rate rises to 12 percent per annum if 
the dividends are not paid in cash.
    \102\ The PSPAs also provide for the retained portfolios of each 
Enterprise to be reduced over time.
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    In light of the foregoing, Sec.  --.11 of the proposed rules 
provides that the guaranty provided by an Enterprise while operating 
under the conservatorship or receivership of FHFA with capital support 
from the United States will satisfy the risk retention requirements of 
the Enterprise under section 15G of the Exchange Act with respect to 
the mortgage-backed securities issued by the Enterprise. Similarly, an 
equivalent guaranty provided by a limited-life regulated entity that 
has succeeded to the charter of an Enterprise, and that is operating 
under the direction and control of FHFA under section 1367(i) of the 
Safety and Soundness Act, will satisfy the risk retention requirements, 
provided that the entity is operating with capital support from the 
United States. If either Enterprise or a successor limited-life 
regulated entity were to begin to operate other than as provided in the 
proposed rules, that Enterprise or entity would no longer be able to 
avail itself of the credit risk retention option set forth in Sec.  
--.11.
    For similar reasons, the proposed rules provide that the premium 
capture cash reserve account requirements in Sec.  --.12, as well as 
the hedging and financing prohibitions in Sec.  --.14(b), (c), and (d), 
of the proposed rules shall not apply to an Enterprise while operating 
under the conservatorship or receivership of FHFA with capital support 
from the United States, or to a limited-life regulated entity that has 
succeeded to the charter of an Enterprise and that is operating under 
the direction and control of FHFA with capital support from the United 
States. In the past, the Enterprises have sometimes acquired pool 
insurance to cover a percentage of losses on the mortgage loans 
comprising the pool.\103\ Because Sec.  --.11 requires each Enterprise, 
while in conservatorship or receivership, to hold 100 percent of the 
credit risk on MBS that it issues, the prohibition on hedging related 
to the credit risk that the retaining sponsor is required to retain 
would limit the ability of the Enterprises to require such pool 
insurance in the future. Because the exception would continue only so 
long as the relevant Enterprise operates under the control of FHFA and 
with capital support from the United States, the proposed exception 
from these restrictions should be consistent with the maintenance of 
quality underwriting standards, in the public interest, and consistent 
with the protection of investors.
---------------------------------------------------------------------------

    \103\ Typically, insurers would pay the first losses on a pool 
of loans, up to one or two percent of the aggregate unpaid principal 
balance of the pool.
---------------------------------------------------------------------------

    A sponsor utilizing this section shall provide to investors, in 
written form under the caption ``Credit Risk Retention'' and, upon 
request, to FHFA and the Commission, a description of the manner in 
which it has met the credit risk retention requirement of this part.
    The Agencies recognize both the need for, and importance of, reform 
of the Enterprises. In recent months, the Administration and Congress 
have been considering a variety of proposals to reform the housing 
finance system and the Enterprises. The Agencies expect to revisit and, 
if appropriate modify Sec.  --.11 of the proposed rules after the 
future of the Enterprises and of the statutory and regulatory framework 
for the Enterprises becomes clearer.
Request for Comment
    79. Is our proposal regarding the treatment of the Enterprises 
appropriate?
    80. Would applying the hedging prohibition to all of the credit 
risk that the Enterprises are required to retain when using Sec.  --.11 
to satisfy the risk retention requirements be an unduly burdensome 
result for the Enterprises?

[[Page 24113]]

    81(a). Instead of the broad exception from the hedging prohibition 
for the Enterprises, when satisfying the risk retention requirements 
pursuant to Sec.  --.11, should the rules prohibit an Enterprise from 
hedging five percent of the total credit risk in any securitization 
transaction where the Enterprise acts as a sponsor (thus ensuring the 
Enterprise retains at least that amount of exposure to the credit risk 
of the assets)? 81(b). Would this be consistent with statutory intent? 
81(c). Would that be feasible for the Enterprises to monitor?
9. Premium Capture Cash Reserve Account
    In many securitization transactions, particularly those involving 
residential and commercial mortgages, conducted prior to the financial 
crisis, sponsors sold premium or interest-only tranches in the issuing 
entity to investors, as well as more traditional obligations that paid 
both principal and interest received on the underlying assets. By 
selling premium or interest-only tranches, sponsors could thereby 
monetize at the inception of a securitization transaction the ``excess 
spread'' that was expected to be generated by the securitized assets 
over time. By monetizing excess spread before the performance of the 
securitized assets could be observed and unexpected losses realized, 
sponsors were able to reduce the impact of any economic interest they 
may have retained in the outcome of the transaction and in the credit 
quality of the assets they securitized. This created incentives to 
maximize securitization scale and complexity, and encouraged aggressive 
underwriting.
    In order to achieve the goals of risk retention, the Agencies 
propose to adjust the required amount of risk retention to account for 
any excess spread that is monetized at the closing of a securitization 
transaction. Otherwise, a sponsor could effectively negate or reduce 
the economic exposure it is required to retain under the proposed 
rules. Furthermore, prohibiting sponsors from receiving compensation in 
advance for excess spread income expected to be generated by 
securitized assets over time should better align the interests of 
sponsors and investors and promote more robust monitoring by the 
sponsor of the credit risk of securitized assets, thereby encouraging 
the use of sound underwriting in connection with securitized loans. It 
also should promote simpler and more coherent securitization structures 
as sponsors would receive excess spread over time and would not be able 
to reduce the economic exposure they are required to retain.
    Accordingly, as proposed, if a sponsor structures a securitization 
to monetize excess spread on the underlying assets--which is typically 
effected through the sale of interest-only tranches or premium bonds--
the proposed rule would ``capture'' the premium or purchase price 
received on the sale of the tranches that monetize the excess spread 
and require that the sponsor place such amounts into a separate 
``premium capture cash reserve account.'' \104\ The amount placed into 
the premium capture cash reserve account would be separate from and in 
addition to the sponsor's base risk retention requirement under the 
proposal's menu of options, and would be used to cover losses on the 
underlying assets before such losses were allocated to any other 
interest or account. As a likely consequence to this proposed 
requirements, the Agencies expect that few, if any, securitizations 
would be structured to monetize excess spread at closing and, thus, 
require the establishment of a premium capture cash reserve account, 
which should provide the benefits described above.
---------------------------------------------------------------------------

    \104\ See proposed rules at Sec.  --.12.
---------------------------------------------------------------------------

    Specifically, the proposal would require that a sponsor retaining 
credit risk under the vertical, horizontal, L-shaped, or revolving 
asset master trust options of the proposed rules establish and fund (in 
cash) at closing a premium capture cash reserve account in an amount 
equal to the difference (if a positive amount) between (i) the gross 
proceeds received by the issuing entity from the sale of ABS interests 
in the issuing entity to persons other than the sponsor (net of closing 
costs paid by a sponsor or the issuing entity to unaffiliated parties); 
and (ii) 95 percent of the par value of all ABS interests in the 
issuing entity issued as part of the transaction. The 95 percent of par 
value amount is designed to take into account the five percent interest 
that the sponsor is required to retain in the issuing entity under each 
of these options.
    If the sponsor will retain (or caused to be retained) credit risk 
under the representative sample, ABCP, or CMBS third-party purchaser 
options of the proposed rules, the sponsor would have to fund in cash 
at closing a premium capture cash reserve account in an amount equal to 
the difference (if a positive amount) between (i) the gross proceeds 
received by the issuing entity from the sale of ABS interests to 
persons other than the sponsor (net of the closing costs described 
above), and (ii) 100 percent of the par value of the ABS interests in 
the issuing entity issued as part of the transaction. In these cases, 
the proposal uses 100 percent (rather than 95 percent) of the par value 
of the ABS interests issued because the relevant menu options do not 
require that the sponsor itself retain any of the ABS interests issued 
in the transaction and, accordingly, potentially all of such interests 
could be sold to third parties.
    Under the proposed rules, a premium capture cash reserve account 
would have to be established and funded whenever a positive amount 
resulted from the relevant calculation described in the preceding 
paragraphs. These calculations are designed to capture the amount of 
excess spread that a sponsor may seek to immediately monetize at 
closing such as through the issuance of an interest-only tranche (which 
may have a nominal value assigned to it, but does not have a par value) 
or premium bonds that are sold for amounts in excess of their par 
value. On the other hand, the proposal would not require a sponsor to 
establish and fund a premium capture cash reserve account if the 
sponsor does not structure the securitization to immediately monetize 
excess spread, thus resulting in no ``premium'' that would be captured 
by the calculations described above. Accordingly, existing types of 
securitization structures that do not monetize excess spread at closing 
would not trigger establishment of a premium capture reserve account. 
Going forward, sponsors would have the ability to structure their 
securitization transactions in a manner that does not monetize excess 
spread at closing and would not require the establishment of such a 
premium capture cash reserve account.
    The proposed rules include a number of conditions and limitations 
on a premium capture cash reserve account. Specifically, the proposed 
rules would require that the premium capture cash reserve account be 
held by the trustee, or person performing functions similar to a 
trustee, in the name and for the benefit of the issuing entity. In 
addition, until all ABS interests in the issuing entity (including 
junior or residual interests) are paid in full or the issuing entity is 
dissolved, amounts in the account would be required to be released to 
satisfy payments on ABS interests in the issuing entity (in order of 
the securitization transaction's priority of payments) on any payment 
date where the issuing entity has insufficient funds to make such 
payments. The proposal specifies that, the determination of whether 
insufficient funds are available must be made prior to the allocation 
of any

[[Page 24114]]

losses to (i) any eligible horizontal residual interest held under the 
horizontal, L-shaped, ABCP, or CMBS third-party purchaser risk 
retention options; or (ii) the class of ABS interests in the issuing 
entity that is allocated losses before other classes if no eligible 
horizontal residual interest in the issuing entity is held under such 
options (or if the contractual terms of the securitization transaction 
do not provide for the allocation of losses by class, the class of ABS 
interests that has the most subordinate claim to payment of principal 
or interest by the issuing entity). Thus, amounts in a premium capture 
reserve account would be used to cover losses on the underlying assets 
first before any other interest in or account of the issuing entity, 
including an eligible horizontal residual interest or a horizontal cash 
reserve account.\105\
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    \105\ Until needed to cover losses, amounts in a premium capture 
cash reserve account may be invested in U.S. Treasury securities 
with remaining maturities of 1 year or less and in fully-insured 
deposits at one or more insured depository institutions. Interest 
received on such investments could be released from the account to 
any person (including the sponsor), but the principal amount 
invested must remain in the account and available to absorb losses.
---------------------------------------------------------------------------

    In order to prevent a sponsor from circumventing the premium 
capture requirements of the proposal by taking back at closing, and 
then reselling, additional ABS interests (thereby reducing the gross 
proceeds received at closing from the sale of interests to third 
parties), the proposal includes a special anti-evasion provision. Under 
this provision, the retaining sponsor would need to add to the ``gross 
proceeds'' amount that is used to calculate the amount (if any) that 
must be placed in the premium capture cash reserve account an amount 
equal to the par value of any ABS interest (or the fair value of the 
ABS interest if it does not have a par value) in the issuing entity 
that is directly or indirectly transferred to the sponsor in connection 
with the closing of the securitization transaction and that (i) the 
sponsor does not intend to hold to maturity; or (ii) represents a 
contractual right to receive some or all of the interest, and no more 
than a minimal amount of principal payments received by the issuing 
entity, and that has a priority of payment of interest (or principal, 
if any) senior to the most subordinated class of interests in the 
issuing entity. The condition in (i) above is designed to capture 
proceeds from those interests that the sponsor retains at closing, but 
expects to sell to third parties after closing. ABS interests retained 
and expected to be held to maturity by the sponsor increase the 
sponsor's exposure to the credit risk of the underlying assets, thus 
mitigating the concerns of a sponsor trying to evade the risk retention 
requirements.
    A sponsor could, however, seek to achieve the same economic 
benefits that could be achieved from the sale of an interest-only 
tranche by retaining an interest-only tranche at or near the top of the 
waterfall that diverts to the sponsor excess spread on the underlying 
assets before other interests are paid. For this reason, the proposal 
requires that the value of any interest-only tranche that the sponsor 
retains at closing be included in the calculation of the premium 
capture reserve account (regardless of whether the sponsor intends to 
hold it to maturity) if such tranche has priority of payment senior to 
the most subordinated class of interests in the issuing entity.\106\
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    \106\ To avoid double counting, the calculation would not 
include any interest-only tranche required to be retained by a 
sponsor using the vertical or L-shaped options to meet its risk 
retention requirement. Also, because an eligible horizontal residual 
interest, by definition, must have the most subordinated claim to 
payments of both principal and interest, a sponsor selecting this 
option of risk retention would be required to include the value of 
any excess spread tranche retained by the sponsor in its calculation 
of gross proceeds received by the issuing entity.
---------------------------------------------------------------------------

    Sponsors required to fund a premium capture cash reserve account 
under the proposed rules would be required to provide potential 
investors before the sale of asset-backed securities as part of the 
securitization transaction and, upon request, the Commission and its 
appropriate Federal banking agency (if any) disclosures describing the 
dollar amount the sponsor was required to place in the account and the 
actual amount the sponsor will deposit (or has deposited) in the 
account at closing. The sponsor would also be required to disclose the 
material assumptions and methodology used in (i) determining the fair 
value of any ABS interest in the issuing entity that does not have a 
par value (and that was used in calculating the amount required for the 
premium capture cash reserve account) and is subject to the anti-
evasion provisions described above; and (ii) the aggregate amount of 
ABS interests in the issuing entity, including those pertaining to any 
estimated cash flows and the discount rate used.
Request for Comment
    82. Do you believe the premium capture cash reserve account will be 
an effective mechanism at capturing the monetization of excess spread, 
promoting sponsor monitoring of credit quality, and promoting the sound 
underwriting of securitized assets?
    83. The Agencies seek input on alternative methods for removing 
incentives to monetize excess spread and whether the proposed premium 
capture reserve account would have any adverse effects on 
securitizations that are inconsistent with the purposes of section 15G. 
For example, is the method of calculating the premium capture cash 
reserve account appropriate or are there alternative methodologies that 
would better achieve the purpose of the account?
    84. Should amounts from the premium capture reserve account be used 
only for amounts due to the senior-most class of ABS interests?
    85(a). Alternatively, are the conditions imposed on the premium 
capture cash reserve account more than what is needed to achieve the 
objectives of the account? 85(b). If so, how?

C. Allocation to the Originator

    As a general matter, the proposed rules would provide that the 
sponsor of a securitization transaction is solely responsible for 
complying with the risk retention requirements established under 
section 15G of the Exchange Act. However, subject to a number of 
considerations, section 15G authorizes the Agencies to allow a sponsor 
to allocate at least a portion of the credit risk it is required to 
retain to the originator(s) of securitized assets.\107\ Accordingly, 
subject to conditions and restrictions discussed below, Sec.  --.13 of 
the proposed rules permits a sponsor to reduce its required risk 
retention obligations in a securitization transaction by the portion of 
risk retention obligations assumed by the originator(s) of the 
securitized assets.
---------------------------------------------------------------------------

    \107\ As discussed above, 15 U.S.C. 78o-11(a)(4) defines the 
term ``originator'' as a person who, through the extension of credit 
or otherwise, creates a financial asset that collateralizes an 
asset-backed security; and who sells an asset directly or indirectly 
to a securitizer (i.e., a sponsor or depositor). Because this 
definition refers only to the person that ``creates'' a loan or 
other receivable, only the original creditor of a loan or 
receivable--and not a subsequent purchaser or transferee--would be 
deemed to be the ``originator'' for purposes of the proposed rules. 
See 15 U.S.C. 78o-11(c)(1)(G)(iv); (d).
---------------------------------------------------------------------------

    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

[[Page 24115]]

and businesses to credit on reasonable terms, which may not include the 
transfer of credit risk to a third party.\108\
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78o-11(d)(2). The Agencies note that section 
15G(d) appears to contain an erroneous cross-reference. 
Specifically, the reference at the beginning of section 15G(d) to 
``subsection (c)(1)(E)(iv)'' is read to mean ``subsection 
(c)(1)(G)(iv)'', as the former subsection does not pertain to 
allocation, while the latter is the subsection that permits the 
Agencies to provide for the allocation of risk retention obligations 
between a securitizer and an originator in the case of a securitizer 
that purchases assets from an originator.
---------------------------------------------------------------------------

    The Agencies are proposing a framework that would permit a sponsor 
of a securitization to allocate a portion of its risk retention 
obligation to an originator that contributes a significant amount of 
assets to the underlying asset pool. The Agencies have endeavored to 
create appropriate incentives for both the securitization sponsor and 
the originator(s) to maintain and monitor appropriate underwriting 
standards, respectively, without creating undue complexity, which 
potentially could mislead investors and confound supervisory efforts to 
monitor compliance. Importantly, the proposal does not mandate 
allocation to an originator. Therefore, it does not raise the types of 
concerns about credit availability that might arise if certain 
originators, such as mortgage brokers or small community banks (that 
may experience difficulty obtaining funding to retain risk positions), 
were required to do so. Mandatory allocation of risk retention to the 
originator of the securitized assets also could pose significant 
operational and compliance problems, as a loan may be sold or 
transferred several times between origination and securitization and, 
accordingly, an originator may not know when a loan it has originated 
is included in a securitization transaction.
    The proposed rules would permit a securitization sponsor that 
satisfies its base risk retention obligation either under the vertical 
risk retention option as set forth in Sec.  --.4 or under the 
horizontal risk retention option through the acquisition of an eligible 
horizontal interest as set forth in Sec.  --.5, to allocate a portion 
of its risk retention obligation under such option to any originator of 
the underlying assets that contributed at least 20 percent of the 
underlying assets in the pool. The amount of the retention interest 
held by each originator that is allocated credit risk in accordance 
with the proposal must be at least 20 percent, but could not exceed the 
percentage of the securitized assets it originated. The originator 
would also have to hold its allocated share of the risk retention 
obligation in the same manner as would have been required of the 
sponsor and subject to the same restrictions on transferring, hedging, 
and financing the retained interest that would apply to the sponsor. 
Thus, for example, if the sponsor satisfies its risk retention 
requirements by acquiring an eligible horizontal residual interest 
under the horizontal risk retention option, an originator allocated 
risk under Sec.  --.13 of the proposal would have to acquire a portion 
of that horizontal first-loss interest, in an amount not exceeding the 
percentage of pool assets created by the originator. The sponsor's risk 
retention requirements would be reduced by the amount allocated to the 
originator.
    The Agencies believe this approach is a relatively straightforward 
way to allow both the sponsor and the originator to retain credit risk 
in securitized assets, on a basis that should reduce the potential for 
confusion by investors in asset-backed securities.
    By limiting this option to originators that have originated at 
least 20 percent of the asset pool, the Agencies have sought to ensure 
that the originator retains risk in an amount significant enough to 
function as an actual incentive for the originator to monitor the 
quality of all the assets being securitized (and to which it would 
retain some credit risk exposure). In addition, by restricting 
originators to holding no more than their proportional share of the 
risk retention obligation, the proposal seeks to prevent sponsors from 
circumventing the purpose of the risk retention obligation by 
transferring an outsized portion of the obligation to an originator 
that may be seeking to acquire a speculative investment. These 
requirements should also reduce the proposal's potential complexity and 
facilitate investor and regulatory monitoring.
Request for Comment
    86(a). Should the proposed rules permit allocation to originators 
where the sponsor is using other menu options, such as the L-shaped 
risk retention option in Sec.  --.6 of the proposed rules, and if so, 
under what specific conditions and requirements? 86(b). In what cases 
is it likely that this alternative approach actually would be used? 
86(c). What are the specific benefits of an alternative approach, and 
do they outweigh concerns regarding complexity?
    87. Should the rule permit allocation to originators if the sponsor 
elects the horizontal cash reserve account option in proposed Sec.  
--.5(b)?
    88(a). Should the proposed rules permit allocation of risk to 
originators that have originated less than 20 percent of the asset 
pool? 88(b). Alternately, is the minimum 20 percent threshold 
sufficient to ensure that an originator allocated risk has an incentive 
to monitor the quality of the entire collateral pool?
    89(a). Are there alternative mechanisms for allocating risk to an 
originator that should be permitted by the Agencies? For example, 
should the rules permit or require that an originator that is allocated 
risk retention by a sponsor retain exposure only to the assets that the 
originator itself originates? 89(b). If so, how might such an 
allocation mechanism feasibly be structured, incorporated into the 
rule, and monitored by investors and supervisors?
    90. Should the rules permit sponsors to allocate risk to a third 
party, and if so, how to ensure that incentives between the sponsor and 
investors are aligned in a manner that promotes quality underwriting 
standards?
    91. Are the proposed disclosures sufficient to provide investors 
with all material information concerning the originator's retained 
interest in a securitization transaction, as well as to enable 
investors to monitor the originator(s) and the Agencies to assess the 
sponsor's compliance with the rule?
    92(a). Should additional disclosures be required? 92(b). If so, 
what should be required and why?
    93(a). As proposed, the retaining sponsor is responsible for 
compliance with the rule and must maintain and adhere to policies and 
procedures reasonably designed to monitor compliance by each originator 
retaining credit risk, including the anti-hedging restrictions. 93(b). 
What are the practical implications if the originator fails to comply?
    94(a). To help ensure that the originator has sufficient incentive 
to retain its interest in accordance with the rule, should the rule 
require that a sponsor obtain a contractual commitment from the 
originator to retain the interest in accordance with the rule? 94(b). 
If so, how should the Agencies implement this requirement?
    95. Are there other methods that could be implemented to help 
ensure that a sponsor satisfies its obligations under the rule?

D. Hedging, Transfer and Financing Restrictions

    Section 15G(a)(1)(A) provides that the risk retention regulations 
prescribed shall ``prohibit a securitizer from directly or indirectly 
hedging or otherwise transferring the credit risk that the securitizer 
is required to retain

[[Page 24116]]

with respect to an asset.'' \109\ Consistent with this statutory 
directive, the proposed rules would prohibit a sponsor from 
transferring any interest or assets that it is required to retain under 
the rule to any person other than an affiliate whose financial 
statements are consolidated with those of the sponsor (a consolidated 
affiliate). The rule permits a transfer to one or more consolidated 
affiliates because the required risk exposure would remain within the 
consolidated organization and, thus, would not reduce the 
organization's financial exposure to the credit risk of the securitized 
assets.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78o-11(a)(1)(A).
---------------------------------------------------------------------------

    The proposal also would prohibit a sponsor or any consolidated 
affiliate from hedging the credit risk the sponsor is required to 
retain under the rule. The proposal extends the hedging prohibition to 
a sponsor's consolidated affiliates because the rule would allow a 
sponsor to transfer the risk it is required to retain to a consolidated 
affiliate. Moreover, even absent such a transfer, if a consolidated 
affiliate was permitted to hedge the risks required to be retained by a 
sponsor, the net effect of the hedge on the organization controlling 
the sponsor would offset the credit risk required to be retained and 
defeat the purposes of section 15G.
    The proposal prohibits a sponsor and its consolidated affiliates 
from purchasing or selling a security or other financial instrument, or 
entering into an agreement (including an insurance contract), 
derivative or other position, with any other person if: (i) Payments on 
the security or other financial instrument or under the agreement, 
derivative, or position are materially related to the credit risk of 
one or more particular ABS interests, assets, or securitized assets 
that the retaining sponsor is required to retain, or one or more of the 
particular securitized assets that collateralize the asset-backed 
securities; and (ii) the security, instrument, agreement, derivative, 
or position in any way reduces or limits the financial exposure of the 
sponsor to the credit risk of one or more of the particular ABS 
interests, assets, or securitized assets, or one or more of the 
particular securitized assets that collateralize the asset-backed 
securities. The statutory hedging prohibition is focused on the credit 
risk associated with the interest or assets that a sponsor is required 
to retain, which itself is dependent on the credit risk of the 
particular securitized assets that underlie the ABS interests. 
Therefore, hedge positions that are not materially related to the 
credit risk of the particular ABS interests or exposures required to be 
retained by the sponsor or its affiliate would not be prohibited under 
the proposal. Such positions would include hedges related to overall 
market movements, such as movements of market interest rates (but not 
the specific interest rate risk, also known as spread risk, associated 
with the ABS interest that is otherwise considered part of the credit 
risk), currency exchange rates, home prices, or of the overall value of 
a particular broad category of asset-backed securities. Likewise, 
hedges tied to securities that are backed by similar assets originated 
and securitized by other sponsors, also would not be prohibited. On the 
other hand, a security, instrument, derivative or contract generally 
would be ``materially related'' to the particular interests or assets 
that the sponsor is required to retain if the security, instrument, 
derivative or contract refers to those particular interests or assets 
or requires payment in circumstances where there is or could reasonably 
be expected to be a loss due to the credit risk of such interests or 
assets (e.g., a credit default swap for which the particular interest 
or asset is the reference asset).
    The proposal also addresses other hedges based on indices that may 
include one or more tranches from a sponsor's asset-backed securities 
transactions, as well as tranches of asset-backed securities 
transactions of other sponsors. The proposal provides that holding a 
security tied to the return of an index (such as the subprime ABX.HE 
index) would not be considered a prohibited hedge by the retaining 
sponsor so long as: (i) Any class of ABS interests in the issuing 
entity that were issued in connection with the securitization 
transaction and that are included in the index represented no more than 
10 percent of the dollar-weighted average of all instruments included 
in the index, and (ii) all classes of ABS interests in all issuing 
entities that were issued in connection with any securitization 
transaction in which the sponsor was required to retain an interest 
pursuant to the proposal and that are included in the index represent, 
in the aggregate, no more than 20 percent of the dollar-weighted 
average of all instruments included in the index. These restrictions 
are designed to prevent a sponsor (or a consolidated affiliate) from 
evading the hedging restrictions through the purchase of instruments 
that are based on an index that is composed, to a significant degree, 
of asset-backed securities from securitization transactions in which a 
sponsor is required to retain risk under the proposed rules.
    The proposal would also prohibit a sponsor and a consolidated 
affiliate from pledging as collateral for any obligation (including a 
loan, repurchase agreement, or other financing transaction) any 
interest or asset that the sponsor is required to retain unless the 
obligation is with full recourse to the sponsor or consolidated 
affiliate. Because the lender of a loan that is not with full recourse 
to the borrower has limited rights against the borrower on default, and 
may rely more heavily on the collateral pledged (rather than the 
borrower's assets generally) for repayment, a limited recourse 
financing supported by a sponsor's risk retention interest may transfer 
some of the risk of the retained interest to the lender during the term 
of the loan. If the sponsor or consolidated affiliate pledged the 
interest or asset to support recourse financing and subsequently 
allowed (whether by consent, pursuant to the exercise of remedies by 
the counterparty or otherwise) the interest or asset to be taken by the 
counterparty to the financing transaction, the sponsor will have 
violated the prohibition on transfer.
    The proposed rules would specify that the issuing entity in a 
securitization would not be deemed a consolidated affiliate of the 
sponsor for the securitization even if its financial statements are 
consolidated with those of the sponsor under applicable accounting 
standards.\110\ This provision is designed to ensure that an issuing 
entity may continue to engage in hedging activities itself because such 
activities would be for the benefit of all investors in the asset-
backed securities.\111\ However, if an issuing entity were to obtain 
credit protection or hedge the exposure on the particular interests or 
assets that the sponsor is required to retain under the proposal, such 
credit protection or hedge could negate or limit the sponsor's credit 
exposure to the securitized assets. Accordingly, under the proposal, 
any credit protection by or hedging protection obtained by an issuing 
entity may not cover any ABS interest or asset that the sponsor is 
required to retain under the rule. For example, if the sponsor uses the 
vertical approach to

[[Page 24117]]

risk retention, an issuing entity may purchase (or benefit from) a 
credit insurance wrap that covers up to 95 percent of the tranches, but 
not the five percent of such tranches required to be retained by the 
sponsor.
---------------------------------------------------------------------------

    \110\ See proposed rules at Sec.  ----.2 (definition of 
``consolidated affiliate'').
    \111\ For example, the proposal would not prohibit an issuing 
entity (and indirectly its investors) from being the beneficiary of 
loan-level private mortgage insurance (PMI) taken out by borrowers 
in connection with the underlying assets that are securitized.
---------------------------------------------------------------------------

Request for Comment
    96(a). Under the proposal, a sponsor would not be permitted to sell 
or otherwise transfer any interest or assets that the sponsor is 
required to retain to any person other than an entity that is and 
remains a consolidated affiliated. Is the permitted transfer to 
consolidated affiliates appropriate?
    96(b). Why or why not?
    97. Is the proposed hedging prohibition appropriately structured?
    98(a). Would the proposal inadvertently capture any kinds of 
hedging that should be permissible? 98(b). If so, please provide 
specific recommendations on how we can appropriately tailor the 
requirements.
    99. Does the proposed approach appropriately implement the 
statutory requirement to prohibit direct and indirect hedging?
    100(a). Does the proposal permit hedging that is inconsistent with 
risk retention and should be prohibited? 100(b). If so, please provide 
specific recommendations on how we can more appropriately tailor the 
requirements.
    101. Are the proposed provisions concerning the pledging of 
retained assets appropriate? Should the rule instead prohibit the 
pledging of retained assets even where the financial transaction is 
recourse to the sponsor or consolidated affiliate?
    102(a). Under the proposal, a sponsor (or a consolidated affiliate) 
would be prohibited from transferring the retained interest or assets 
until the retained interest or assets were fully repaid or 
extinguished. Is this appropriate, or should a sponsor be permitted to 
freely transfer or hedge its retained exposure after a specified period 
of time? 102(b). If so, should a period of time be established for 
different types of securitizations?
    103. Are the proposal's requirements pertaining to index hedging 
appropriate?
    104. Are the 10 percent and 20 percent thresholds discussed above 
consistent with market practice and the underlying goals of the 
statutory risk retention requirements?
    105. Should credit protection and hedging by the issuing entity of 
any portion of the credit risk on the securitized assets be permitted 
or, because such credit protection and hedges could limit the incentive 
of investors to conduct due diligence on the securitized assets, should 
all credit protection and hedging by the issuing entity (other than 
interest rate and currency risk) be prohibited?

IV. Qualified Residential Mortgages

    Section 15G provides that the risk retention requirements shall not 
apply to an issuance of ABS if all of the assets that collateralize the 
ABS are QRMs.\112\ Section 15G also directs all of the Agencies to 
define jointly what constitutes a QRM, taking into consideration 
underwriting and product features that historical loan performance data 
indicate result in a lower risk of default.\113\ Moreover, section 15G 
requires that the definition of a QRM be ``no broader than'' the 
definition of a ``qualified mortgage'' (QM), as the term is defined 
under section 129C(b)(2) of the Truth in Lending Act (TILA) (15 U.S.C. 
1639C(b)(2)), as amended by the Dodd-Frank Act, and regulations adopted 
thereunder.\114\
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    \112\ See 15 U.S.C. 78o-11(c)(1)(C)(iii).
    \113\ See id. at sec. 78o-11(e)(4).
    \114\ See id. at sec. 78o-11(e)(4)(C). As adopted, the text of 
section 15G(e)(4)(C) cross-references section 129C(c)(2) of TILA for 
the definition of a QM. However, section 129C(b)(2), and not section 
129C(c)(2), of TILA contains the definition of a ``qualified 
mortgage.'' The legislative history clearly indicates that the 
reference in the statute to section 129C(c)(2) of TILA (rather than 
section 129C(b)(2) of TILA) was an inadvertent technical error. See 
156 Cong. Rec. S5929 (daily ed. July 15, 2010) (statement of Sen. 
Christopher Dodd) (``The [conference] report contains the following 
technical errors: the reference to `section 129C(c)(2)' in 
subsection (e)(4)(C) of the new section 15G of the Securities and 
Exchange Act, created by section 941 of the [Dodd-Frank Act] should 
read `section 129C(b)(2).' In addition, the references to 
`subsection' in paragraphs (e)(4)(A) and (e)(5) of the newly created 
section 15G should read `section.' We intend to correct these in 
future legislation.'').
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A. Overall Approach to Defining Qualifying Residential Mortgages

    In considering how to define a QRM for purposes of the proposed 
rules, the Agencies were guided by several factors and principles. The 
sponsor of an ABS that is collateralized solely by QRMs is completely 
exempt from the risk retention requirement with respect to such 
securitization. Accordingly, under the statute, a sponsor will not be 
required to retain any portion of the credit risk associated with the 
securitization of residential mortgages that meet the requirements to 
be a QRM. This requirement suggests that the underwriting standards and 
product features for QRMs should help ensure that such residential 
mortgages are of very high credit quality.
    In considering how to determine if a mortgage is of sufficient 
credit quality, the Agencies also examined data from several sources. 
For example, the Agencies reviewed data on mortgage performance 
supplied by the Applied Analytics division (formerly McDash Analytics) 
of Lender Processing Services (LPS). To minimize performance 
differences arising from unobservable changes across products, and to 
focus on loan performance through stressful environments, for the most 
part, the Agencies considered data for prime fixed-rate loans 
originated from 2005 to 2008. This dataset included underwriting and 
performance information on approximately 8.9 million mortgages.
    As is typical among data provided by mortgage servicers, the LPS 
data do not include detailed information on borrower income and on 
other debts the borrower may have in addition to the mortgage. For this 
reason, the Agencies also examined data from the 1992 to 2007 waves of 
the triennial Survey of Consumer Finances (SCF).\115\ Because families' 
financial conditions will change following the origination of a 
mortgage, the analysis of SCF data focused on respondents who had 
purchased their homes either in the survey year or the previous year. 
This data set included information on approximately 1,500 families. The 
Agencies also examined a combined data set of loans purchased or 
securitized by the Enterprises from 1997 to 2009. This data set 
consisted of more than 75 million mortgages, and included data on loan 
products and terms, borrower characteristics (e.g., income and credit 
score), and performance data through the third quarter of 2010.\116\
---------------------------------------------------------------------------

    \115\ The SCF is conducted every three years by the Board, in 
cooperation with the Treasury, to provide detailed information on 
the finances of U.S. families. The SCF collects information on the 
balance sheet, pension, income, and other demographic 
characteristics of U.S. families. To ensure the representativeness 
of the study, respondents are selected randomly using a scientific 
sampling methodology that allows a relatively small number of 
families to represent all types of families in the nation. 
Additional information on the SCF is available at http://www.federalreserve.gov/pubs/oss/oss2/method.html.
    \116\ Additional information concerning the Enterprise data used 
by the Agencies in developing the proposed QRM standards is provided 
in Appendix A in the proposed common rule.
---------------------------------------------------------------------------

    Based on these and other data, the underwriting and product 
features established by the Agencies for QRMs include standards related 
to the borrower's ability and willingness to repay the mortgage (as 
measured by the borrower's debt-to-income (DTI) ratio); the borrower's 
credit history; the borrower's down payment amount and sources; the 
loan-to-value (LTV) ratio for the loan; the form of valuation used in 
underwriting the loan; the type of

[[Page 24118]]

mortgage involved; and the owner-occupancy status of the property 
securing the mortgage. A substantial body of evidence, both in academic 
literature and developed for this rulemaking, supports the view that 
loans that meet the minimum standards established by the Agencies have 
low credit risk even in stressful economic environments that combine 
high unemployment with sharp drops in house prices.\117\
---------------------------------------------------------------------------

    \117\ For the importance of loan-to-value ratio at origination, 
see Quigley, J. and R. Van Order. ``Explicit tests of contingent 
claims models of mortgage default,'' Journal of Real Estate Finance 
and Economics, 11, 99-117 (1995) and the extensive literature that 
has followed, including Foote, C., K. Gerardi and P. Willen, 
``Negative equity and foreclosures: Theory and evidence,'' Federal 
Reserve Bank of Boston Public Policy Discussion Papers Number 08-3. 
(2008) http://www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf; for 
the importance of credit history, see Barakova, I., R. Bostic, P. 
Calem, and S. Wachter, ``Does credit quality matter for 
homeownership?'' Journal of Housing Economics, 12, 318-336 (2003); 
for several other underwriting criteria see Foote, C., K. Gerardi 
and P. Willen, ``Negative equity and foreclosures: theory and 
evidence,'' Federal Reserve Bank of Boston Public Policy Discussion 
Papers Number 08-3 (2008). http://www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf, Mayer, C., K. Pence and S. M. Sherlund ``The rise 
in mortgage defaults: facts and myths,'' Manuscript, Federal Reserve 
Board, Washington, DC. (2008), and S. Sherlund, ``The past, present, 
and future of subprime mortgages,'' Finance and Economics Discussion 
Series No. 2008-63, Federal Reserve Board, Washington, DC (2008). 
http://www.federalreserve.gov/pubs/feds/2008/200863/200863abs.html.
---------------------------------------------------------------------------

    Any set of fixed underwriting rules likely will exclude some 
creditworthy borrowers. For example, a borrower with substantial liquid 
assets might be able to sustain an unusually high DTI ratio above the 
maximum established for a QRM. As this example indicates, in many cases 
sound underwriting practices require judgment about the relative weight 
of various risk factors (e.g., the tradeoff between LTV and DTI 
ratios). These decisions are usually based on complex statistical 
default models or lender judgment, which will differ across originators 
and over time. However, incorporating all of the tradeoffs that may 
prudently be made as part of a secured underwriting process into a 
regulation would be very difficult without introducing a level of 
complexity and cost that could undermine any incentives for sponsors to 
securitize, and originators to originate, QRMs.
    The Agencies recognize that many prudently underwritten residential 
mortgage loans will not meet the proposed definition of a QRM. Sponsors 
of ABS backed by these mortgages will be required to retain some of the 
credit risk of these mortgage loans in accordance with the proposed 
regulation (unless another exemption is available). However, as 
discussed further in Part III.B of this Supplementary Information, the 
Agencies have sought to provide sponsors with several options for 
complying with the risk retention requirements of section 15G so as to 
reduce the potential for these requirements to disrupt securitization 
markets, including those for non-QRM residential mortgages, or 
materially affect the flow or pricing of credit to borrowers and 
businesses. Moreover, the amount of non-QRM residential mortgages 
should be sufficiently large, and include enough prudently underwritten 
loans, so that ABS backed by non-QRM residential mortgages may be 
routinely issued and purchased by a wide variety of investors. As a 
result, the market for such securities should be relatively liquid, all 
else being equal. Indeed, the broader the definition of a QRM, the less 
liquid the market ordinarily would be for residential mortgages falling 
outside the QRM definition.
    The Agencies also have sought to make the standards applicable to 
QRMs transparent to, and verifiable by, originators, securitizers, 
investors and supervisors. As discussed further below, whether a 
residential mortgage meets the definition of a QRM can and will be 
determined at or prior to the time of origination of the mortgage loan. 
For example, the DTI ratio and the LTV ratio are measured at or prior 
to the closing of the mortgage transaction. The Agencies believe that 
this approach should assist originators of all sizes in determining 
whether residential mortgages will qualify for the QRM exemption, and 
assist ABS issuers and investors in assessing whether a pool of 
mortgages will meet the requirements of the QRM exemption. In addition, 
the approach taken by the proposal would allow individual QRM loans to 
be modified after securitization without the loan ceasing to be a QRM 
in order to avoid creating a disincentive to engage in appropriate loan 
modifications.
    In developing the proposed criteria for a QRM, the Agencies also 
considered how best to address the interaction between the definitions 
and standards for QRM and QM, as mandated by the Dodd-Frank Act.\118\ 
The Board currently has sole rulemaking authority for the QM standards, 
which authority will transfer to the Consumer Financial Protection 
Bureau (the CFPB) on the designated transfer date, which is set as July 
21, 2011 (transfer date). In addition, while Section 15G's risk 
retention requirements are to be prescribed by the Agencies no later 
than 270 days after enactment of the Dodd-Frank Act (April 17, 2011), 
the Dodd-Frank Act provides that the rules implementing the QM 
standards must be prescribed before the end of the 18-month period 
beginning on the transfer date.
---------------------------------------------------------------------------

    \118\ See 15 U.S.C. 78o-11(e)(4)(C).
---------------------------------------------------------------------------

    In light of these provisions, the Agencies propose to incorporate 
the statutory QM standards, in addition to other requirements, into the 
QRM requirements and apply those standards strictly in setting the QRM 
requirements in order to ensure that, consistent with Congress' 
directive, the definition of a QRM be no broader than a QM. The 
Agencies have proposed this approach to minimize any potential for 
conflicts between the QRM standards in the proposed rules and the QM 
standards that ultimately will be proposed or adopted under TILA, as 
well as to provide the public a reasonable opportunity to comment on 
the proposed QRM standards, including those that are bounded by the 
statutory QM standards. The proposed approach also helps reinforce the 
goal of ensuring that QRMs are of very high credit quality.
    As noted above, rulemaking authority for the QM standards is vested 
initially in the Board and, after the transfer date, the CFPB. TILA 
provides the QM rulewriting agency with the authority to establish key 
aspects of the QM definition (e.g., any qualifying ratios of the 
borrower's total debt to monthly income) and to revise, add to, or 
subtract from the criteria for a residential mortgage loan to qualify 
as a QM.\119\ Accordingly, the Agencies expect to monitor the rules 
adopted under TILA to define a QM and will review those rules to 
determine whether changes to the definition of QRM are necessary or 
appropriate to ensure that the definition of a QRM is ``no broader'' 
than the definition of a QM as defined in section 129C(b)(2) of TILA 
and to appropriately implement the risk retention requirement of 
section 15G.\120\ In light of the different purposes and effects of the 
QRM and the QM standards,\121\ as well as the different

[[Page 24119]]

agencies responsible for implementing these standards, the proposed 
standards for QRMs should not be interpreted in any way as reflecting 
or suggesting the way in which the QM standards under TILA may be 
defined either in proposed or final form.
---------------------------------------------------------------------------

    \119\ See Section 129C(b)(3)(B)(i) of TILA.
    \120\ Under section 15G(e)(4)(C), future changes to the QM 
definition do not, in and of themselves, alter the QRM definition. 
The QRM definition will not change until the Agencies have 
determined, through joint rulemaking, that the QRM definition should 
be altered.
    \121\ The function of the QM standard is to provide lenders with 
a presumption of compliance with the requirement in section 129C(a) 
of TILA to assess a borrower's ability to repay a residential 
mortgage loan. The purposes of these provisions are to ensure that 
consumers are offered and receive residential mortgage loans on 
terms that reasonably reflect their ability to repay the loans and 
that are understandable and not unfair, deceptive, or abusive. See 
section 129B(a)(2) of TILA.
---------------------------------------------------------------------------

    As required by section 15G, the Agencies also considered 
information regarding the credit risk mitigation effects of mortgage 
guarantee insurance or other credit enhancements obtained at the time 
of origination.\122\ If such guarantees are backed by sufficient 
capital, they likely lower the credit risk faced by lenders or 
purchasers of securities because they typically pay out when borrowers 
default. Such guarantees have historically been required for loans with 
higher LTV ratios, where borrowers have relatively thin equity 
cushions.\123\ Mortgage insurance companies charge a risk-based premium 
for this insurance, as well as impose additional underwriting 
restrictions. The Agencies considered a variety of information and 
reports relative to such guarantees and other credit enhancements. 
While this insurance protects creditors from losses when borrowers 
default, the Agencies have not identified studies or historical loan 
performance data adequately demonstrating that mortgages with such 
credit enhancements are less likely to default than other mortgages, 
after adequately controlling for loan underwriting or other factors 
known to influence credit performance, especially considering the 
important role of LTV ratios in predicting default. Therefore, the 
Agencies are not proposing to include any criteria regarding mortgage 
guarantee insurance or other types of insurance or credit enhancements 
at this time. The Agencies note that mortgage guarantee insurance is a 
form of credit enhancement accepted by the Enterprises for mortgages 
with higher LTV ratios that allows such mortgages to be securitized 
through mortgage-backed securities guaranteed by the Enterprises. For 
the reasons explained in Part III.B.8 of this Supplemental Information, 
under Sec.  ----.11 of the proposed rules, the guarantee provided by an 
Enterprise while operating under the conservatorship or receivership of 
FHFA with capital support from the United States would satisfy the risk 
retention requirements of the Enterprise with respect to the mortgage-
backed securities issued by the Enterprise.
---------------------------------------------------------------------------

    \122\ See 15 U.S.C. 78o-11(e)(4)(B)(iv).
    \123\ See National Association of Realtors, ``Financing the Home 
Purchase: The Real Estate Professional's Guide 1993,'' Chicago: 
National Association of Realtors, at 20 and 117.
---------------------------------------------------------------------------

    A number of the proposed standards developed for the QRM exemption 
(e.g., the DTI ratios and acceptable sources of borrower funds) are 
dependent upon certain definitions, calculations and verification 
requirements that are critical to the robustness of the QRM standards. 
The Agencies believe that it is important to provide clarity on what 
these definitions, calculations, and verification requirements include 
for purposes of the QRM standards. The Agencies considered how best to 
achieve this goal in a manner that is transparent, uniform, and 
familiar to the mortgage industry. After carefully considering a 
variety of options, the Agencies propose to incorporate and use certain 
definitions and key terms established by HUD and required to be used by 
lenders originating residential mortgages that are insured by the 
Federal Housing Administration (FHA). Specifically, the proposed rules 
incorporate the definitions and standards currently set out in the HUD 
Handbook 4155.1 (New Version), Mortgage Credit Analysis for Mortgage 
Insurance, as in effect on December 31, 2010 (HUD Handbook) \124\ for 
determining and verifying borrower funds and the borrower's monthly 
housing debt, total monthly debt and monthly gross income. This 
proposed approach provides a transparent, uniform and well-known basis 
for lenders to determine whether a residential mortgage loan qualifies 
as a QRM, without requiring the Agencies to establish and maintain--and 
lenders to comply with--new requirements.
---------------------------------------------------------------------------

    \124\ See HUD Handbook, available at http://www.fhaoutreach.gov/FHAHandbook/prod/contents.asp?address=4155-1.
---------------------------------------------------------------------------

    In order to facilitate the use of these standards for QRM purposes, 
the Agencies propose to include in the Additional QRM Standards 
Appendix of the proposed rules all of the standards in the HUD Handbook 
that are used for QRM purposes. The only modifications made to the 
relevant standards in the HUD Handbook would be those necessary to 
remove those portions unique to the FHA underwriting process (e.g., 
TOTAL Scorecard instructions). The proposed rules and the Additional 
QRM Standards Appendix would not affect or change any of the standards 
in the HUD Handbook as they apply to FHA-insured mortgages. Moreover, 
HUD continues to have sole authority to modify the HUD Handbook. Any 
such amendments would not affect the Additional QRM Standards Appendix 
of the proposed rules unless separately adopted by the Agencies under 
section 15G.
Request for Comment
    106. Is the overall approach taken by the Agencies in defining a 
QRM appropriate?
    107. What impact might the proposed rules have on the market for 
securitizations backed by QRM and non-QRM residential mortgage loans?
    108. What impact, if any, might the proposed QRM standards have on 
pricing, terms, and availability of non-QRM residential mortgages, 
including to low and moderate income borrowers?
    109(a). The Agencies seek general comment on the overall approach 
of using certain longstanding HUD standards for certain definitions and 
standards within the QRM exemption and whether the Agencies should 
adopt a different approach. 109(b). Are there any other existing, 
transparent, and widely recognized standards that the Agencies should 
use for ensuring that lenders follow consistent and sound processes in 
determining whether a residential mortgage loan meets the 
qualifications for a QRM?
    110. The Agencies seek comment on all aspects of the proposed 
definition of a QRM, including the specific terms and conditions 
discussed in the following section.
    111(a). The Agencies seek comment on whether mortgage guarantee 
insurance or other types of insurance or credit enhancements obtained 
at the time of origination would or would not reduce the risk of 
default of a residential mortgage that meets the proposed QRM criteria 
but for a higher adjusted LTV ratio. Commenters are requested to 
provide historical loan performance data or studies and other factual 
support for their views if possible, particularly if they control for 
loan underwriting or other factors known to influence credit 
performance. 111(b). If the information indicates that such products 
would reduce the risk of default, should the LTV ratio limits be 
increased to account for the insurance or credit enhancement? 111(c). 
If so, by how much?
    112(a). If the proposed QRM criteria were adjusted for the 
inclusion of mortgage guarantee insurance or other types of insurance 
or credit enhancements, what financial eligibility standards should be 
incorporated for mortgage insurance or financial product providers and 
how might those standards be monitored and enforced?
    112(b). What disclosure regarding the entity would be appropriate?
    113. Are there additional ways that the Agencies could clarify the 
standards

[[Page 24120]]

applicable to QRMs to reduce the potential for uncertainty as to 
whether a residential mortgage loan qualifies as a QRM at origination?

B. Exemption for QRMs

    Consistent with section 15G, Sec.  --.15(b) of the proposed rules 
provides that a sponsor is exempt from the risk retention requirements 
of the proposed rules with respect to any securitization transaction if 
all of the securitized assets that collateralize the ABS are QRMs, and 
none of the securitized assets that collateralize the ABS are other 
ABS. These conditions implement the requirements in 15 U.S.C. 78o-
11(c)(1)(C)(iii) and (e)(5).
    Section --.15(b) of the proposed rules includes two additional 
requirements for a securitization transaction to qualify for the QRM 
exemption. First, the proposal would require that, at the closing of 
the securitization transaction, each QRM collateralizing the ABS is 
currently performing (i.e., the borrower is not 30 days or more past 
due, in whole or in part, on the mortgage).\125\ Because QRMs are 
completely exempt from the risk retention requirements, the proposed 
rules would not permit a residential mortgage loan that satisfied the 
conditions to be a QRM upon origination to be included in an ABS 
transaction exempt under Sec.  --.15(c) of the proposed rules if the 
loan was not currently performing at the time of closing of the 
securitization transaction. Second, the depositor \126\ for the ABS 
must certify that it evaluated the effectiveness of its internal 
supervisory controls for ensuring that all of the assets that 
collateralize the ABS are QRMs and that it has determined that its 
internal supervisory controls are effective. This evaluation must be 
performed as of a date within 60 days prior to the cut-off date (or 
similar date) for establishing the composition of the collateral pool. 
The sponsor also must provide, or cause to be provided, a copy of this 
certification to potential investors a reasonable period of time prior 
to the sale of ABS and, upon request, to the Commission and its 
appropriate Federal banking agency, if any. These evaluation and 
certification conditions implement the requirements in 15 U.S.C. 78o-
11(e)(6).\127\
---------------------------------------------------------------------------

    \125\ See proposed rules at Sec.  --.15(a) (definition of 
``currently performing'' for QRM purposes).
    \126\ See proposed rules at Sec.  --.2 (definition of 
``depositor'').
    \127\ For these purposes, the Agencies interpret the term 
``issuer'' as used in section 15G(e)(6) to refer to the depositor 
for the transaction.
---------------------------------------------------------------------------

C. Eligibility Criteria

1. Eligible Loans, First Lien, No Subordinate Liens, Original Maturity 
and Written Application Requirements
    The proposed definition limits a QRM to a closed-end first-lien 
mortgage to purchase or refinance a one-to-four family property, at 
least one unit of which is the principal dwelling of a borrower.\128\ 
Under the proposal, construction loans, ``bridge'' loans with a term of 
twelve months or less, loans to purchase time-share properties, and 
reverse mortgages could not be QRMs. Construction loans, bridge loans 
and other loans designed to offer temporary financing have typically 
not been securitized in the past, and their underwriting is notably 
more complex than that of standard mortgage loans. Thus, expanding the 
definition of QRMs to include such loans would be complex and seem to 
offer few, if any, benefits. Any loan relating to a time share also may 
not be a QRM, as these types of loans are excluded from the definition 
of a ``residential mortgage loan'' that may be a QM under section 
103(cc)(5) of TILA.
---------------------------------------------------------------------------

    \128\ Closed-end credit and the related terms consumer credit 
and open-end credit are defined in a manner consistent with the 
definition of such terms under the Board's Regulation Z, which 
implements TILA.
---------------------------------------------------------------------------

    Even before the financial crisis, the overwhelming majority of 
reverse mortgages were insured by the FHA.\129\ Reverse mortgages 
insured by the FHA are separately exempted from the risk retention 
requirements of section 15G.\130\ In addition, reverse mortgages may be 
QMs only to the extent that they meet certain standards to be 
determined by regulation by the Board or CFPB under section 
129C(b)(2)(A)(ix) of TILA. Because the extent to which reverse 
mortgages may be considered a QM under TILA is not yet known, the 
Agencies have excluded reverse mortgages from potential QRM status.
---------------------------------------------------------------------------

    \129\ See Hui Shan, ``Reversing the Trend: The Recent Expansion 
of the Reverse Mortgage Market Finance and Economics Discussion 
Series,'' Board of Governors of the Federal Reserve System, 2009-42 
(2009), available at http://www.federalreserve.gov/pubs/feds/2009/200942/200942pap.pdf .
    \130\ See 15 U.S.C. 78o-11(e)(3)(B).
---------------------------------------------------------------------------

    Under the proposal, a QRM must be secured by a first-lien, 
perfected in accordance with applicable law, on the one-to-four family 
property to be purchased or refinanced. In addition, consistent with 
the QM requirement under section 129C(b)(2) of TILA, the maturity date 
of a QRM, at the closing of the mortgage transaction, must not exceed 
30 years. A one-to-four family property is defined to mean real 
property that is (i) held in fee simple, or on leasehold under a lease 
for not less than 99 years which is renewable, or under a lease having 
a period that is at least 10 years longer than the mortgage, and (ii) 
improved by a residential structure that contains one to four 
units.\131\ A one-to-four family property may include an individual 
condominium or cooperative unit, as well as a manufactured home that is 
constructed in conformance with the National Manufactured Home 
Construction and Safety Standards and erected on, or otherwise affixed 
to, a foundation in accordance with requirements established by the 
FHA.
---------------------------------------------------------------------------

    \131\ See proposed rules at Sec.  --.15(a) (definition of ``one-
to-four family property'').
---------------------------------------------------------------------------

    If the mortgage transaction is to purchase a one-to-four family 
property, no other recorded or perfected liens on the one-to-four 
family property can, to the creditor's knowledge, exist at the time of 
the closing of the mortgage transaction. Thus, the proposed rules 
prohibit the use of a junior lien in conjunction with a QRM to purchase 
a home. Data indicate that, controlling for other factors, including 
combined LTV ratio, the use of junior liens at origination to decrease 
down payments--so-called ``piggyback'' mortgages--significantly 
increased the risk of default.\132\ The proposal would not prohibit the 
existence of junior liens in connection with the refinancing of an 
existing loan secured by an owner-occupied one-to-four family property, 
provided that the combined LTV ratio at closing of the mortgage 
transaction does not exceed certain thresholds established by the 
proposed rules.\133\ The Agencies have not proposed to prohibit the 
existence of a junior lien in connection with a refinancing transaction 
(subject to certain combined LTV limits) because the Agencies recognize 
that some borrowers may have existing home equity loans or lines of 
credit and are currently performing on all of their mortgage 
obligations.\134\ A prohibition on junior liens in connection with a 
refinancing transaction would force such performing borrowers to 
terminate their existing home equity loans or lines of credit and 
obtain a new home equity loan or line of credit shortly thereafter, 
with additional transaction costs

[[Page 24121]]

(including a loan origination fee). To help ensure that the borrower 
continues to have the ability and incentive to repay a QRM that is 
originated as part of a refinancing transaction, the proposal includes 
certain combined LTV limits on refinancing transactions and DTI limits 
both of which assume that any home equity loan or line of credit is 
fully drawn.
---------------------------------------------------------------------------

    \132\ See Kristopher Gerardi, Andreas Lehnert, Shane Sherlund, 
and Paul S. Willen, ``Making Sense of the Subprime Crisis,'' 
Brookings Papers on Economic Activity (Fall 2008), at 86, Table 3.
    \133\ See proposed rules at Sec.  --.15(d)(9).
    \134\ As discussed further below, the proposed rules would 
require that the borrower be currently performing on all of the 
borrower's debt obligations--including any current first mortgage, 
home equity loan or line of credit--for any new mortgage to qualify 
as a QRM.
---------------------------------------------------------------------------

    The proposed rules also would require that the borrower complete 
and submit to the creditor a written application for the mortgage 
transaction. The application, as supplemented or amended prior to 
closing of the mortgage transaction, must include an acknowledgement by 
the borrower that the information provided in the application is true 
and correct as of the date executed by the borrower, and that any 
intentional or negligent misrepresentation of the information provided 
in the application may result in civil liability and/or criminal 
penalties under 18 U.S.C. 1001.\135\ This standard is consistent with 
the written acknowledgement in the Uniform Residential Loan Application 
(Form 1003) used by the Enterprises.
---------------------------------------------------------------------------

    \135\ See proposed rules at Sec.  --.15(d)(9).
---------------------------------------------------------------------------

Request for Comment
    114(a). The Agencies request comment on each of these conditions 
for QRM eligibility. In addition, should a loan be disqualified from 
being a QRM if the creditor has ``reason to know'' of another recorded 
or perfected lien on the property in a purchase transaction? 114(b). If 
so, what would constitute a ``reason to know'' by the creditor?
2. Borrower Credit History
    The Agencies' own analysis, as well as work published in academic 
journals,\136\ indicates that borrower credit history is among the most 
important predictors of default. In many datasets, credit history is 
proxied using a credit score, often the FICO score determined under the 
credit scoring model devised by Fair Isaac Corporation. Among the 
residential mortgage loans in the LPS dataset described above, 13 
percent of all loans defaulted (defined as ever having missed three or 
more consecutive payments or ever being in foreclosure). However, 24.5 
percent of residential mortgage loans taken out by borrowers with a 
FICO score of 690 or below defaulted, compared to a default rate of 7.7 
percent among residential mortgage loans taken out by borrowers with a 
FICO score greater than 690. Even among the higher-FICO group, 
differences remained: borrowers with FICO scores of 691 to 740 had a 
default rate of 11.4 percent, while borrowers with FICO scores above 
740 had a default rate of 4 percent. Thus, in these data, mortgage 
borrowers with a FICO score of 690 or below were more than six times as 
likely to default as borrowers with FICO scores of above 740.
---------------------------------------------------------------------------

    \136\ See, e.g., Avery, Robert B., Raphael Bostic, Paul S. 
Calem, and Glenn B. Canner, ``Credit Risk, Credit Scoring, and the 
Performance of Home Mortgages,'' Federal Reserve Bulletin 82(7) 621-
48 (1996); Pennington-Cross, Anthony, ``Credit History and the 
Performance of Prime and Nonprime Mortgages,'' Journal of Real 
Estate Finance and Economics 27(3) 279-301 (2003); Calem, Paul and 
Susan Wachter, ``Community Reinvestment and Credit Risk: Evidence 
from an Affordable-Home-Loan Program,'' Real Estate Economics 27(1) 
105-134 (1999).
---------------------------------------------------------------------------

    A similar pattern emerges from the SCF data described above. 
Although the SCF data do not record the borrower's credit score, they 
do report several important contributors to low credit scores. The most 
important predictor of whether a household in the SCF data set was 
delinquent on its mortgage payment was whether it currently was behind 
on any non-mortgage debt. The second-most important variable was 
whether the household had filed for bankruptcy within the past five 
years. Households that were current on their non-mortgage obligations 
and had not filed for bankruptcy within the previous five years had a 
mortgage delinquency rate of 0.2 percent, compared to a delinquency 
rate of 17.9 percent for other households.
    Data on residential mortgages purchased or securitized by the 
Enterprises also show the importance of borrower credit scores as a 
predictor of default. From 1997 through 2002, loans that are estimated 
to meet the proposed QRM requirements (except for credit history) had 
cumulative rates of serious delinquency ranging from 31 to 44 basis 
points if the borrower's credit score was above 690, but ranged from 
267 to 356 basis points for borrowers with credit scores of 690 or 
lower. The data show that, in the peak years of the housing bubble 
(from 2005 to 2007), rates of serious delinquency for loans that were 
estimated to meet the proposed QRM standards with credit scores above 
690 ranged from 186 to 272 basis points, while similar loans to 
borrowers with lower credit scores ranged from 833 to 1,103 basis 
points.\137\
---------------------------------------------------------------------------

    \137\ See Appendix A in the proposed common rule.
---------------------------------------------------------------------------

    In developing the proposal, the Agencies carefully considered how 
to incorporate a borrower's credit history into the standards for a 
QRM. The Agencies are aware that credit scores are used often by 
originators in the loan underwriting process. However, the Agencies do 
not propose to use a credit score threshold as part of the QRM 
definition because such a standard would require reliance on credit 
scoring models developed and maintained by privately owned entities and 
such models may change materially at the discretion of such entities. 
There also may be inconsistencies across the various credit scoring 
models used by consumer reporting agencies, as well as among different 
scoring models used by a single provider. Consequently, in order to 
ensure that creditors could continue to choose among different credit 
score providers, the Agencies would have to determine a cutoff score 
under multiple scoring models and periodically revise the regulation in 
response to new scoring models that might arise.
    Instead, the proposed rules define a set of so-called ``derogatory 
factors'' relating to a borrower that would disqualify a mortgage for 
such borrower from qualifying as a QRM. The Agencies considered how 
these derogatory factors related to the credit scores observed in the 
data. A 2007 report to Congress by the Board found that, among all 
persons with a FICO score, 42 percent had scores below 700, 18 percent 
had scores between 700 and 749, and 40 percent had scores of 750 or 
above.\138\ Thus, the median FICO score is somewhere between 700 and 
749. The analysis of the LPS data found that borrowers with prime 
fixed-rate mortgages with FICO scores below 700 were substantially more 
likely than the average of such borrowers to default. The Board's 
report to Congress also found that any major derogatory factor, 
including being substantially late on any debt payment (not just a 
mortgage), as well as bankruptcy or foreclosure, would push a 
borrower's credit score down substantially. Thus, the relatively 
stringent set of credit history derogatory factors set forth in Sec.  
--.15(d)(5) of the proposed rules is designed to be a reasonable proxy 
for the credit score thresholds associated with low delinquency rates 
in the data.
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    \138\ See Report to the Congress on Credit Scoring and Its 
Effects on the Availability and Affordability of Credit, Board of 
Governors of the Federal Reserve System (August 2007), available at 
http://www.federalreserve.gov/boarddocs/rptcongress/creditscore/creditscore.pdf.
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    Specifically, under the proposal, a mortgage loan could qualify as 
a QRM only if the borrower was not currently 30 or more days past due, 
in whole or in part, on any debt obligation, and the borrower had not 
been 60 or more days past due, in whole or in part, on any

[[Page 24122]]

debt obligation within the preceding 24 months. Further, a borrower 
must not have, within the preceding 36 months, been a debtor in a 
bankruptcy proceeding, had property repossessed or foreclosed upon, 
engaged in a short sale or deed-in-lieu of foreclosure, or been subject 
to a Federal or State judgment for collection of any unpaid debt.
    The proposal would require that the originator verify and document, 
within 90 days prior to the closing of the mortgage transaction, that 
the borrower satisfied these credit history requirements. The Agencies 
are proposing a safe harbor that would allow an originator to satisfy 
the documentation and verification requirements regarding a borrower's 
credit history by obtaining, no more than 90 days before the closing of 
the mortgage, credit reports from at least two consumer reporting 
agencies that compile and maintain files on consumers on a nationwide 
basis.\139\ Such credit reports must demonstrate that the borrower 
satisfies the credit history requirements for a QRM and the originator 
must maintain paper or electronic copies of such credit reports in the 
loan file for the mortgage transaction. This safe harbor would not be 
available if the creditor later obtained an additional credit report 
before closing of the mortgage which indicated that the borrower did 
not meet the proposed rules' credit history requirements.
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    \139\ The proposal defines a ``consumer reporting agency that 
compiles and maintains files on a nationwide basis'' by reference to 
the definition of that term in the Fair Credit Reporting Act (15 
U.S.C. 1681a(p)). See the proposed rules at Sec.  --.15(a)(7).
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Request for Comment
    115. Are the proposed credit history standards useful and 
appropriate indicators of the likelihood that a borrower might default 
on a new residential mortgage loan?
    116. Are there additional or different standards that should be 
used in considering how a borrower's credit history may affect the 
likelihood that the borrower would default on a new mortgage?
    117(a). Should the Agencies include minimum credit score thresholds 
as an additional or alternative QRM standard? 117(b). If so, how might 
the rules incorporate privately developed credit scoring models in a 
manner that (i) ensures that borrowers, originators, and investors have 
adequate notice, and an opportunity to comment on, changes to scoring 
methodologies that may affect a borrower's eligibility for a QRM, (ii) 
maintains a level competitive playing field for providers and 
developers of credit scores, and (iii) ensures that any credit scoring 
methodology used for QRM purposes is and remains predictive of a 
borrower's default risk?
    118. The Agencies request comment on the appropriateness of the 
safe harbor that would allow an originator to satisfy the documentation 
and verification requirements regarding a borrower's credit history by 
obtaining credit reports from at least two consumer reporting agencies 
that compile and maintain files on consumers on a nationwide basis.
3. Payment Terms
    Section --.15(d)(6) of the proposed rules addresses the payment 
terms of a QRM, based on the terms of the mortgage transaction at 
closing. Consistent with the requirements for a QM under section 
129C(b)(2)(A)(i) of TILA, the proposed rules would prohibit QRMs from 
having, among other features, payment terms that allow interest-only 
payments or negative amortization. Under the proposed rules, regularly 
scheduled principal and interest payments on the mortgage transaction 
may not result in an increase of the unpaid principal balance of the 
mortgage and may not allow the borrower to defer payment of interest or 
repayment of principal.
    In addition, consistent with the requirements for a QM under 
section 129C(b)(2)(A)(ii) of TILA, the proposed rules would prohibit 
the terms of a QRM from permitting any ``balloon payment,'' defined for 
these purposes as a scheduled payment of principal and interest that is 
more than twice as large as any earlier scheduled payment of principal 
and interest. This definition of a balloon payment is consistent with 
the current definition of that term under the Board's Regulation 
Z,\140\ and somewhat more restrictive than the definition of a balloon 
payment in section 129C(b)(2)(A)(ii) of TILA and applicable to a 
QM.\141\
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    \140\ See 12 CFR 226 Supplement I, comment 32(d)(1)(i)-1 and 12 
CFR 226.18(s)(5)(i).
    \141\ Section 129C(b)(2)(A)(ii) of TILA defines a balloon 
payment for QM purposes as a scheduled payment that is more than 
twice as large as the average of earlier scheduled payments.
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    Under the proposed rules, both fixed-rate and adjustable-rate 
mortgages may qualify as a QRM. However, the Agencies are proposing to 
limit the amount by which interest rates may increase on adjustable-
rate loans that are QRMs to reduce the risk of default on QRMs by 
limiting the potential for consumers to face a ``payment shock'' in the 
event that their monthly mortgage payments were to rise rapidly due to 
expiration of ``teaser rate'' periods in the early years of a mortgage 
loan or other interest rate increases. Section 15G(e)(4)(B)(iii) 
provides that one of the underwriting and product features the Agencies 
may take into consideration in defining a QRM are those that mitigate 
``the potential for payment shock on adjustable rate mortgages through 
product features and underwriting standards.'' Under Sec.  
--.15(d)(6)(iii) of the proposed rules, in order for a mortgage that 
allows the annual rate of interest to increase after the closing of the 
mortgage transaction to be a QRM, the terms of the mortgage must 
provide that any such increase may not exceed: (a) Two percent (200 
basis points) in any twelve month period and (b) six percent (600 basis 
points) over the life of the mortgage transaction.\142\
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    \142\ As described more fully below, an originator also would be 
required to calculate the borrower's front-end and back-end DTI 
ratios based on the maximum interest rate permitted during the first 
five years of the mortgage transaction. Consequently, originators of 
adjustable-rate mortgages would have to determine that a borrower 
had acceptable DTI ratios even if rates rose as rapidly as possible 
under the terms of the mortgage (subject to the annual and lifetime 
caps described above).
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    Section --.15(d)(6)(iv) of the proposed rules also would prohibit a 
QRM from containing any prepayment penalty. The term ``prepayment 
penalty'' would be defined as a penalty imposed solely because the 
mortgage obligation is prepaid in full or in part. For purposes of this 
definition, a prepayment penalty would not include, for example, fees 
imposed for preparing and providing documents in connection with 
prepayment, such as a loan payoff statement, a reconveyance, or other 
document releasing the creditor's security interest in the one-to-four 
family property securing the loan.
    When defining a QRM, section 15G directs the Agencies to take into 
consideration underwriting and product features that historical loan 
performance data indicate result in a lower risk of default, such as a 
prohibition or restriction on the use of prepayment penalties.\143\ In 
addition, under section 129C(c)(1)(B) of TILA, prepayment penalties are 
prohibited or subject to significant limitations for certain loans even 
if those loans otherwise meet the QM definition under section 
129C(b)(2) of TILA.\144\
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    \143\ 15 U.S.C. 78o-11(e)(4)(B)(v).
    \144\ TILA's prepayment penalty restriction scheme is quite 
complex. Specifically, section 129C(c)(1)(B) of TILA prohibits 
prepayment penalties for any residential mortgage loan with an 
adjustable rate, or for those loans where the annual percentage rate 
exceeds certain thresholds over the average prime offer rate for a 
comparable transaction, based on the loan's amount and lien status. 
In addition, where permitted, prepayment penalties may not exceed 
three percent of the outstanding balance of the loan in the first 
year, two percent in the second year, and one percent in the third 
year. Creditors who offer a consumer a loan with a prepayment 
penalty must also offer the consumer a loan without a prepayment 
penalty. Under section 129C(b)(2)(A)(vii) of TILA, the total 
``points and fees'' for a QM may not exceed three percent of the 
total loan amount, and under section 103(aa)(4) of TILA, the 
definition of ``points and fees'' now includes the maximum 
prepayment penalties and fees which may be charged or collected 
under the terms of the credit transaction. TILA also limits 
prepayment penalties in section 103(aa)(1)(A)(iii), which defines a 
``high-cost'' mortgage loan as any mortgage (regardless of its cost 
or other terms) in which the creditor may charge prepayment fees or 
penalties more than 36 months after the closing of the transaction, 
or in which the fees or penalties exceed, in the aggregate, more 
than two (2) percent of the amount prepaid. And under section 129(c) 
of TILA, as amended by the Dodd-Frank Act, high-cost mortgage loans 
may not contain prepayment penalties.

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[[Page 24123]]

Request for Comment
    119(a). The Agencies request comment on all aspects of the proposed 
rules' limits on the payment terms of a QRM. In addition, the Agencies 
request comment on the following matters. 119(b). Should additional or 
different payment terms be established for QRMs? Commenters requesting 
additional or different limits are encouraged to provide data 
indicating that such additional or different terms would result in a 
lower risk of default. 119(c). Would different interest rate caps, such 
as a one percent (100 basis points) increase in any twelve month 
period, be more appropriate than the caps set forth in the proposal? 
119(d). Recognizing the very damaging effects that prepayment penalties 
had on some borrowers during the recent housing market distress, the 
proposed rules do not permit any loans with prepayment penalties to 
qualify as a QRM. Often, the borrower that suffered because of the 
existence of such penalties were those with large, unaffordable payment 
shocks as low initial rates expired or those whose credit standing 
improved after origination of the loan, but who were not able to 
benefit from such improvements by refinancing into a potentially lower 
rate loan. Given the tight credit and product standards proposed for 
QRMs, such conditions are less likely to be relevant to QRM borrowers, 
and some QRM borrowers might reasonably benefit from an opportunity to 
obtain a mortgage with modest prepayment penalties in the early years 
of the loan in exchange for lower interest rate. Should the Agencies 
permit prepayment penalties in QRM loans (to the extent otherwise 
possible within the limits established for QMs)? 119(e). If so, what, 
if any, limitations should apply to such penalties?
4. Loan-to-Value Ratio
    Borrowers with substantial equity in their properties--that is, a 
low LTV ratio--should in principle default infrequently. If faced with 
financial hardship, such borrowers typically can sell their homes or 
otherwise tap their accumulated home equity. To ensure that QRMs have 
low default risk consistent with their complete exemption from risk 
retention requirements, the Agencies are proposing that the QRM 
definition require a sizable equity contribution.
    The figure below shows the default rate among loans in the LPS 
dataset considered by the Agencies (and described above) with the data 
further restricted to those loans with fully documented income in order 
to better match the proposed underwriting characteristics of QRMs. 
These loans are divided by their purpose: To purchase a home, to 
refinance an existing loan without increasing its principal balance (a 
so-called ``rate and term'' refinancing), or to refinance an existing 
loan and increase the principal balance (a so-called ``cash out'' 
refinancing). Different types of mortgage transactions (i.e., purchase, 
rate and term refinancing, and cash-out refinancing) had varying rates 
of default.
    As shown in the figure below, default rates increase noticeably 
among loans used to purchase homes at LTV ratios above 80 percent. The 
precise size of this increase and the LTV ratio at which it occurs are 
likely to vary across datasets and over time. Nonetheless, lenders have 
long experience underwriting loans with LTV ratios of 80 percent or 
less and there is substantial data indicating that loans with LTV 
ratios of 80 percent or less perform noticeably better than those with 
LTV ratios above 80 percent.\145\ Data from the Enterprises concerning 
loans purchased or securitized by the Enterprises also show that first-
lien purchase loans with high LTV ratios are riskier. The data show 
that purchase loans estimated to meet other QRM standards, but that 
exceeded the proposed LTV ratio cap, had serious delinquency rates 80 
to 128 basis points higher when examining loans originated from 1997 to 
2002, and 287 to 443 basis points higher for loans originated from 2005 
to 2007.\146\ Based on historical loan performance data, the Agencies 
are proposing a requirement for a LTV ratio of 80 percent for purchase 
mortgage transactions.
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    \145\ While many creditworthy homebuyers seeking to purchase a 
home will likely not have the 20 percent down payment required for a 
QRM, sound underwriting of these loans may well require the prudent 
use of judgment about the borrower's ability to repay the loan and 
other risk mitigants that are likely to change over time and vary 
from borrower to borrower. Such judgments are difficult to 
incorporate accurately and effectively into a rule without 
introducing substantial complexity and cost.
    \146\ See Appendix A in the proposed common rule.
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    According to the LPS dataset, loans used to refinance existing 
mortgages have a greater likelihood of default at every LTV ratio level 
than those used to purchase homes; moreover, the default rates are 
steeper for refinance loans than for purchase loans, suggesting that 
refinance loans are more sensitive to the LTV ratio. Thus, to control 
risk of default in a manner consistent with the complete exemption 
afforded QRMs, the Agencies are proposing that these loans have tighter 
LTV ratio requirements than purchase loans.
    The proposed rules put a combined LTV ratio cap for QRMs of 75 
percent on rate and term refinance loans and 70 percent for cash-out 
refinance loans.\147\ Again, estimates of the performance of these 
loans vary across datasets. However, because they have historically 
performed worse than purchase loans, and because they are more 
sensitive to LTV ratios than purchase loans, the lower combined LTV 
ratio caps on refinance loans should work to reduce risk of default on 
these loans.
---------------------------------------------------------------------------

    \147\ See proposed rules at Sec.  --.15(a) for the proposed 
definition of a ``rate and term refinancing'' and a ``cash-out 
refinancing.''
---------------------------------------------------------------------------

    Again, the data from the Enterprises indicates that these LTV ratio 
caps should significantly reduce the default rate on QRMs that are 
refinancing transactions. These data show that rate and term 
refinancings that are estimated to meet other QRM standards, but are 
estimated to have exceeded the proposed combined LTV cap, had serious 
delinquency rates 32 to 70 basis points higher when examining loans 
originated from 1997 to 2002, and 196 to 539 basis points higher for 
loans originated from 2005 to 2007. For cash-out refinancings that are 
estimated to meet other QRM standards, but are estimated to have 
exceeded the proposed combined LTV cap, such loans had serious 
delinquency rates 42 to 81 basis points higher when examining loans 
originated between 1997 and 2002, and 255 to 405 basis points higher 
when examining loans originated from 2005 to 2007.

[[Page 24124]]

[GRAPHIC] [TIFF OMITTED] TP29AP11.002

Request for Comment
    120. The Agencies seek comment on the appropriateness of the 
proposed LTV and combined LTV ratios for the different types of 
mortgage transactions.
5. Down Payment
    If a mortgage transaction is for the purchase of a one-to-four 
family property, then the proposed rules require that the borrower 
provide a cash down payment in an amount equal to at least the sum of:
    (i) The closing costs payable by the borrower in connection with 
the mortgage transaction;
    (ii) 20 percent of the lesser of--
    (A) The estimated market value of the one-to-four family property 
as determined by a qualifying appraisal (as described in the following 
section); and
    (B) The purchase price of the one-to-four family property to be 
paid in connection with the mortgage transaction; and
    (iii) If the estimated market value of the one-to-four family 
property as determined by a qualifying appraisal is less than the 
purchase price of the one-to-four family property to be paid in 
connection with the mortgage transaction, the difference between these 
amounts.
    For example, the down payment amount would equal $30,000 on a 
mortgage transaction with $10,000 in borrower-paid closing costs, and 
where the purchase price equaled $100,000 on a property with a 
qualifying appraisal that reflects a $100,000 market value as follows: 
(i) $10,000 in closing costs; plus (ii) $20,000 (based on 20 percent of 
the $100,000 purchase price which is less than or equal to the $100,000 
market value); plus (iii) $0 (due to purchase price being less than or 
equal to the market value of the property). However, the down payment 
amount would equal $40,000 on a mortgage transaction with $10,000 in 
closing costs, and where the purchase price equaled $110,000 on a 
property with a qualifying appraisal that reflects a $100,000 market 
value as follows: (i) $10,000 in closing costs; plus (ii) $20,000 
(based on 20 percent of the $100,000 market value which is less than 
the $110,000 purchase price); plus (iii) $10,000 (difference between 
the $110,000 purchase price and the $100,000 market value).
    Because historical data indicate that borrowers with a meaningful 
equity interest in their properties exhibit a lower risk of 
default,\148\ the proposal does not permit the dilution of a borrower's 
equity position by allowing the financing of closing costs.
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    \148\ See Austin Kelly, ``Skin in the Game: Zero Down Payment 
Mortgage Default,'' Federal Housing Finance Agency, Journal of 
Housing Research, Vol. 19, No. 2, 2008, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1330132.
---------------------------------------------------------------------------

    The proposal also provides that the funds used by the borrower to 
meet the 20 percent down payment requirement must come from one or more 
acceptable sources of the borrower's own funds as specified in the 
Additional QRM Standards Appendix to the proposed rules. The acceptable 
sources of funds included in the Additional QRM Standards Appendix are 
those that would be considered acceptable sources under the 
``Acceptable Sources of Borrower Funds'' section in the HUD Handbook 
(e.g., savings and checking accounts, cash saved at home, stocks and 
bonds, and gifts, including eligible downpayment assistance programs).
    While the down payment must come from acceptable sources of 
borrower funds, which as noted above can include gifts, the Agencies 
are proposing to prohibit the use of any funds subject to a contractual 
obligation by the borrower to repay and any funds from a person or 
entity with an interest in the sale of the property (other than the 
borrower). In addition, the Agencies are proposing to require 
originators to verify and document the borrower's compliance with the 
down payment requirements in accordance with the verification and 
documentation standards set forth in the Additional QRM Standards 
Appendix. Again, these standards are based on the standards in the HUD 
Handbook.
Request for Comment
    121. The Agencies request comment on the proposed amount and 
acceptable sources of funds for the borrower's down payment.

[[Page 24125]]

6. Qualifying Appraisal
    After considering a variety of valuation information sources, the 
Agencies are proposing that a QRM be supported by a written appraisal 
that conforms to generally accepted appraisal standards, as evidenced 
by the Uniform Standards of Professional Appraisal Practice, the 
appraisal requirements of the Federal banking agencies, and applicable 
laws.\149\ The Agencies believe these requirements will help ensure 
that the appraisal is prepared by an independent third party with the 
experience, competence, and knowledge necessary to provide an accurate 
and objective valuation based on the property's actual physical 
condition. These requirements are intended to ensure the integrity of 
the appraisal process and the accuracy of the estimate of the market 
value of the residential property.
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    \149\ The appraisal regulations and guidance promulgated by the 
Federal banking agencies generally do not apply to real estate-
related financial transactions that qualify for sale to a U.S. 
government agency or to the Enterprises, or in which the appraisal 
conforms to the appropriate Enterprise's appraisal standards 
applicable to that category of real estate. See 12 CFR 34.43(a)(10) 
(OCC); 12 CFR 225.63(a)(10); (Board); 12 CFR 323(a)(10) (FDIC). The 
Interagency Appraisal and Evaluation Guidelines clarify that such 
transactions are expected to meet all of the underwriting 
requirements of the appropriate agency or Enterprise, including its 
appraisal requirements. Residential mortgage loans sold to the 
Enterprises will, in any case, continue to be required to meet 
appraisal standards of the appropriate Enterprise applicable to that 
category of real estate.
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Request for Comment
    122. Should other valuation approaches be considered in determining 
the value of the real property pledged on the mortgage transaction?
7. Ability To Repay
    Section 15G provides that, in defining QRMs, the Agencies should 
take into consideration underwriting and product features that 
historical loan performance data indicate result in a lower risk of 
default, such as standards with respect to the borrower's residual 
income,\150\ after taking account of all monthly obligations, the ratio 
of the borrower's housing payment to the borrower's monthly income, or 
the ratio of the borrower's total monthly installment payments to the 
borrower's income.\151\
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    \150\ Residual income is the borrower's remaining or 
``residual'' monthly income after all of the borrower's monthly 
obligations, including the residual mortgage loan, have been paid.
    \151\ See 15 U.S.C. 78o-11(e)(4)(B)(ii).
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    Intuitively, a measure of a borrower's debt service burden ought to 
be an important predictor of default. These burdens are often measured 
as the ratio of the borrower's mortgage payment to his gross income 
(often known as the ``front-end ratio'') and the ratio of all of the 
borrower's debt payments to his gross income (often known as the 
``back-end ratio'').\152\
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    \152\ The Agencies' assessment of the available information 
suggested that the residual income method for assessing the 
borrowers' ability to repay is neither widely used nor consistently 
calculated. Therefore, the Agencies are not proposing to require the 
use of the residual income method for purposes of determining a 
borrower's ability to repay.
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    The Agencies' review found that historical loan performance data 
did not always contain information on the borrowers' monthly income and 
debt obligations and, where such data were provided, the information 
was not always captured in a consistent manner, making it difficult to 
aggregate for statistical analysis. For example, the loan performance 
data from the Enterprises reflect that borrowers with lower DTI ratios 
had lower default rates before consideration of other underwriting 
factors. These data show that, among all loan types, loans that are 
estimated to meet the other proposed QRM standards, but had a front-end 
ratio of more than 28 percent or a back-end ratio of more than 36 
percent, had serious delinquency rates 20 to 39 basis points higher 
when examining loans originated from 1997 to 2002, and 236 to 359 basis 
points higher for loans originated from 2005 to 2007.\153\
---------------------------------------------------------------------------

    \153\ See Appendix A to this Supplementary Information.
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    However, in the LPS data described above, payment to income ratios 
did not add significant predictive power once the effects of credit 
history, loan type, and LTV were considered. These results could be due 
to different originators using different definitions of income and non-
mortgage debt burdens. Additionally, loan officers and brokers may only 
verify and report the minimum income necessary to qualify a borrower 
for a loan (or for the type of loan or interest rate sought). For 
example, two borrowers with the same loan type and the same reported 
front-end DTI ratio might actually have different incomes because one 
borrower's spouse works, but this additional income was not necessary 
to qualify for the loan and so was not reported.
    The rule proposes a front-end ratio limit of 28 percent and a back-
end ratio limit of 36 percent, which are consistent with the overall 
conservative nature of the QRM standards. These ratios are consistent 
with the standards widely used in the early 1990s that limited front-
end ratios to a maximum of 25 to 28 percent and back-end ratios to a 
maximum of 33 to 36 percent, with the higher ratios only available to 
borrowers with relatively large down payments.\154\ As noted above and 
described more fully in Appendix A to this Supplementary Information, 
loan performance data from the Enterprises indicate that these ratios 
are likely to help contribute to a set of QRM standards indicative of 
loans of very high credit quality.
---------------------------------------------------------------------------

    \154\ See National Association of Realtors, ``Financing the Home 
Purchase: The Real Estate Professional's Guide,'' Chicago: National 
Association of Realtors (1993), at 20.
---------------------------------------------------------------------------

    For purposes of calculating these proposed ratios, the proposal 
would require originators to use the borrower's monthly gross income, 
as determined in accordance with the effective income standards set 
forth in the HUD Handbook, which have been incorporated into the 
Additional QRM Standards Appendix to the proposed rules. In addition, 
originators would be required to use the borrower's monthly housing 
debt in calculating the front-end ratio, and the borrower's total 
monthly debt in calculating the back-end ratio, as such debt amounts 
are defined in the HUD Handbook and incorporated into the Additional 
QRM Standards Appendix. The proposed rules, however, specifically 
provide that an originator must include in the borrower's monthly 
housing debt and total monthly debt any monthly pro rata payments for 
real estate taxes, insurance, ground rent, special assessments, and 
homeowner and condominium association dues. This requirement is 
intended to help ensure that the borrower has the capacity to meet 
these ongoing, housing-related monthly obligations, even where the 
borrower does not pay these obligations on a monthly basis.
    The proposed rules also require that originators verify and 
document the borrower's monthly gross income, monthly housing debt, and 
monthly total debt in accordance with the verification and 
documentation standards of the HUD Handbook, as incorporated into the 
Additional QRM Standards Appendix.\155\ The proposed rules also require 
the originator to determine the amount of the monthly first-lien 
mortgage payment and, in the case of refinancing transactions, the 
monthly payment for other debt secured by the property (including any 
open-end credit transaction as if fully drawn) that to the creditor's 
knowledge would exist at the closing of the refinancing

[[Page 24126]]

transaction. These determinations would be based on the maximum 
interest rate chargeable during the first five years after the date on 
which the first regular periodic payment will be due and a payment 
schedule that fully amortizes the mortgage over the full term of the 
loan, which cannot exceed 30 years. These requirements are based on 
those that apply to QMs under section 129C of TILA.\156\
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    \155\ Section 129C(b)(2)(A)(iii) of TILA requires that the 
originator of a QM verify and document the income and financial 
resources relied upon in qualifying the borrower for the loan.
    \156\ See section 129C(b)(2)(A)(iv) and (v) of TILA.
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Request for Comment
    123. The Agencies seek comment on the appropriateness of the 
proposed front-end ratio limit of 28 percent and the proposed back-end 
ratio limit of 36 percent.
8. Points and Fees
    Section --.15(d)(7) of the proposed rules reflects the restriction 
on ``points and fees'' for QMs contained in section 129C(b)(2)(A)(vii) 
of TILA. As with other standards set forth in TILA for QMs, the 
Agencies have considered the statutory provisions governing points and 
fees for QMs and have sought to ensure that the standards applicable to 
QRMs would be no broader than those that may potentially apply to 
QMs.\157\ Under the proposal, in order for a mortgage to be a QRM, the 
total points and fees payable by the borrower in connection with the 
mortgage transaction may not exceed three percent of the total loan 
amount, which would be calculated in the same manner as in Regulation 
Z.\158\ Under Regulation Z, the ``total loan amount'' is calculated by 
taking the ``amount financed,'' as defined in 12 CFR 226.18(b), and 
deducting any ``points and fees'' that are financed by the creditor and 
not otherwise deducted in calculating the amount financed. In this way, 
the three percent limit on points and fees for QRMs will be based on 
the amount of credit extended to the borrower without taking into 
account the financed points and fees themselves.
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    \157\ Section 129C(b)(2)(C) of TILA defines the term ``points 
and fees'' with reference to the definition of ``points and fees'' 
in section 103(aa)(4) of TILA, which deals with ``high-cost'' 
mortgages. Under section 103(aa)(4) of TILA, as amended by the Dodd-
Frank Act, points and fees include: (i) All items included in the 
``finance charge'' under TILA, except interest or the time-price 
differential; (ii) All compensation paid directly or indirectly by a 
consumer or creditor to a mortgage originator (as defined in section 
103(cc)(2) of TILA) from any source, including a mortgage originator 
that is also the creditor in a table-funded transaction; (iii) Each 
of the charges listed in section 106(e) of TILA (except an escrow 
for future payment of taxes) that are excluded from the definition 
of the ``finance charge'' (under section 106(e) of TILA, the 
following items when charged in connection with any extension of 
credit secured by an interest in real property are not included in 
the computation of the finance charge with respect to that 
transaction: fees or premiums for title examination, title 
insurance, or similar purposes; fees for preparation of loan-related 
documents; escrows for future payments of taxes and insurance; fees 
for notarizing deeds and other documents; appraisal fees, including 
fees related to any pest infestation or flood hazard inspections 
conducted prior to closing; and fees or charges for credit reports), 
unless the charge is reasonable, the creditor receives no direct or 
indirect compensation, and the charge is paid to a third party 
unaffiliated with the creditor; (iv) Premiums or other charges 
payable at or before closing for any credit life, credit disability, 
credit unemployment, or credit property insurance, or any other 
accident, loss-of-income, life or health insurance, or any payments 
made directly or indirectly for any debt cancellation or suspension 
agreement or contract, except that insurance premiums or debt 
cancellation or suspension fees calculated and paid in full on a 
monthly basis are not considered financed by the creditor; (v) The 
maximum prepayment fees and penalties that may be charged or 
collected under the terms of the credit transaction; (vi) All 
prepayment fees or penalties that are incurred by the consumer if 
the consumer refinances a previous loan made or currently held by 
the same creditor or an affiliate of the creditor; and (vii) Such 
other charges as the Board determines to be appropriate.
    For purposes of a ``qualified mortgage,'' section 129C(b)(2)(C) 
of TILA provides some exceptions to the definition of ``points and 
fees'' under section 103(aa)(4) of TILA. In calculating points and 
fees for purposes of the three percent limit applicable to QMs, 
points and fees do not include bona fide third party charges not 
retained by the mortgage originator, creditor, or an affiliate of 
the creditor or mortgage originator. See section 129C(b)(2)(C)(i) of 
TILA. In addition, for purposes of computing the total points and 
fees for the three percent QM limit, the total points and fees 
excludes certain bona fide discount points if certain conditions are 
met. See section 129C(b)(2)(C)(ii)-(iv) of TILA.
    \158\ See 12 CFR 226.32(a)(1)(ii) and (b)(1).
---------------------------------------------------------------------------

    For QRMs, the proposed rules would define ``points and fees'' 
consistent with the current definition of ``points and fees'' under the 
Board's Regulation Z, but would include the additional items added to 
the TILA definition of ``points and fees'' by the Dodd-Frank Act. 
Specifically, the term ``points and fees'' would include: (1) All items 
required to be disclosed as ``finance charges'' under Regulation Z (12 
CFR 226.4(a) and 226.4(b)), except interest or the time-price 
differential; (2) All compensation paid directly or indirectly by a 
consumer or creditor to a ``mortgage originator'' (as defined in 
section 103(cc)(2) of TILA) from any source,\159\ including a mortgage 
originator that is also the creditor in a table-funded transaction; 
\160\ (3) All items excluded from the ``finance charge'' under 
Regulation Z listed in 12 CFR 226.4(c)(7) (other than amounts held for 
future payment of taxes), unless the charge is reasonable, the creditor 
and mortgage originator receive no direct or indirect compensation in 
connection with the charge, and the charge is not paid to an affiliate 
of the creditor or mortgage originator; (4) Premiums or other charges 
payable at or before closing for any credit life, credit disability, 
credit unemployment, or credit property insurance, or any other 
accident, loss-of-income, life or health insurance, or any payments 
made directly or indirectly for any debt cancellation or suspension 
agreement or contract; \161\ and (5) All prepayment fees or penalties 
that are incurred by the consumer if the consumer refinances a previous 
loan made or currently held by the same creditor or an affiliate of the 
same creditor.\162\
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    \159\ Under section 103(aa)(4)(B) of TILA, as amended by the 
Dodd-Frank Act, compensation paid to a mortgage originator ``from 
any source'' is included in ``points and fees.''
    \160\ For clarity, the proposal does not include the phrase 
``from any source'' because the proposal would include all 
compensation paid directly or indirectly by a consumer or creditor 
to a mortgage originator, which would necessarily include 
compensation from any source.
    \161\ All such charges are included in ``points and fees'' under 
section 103(aa)(4)(D) of TILA and, thus, are included in points and 
fees under the proposal. Another amendment to TILA added by the 
Dodd-Frank Act (Section 129C(d) of TILA), restricts creditors from 
financing certain of these charges. This prohibition will be 
implemented when the Board or CFPB implements that section of TILA.
    \162\ Section 103(aa)(4) of TILA also includes in ``points and 
fees'' the maximum prepayment fees and penalties which may be 
charged or collected under the terms of the credit transaction. 
However, under the proposed rule, QRMs would not be permitted to 
have prepayment penalties.
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    Items excluded from the finance charge under 12 CFR 226.4(c), 
226.4(d) and 226.4(e) would be excluded from the proposal's definition 
of ``points and fees,'' unless those items are specifically included 
elsewhere in the definition of ``points and fees.'' The proposed rules 
do not exclude ``bona fide discount points'' or certain bona fide 
third-party charges from ``points and fees.'' The Agencies are also not 
proposing an adjustment to the limitation on points and fees for 
smaller loans as required for QMs under section 129C(b)(2)(D) of TILA.
Request for Comment
    124(a). The Agencies request comment on all aspects of the proposed 
definition of ``points and fees'' for QRM purposes. In addition, the 
Agencies seek comment on the following matters. 124(b). Should the 
exclusion for ``bona fide discount points'' and certain bona fide 
third-party charges be included in the final rule? 124(c). If so, in 
what manner? 124(d) Would an adjustment to the limitation on points and 
fees for smaller loans, if implemented under section 129C(b)(2)(D) of 
TILA, be appropriate for QRMs?
9. Assumability Prohibition
    Under the proposed rules, a QRM could not be assumable by any 
person who was not a borrower under the

[[Page 24127]]

original mortgage transaction. If a mortgage were assumable after 
origination or its securitization, it is possible that the new borrower 
would not satisfy the QRM requirements, which could result in the 
credit quality of the mortgage being significantly and negatively 
affected. While the rule could require that the loan essentially be re-
underwritten using the QRM standards in connection with an assumption 
to address these concerns, such a requirement could impose significant 
costs on the holder or servicer of the mortgage, and potentially 
increase the cost and reduce the liquidity of QRMs.
10. Default Mitigation
    The proposed rules also would require that the originator of a QRM 
incorporate into the mortgage transaction documents certain 
requirements regarding servicing policies and procedures for the 
mortgage, including requirements regarding loss mitigation actions, 
subordinate liens, and responsibility for assumption of these 
requirements if servicing rights with respect to the QRM are sold or 
transferred. Timely initiation of loss mitigation activities often 
reduces the risk of subsequent default on mortgages backing the 
securitization transaction. Disclosure of the policies and procedures 
governing loss mitigation activities also will inform borrowers and 
provide clarity regarding the consequences of default.
    Specifically, the proposed rules would require that the QRM 
mortgage transaction documents include a provision obliging the 
creditor of the QRM to have servicing policies and procedures to 
promptly initiate activities to mitigate risk of default on the 
mortgage loan (within 90 days after the mortgage loan becomes 
delinquent, if such delinquency has not been cured) and to take loss 
mitigation actions, such as engaging in loan modifications, in the 
event the estimated net present value of such action exceeds the 
estimated net present value of recovery through foreclosure, without 
regard to whether the particular loss mitigation action benefits the 
interests of a particular class of investors in a securitization. The 
loss mitigation policies and procedures must also take into account the 
borrower's ability to repay and other appropriate underwriting 
criteria. The policies and procedures must include servicing 
compensation arrangements that are consistent with the creditor's 
commitment to engage in loss mitigation activities.
    In addition, under the proposal, the creditor's policies and 
procedures would be required to provide that the creditor will 
implement procedures for addressing any whole loan owned by the 
creditor (or any of its affiliates) and secured by a subordinate lien 
on the same property that secures a QRM if the borrower becomes more 
than 90 days past due on the QRM. If the QRM will collateralize any 
asset-backed securities, the creditor must disclose those procedures or 
require them to be disclosed to potential investors within a reasonable 
period of time prior to the sale of the asset-backed securities. The 
Agencies are proposing inclusion of this element in the policies and 
procedures because modification of the QRM could affect the status of 
subordinate mortgages, and the existence of a subordinate mortgage 
could affect the structuring of actions to mitigate losses on the QRM.
    As proposed, the mortgage originator must provide disclosure of the 
foregoing default mitigation commitments to the borrower at or prior to 
the closing of the mortgage transaction. Also, the mortgage originator 
would be required to include terms in the mortgage transaction 
documents under which the creditor commits to include in its servicing 
policies and procedures that it will not sell transfer, or assign 
servicing rights for the mortgage loan unless the transfer agreement 
requires the purchaser, transferee or assignee servicer to abide by the 
default mitigation commitments of the creditor as if the purchaser, 
transferee or assignee were the creditor under this section of the 
proposed rule.\163\
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    \163\ As noted above, the policies and procedures prescribed 
under the proposed rule require the creditor's procedures with 
respect to subordinate liens held by the creditor or affiliates on 
the mortgaged property to be disclosed to potential investors if the 
creditor subsequently securitizes the QRM. In addition, the Agencies 
expect the creditor's commitments to have servicing policies and 
procedures as specified in the proposed rule would be reflected in 
the servicing agreement(s) for the securitization, which set forth 
the terms under which the servicer will service the securitized 
assets, and would thus be disclosed to potential investors in a 
securitization offering covered by the SEC's Regulation AB. If the 
servicing is transferred from the creditor to another entity who 
acts as securitization servicer, the Agencies expect these 
commitments would nevertheless be carried forward to the servicing 
agreements for the securitizations and disclosed pursuant to 
Regulation AB, because the policies and procedures prescribed under 
the proposed rule require the creditor not to transfer QRM servicing 
unless the agreement requires the transferee to abide by the same 
kind of default mitigation commitments as are required of the 
creditor.
---------------------------------------------------------------------------

    It is noted that there is an ongoing interagency effort among 
certain Federal regulatory agencies, including some of the Agencies 
joining in this proposed rulemaking, to develop national mortgage 
servicing standards that would apply to servicers of residential 
mortgages, including bank and bank-affiliated servicers and servicers 
that are not affiliated with a bank.\164\ These standards would apply 
to residential mortgages regardless of whether the mortgages are QRMs, 
are securitized or are held in portfolio by a financial institution. 
The primary objective of this separate interagency effort is to develop 
a comprehensive, consistent, and enforceable set of servicing standards 
for residential mortgages that servicers would have to meet. In 
addition to servicing matters covered in this proposal, the separate 
interagency effort on national mortgage servicing standards is taking 
into consideration a number of other aspects of servicing, including 
the quality of customer service provided throughout the life of a 
mortgage; the processing and handling of customer payments; foreclosure 
processing; operational and internal controls; and servicer 
compensation and payment obligations. The agencies participating in 
this separate effort currently anticipate requesting comment on 
proposed standards later this year, with the goal of having final 
standards issued shortly afterward. At this time, with respect to 
specific servicing standards, the Agencies are requesting comment only 
on those particular standards included in this proposed rulemaking.
---------------------------------------------------------------------------

    \164\ Participating agencies in the effort include the Federal 
Reserve Board, the Office of the Comptroller of the Currency, the 
Federal Deposit Insurance Corporation, the Office of Thrift 
Supervision, the Federal Housing Finance Agency, the Department of 
Housing and Urban Development (including the Government National 
Mortgage Association (Ginnie Mae)), the Consumer Financial 
Protection Bureau, and the Department of the Treasury.
---------------------------------------------------------------------------

Request for Comment
    125. The Agencies solicit comment on whether the definition of QRM 
should include servicing requirements.
    126(a). Should the proposed servicing requirements be more or less 
robust? 126(b) If so, how should the proposed servicing requirements be 
changed?
    127(a). Should servicers be required, as is proposed, to have 
policies and procedures that provide for loss mitigation activities if 
the borrower is 90 days delinquent, but default may not have occurred 
under the mortgage loan transaction documents?
    127(b). Should the policies and procedures require, or at least not 
prohibit, initiation of loss mitigation activities, including loan 
modifications, when default is reasonably foreseeable?
    127(c). What would be the practical implications of such an 
approach?
    128(a). Should servicers be required, as is proposed, to have 
policies and

[[Page 24128]]

procedures that provide for loss mitigation actions for QRMs (within 90 
days after delinquency, unless the delinquency is cured) when the 
estimated net present value of the action would exceed the estimated 
net present value of recovery through foreclosure?
    128(b). Should those policies and procedures be required to include 
specific actions, such as (i) restructuring the mortgage loan; (ii) 
reducing the borrower's payments through interest rate reduction, 
extension of loan maturity, or similar actions; (iii) making principal 
reductions, or (iv) taking other loss mitigation action in the event 
that the estimated net present value of that action would exceed the 
estimated net present value of recovery though loan foreclosure?
    128(c). What would be the practical implications of such an 
approach?
    129. The Agencies seek comment on whether other servicing standards 
should be included, consistent with the statute's authority.
    130(a). What are the practical implications of the proposed QRM 
servicing standards?
    130(b). Do commenters envision operational issues in implementing 
the standards?
    130(c). If so, please describe.
    130(d). Are the standards sufficiently clear?
    130(e). If not, which should be clarified?
    131. Would the proposed QRM servicing conditions restrict or impede 
the ability or willingness of certain classes of originators to 
originate QRMs?
    132(a). Is the scope of the QRM servicing standards appropriate?
    132(b). Are there alternatives to QRM servicing standards that 
would better address servicing issues?
    133(a). Should the servicing requirements be part of the pooling 
and servicing agreement rather than part of the mortgage transaction 
documents?
    133(b). Should they be included in both sets of documentation?
    134(a). If a creditor or an affiliate has an ownership interest in 
a subordinate lien mortgage and the creditor services the first lien 
mortgage, should the creditor be required to implement pre-defined 
processes to address any potential conflicts of interest when the first 
lien loan becomes 90 days past due?
    134(b). What types of processes should be required?
    134(c). Would specification of a particular process unduly limit 
the ability of the creditor to address different circumstances that may 
arise?
    135(a). Should the Agencies impose a standard requiring that a 
particular risk mitigation activity maximize the recovery based on net 
present value to avoid potential conflicts of interests between 
different classes of investors?
    135(b). How would that be determined?
    135(c). Would this approach improve the ability of servicers to 
best represent the interest of all investors?
    135(d). What would be the practical implications under such an 
approach?
    136(a). Are the proposed compensation requirements appropriate?
    136(b). For example, should the compensation structure be more 
specific, depending on the type of risk mitigation action deemed 
appropriate?
    136(c). If so, how?
    137(a). Pursuant to servicers' obligations to investors under the 
terms of securitization transaction documents, servicers are generally 
required to advance scheduled payments of principal and interest to 
investors after a borrower has become past due for some period of time 
(with respect to private label securities, usually until foreclosure is 
started), to the extent that such monthly advances are expected to be 
reimbursed from future payments and collections or insurance payments 
or proceeds of liquidation of the related mortgage loan. These monthly 
advances are intended to maintain a regular flow of scheduled principal 
and interest payments on the certificates rather than to guarantee or 
insure against losses. Does funding of these delinquent payments create 
liquidity constraints for servicers that incent servicers to take 
action (e.g., start foreclosure) that may not be in the investors' best 
interest?
    137(b). Should the Agencies put limits on servicers advancing 
delinquent mortgagors' payments of principal and interest to investors?
    137(c). Would such a limitation harm investors' interests?
    137(d). What are the practical implications of such an approach?
    138(a). Should the Agencies require servicing standards for a 
broader class of securitized residential mortgages?
    138(b). If so, how?
    139. For commenters responding to any of the foregoing questions or 
with recommendations for different or additional approaches to 
servicing standards, are such approaches consistent with the statutory 
factors the Agencies are directed to take into account under the QRM 
exemption?
    140. The Agencies are in the process of developing national 
mortgage servicing standards, which would cover all residential 
mortgage loans, including QRMs. In light of this, the Agencies seek 
comment on whether the establishment of national mortgage servicing 
standards is a more effective means to address the problems associated 
with servicing of all loans.

D. Repurchase of Loans Subsequently Determined To Be Non-Qualified 
After Closing

    As required by section 15G and discussed in greater detail in Part 
IV.B of this Supplementary Information, the proposed rules require that 
the depositor of the asset-backed security certify that it has 
evaluated the effectiveness of its internal supervisory controls with 
respect to the process for ensuring that all assets that collateralize 
the asset-backed security are QRMs and has concluded that such internal 
supervisory controls are effective. Nevertheless, the Agencies 
recognize that, despite the use of robust processes and procedures, it 
is possible that one or more loans included in a QRM securitization 
transaction may later be determined to have not met the QRM definition 
due to inadvertent error. For example, an originator conducting post-
origination file reviews for compliance or internal audit purposes may 
find that some aspects of the documentation required to verify the 
borrower's monthly gross income were not obtained. If the discovery of 
such an error after closing of the securitization terminated the 
securitization's QRM exemption, then sponsors and investors may well be 
unwilling to participate in the securitization of QRMs. On the other 
hand, unless sponsors or depositors face some penalty for the inclusion 
in a QRM securitization transaction of loans that do not meet the QRM 
standards, sponsors and depositors may not have the proper incentives 
to use all reasonable efforts to ensure that securitizations relying on 
the QRM exemption are collateralized only by loans that meet all of the 
QRM standards.
    The proposal seeks to balance these interests by providing that a 
sponsor that has relied on the QRM exemption with respect to a 
securitization transaction would not lose the exemption, with respect 
to the transaction, if, after closing of the securitization 
transaction, it is determined that one or more of the mortgages 
collateralizing the ABS do not meet all of the criteria to be a QRM, 
provided that certain conditions are met. First, the depositor must 
have certified that it evaluated the effectiveness of its internal 
supervisory controls with respect to the process for ensuring that all 
of the loans that collateralize the ABS are QRMs and concluded that its 
internal supervisory

[[Page 24129]]

controls are effective, as required by Sec.  --.15(b)(4) of the 
proposed rules. Second, the sponsor must repurchase the loan(s) 
determined to not be QRMs from the issuing entity at a price at least 
equal to the remaining principal balance and accrued interest on the 
loan(s). The sponsor must complete this repurchase no later than ninety 
(90) days after the determination that the loan(s) does not satisfy the 
QRM requirements. Third, the sponsor must promptly notify (or cause to 
be notified) all investors of the ABS of any loan(s) that are required 
to be repurchased by the sponsor pursuant to this repurchase 
obligation, including the principal amount of the repurchased loan(s) 
and the cause for such repurchase.
    These conditions are intended to provide a sponsor with the 
opportunity to correct inadvertent errors by promptly repurchasing any 
non-qualified loan(s) and removing such non-qualifying loan(s) from the 
pool, while protecting investors. Moreover, in light of this buy-back 
requirement, sponsors should continue to have a strong economic 
incentive to ensure that all loans backing a QRM securitization satisfy 
all of the conditions applicable to QRMs prior to closing of the 
transaction.
Request for Comment
    141(a). Should the Agencies require, as a condition to qualify for 
the QRM exemption, that the sponsor repurchase the entire pool of loans 
collateralizing the ABS if the amount or percentage of the loans that 
are required to be repurchased due to the failure to meet the QRM 
standards reaches a certain threshold?
    141(b). If so, what threshold would be appropriate?
    142(a). Should the Agencies permit a sponsor, within the first four 
months after the closing of a QRM securitization, to substitute a 
comparable QRM loan for a residential mortgage loan that is determined, 
post-closing, to not be a QRM (in lieu of purchasing the loan for 
cash)?
    142(b). If so, is four months an appropriate period or should the 
rule allow more or less time?

E. Request for Comment on Possible Alternative Approach

    As discussed previously, the approach taken by the proposal to 
implementing the exemption for QRMs within the broader context of 
section 15G is to limit QRMs to mortgages of very high credit quality, 
while providing sponsors considerable flexibility in how they meet the 
risk retention requirements for loans that do not qualify as QRMs (or 
for another exemption). An alternative approach to implementing the 
exemption for QRMs within the context of section 15G would be to create 
a broader definition of a QRM that includes a wider range of mortgages 
of potentially lower credit quality, and make the risk retention 
requirements stricter for non-QRM mortgages, such as by, for example, 
providing sponsors with less flexibility in how they retain risk (e.g., 
requiring vertical risk retention or increasing the base risk retention 
requirement), in order to provide additional incentives to originate 
QRM loans. Under this type of alternative approach, the proposed QRM 
standards could be modified as follows--
    (a) If the mortgage transaction is a purchase transaction or rate 
and term refinancing, the combined LTV ratio of the mortgage 
transaction could not exceed 90 percent (with no restriction on the 
existence of a subordinate lien at closing of a purchase transaction);
    (b) If the mortgage transaction is a cash-out refinancing, the 
combined LTV ratio of the mortgage transaction could not exceed 75 
percent;
    (c) The borrower's required cash down payment on a purchase 
mortgage could be reduced to--
    (1) 10 percent (rather than the proposed 20 percent) of the lesser 
of the property's market value or purchase price, plus
    (2) The closing costs payable by the borrower in connection with 
the mortgage transaction; and
    (d) A borrower's maximum front-end DTI ratio could be increased 
to--
    (1) 33 percent, if payments under the mortgage could not increase 
by more than 20 percent over the life of the mortgage; or
    (2) 28 percent, if payments under the mortgage could increase by 
more than 20 percent over the life of the mortgage;
    (e) A borrower's maximum back-end DTI ratio would be increased to--
    (1) 41 percent, if payments under the mortgage could not increase 
by more than 20 percent over the life of the mortgage; or
    (2) 38 percent, if payments under the mortgage could increase by 
more than 20 percent over the life of the mortgage; and
    (f) Mortgage guarantee insurance or other types of insurance or 
credit enhancements provided by third parties could be taken into 
account in determining whether the borrower met the applicable combined 
LTV requirement, but such insurance or enhancements would not alter the 
90 percent maximum combined LTV for purchase transactions and rate and 
term refinancings and 75 percent maximum combined LTV for cash-out 
refinancings.
Request for Comment
    143. The Agencies seek comment on the potential benefits and costs 
of the alternative approach, with a broader QRM exemption combined with 
a stricter set of risk retention requirements for non-QRM mortgages.
    144(a). If such an alternative approach were to be adopted, what 
stricter risk retention requirements would be appropriate in order to 
provide additional incentives to underwrite a greater share of 
origination volume within the QRM definition?
    144(b). Should such stricter requirements involve the form of risk 
retention or a higher amount of risk retention?
    144(c). Are there other changes that would achieve the same 
objective?
    145. How would this approach help to ensure high quality loan 
underwriting standards and align the interests of investors?
    146(a). Would this approach have the practical effect of exempting 
the securitization of most residential loans from the risk retention 
requirement?
    146(b). If so, how would this positively and/or negatively affect 
investors in such securitizations?
    146(c). Would an offering of an ABS backed by loans complying with 
the lower standards in the alternative approach adequately promote the 
necessary alignment of incentives among originators, sponsors, and 
investors?
    147. What impact might a broader QRM definition have on the 
pricing, liquidity, and availability of loans that might fall outside 
the broader QRM boundary?
    148. Would the lower QRM standards under the alternative approach 
be consistent with the requirement that QRMs be fully exempted from 
section 15G's risk retention requirements?
    149. How could this type of alternative approach be designed to 
limit the likelihood that loans with significant credit risk are 
included in the pool and thus not subject to risk retention?

V. Reduced Risk Retention Requirements for ABS Backed by Qualifying 
Commercial Real Estate, Commercial or Automobile Loans

    Under Section 15G, the regulations issued by the Agencies must 
include underwriting standards for residential mortgages, commercial 
real estate (CRE) loans, commercial loans, and automobile loans, as 
well as any other asset class that the Federal banking

[[Page 24130]]

agencies and the Commission deem appropriate.\165\ These underwriting 
standards, which are to be established by the Federal banking agencies, 
must specify terms, conditions, and characteristics of a loan within 
such asset class that indicate low credit risk with respect to the 
loan.\166\ Section 15G provides that the Agencies must allow a 
securitizer to retain less than five percent of the credit risk of 
loans within an asset class that meet the underwriting standards set 
jointly by the Federal banking agencies if such loans are securitized 
through the issuance of an ABS.\167\
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    \165\ See 15 U.S.C. 78o-11(c)(2)(A).
    \166\ See id. at sec. 78o-11(c)(2)(B).
    \167\ See id. at sec. 78o-11(c)(1)(B)(ii).
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    The following discussion addresses the underwriting standards 
established by the Federal banking agencies for CRE loans, commercial 
loans, and automobile loans.

A. Asset Classes

    As directed by section 15G, Sec.  --.18 to Sec.  --.20 of the 
proposed rules include underwriting standards for CRE loans, commercial 
loans, and automobile loans that would allow ABS backed exclusively by 
loans that meet these underwriting standards to qualify for a less than 
five percent risk retention requirement. As discussed in further detail 
in Part IV of this Supplementary Information, the proposed rules 
provide a complete exemption from the risk retention requirements for 
securitization transactions that are collateralized solely by 
residential mortgages that qualify as QRMs. Accordingly, the proposed 
rules do establish separate rules for securitizations of residential 
mortgages that have terms, conditions and characteristics that indicate 
a low credit risk as required by section 15G(c)(2)(B). The Agencies do 
not propose to establish additional underwriting standards for 
residential mortgages that would be different from those set forth in 
the QRM standards. In determining not to propose additional standards, 
the Agencies considered, among other things, whether requiring risk 
retention greater than zero percent but less than five percent would 
provide an adequate incentive to sponsors and originators to underwrite 
assets meeting those standards.
    Although the Agencies recognize that securitization markets include 
securitizations collateralized by various subcategories of assets with 
unique characteristics, the Agencies believe that the asset classes 
specified in section 15G (e.g., residential mortgages, commercial 
mortgages, commercial loans and automobile loans) capture a 
predominance of all ABS issuances by dollar volume where the underlying 
pool is comprised of relatively homogeneous assets. Moreover, general 
information for ABS issuances collateralized exclusively by CRE, 
commercial, and automobile loans is widely available and, due to the 
homogeneity of the underlying pool, lends itself to the establishment 
of uniform underwriting standards establishing low credit risk for all 
of the assets within the pool. These characteristics also should 
facilitate the ability of investors and supervisors to monitor a 
sponsor's compliance with the proposed standards and disclosure 
requirements in a timely and comprehensive manner.
    In contrast, many of the other types of ABS issuances are 
collateralized by assets that exhibit significant heterogeneity, or 
assets that by their nature exhibit relatively high credit risk. Such 
factors make it difficult to develop underwriting standards 
establishing low credit risk that can be, as a practical matter, 
applicable to an entire class of underlying assets in the manner 
described under section 15G. Accordingly, for purposes of the proposed 
rules, the Federal banking agencies and the Commission do not propose 
to establish asset classes in addition to those set forth in section 
15G.
Request for Comment
    150(a). Should underwriting standards be developed for residential 
mortgage loans that are different from those proposed for the QRM 
definition and under which a sponsor would be required to retain more 
than zero but less than five percent of the credit risk?
    150(b). If so, what should those underwriting standards be and how 
should they differ from those established under the QRM provisions?
    150(c). For example, should such underwriting standards allow for a 
loan-to-value ratio of up to 90 percent for purchase mortgage loans if 
there is mortgage insurance that would provide investors similar 
amounts of loss protection upon default as would be provided by a 
mortgage with a loan-to-value ratio of 80 percent?
    150(d). If additional underwriting standards were established for 
residential mortgages, what amount of risk retention less than five 
percent should be required for loans meeting such standards, and should 
it be required to be held in a particular form?
    151. If any new underwriting standards for residential mortgages 
were to be established and permit the inclusion of mortgage guarantee 
insurance or other types of insurance or credit enhancements, what 
financial eligibility standards should be incorporated for mortgage 
insurance or financial product providers?
    152. Should additional asset classes beyond those specified in 
section 15G be established and, if so, how should the associated 
underwriting standards for such additional asset classes be defined? 
Commenters are encouraged to provide supporting data regarding the 
prevalence of each asset class in the ABS market, as well as loan-level 
performance data that provides information on the characteristics, 
terms, and conditions of the underlying loans and that may be useful in 
developing standards that identify loans within such asset class that 
have low credit risk.

B. ABS Collateralized Exclusively by Qualifying CRE Loans, Commercial 
Loans, or Auto Loans

    Section 15G(c)(1)(B)(ii) provides that a sponsor of an ABS issuance 
collateralized exclusively by loans that meet the underwriting 
standards prescribed by the Federal banking agencies under section 
15G(c)(2)(B) shall be required to retain less than five percent of the 
credit risk of the securitized loans. The Agencies are proposing a zero 
percent risk retention requirement (that is, the sponsor would not be 
required to retain any portion of the credit risk) for ABS issuances 
collateralized exclusively by loans from one of the asset classes 
specified in the proposed rules, and which meet the proposed 
underwriting standards. In proposing a zero risk retention requirement 
for ABS backed by qualifying loans within these asset classes, the 
Agencies considered several factors. As discussed below, the 
underwriting standards the Agencies propose are, as is appropriate for 
a zero percent risk retention requirement, very conservative. In 
addition, the Agencies were concerned that establishing a risk 
retention requirement between zero and five percent for qualifying 
assets within these asset classes may not sufficiently incent 
securitizers to allocate the resources necessary to ensure that the 
collateral backing an ABS issuance satisfies the proposed underwriting 
standards, as there may be significant compliance costs to structure 
and maintain the retention piece of a securitization structure 
(irrespective of how it is calibrated) and provide required disclosures 
to investors.
    Sections --.18 to --.20 of the proposed rules establish 
underwriting standards for CRE loans, commercial

[[Page 24131]]

loans, and automobile loans that are designed to ensure that loans in 
these asset classes, which qualify for a zero risk retention 
requirement, are of very low credit risk. The proposed underwriting 
standards are based on the Federal banking agencies' expertise and 
supervisory experience with respect to the credit risk of the loans in 
each of the prescribed asset classes. Commercial, CRE and automobile 
loans that meet the conservative underwriting standards included in the 
proposed rules are referred to as ``qualifying'' commercial, CRE and 
automobile loans.
    The Federal banking agencies have sought to make the standards for 
qualifying commercial loans, CRE loans and automobile loans, 
transparent to, and verifiable by, originators, securitizers, investors 
and supervisors. To facilitate compliance with the rule, as well as the 
supervision and enforcement of the rule, the proposed standards are 
generally prescriptive, rather than principle-based.
    The Agencies recognize that many prudently underwritten CRE, 
commercial and automobile loans will not meet the underwriting 
standards set forth in Sec.  --.18 to Sec.  --.20 of the proposed 
rules. For example, the Agencies note that the proposed standards are 
significantly more prudent and conservative than those required to 
attain a ``pass'' credit under the Federal banking agencies' 
supervisory practices. Sponsors of ABS backed by loans that do not meet 
the underwriting standards will be required to retain some of the 
credit risk of the securitized loans in accordance with the proposed 
regulation (unless another exemption is available). However, as noted 
previously, the proposed rules provide sponsors with several options 
for complying with the risk retention requirements of section 15G so as 
to reduce the potential for these requirements to disrupt 
securitization markets or materially affect the flow or pricing of 
credit to borrowers and businesses. Moreover, the national pool of 
commercial loans, CRE loans and automobile loans that do not meet the 
standards set forth in Sec.  --.18 to Sec.  --.20 of the proposed rules 
should be sufficiently large, and include enough prudently underwritten 
loans, so that ABS backed by such loans will be routinely issued and 
purchased by a wide variety of investors. As a result, the market for 
such securities should be relatively liquid.
Request for Comment
    153. The Agencies request comment on the appropriateness of a total 
exemption for sponsors of ABS issuances collateralized exclusively by 
qualifying CRE, commercial, or automobile loans that meet the 
underwriting standards set forth in Sec.  --.18 to Sec.  --.20 of the 
proposed rules. Commenters who support a partial exemption are 
encouraged to provide information regarding the methodology the 
Agencies should use to calibrate the retention requirement, in a manner 
that considers the relative risk of the securitization transaction, 
both within and across the proposed asset classes.

C. Qualifying Commercial Loans

    For an ABS issuance collateralized exclusively by commercial loans 
to qualify for a zero percent risk retention requirement, the 
commercial loans must satisfy the underwriting standards set forth in 
Sec.  --.18 of the proposed rules. The proposed rules define a 
commercial loan as any secured or unsecured loan to a company or an 
individual for business purposes, other than a loan to purchase or 
refinance a one-to-four family residential property, a loan for the 
purpose of financing agricultural production, or a loan for which the 
primary source (that is, 50 percent or more) of repayment is expected 
to be derived from rents collected from persons or entities that are 
not affiliates of the borrower. Commercial loans encompass a wide 
variety of credit types and terms. However, these loans generally are 
similar in that the primary source of repayment is revenue from the 
business operations of the borrower. The standards for a qualifying 
commercial loan use measures that are consistent with, but more prudent 
and conservative than, industry standards for evaluating the financial 
condition and repayment capacity of a borrower.
1. Ability To Repay
    The historical performance of a borrower with respect to its 
outstanding loan obligations is, generally, a useful measure for 
evaluating whether the borrower will likely satisfy new debt 
obligations. However, even where a borrower has a consistent and 
documented record of satisfactory performance on prior debt 
obligations, the originator also must ensure that the borrower's 
financial condition has not changed in a way that could adversely 
affect its capacity to satisfy new loan obligations. Accordingly, under 
Sec.  --.18 of the proposed rules, the originator of a qualifying 
commercial loan must verify and document the financial condition of the 
borrower as of the end of the borrower's two most recently completed 
fiscal years. In addition, the originator must conduct an analysis of 
the borrower's ability to service its overall debt obligations during 
the next two years, based on reasonable projections. A commercial loan 
would meet the standards in the proposed rules only if the originator 
determines that, during the borrower's two most recently completed 
fiscal years and the two-year period after the closing of the 
commercial loan, the borrower had, or is expected to have: (1) A total 
liabilities ratio \168\ of 50 percent or less; (2) a leverage ratio 
\169\ of 3.0 or less; and (3) a debt service coverage (DSC) ratio \170\ 
of 1.5 or greater.
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    \168\ Total liabilities ratio equals the borrower's total 
liabilities, determined in accordance with GAAP divided by the sum 
of the borrower's total liabilities and equity, less the borrower's 
intangible assets, with each component determined in accordance with 
GAAP.
    \169\ The leverage ratio equals the borrower's total debt 
divided by the borrower's annual income before expenses for 
interest, tax, depreciation, and amortization (EBITDA), as 
determined in accordance with GAAP.
    \170\ The DSC ratio equals the borrower's EBITDA, as of the most 
recently completed fiscal year divided by the sum of the borrower's 
annual payments for principal and interest on any debt obligation.
---------------------------------------------------------------------------

    Under the proposed rules, the loan payments under the commercial 
loan must be determined based on straight-line amortization of 
principal and interest that fully amortize the debt over a term that 
does not exceed five years from the closing date for the loan. In 
addition, the loan documentation must require payments no less 
frequently than quarterly over a term that does not exceed five years. 
The Federal banking agencies believe these proposed methods for 
assessing a borrower's financial condition and ability to repay are 
consistent with industry standards for evaluating the financial 
condition and repayment capacity of a borrower.
    The proposal does not require that a commercial loan be secured by 
collateral in order to be a qualifying commercial loan. However, where 
the loan is made on a secured basis, the proposed rules include several 
conditions designed to ensure that the collateral is maintained and 
available to be used to satisfy the borrower's obligations under the 
loan, if necessary. For example, if the commercial loan is originated 
on a secured basis, the originator must obtain a first-lien security 
interest on the pledged property and include covenants in the loan 
agreement that require the borrower to maintain the condition of the 
collateral and permit the originator to inspect the collateral and the 
books and records of the borrower. The loan documentation for the 
commercial loan also must include covenants that require the borrower 
to: (a) Pay all applicable taxes, fees, charges and claims where

[[Page 24132]]

nonpayment could give rise to a lien against the collateral; (b) take 
any action necessary to perfect or defend the security interest (or 
priority of the security interest) of the originator (or any subsequent 
holder of the loan) in the collateral against claims adverse to the 
lender's interest; and (c) maintain insurance that protects against 
loss on the collateral at least up to the amount of the loan, and that 
names the originator (or any subsequent holder of the loan) as an 
additional insured or loss payee.
2. Risk Management and Monitoring Requirements
    To mitigate default risk during periods of economic stress or when 
the financial condition of the borrower otherwise deteriorates, the 
proposed rules require the loan documentation to include covenants that 
restrict the borrower's ability to incur additional debt or transfer or 
pledge its assets. Specifically, the proposed rules require the loan 
documentation to provide certain covenants, including a covenant to 
provide to the originator (or any subsequent holder) and the servicer 
financial information and supporting schedules on an ongoing basis, but 
not less frequently than quarterly. The covenants must also prohibit 
the borrower from retaining or entering into a debt arrangement that 
permits payments-in-kind, and place limitations on the transfer of any 
of the borrower's assets, on the borrower's ability to create other 
security interests with respect to any of its assets, and on any change 
to the name, location, or organizational structure of the borrower (or 
any other party that pledges collateral for the loan). The loan 
documentation must also include covenants designed to protect the value 
of any collateral pledged to secure the loan that require the borrower 
(and any other party that pledges collateral for the loan) to: (a) 
Maintain insurance protecting against loss on any collateral at least 
up to the amount of the loan and names the originator (or any 
subsequent holder) as an additional insured, loss payee, or similar 
beneficiary; (b) pay any taxes, charges, claims and fees where 
nonpayment could give rise to a lien against any collateral securing 
the loan; (c) take any action necessary to perfect or defend the 
security interest of the originator or any subsequent holder of the 
loan in the collateral for the commercial loan or the priority thereof, 
and to defend the collateral against claims adverse to the lender's 
interest; (d) permit the originator or any subsequent holder of the 
loan, and the servicer of the loan, to inspect the collateral and the 
books and records of the borrower; and (e) maintain the physical 
condition of any collateral for the loan.
Request for Comment
    154(a). Are the proposed standards appropriate for a qualifying 
commercial loan? 154(b) Are these standards sufficient and appropriate 
to ensure that qualifying commercial loans are of very low credit risk?
    155. Are the metrics to measure a borrower's financial capacity, 
and the specified parameter for each metric, an appropriate standard?

D. Qualifying CRE Loans

    Section --.19 of the proposed rules provides the underwriting 
standards for qualifying CRE loans. Such standards focus predominately 
on the following criteria: The borrower's ability to repay the loan; 
the value of, and the originator's security interest in, the 
collateral; the LTV ratio; and whether the loan documentation includes 
the appropriate covenants to protect the collateral.
    For purposes of the proposed rules, a CRE loan is defined as a loan 
secured by a property with five or more single-family units, or by 
nonfarm non-residential real property, the primary source (50 percent 
or more) of repayment for which is expected to be derived from: (a) The 
proceeds of the sale, refinancing, or permanent financing of the 
property; or (b) rental income associated with the property other than 
rental income that is derived from any affiliate of the borrower. 
However, under the proposal, a CRE loan does not include a land 
development and construction loan (including one-to-four family 
residential or commercial construction loans), loans on raw or 
unimproved land, a loan to a real estate investment trust (REIT), or an 
unsecured loan.
1. Ability To Repay
    The Federal banking agencies believe that prudent underwriting 
standards should require the originator to verify and document the 
capacity of the borrower, or income from the underlying collateral, to 
repay the loan. For qualifying CRE loans, the proposed underwriting 
standards focus on both the sufficiency of the CRE property's net 
operating income (NOI) \171\ less replacement reserves to support the 
payment of principal and interest over the full term of the CRE loan, 
as well as the financial condition of the borrower (independent of the 
CRE property's NOI less replacement reserves) to repay other 
outstanding debt obligations. Specifically, the proposed rules 
generally require the borrower to have a DSC ratio \172\ of 1.7 or 
greater. The proposed rules, however, would allow a CRE loan on 
properties with a demonstrated history of stable NOI to have a slightly 
lower (1.5) DSC ratio. To qualify for the lower DSC ratio requirement, 
the CRE loan must be secured by either (1) a residential property 
(other than a hotel, motel, inn, hospital, nursing home, or other 
similar facility where dwellings are not leased to residents) that 
consists of five or more dwelling units primarily for residential use, 
and where at least 75 percent of the CRE property's NOI is derived from 
residential rents and tenant amenities (such as a swimming pool, gym 
membership, or parking fees); or (2) commercial nonfarm real property 
(other than a multi-family property or a hotel, inn or similar 
property) that is occupied by, and derives at least 80 percent of its 
aggregate gross revenue from, one or more ``qualified tenants.'' Under 
the proposed rules, a qualified tenant is defined as a tenant that (1) 
is subject to a triple net lease \173\ that is current and performing 
with respect to the CRE property, or (2) was subject to a triple net 
lease that has expired, currently is leasing the property on a month-
to-month basis, has occupied the property for at least three years 
prior to closing, and is current and performing with respect to all 
obligations associated with the CRE property. All outstanding triple 
net leases must have a remaining maturity of at least six months, 
unless the tenant leases the property on a month-to-month basis as 
described above.
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    \171\ Section --.16 of the proposed rules defines NOI as income 
generated by a CRE property, net of all expenses that have been 
deducted for federal income tax purposes (except depreciation, debt 
service expenses, and federal and state income taxes) and any 
unusual or nonrecurring income items.
    \172\ Under Sec.  --.16 of the proposed rules (definition of 
``Debt service coverage (DSC) ratio''), the DSC ratio for a CRE loan 
equals the CRE property's annual NOI less the annual replacement 
reserve of the CRE property at the time of origination divided by 
the sum of the borrower's annual payments for principal and interest 
on any debt obligation.
    \173\ For purposes of the proposed rules, a triple net lease 
means a lease pursuant to which the lessee is required to pay rent 
as well as taxes, insurance, and maintenance expenses associated 
with the property.
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    Under the proposed rules, the originator of a qualifying CRE loan 
must also determine whether the borrower has the ability to service its 
other outstanding debt obligations, net of any income generated from 
the CRE (based on the NOI). This requirement is intended to ensure that 
the CRE remains a reliable source of repayment and

[[Page 24133]]

security for the CRE loan, and not other debts of the borrower, over 
the full loan term. Accordingly, under the proposed rules, the 
originator must conduct an analysis of the borrower's ability, and 
determine that the borrower has the ability, to service all outstanding 
debt obligations over the two years following the origination date for 
the loan, based on reasonable projections and including the new debt 
obligation. A borrower's historical performance in satisfying debt 
obligations is often an indicator of whether the borrower will satisfy 
a new debt obligation. Accordingly, as part of this analysis, the 
originator also must document and verify that the borrower has 
satisfied all debt obligations over a look-back period of at least two 
years.
    The proposed rules generally require that a qualifying CRE loan 
have a fixed stated interest rate to reduce the potential for the 
borrower to experience payment shock. However, the proposed rules allow 
the interest rate to be adjustable if the borrower obtains, prior to or 
concurrently with the origination date for the CRE loan, a derivative 
product that effectively results in the borrower paying a fixed 
interest rate on the CRE loan. Commercial borrowers often purchase a 
derivative (such as an interest rate swap) that effectively ``convert'' 
an adjustable rate into a fixed rate. In addition, the proposed 
standards for qualifying CRE loans would prohibit terms that (1) permit 
the borrower to defer principal or interest payments; (2) allow the 
originator to establish an interest reserve to fund all or part of a 
payment on the loan; or, (3) provide a maturity date that is earlier 
than ten years following the closing date for the loan. Further, the 
loan payment amount must be based on straight-line amortization of the 
debt over the term of the loan not to exceed twenty (20) years, with 
payments made no less frequently than monthly over a term of at least 
ten (10) years.
2. Loan-to-Value Requirement
    The Agencies believe that prudent underwriting standards should 
limit the amount an originator may advance relative to the market value 
of the CRE property. Therefore, the Federal banking agencies are 
proposing to require a combined loan-to-value (CLTV) ratio of less than 
or equal to 65 percent for qualifying CRE loans. However, the recent 
crisis has demonstrated that the use of very low capitalization rates 
generally results in significantly higher market values for some CRE 
properties. Where the capitalization rate used in the appraisal is less 
than the 10-year interest rate swap rate \174\ plus 300 basis points, 
the maximum CLTV ratio requirement will be 60 percent to mitigate the 
effect of an artificially low capitalization rate.
---------------------------------------------------------------------------

    \174\ The 10-year interest rate swap rate is as reported on the 
previous day's Federal Reserve Statistical Release H.15: Selected 
Interest Rates.
---------------------------------------------------------------------------

3. Valuation of the Collateral
    Because the credit risk of a CRE loan is closely linked with the 
commercial real estate collateralizing the loan, the proposed rules 
include several conditions relating to the collateral. For example, 
under Sec.  --.19(b) of the proposed rules, the originator of a 
qualifying CRE loan must determine whether the purchase price for the 
CRE property that secures the loan reflects the current market value of 
the property, so as to ensure that the collateral is sufficient to 
recover any unpaid principal in the event of default, and that the 
borrower has sufficient equity in the property to incent continued 
performance of all loan obligations during an economic downturn or when 
the CRE property's NOI may not be sufficient to cover loan payments. To 
determine the value of the CRE property, the proposed rules require the 
originator to obtain an appraisal prepared not more than six months 
before the origination date for the loan, in accordance with the 
Uniform Standards of Professional Appraisal Practice and the appraisal 
requirements of the Federal banking agencies for the CRE property 
securing the loan. The appraisal report must provide an ``as is'' 
opinion of the current market value of the CRE property, which includes 
an income approach that uses a discounted cash flow analysis based on 
the CRE property's actual NOI. These requirements are intended to help 
ensure that the appraisal is prepared by an independent third party 
with the experience, competence, and knowledge necessary to provide an 
accurate and objective valuation based on the CRE property's actual 
physical condition.
    Environmental hazards, such as ground water contamination and the 
presence of lead or other harmful chemicals or substances, may 
potentially jeopardize the value of CRE property as well as the 
borrower's ability to repay the loan. Accordingly, under the proposed 
rules, the originator also must conduct an environmental risk 
assessment of the CRE property securing a qualifying CRE loan and, 
based on this assessment, take appropriate measures to mitigate any 
risk of loss to the value of the CRE property. Appropriate measures may 
include a reduction in the loan amount sufficient to reflect potential 
losses; however, where the assessment reveals significant environmental 
hazards, originators are encouraged to reconsider the primary loan 
decision. The originator can have a qualified third party perform the 
assessment, but remains responsible for ensuring that appropriate 
measures are taken to mitigate any risk of loss due to environmental 
risks.
4. Risk Management and Monitoring Requirements
    Under Sec.  --.19(b) of the proposed rules, the CRE loan 
documentation must provide certain covenants that are generally 
designed to facilitate the ability of the originator to monitor and 
manage credit risk over the full term of the loan. In developing the 
proposed covenants, the Federal banking agencies reviewed the 
supporting loan documentation for several recent ABS issuances 
collateralized by CRE loans. The proposed covenants are generally 
consistent with those provided in such loan documentation and, 
therefore, should reflect current industry practice and impose minimal 
compliance burden.
    As with the covenants required for commercial loans (as discussed 
in the previous section), the covenants for CRE loans require certain 
information be provided to the originator (or any subsequent holder) 
and the servicer financial on an ongoing basis. Additionally, with 
respect to CRE loans in particular, such information must include 
information on existing, maturing, and new leasing or rent-roll 
activity, as appropriate for the CRE property. This should assist the 
originator in monitoring volatility in the repayment capacity of the 
borrower, with respect to the CRE property's NOI and the borrower's 
financial condition.
    The loan documentation for a qualifying CRE loan also must include 
covenants restricting the ability of the borrower to create additional 
security interests with respect to the CRE property and covenants 
designed to help maintain the value of, and protect the originator's 
(or any subsequent holder's) security interest in, the collateral. 
These covenants are substantially the same as the covenants required 
for commercial loans (as discussed above). Additionally, a covenant 
must be included that requires the borrower to comply with all legal or 
contractual obligations applicable to the collateral. Finally, the loan 
documentation must include a covenant that prohibits the borrower from 
pledging the CRE property as security

[[Page 24134]]

for another loan, even where doing so results in the creation of a 
subordinate lien. The Agencies note, however, that the proposed rules 
provide an exception for loans that finance the purchase of machinery 
and equipment that is pledged as additional collateral for the CRE 
loan. This restriction is intended to ensure that the CRE property 
remains a reliable source of repayment and security for the CRE loan 
and the borrower does not become overleveraged, which could threaten 
the borrower's ability to repay the CRE loan. The proposed covenants 
must be applicable to the borrower as well as any other party who 
provides collateral for the loan.
Request for Comment
    156(a). Are the proposed requirements for a qualifying CRE loan 
appropriate?
    156(b). Are these standards sufficient to ensure that qualifying 
CRE loans have very low credit risk?
    157. Are the DSC metrics employed for measuring a borrower's 
financial capacity, and the specified parameter for each type of CRE 
property, an appropriate standard?
    158. The Agencies are proposing the same DSC ratio (1.5) for 
qualifying leased CRE loans and qualifying multifamily CRE loans, where 
the DSC analysis is based on at least two years of actual performance. 
The Agencies request comment whether the risk of default for qualifying 
non-Enterprise multifamily CRE loans is demonstrably lower as to 
justify a lower DSC ratio (such as 1.3). For example, the Agencies 
acknowledge that several highly-publicized defaults on large 
multifamily CRE loans had a much weaker structure (e.g., pro-forma 
underwritten DSC ratio or DSC ratio lower than 1.2) than what is 
contained in the proposed rules. Commenters should provide relevant 
criteria to be applied to qualify for a reduced DSC ratio and 
multifamily CRE loan performance data supporting the conclusion that 
multifamily loans meeting such criteria, as a class, have a 
correspondingly reduced risk of default to support a reduced DSC ratio 
for such loans.

D. Qualifying Automobile Loans

    Sec.  --.20 of the proposed rules provides underwriting standards 
for qualifying automobile loans. Although automobile loans involve 
secured financing, the collateral represents a highly depreciable 
asset. Accordingly, in developing the proposed underwriting standards 
for qualifying automobile loans, the Federal banking agencies sought to 
establish conservative requirements that are consistent with 
underwriting standards commonly used by the industry for unsecured 
installment credits. The proposed rules define an automobile loan as a 
loan to an individual to finance the purchase of, and secured by a 
first lien on, a passenger car or other passenger vehicle, such as a 
minivan, van, sport-utility vehicle, pickup truck, or similar light 
truck for personal, family, or household use. Under the proposed rules, 
an automobile loan would not include: (a) Any loan to finance fleet 
sales; (b) a personal cash loan secured by a previously purchased 
automobile; (c) a loan to finance the purchase of a commercial vehicle 
or farm equipment that is not used for personal, family, or household 
purposes; (d) any lease financing; or (e) a loan to finance the 
purchase of a vehicle with a salvage title.\175\ A qualifying 
automobile loan may be for a new \176\ or used vehicle.\177\
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    \175\ Under the proposed rules, a new vehicle is one that is not 
a used vehicle and has not been previously sold to an end user. A 
used vehicle is any vehicle driven more than the limited use 
necessary in transporting or road testing the vehicle prior to the 
initial sale of the vehicle and does not include any vehicle sold 
only for scrap or parts (title documents surrendered to the State 
and a salvage certificate issued). Salvage title is a form of 
vehicle title branding by an insurance company paying a claim on the 
vehicle, where the vehicle title notes that the vehicle has been 
severely damaged and/or deemed a total loss and uneconomical to 
repair.
    \176\ A new vehicle is one that is not a used vehicle and has 
not been previously sold to an end user.
    \177\ A used vehicle is any vehicle driven more than the limited 
use necessary in transporting or road testing the vehicle prior to 
the initial sale of the vehicle and does not include any vehicle 
sold only for scrap or parts (title documents surrendered to the 
State and a salvage certificate issued).
---------------------------------------------------------------------------

1. Ability To Repay
    A borrower's ability to repay an automobile loan primarily hinges 
on the amount of the borrower's monthly total debt obligations in 
relation to the borrower's monthly income. The Agencies have sought to 
establish standards for the verification and documentation of a 
borrower's ability to repay an automobile loan that will help ensure 
that the loan is of very low credit risk. At the same time, the 
proposed standards seek to reflect the nature of automobile loans and 
allow originators to make qualifying automobile loans without undue 
burden or disruption to existing methods for making automobile loans. 
For example, originators of automobile loans typically do not verify 
all of a borrower's income and debt obligations prior to making an 
automobile loan and requiring an originator to do so could 
significantly limit any incentive an originator might otherwise have to 
underwrite loans in accordance with the standards for a qualifying 
automobile loan. The Federal banking agencies have sought to balance 
these considerations in developing the proposed underwriting standards.
    Under the proposed rules, the borrower under a qualifying 
automobile loan must have a monthly DTI ratio of less than or equal to 
36 percent, consistent with the proposed DTI ratio requirement for QRM 
loans. The originator must make this determination, and document the 
underlying analysis, upon origination of the loan.
    Originators typically consider a borrower's income and debts in the 
credit approval process; however, the income history requirements of 
and the type of information considered by the originator vary widely 
across the industry. The Agencies believe that the use of consistent 
underwriting standards, to the extent practical and consistent with 
industry practice, should reduce implementation burden and ensure that 
all ABS issuances that qualify for an exemption from the risk retention 
requirement of the proposed rules are collateralized by high-quality, 
low credit risk loans. Based on the Federal banking agencies' 
supervisory experience in overseeing automobile lending, and in an 
effort to address these inconsistencies, the Federal banking agencies 
propose to require that originators verify and document the borrower's 
income using payroll stubs, tax returns, profit and loss statements, or 
other similar documentation, and that originators verify that all 
outstanding debts reported in a borrower's credit report are 
incorporated into the calculation of the borrower's ratio of total debt 
to monthly income (DTI ratio). For the borrower's monthly debt 
obligations, the Agencies propose to require the originator to obtain 
information from the borrower about all monthly housing payments (rent- 
or mortgage-related, including any property taxes, insurance, and home 
owners association fees), plus any of the following that are dependent 
on the borrower's income for payment: (1) Monthly payments on all debt 
and lease obligations (such as installment loans or credit card loans), 
including the monthly amount due on the automobile loan; (2) estimated 
monthly amortizing payments for any term debt, debts with other than 
monthly payments, and debts not in repayment (for example, deferred 
student loans, interest-only loans); and (3) any required monthly 
alimony, child support, or court-ordered payments. These elements are 
generally consistent many of the elements taken into account for the 
DTI requirement for the QRM standards.

[[Page 24135]]

2. Loan Terms
    The Federal banking agencies have found that, in supervising credit 
risk for such highly depreciable assets as automobiles, a fixed payment 
amount helps ensure that a borrower will have the ability to repay a 
loan over the life of the credit. Therefore, the proposed rules require 
qualifying automobile loans to provide for a fixed interest rate. In 
addition, under the proposal, the monthly payment must be calculated 
using straight-line amortization for the term of the loan, not to 
exceed five years, with the first payment due within 45 days of the 
closing date. The proposed rules also prohibit loan terms that permit a 
borrower to defer repayment of principal or interest.
    If the loan is for a new vehicle, the proposal would require the 
loan agreement provide a maturity date for the loan that does not 
exceed 5 years from the date of closing. If the loan is for a used 
vehicle, the loan agreement must provide that the term of the loan, 
plus the difference between the current model year and the vehicle's 
model year, cannot exceed 5 years. In addition, under the proposed 
rules, the transaction documents must require that the originator, 
subsequent holder of the loan, or any agent of the originator or 
subsequent holder maintain physical possession of the vehicle title 
until the loan is repaid in full and the borrower has satisfied all 
obligations under the loan agreement.
3. Reviewing Credit History
    The supervisory experience of the Federal banking agencies has 
shown that the historical payment performance of a borrower often is 
indicative of the borrower's ability to manage debt and willingness to 
repay a new loan. Accordingly, the proposed rules require the 
originator to verify and document, within 30 days of the origination 
date for a qualifying automobile loan, that the borrower (1) is not 
currently 30 days or more past due, in whole or in part, on any debt 
obligation and (2) has not been 60 days or more past due on, in whole 
or in part, on any debt obligation within the past 24 months. 
Additionally, the originator must verify and document that, within the 
previous 36 months, the borrower was not a debtor in any bankruptcy 
proceeding, subject to a Federal or State judgment for collection of 
any unpaid debt or foreclosure, repossession, deed in lieu of 
foreclosure, or short sale, and has not had any personal property 
repossessed. These credit history standards are the same as those 
established for QRMs.
    Similar to the safe harbor proposed in Sec.  --.15 of the proposed 
rules for the QRM requirements, the Federal banking agencies are 
proposing a safe harbor that would allow an originator to satisfy the 
documentation and verification requirements regarding a borrower's 
credit history. Under the proposal, an originator of a qualifying 
automobile loan will be deemed to have complied with the verification 
and documentation requirements related to the borrower's credit history 
(as described above) if, no more than 90 days before the automobile 
loan closing, the originator (1) obtains a credit report regarding the 
borrower from at least two consumer reporting agencies that compile and 
maintain files on consumers on a nationwide basis (within the meaning 
of 15 U.S.C. 1681a(p)); and (2) determines, based on the information in 
such credit reports, that the borrower meets the credit history 
requirements related described above. This safe harbor would not be 
available if the originator obtains a subsequent credit report before 
the closing of the automobile loan transaction that indicates that the 
borrower does not meet the credit history requirements.
4. Loan-to-Value
    Limitations relative to the amount financed are critical for 
automobile lending because the collateral is subject to such rapid 
depreciation. Therefore, under the proposed rules, an originator must 
document that, at the time of the closing of the automobile loan, the 
borrower tendered a minimum down payment from the borrower's personal 
funds and trade-in allowance,\178\ if any, that is sufficient to pay 
(1) the full cost of vehicle title, tax, and registration fees, as well 
as any dealer-imposed fees, and (2) 20 percent of the purchase price of 
the automobile. Under Sec.  --.16 of the proposed rules, the purchase 
price of a new automobile is the net amount the consumer paid for the 
vehicle after any manufacturer, dealer, or financing incentive payments 
or cash rebates are applied. However, for a used automobile, the 
purchase price is the lesser of either the actual purchase price or the 
value of the automobile, as determined by a nationally recognized 
automobile pricing agency (for example, N.A.D.A. or Kelley Blue Book) 
based on the manufacturer, year, model, features, and condition of the 
vehicle.
---------------------------------------------------------------------------

    \178\ Under Sec.  --.16 of the proposed rules, a trade-in 
allowance is the amount a vehicle purchaser is given as a credit at 
the purchase of a vehicle for the fair exchange of the borrower's 
existing vehicle to compensate the dealer for some portion of the 
vehicle purchase price, except that such amount shall not exceed the 
trade-in value of the used vehicle, as determined by a nationally 
recognized automobile pricing agency and based on the manufacturer, 
year, model, features, and condition of the vehicle.
---------------------------------------------------------------------------

    An illustration of how to determine the minimum down payment is 
provided below.

                       Down Payment Determination
------------------------------------------------------------------------
 
------------------------------------------------------------------------
$30,000.............................  Invoice Purchase Price.
$2,000..............................  Manufacturer Cash Rebate.
$1,000..............................  Dealer Incentive.
$27,000.............................  Purchase Price.
$5,400..............................  20% of Purchase Price.
$2,700..............................  Tax, Title, and License.
$8,100..............................  Down Payment Requirement.
$18,900.............................  Maximum Loan Amount.
------------------------------------------------------------------------

Request for Comment
    159(a). Are the proposed requirements for a qualifying automobile 
loan appropriate?
    159(b). Are these standards sufficient and appropriate to ensure 
that qualifying automobile loans have very low credit risk?
    160. Are the DTI ratios employed for measuring a borrower's 
financial capacity an appropriate standard?

E. Buy-Back Requirements for ABS Issuances Collateralized Exclusively 
by Qualifying Commercial, CRE or Automobile Loans

    Under the proposed rules, for a securitizer to qualify for a zero 
percent risk retention requirement under Sec.  --.18, Sec.  --.19 or 
Sec.  --.20, as applicable, the depositor must have (and certify that 
it has) effective internal supervisory controls with respect to its 
process for ensuring that all assets that collateralize the ABS meet 
the applicable underwriting standards set forth in Sec.  --.18, Sec.  
--.19 or Sec.  --.20, as applicable, of the proposed rules. The Federal 
banking agencies recognize that, despite the use of reasonable 
processes and procedures by a depositor or sponsor, it is possible that 
one or more loans included in a securitization transaction may later be 
determined to have not met the underwriting standards set forth in 
Sec.  --.18, Sec.  --.19 or Sec.  --.20, as applicable, of the proposed 
rules due to inadvertent error. For example, an originator conducting 
post-origination file reviews for compliance or internal audit purposes 
may find that some aspects of the documentation required to verify the 
borrower's monthly income were not obtained. The Agencies are concerned 
that if an error that is discovered after closing of the securitization 
were to make the issuance ineligible for the proposed exemption, then 
sponsors and investors may well be less willing to participate in 
securitization transactions that are structured to meet the

[[Page 24136]]

underwriting standards of Sec.  --.18, Sec.  --.19 or Sec.  --.20, as 
applicable, of the proposed rules. On the other hand, if there is no 
penalty for including in a securitization transaction a loan that does 
not meet such underwriting standards, sponsors and other participants 
in the securitization may not have the proper incentives to ensure that 
the issuance is collateralized exclusively by qualifying commercial, 
CRE, or automobile loans.
    The proposal seeks to balance these interests by providing that a 
sponsor that has relied on an exemption from the retention requirement 
under Sec.  --.18, Sec.  --.19 or Sec.  --.20, as applicable, of the 
proposed rules would not lose the exemption, if, after closing of the 
securitization transaction, it is determined that one or more of the 
loans collateralizing the ABS do not meet all of the applicable 
criteria under Sec.  --.18, Sec.  --.19 or Sec.  --.20, as applicable, 
of the proposed rules provided that:
    (a) The depositor certified the effectiveness of its internal 
supervisory controls for ensuring all of the loans backing the ABS are 
qualified loans under Sec.  --.18, Sec.  --.19 or Sec.  --.20, as 
applicable, of the proposed rules;
    (b) The sponsor repurchases the loan(s) determined to not meet the 
underwriting standards set forth in Sec.  --.18, Sec.  --.19 or Sec.  
--.20, as applicable, of the proposed rules from the issuing entity at 
a price at least equal to the remaining principal balance and accrued 
interest on the loan(s) no later than ninety (90) days after the 
determination that the loans do not satisfy the underwriting standards 
set forth in Sec.  --.18, Sec.  --.19 or Sec.  --.20, as applicable, of 
the proposed rules; and
    (c) The sponsor discloses to the investors of the ABS any loan(s) 
that are repurchased by the sponsor, including the principal amount of 
such repurchased loan(s) and the cause for such repurchase.
    These conditions, which are identical to those applicable to QRMs, 
are intended to provide the sponsor with the opportunity to correct 
inadvertent errors by repurchasing any non-qualified loan(s) and 
removing such non-qualifying loan(s) from the ABS, while protecting 
investors. Moreover, in light of the buy-back requirement, sponsors 
should continue to have a strong economic incentive to ensure that all 
loans backing a securitization subject to zero risk retention under 
Sec.  --.18, Sec.  --.19 or Sec.  --.20, as applicable, of the proposed 
rules satisfy all of the conditions applicable to such loans under 
Sec.  --.18, Sec.  --.19 or Sec.  --.20, as applicable, of the proposed 
rules.
Request for Comment
    161(a). The Agencies seek comment on whether the sponsor should be 
required to repurchase the entire pool of loans collateralizing the ABS 
if the amount or percentage of the loans that are required to be 
repurchased due to the failure to meet the underwriting standards under 
Sec.  --.18, Sec.  --.19 or Sec.  --.20, as applicable, of the proposed 
rules reaches a certain threshold. 161(b). If so, what threshold would 
be appropriate?

VI. General Exemptions

    Section 15G(c)(1)(G) and section 15G(e) of the Exchange Act require 
the Agencies to provide a total or partial exemption from the risk 
retention requirements for certain types of ABS or securitization 
transactions. In addition, section 15G(e)(1) permits the Federal 
banking agencies and the Commission jointly to adopt or issue 
additional exemptions, exceptions, or adjustments to the risk retention 
requirements of the rules, including exemptions, exceptions, or 
adjustments for classes of institutions or assets, if the exemption, 
exception, or adjustment would: (A) help ensure high quality 
underwriting standards for the securitizers and originators of assets 
that are securitized or available for securitization; and (B) encourage 
appropriate risk management practices by the securitizers and 
originators of assets, improve the access of consumers and businesses 
to credit on reasonable terms, or otherwise be in the public interest 
and for the protection of investors.\179\
---------------------------------------------------------------------------

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

    Consistent with these provisions, section --.21 of the proposed 
rules exempts certain types of ABS or securitization transactions from 
the credit risk retention requirements of the rule. Certain of these 
exemptions would appear in the rules of all Agencies, and others would 
appear only in the rules of certain Agencies, reflecting the different 
scope of the Agencies' rulewriting authority.

A. Exemption for Federally Insured or Guaranteed Residential, 
Multifamily, and Health Care Mortgage Loan Assets

    Proposed Sec.  --.21(a)(1) would implement section 15G(e)(3)(B) of 
the Exchange Act, which exempts from the risk retention requirements 
any residential, multifamily, or health care facility mortgage loan 
asset, or securitization based directly or indirectly on such an asset, 
that is insured or guaranteed by the United States or an agency of the 
United States.\180\ Section 15G expressly clarifies that Fannie Mae, 
Freddie Mac, and the Federal Home Loan Banks are not agencies of the 
United States,\181\ and the proposed rules include a specific provision 
making clear that the exemptions that apply to ABS that is issued, 
guaranteed or insured by a U.S. government agency or that is backed by 
loans insured or guaranteed by a U.S. government agency do not apply 
where the issuer, insurer or guarantor is Fannie Mae, Freddie Mac, or a 
Federal Home Loan Bank.\182\
---------------------------------------------------------------------------

    \180\ See 15 U.S.C. 78o-11(e)(3)(B).
    \181\ See 15 U.S.C. 78o-11(c)(1)(G)(ii), (e)(3)(B).
    \182\ See section 15 U.S.C. 78o-11(c)(1)(G) and (e)(3)(B) and 
the proposed rules at Sec.  --.21(c). At this time, the Federal Home 
Loan Banks do not, and are not authorized to, issue or guarantee 
asset-backed securities. Similarly, neither Fannie Mae, Freddie Mac, 
nor the Federal Home Loan Banks insure or guarantee individual 
loans, and none is authorized to do so. These references are 
included in Sec.  --.21(c) in order to conform the rule of 
construction to that which is required by section 15G(e)(3) of the 
Exchange Act.
---------------------------------------------------------------------------

    Proposed Sec.  --.21(a)(1)(i) would exempt any securitization 
transaction that is collateralized solely (excluding cash and cash 
equivalents) by residential, multifamily, or health care facility 
mortgage loan assets if the assets are insured or guaranteed as to the 
payment of principal and interest by the United States or an agency of 
the United States. Currently, the federal government insures or 
guarantees residential, multifamily, and healthcare facility loans 
through a variety of programs. Some examples include FHA insurance on 
single family mortgage loans which insures the lender at approximately 
100 percent of losses including advanced taxes, insurance and 
foreclosure costs. The Department of Veterans Administration also 
guarantees between 25 percent and 50 percent of lender losses in the 
event of residential borrower defaults. United States Department of 
Agriculture Rural Development also guarantees a sliding amount against 
loss of up to 90 percent of the original loan amount for single family 
loans. Each of the agencies sets underwriting and servicing standards, 
and in the case of some multifamily programs underwrites the mortgage 
itself. The agencies charge a fee or premium for the insurance/
guaranty, and monitor the performance of participating lenders and 
borrowers.
    Proposed Sec.  --.21(a)(1)(ii) would exempt any securitization 
transaction that involves the issuance of ABS if the ABS are insured or 
guaranteed as to the payment of principal and interest by the United 
States or an agency of the United States and that are collateralized 
solely (excluding cash and cash equivalents)

[[Page 24137]]

by residential, multifamily, or health care facility mortgage loan 
assets, or interests in such assets. Thus, proposed Sec.  
--.21(a)(1)(ii) would exempt ABS the payment of principal and interest 
on which is guaranteed by the United States or an agency of the United 
States and that is collateralized by ABS that itself is backed by 
residential, multifamily, or health care facility mortgage loan assets. 
Examples of securitization transactions that would be exempted under 
Sec.  --.21(a)(1)(ii) include securities guaranteed by the Government 
National Mortgage Association (Ginnie Mae). Ginnie Mae guarantees the 
issuance of securities by approved lender/issuers. These mortgage-
backed securities (MBS) are collateralized solely by federally insured 
or guaranteed loans. The insurance or guarantee protects the lender 
from some or all of the credit loss on the loan in the event of a 
borrower default. Upon issuance of the security, the issuer is 
obligated to advance from its own funds principal and interest to the 
investors if the borrower fails to pay the mortgage. Ginnie Mae 
guarantees to the investors that, in the event the issuer defaults on 
this obligation, Ginnie Mae will ensure the investors are paid. Ginnie 
Mae provides a similar guarantee for Real Estate Mortgage Investment 
Conduits (REMICs) and Platinum Securities, which are collateralized by 
Ginnie Mae MBS.
    Although, historically, federally insured/guaranteed loans have 
been securitized largely through Ginnie Mae, and Ginnie Mae is 
statutorily restricted to guaranteeing only securities collateralized 
by federally insured/guaranteed loans, this regulation would exempt a 
private securitization from risk retention to the extent it is 
collateralized solely by loans with federal insurance or guarantees. In 
addition, in cases where private securitization may be used the 
proposed rules do not limit the exemption based on the federal housing 
program involved or the nature of the government's insurance or 
guaranty coverage.
Request for Comments
    162(a). Have the Agencies appropriately implemented the exemption 
in section 15G(e)(3)(B) of the Exchange Act? 162(b). Why or why not?
    163. Are we correct in believing the federal department or agency 
issuing, insuring, or guaranteeing the ABS or collateral will monitor 
the quality of the assets securitized?
    164(a). While it appears that Congress may have intended to exempt 
all existing federal insurance or guarantee programs for residential, 
multifamily, or health care facility mortgage loans, comments are 
requested on the proposed rules where private securitization may be 
used in the following areas. Are there risks in exempting assets or ABS 
that are not significantly insured or guaranteed by a federal agency? 
164(b). If so, what level of federal guarantee or insurance should be 
required? 164(c). Would inclusion of additional requirements be 
appropriate in the public interest and for the protection of investors? 
164(d). Why or why not? 164(e). Would inclusion of additional 
requirements be disruptive to any federal guarantee or insurance 
programs established or authorized by Congress? 164(f). If so, how and 
to what extent?

B. Other Exemptions

    Section 15G(c)(1)(G)(ii) of the Exchange Act separately requires 
the rules of the Agencies to provide for a total or partial exemption 
from risk retention requirements for securitizations of assets that are 
issued or guaranteed by the United States or an agency of the United 
States as the Federal banking agencies and the Commission jointly 
determine appropriate in the public interest and the protection of 
investors.\183\ This exemptive authority is broader than the statutory 
exemption in section 15G(e)(3)(B) because it permits the exemption of 
any securitization of assets that are issued or guaranteed by the 
United States or any agency of the United States (and not just those 
based on residential, multifamily, or health care facility mortgage 
loan assets). Proposed Sec.  --.21(b)(1) fully exempts any 
securitization transaction if the asset-backed securities issued in the 
transaction are (i) collateralized solely (excluding cash and cash 
equivalents) by obligations issued by the United States or an agency of 
the United States; (ii) collateralized solely (excluding cash and cash 
equivalents) by assets that are fully insured or guaranteed as to the 
payment of principal and interest by the United States or an agency of 
the United States (other than those referred to in paragraph (a)(1)(i) 
of this section); \184\ or (iii) fully guaranteed as to the timely 
payment of principal and interest by the United States or any agency of 
the United States. This exemption is being proposed because payments of 
principal and interest on the ABS, or on the collateral backing the 
ABS, would be backed by the United States or an agency of the United 
States and, thus, the exemption should be appropriate in the public 
interest and for the protection of investors. The federal department or 
agency issuing, insuring or guaranteeing the ABS or collateral would 
monitor the quality of the assets securitized, consistent with the 
relevant statutory authority.\185\
---------------------------------------------------------------------------

    \183\ See 15 U.S.C. 78o-11(c)(1)(G).
    \184\ To avoid confusion, the proposed rules provide that these 
assets do not include the types of federally insured or guaranteed 
residential, mortgage, and health care mortgage loan assets that are 
covered by the exemption in proposed Sec.  --.21(a).
    \185\ See 12 U.S.C. 78o-11(e)(2).
---------------------------------------------------------------------------

    Proposed Sec.  --.21(a)(2) provides an exemption from the risk 
retention requirements of the rules for any securitization transaction 
that is collateralized solely (excluding cash and cash equivalents) by 
loans or other assets made, insured, guaranteed, or purchased by any 
institution that is subject to the supervision of the Farm Credit 
Administration, including the Federal Agricultural Mortgage 
Corporation. This provision implements the exemption for these types of 
assets included in section 15G(e)(3)(A) of the Exchange Act.\186\
---------------------------------------------------------------------------

    \186\ See 15 U.S.C. 78o-11(e)(3)(A).
---------------------------------------------------------------------------

    Section 15G(c)(1)(G)(iii) requires that the rules of the Agencies 
provide a total or partial exemption for an ABS if the security is (i) 
issued or guaranteed by any State of the United States, or by any 
political subdivision of a State or territory, or by any public 
instrumentality of a State or territory that is exempt from the 
registration requirements of the Securities Act by reason of section 
3(a)(2) of the Securities Act \187\ or (ii) defined as a qualified 
scholarship funding bond in section 150(d)(2) of the Internal Revenue 
Code of 1986.\188\ In light of the special treatment afforded such 
securities by Congress, the directive in section 15G(c)(1)(G)(iii), and 
the role of the State or municipal entity in issuing, insuring, or 
guaranteeing the ABS or collateral, the Agencies are proposing to 
exempt such ABS from the risk retention requirements of the rule as an 
exemption that is appropriate in the public interest and for the 
protection of investors.\189\
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 77c(a)(2).
    \188\ See 26 U.S.C. 150(d)(2). Such bonds are those issued by a 
not-for-profit corporation established and operated exclusively for 
the purpose of acquiring student loans incurred under the Higher 
Education Act of 1965, and organized at the request of a State or a 
political subdivision of a State. See 10 U.S.C. chapter 28.
    \189\ See Sec. Sec.  --.21(a)(3) and (4) of the proposed rules.
---------------------------------------------------------------------------

Request for Comments
    165(a). Have the Agencies appropriately implemented the exemption 
in section 15G(e)(3)(A) of the Exchange Act and the exemptive

[[Page 24138]]

authority in section 15G(c)(1)(G)(ii) and (iii)? 165(b). Why or why 
not?
    166(a). Is the proposed exemption for ABS issued or guaranteed by a 
State or municipal entity appropriate? 166(b). Is it under or over-
inclusive? 166(c). There may be some ABS in which the sponsor is a 
municipal entity (i.e., a State or Territory of the United States, the 
District of Columbia, any political subdivision of any State, Territory 
or the District of Columbia, or any public instrumentality of one or 
more States, Territories or the District of Columbia), however, the ABS 
are issued by a special purpose entity, that is created at the 
direction of the municipal entity, but are not issued or guaranteed by 
the municipal entity. Should the rules also exempt from the risk 
retention requirements asset-backed securities where the sponsor is a 
municipal entity? 166(d). There are some municipal ABS that are issued 
by a municipal entity and exempt by reason of Section 3(a)(2) of the 
Securities Act but may include assets originated using the same 
underwriting criteria as private label securitizations. Should the 
rules, as proposed, exempt them?
    167(a). Are there any ABS that are collateralized solely by 
obligations issued by the United States or an agency of the United 
States where the process of packaging and securitizing those 
obligations may raise issues that the risk retention requirement was 
designed to address? 167(b). For example, would a securitization by a 
non-governmental securitizer of debt issued by the Tennessee Valley 
Authority raise any issues such that the Agencies should provide only a 
partial exemption? 167(c). If so, what type of transactions and how 
should the Agencies determine the amount and form of risk retention to 
be required?

C. Exemption for Certain Resecuritization Transactions

    Section --.21(a)(5) of the proposed rules would exempt from the 
credit risk retention requirements certain resecuritization 
transactions that meet two conditions.\190\ First, the transaction must 
be collateralized solely by existing ABS issued in a securitization 
transaction for which credit risk was retained as required under the 
rule or which was exempted from the credit risk retention requirements 
of the rule (hereinafter 15G-compliant ABS). Second, the transaction 
must be structured so that it involves the issuance of only a single 
class of ABS interests and provides for the pass-through of all 
principal and interest payments received on the underlying ABS (net of 
expenses of the issuing entity) to the holders of such class. The 
holder of a resecuritization ABS structured as a single-class pass-
through has a fractional undivided interest in the pool of underlying 
ABS and in the distributions of principal and interest (including 
prepayments) from these underlying ABS. Accordingly, the principal and 
interest payments allocated to each holder are identical (less any fees 
associated with the resecuritization) to those that would occur if that 
holder were to hold individual securities representing the same 
fractional interest in each of the underlying ABS.\191\ Thus, a 
resecuritization ABS structured as a single-class pass-through would 
not alter the level or allocation of credit risk and interest rate risk 
on the underlying ABS.
---------------------------------------------------------------------------

    \190\ In a resecuritization transaction, the asset pool 
underlying the ABS issued in the transaction comprises one or more 
asset-backed securities. In this section, we refer to the securities 
issued in a resecuritization transaction as ``resecuritization 
ABS.''
    \191\ According to the staff of the FHFA, Fannie Mae Mega 
Certificates are an example of a single-class pass-through 
resecuritization. FHFA staff have indicated that these certificates 
represent a fractional undivided beneficial ownership interest in 
the pool of underlying ABS (typically MBS, REMICs and other Mega 
Certificates) and in the principal and interest distributions from 
those underlying ABS. The proposed exemption in Sec.  --.21(a)(5) of 
the proposed rules would be available to any sponsor of a 
securitization transaction that is structured in accordance with the 
rule's requirements.
---------------------------------------------------------------------------

    The Agencies propose to adopt this exemption under the general 
exemption provisions of section 15G(e)(1) of the Exchange Act. Under 
that provision, the Agencies may jointly adopt or issue exemptions, 
exceptions, or adjustments to the risk retention rules, if such 
exemption, exception, or adjustment would: (A) help ensure high quality 
underwriting standards for the securitizers and originators of assets 
that are securitized or available for securitization; and (B) encourage 
appropriate risk management practices by the securitizers and 
originators of assets, improve the access of consumers and businesses 
to credit on reasonable terms, or otherwise be in the public interest 
and for the protection of investors.\192\ As noted above, all of the 
ABS underlying a resecuritization that would be exempted under proposed 
Sec.  --.21(a)(5) would already have been issued in a securitization 
transaction in which the sponsor has retained credit risk in accordance 
with the rule, or for which an exemption from the rule was available. 
Accordingly, the resecuritization of a single-class pass-through would 
neither increase nor reallocate the credit risk inherent in that 
underlying 15G-compliant ABS. Furthermore, because this type of 
resecuritization may be used to combine 15G-compliant ABS backed by 
smaller asset pools, the exemption for this type of resecuritization 
could improve the access of consumers and businesses to credit on 
reasonable terms by allowing for the creation of an additional 
investment vehicle for these smaller pools. The exemption would allow 
the creation of ABS that may be backed by more geographically diverse 
pools than those that can be achieved by the pooling of individual 
assets as part of the issuance of the underlying 15G-compliant ABS, 
which could also improve access to credit on reasonable terms.
---------------------------------------------------------------------------

    \192\ 15 U.S.C. 78o-11(e)(1).
---------------------------------------------------------------------------

    Under the proposed rules, sponsors of resecuritizations that are 
not structured purely as single-class pass-through transactions would 
be required to meet the credit risk retention requirements with respect 
to such resecuritizations unless another exemption for the 
resecuritization is available, regardless of whether the sponsor of the 
initial securitization transaction retained credit risk under the rule 
or whether an exemption applied to the initial securitization 
transaction. Thus, resecuritizations that re-tranche the credit risk of 
the underlying ABS would be subject to separate risk retention 
requirements under the proposed rules.\193\ Similarly, under the 
proposed rules, resecuritizations that re-tranche the prepayment risk 
of the underlying ABS, or that are structured to achieve a sequential 
paydown of tranches, would not be exempted. In these resecuritizations, 
although losses on the underlying ABS would be allocated to holders in 
the resecuritization on a pro rata basis, holders of longer duration 
classes in the resecuritization could be

[[Page 24139]]

exposed to a higher level of credit risk than holders of shorter 
duration classes.
---------------------------------------------------------------------------

    \193\ For example, under the proposed rules, the sponsor of a 
collateralized debt obligation (CDO) would not meet the proposed 
conditions of the exemption and therefore would be required to 
retain risk in accordance with the rule with respect to the CDO, 
regardless of whether the underlying ABS have been drawn exclusively 
from 15G-compliant ABS. See 15 U.S.C. 78o-11(c)(1)(F). In a typical 
CDO transaction, a securitizer pools interests in the mezzanine 
tranches from many existing ABS and uses that pool to collateralize 
the CDO. Repayments of principal on the underlying ABS interests are 
allocated so as to create a senior tranche, as well as supporting 
mezzanine and equity tranches of increasing credit risk. 
Specifically, as periodic principal payments on the underlying ABS 
are received, they are distributed first to the senior tranche of 
the CDO and then to the mezzanine and equity tranches in order of 
increasing credit risk, with any shortfalls being borne by the most 
subordinate tranche then outstanding.
---------------------------------------------------------------------------

    Section 15G does not apply to ABS issued before the effective date 
of the Agencies' final rules.\194\ As a practical matter, private-label 
ABS issued before the effective date of the final rules will typically 
not be 15G-compliant ABS, because such ABS will not have been 
structured to meet the rule's risk retention requirements. ABS issued 
before the effective date that meets the terms of an exemption of the 
type proposed under ----.21 (General exemptions) or ----.11 (Fannie Mae 
and Freddie Mac ABS) could serve as 15G-compliant ABS.
---------------------------------------------------------------------------

    \194\ See 15 U.S.C. 78o-11(i) (regulations become effective with 
respect to residential mortgage-backed ABS 1 year after publication 
of the final rules in the Federal Register, and 2 years for all 
other ABS).
---------------------------------------------------------------------------

Request for Comment
    168(a). Are there other types of resecuritization transactions 
backed solely by 15G-compliant ABS that should be exempt from the risk 
retention requirements? 168(b). If so, what principles and factors 
should the Agencies use in considering whether other types of 
resecuritizations backed by 15G-compliant ABS should be exempted from 
the risk retention requirements of section 15G? 168(c). Should the 
Agencies consider granting an exemption only if it is clear that the 
resecuritization transaction does not expose investors in the 
resecuritization to different levels or types of credit risk in the 
securitized assets than the underlying 15G-compliant ABS?
    169(a). Should the rule provide an exemption for a sequential-pay 
resecuritization that is collateralized only by 15G-compliant ABS? In 
this type of resecuritization, the rights to principal repayment of the 
holders of the different classes differ solely with respect to the 
timing of such repayments. Longer duration classes receive no payments 
of principal until shorter duration classes have been paid off in full 
and principal shortfalls are allocated on a pro-rata basis based upon 
the unpaid principal balance of each class. As the shorter duration 
classes are paid off, the unpaid principal balances of the longer 
duration classes begin to represent a larger portion of the total 
unpaid principal balances of the underlying ABS and, therefore, the 
longer duration classes are allocated an ever-increasing percentage of 
credit losses as the ABS matures. 169(b). If an exemption for 
sequential-pay resecuritizations backed by 15G-compliant ABS is 
appropriate, how could such an exemption be written to ensure the 
exemption is limited to this particular structure?
    170(a). Should the Agencies provide an exemption for prepayment-
tranched resecuritizations that are backed solely by 15G-compliant ABS? 
This form of resecuritization involves the sponsor of the 
resecuritization creating tranches based on the prepayments of the 
underlying ABS (i.e., prepayments received by the ABS in the first-
level ABS securitization). One type of prepayment-tranched 
resecuritization is a planned amortization class (PAC) 
resecuritization. PAC bonds receive principal payments based on the 
level of prepayments and will have their expected duration if the 
actual speed of prepayments on the underlying ABS falls within a 
designated range. In order to create a PAC bond with greater certainty 
of cash flow than the underlying ABS, one or more support (SUP) classes 
that are highly sensitive to varying levels of prepayment are created 
as part of the same transaction. If the rate of prepayments is faster 
than that assumed in the creation of the PAC, the SUPs receive more 
principal in order to prevent an overpayment of principal on the PAC. 
If the rate of prepayment is slower, principal is redirected from the 
SUPs in order to achieve the specified repayment schedule on the PAC. 
In either case, credit losses are allocated on a pro rata basis based 
on the unpaid principal balance attributable to each class. 
Accordingly, the effect of faster-than-expected rates of prepayment 
will tend to expose holders of the PAC bonds to relatively greater 
losses than the holders of the SUPs, while slower-than-expected rates 
of prepayment will tend to have the opposite effect. Moreover, in 
transactions where more than one PAC bond is created, the distribution 
of principal repayments to the PACs are based on priority and, 
therefore, the holders of the PACs are exposed to levels of credit risk 
that differ from that of the underlying ABS. 170(b). If an exemption of 
prepayment-tranched resecuritizations or certain types of such 
resecuritizations (such as PAC structures) is appropriate, how could an 
exemption be written to ensure that the exemption does not extend to 
other resecuritizations?
    171. As noted above, the proposed exemptions require the underlying 
ABS be 15G-compliant ABS. In practice, initially this may mean that 
only resecuritizations based on ABS guaranteed by Fannie Mae and 
Freddie Mac will qualify for this exemption. Does this raise any 
competitive or other issues and if so, how can they be mitigated 
without eliminating the requirement there be risk retention on the 
underlying ABS?
    172(a). Is the proposed language for this exemption appropriate? 
172(b). Does any portion of the exemption cause an ambiguity that 
should be addressed?

D. Additional Exemptions

    Consistent with section15G of the Exchange Act, Sec.  --.23(b) of 
the proposed rules provides that the Federal banking agencies and the 
Commission, in consultation with FHFA and HUD, may jointly adopt or 
issue additional exemptions, exceptions or adjustments to the credit 
risk retention requirements, including exemptions, exceptions or 
adjustments for classes of institutions or assets in accordance with 
section 15G(e).\195\ In addition, Sec.  --.23(a) of the proposed rules 
recognizes that the Agencies with rulewriting authority under section 
15G(b) \196\ with respect to the type of assets involved may jointly 
provide a total or partial exemption of any individual securitization 
transaction, as such Agencies determine may be appropriate in the 
public interest and for the protection of investors, as permitted by 
section 15G(c)(1)(G)(i).\197\ The Agencies expect to coordinate with 
each other to facilitate the processing, review and action on requests 
for such written interpretations or guidance, or additional exemptions, 
exceptions or adjustments.
---------------------------------------------------------------------------

    \195\ 15 U.S.C. 78o-11(e).
    \196\ 15 U.S.C. 78o-11(b).
    \197\ 15 U.S.C. 78o-11(c)(1)(G)(i).
---------------------------------------------------------------------------

Request for Comments
    173(a). Are there securitization transactions that would not be 
covered by the exemptions in the proposed rules that should be exempted 
from risk retention requirements pursuant to section 15G(e)(3) of the 
Exchange Act? 173(b). If so, what are the features and characteristics 
of such securitization transactions that would properly exempt them 
from risk retention requirements pursuant to section 15G(e)(3)?

E. Safe Harbor for Certain Foreign-Related Transactions

    The proposed rules include a safe harbor provision for certain 
predominantly foreign transactions based on the limited nature of the 
transactions' connections with the United States and U.S. investors. 
The proposed safe harbor is intended solely to provide clarity that the 
Agencies would not apply the requirements of the proposed rules to 
transactions that meet

[[Page 24140]]

all of the conditions of the safe harbor. The proposed safe harbor 
should not be interpreted as reflecting the views of any Agency as to 
the potential scope of transactions or persons subject to section 15G 
or the proposed rules.
    As set forth in section --.23 of the proposed rules, the safe 
harbor provides that the rule's risk retention requirements would not 
apply to a securitization transaction if certain conditions are met, 
including: (i) The securitization transaction is not required to be and 
is not registered under the Securities Act; (ii) no more than 10 
percent of the dollar value by proceeds (or equivalent if sold in a 
foreign currency) of all classes of ABS interests sold in the 
securitization transaction are sold to U.S. persons or for the account 
or benefit of U.S. persons; \198\ (iii) neither the sponsor of the 
securitization transaction nor the issuing entity is (A) chartered, 
incorporated, or organized under the laws of the U.S., or a U.S. State 
or Territory or (B) the unincorporated branch or office located in the 
U.S. of an entity not chartered, incorporated, or organized under the 
laws of the U.S., or a U.S. State or Territory (collectively, a U.S.-
located entity); (iv) no more than 25 percent of the assets 
collateralizing the ABS sold in the securitization transaction were 
acquired by the sponsor, directly or indirectly, from a consolidated 
affiliate of the sponsor or issuing entity that is a U.S.-located 
entity.\199\
---------------------------------------------------------------------------

    \198\ The proposed rules include a definition of ``U.S. person'' 
that is substantially the same as the definition of ``U.S. person'' 
in the Commission's Regulation S, although Regulation S relates 
solely to the application of section 5 of the Securities Act (12 
U.S.C. 77e). See proposed rules at Sec.  --.23 and 17 CFR 
203.902(k). Additionally, the 10 percent threshold is consistent 
with other Commission exemptive rules relating to cross-border 
offerings under which the Commission has provided accommodations for 
not applying its rules even though there is a limited offering of 
securities in the United States. See Securities Act Rules 801 and 
802 (17 CFR 230.801 and 802).
    \199\ See proposed rules at Sec.  --.23.
---------------------------------------------------------------------------

    The safe harbor is intended to exclude from the proposed risk 
retention requirements transactions in which the effects on U.S. 
interests are sufficiently remote so as not to significantly impact 
underwriting standards and risk management practices in the United 
States or the interests of U.S. investors. Accordingly, the conditions 
for use of the safe harbor limit involvement by persons in the U.S. 
with respect to both assets being securitized in a transaction and the 
ABS sold in connection with the transaction. The safe harbor would not 
be available for any transaction or series of transactions that, 
although in technical compliance with the conditions of the safe 
harbor, is part of a plan or scheme to evade the requirements of 
section 15G and the proposed rules.
Request for Comment
    174(a). Are there any extra or special considerations relating to 
these circumstances that we should take into account? 174(b). Should 
the more than 10 percent proceeds trigger be higher or lower (e.g., 0 
percent, 5 percent, 15 percent, or 20 percent)?

Appendix A to the Supplementary Information

    The tables below show the estimated effects of the proposed QRM 
standards based on data for all residential mortgage loans purchased or 
securitized by the Enterprises between 1997 and 2009. The first set of 
results shows rates of serious delinquency (SDQ), that is, loans that 
are 90 days or more delinquent, or are in the process of foreclosure. 
The second set of results shows volume, in dollars of unpaid principal 
balance (UPB).
    Because the data that FHFA routinely receives from the Enterprises 
does not include all the factors needed to identify QRM eligible loans, 
the universe of loans within the data set that would qualify as a QRM 
under the proposed standards was estimated based on four of the most 
significant QRM elements: (i) Product type (i.e. excluding non-owner 
occupied loans, low or no documentation loans, interest-only or 
negative amortization loans, loans with balloon payments, and ARM loans 
that permit payment shocks in excess of the range permitted by the 
proposed QRM standards); (ii) front-end and back-end DTI ratios; (iii) 
LTV ratios; and (iv) credit history.
    Because of data limitations, proxies were used for certain of these 
QRM standards. FHFA does not have individual credit items in the data 
set used for analysis, such as previous bankruptcies or foreclosures 
involving the borrower, or current or recent borrower delinquencies on 
other debt obligations. However, borrowers with such credit issues 
would tend to have much lower credit scores than other borrowers (all 
else being equal). To proxy the credit history restrictions in the 
proposed QRM definition, borrowers with FICO scores below 690 were 
deemed to not satisfy the proposed QRM credit history standards for 
purposes of the analysis.
    In addition, the analysis uses first-lien LTV ratios as a proxy for 
combined LTV when relevant. The Agencies do not believe that this proxy 
would produce a large discrepancy for analysis of loans originated 
before 2002 or after 2007, but it may understate the proposed QRM 
definition's effects, both on volume and on rates of SDQ, for 
originations from 2002 to 2007, as second liens were increasingly used 
during this period. (That is, the proposed QRM definition would likely 
cause a greater decrease in SDQ rates and loan volumes than estimated 
through the use of this proxy.)
    Other proposed QRM factors may differ somewhat for this analysis. 
The QRM proposal is based on current FHA definitions of income, and 
standards for full documentation of income and full appraisals. The 
data used in this analysis for purposes of estimating whether a loan 
would meet the DTI and LTV ratios in the proposed QRM standards, 
however, is based on Enterprise definitions of income, and Enterprise 
documentation and appraisal requirements that prevailed at the time the 
loans were originated. While there may be some circumstances in which 
the different standards and definitions would have led to a different 
QRM eligibility estimate, the Agencies do not believe that these 
differences would have a material impact on the analysis. For example, 
the Enterprises did not always require an interior appraisal in cases 
where the default risk was judged to be low and the down payment was 
substantial. While loans originated to these standards would not be QRM 
eligible under this proposal, it is likely that the QRM standard would 
induce originators to require full appraisals going forward, and thus 
cause these loans to be QRM eligible.
    For the first set of results concerning SDQ rates, the first column 
shows the ``QRM qualifying'' population. This is the SDQ rate for all 
loans that are estimated as meeting the proposed QRM standards. The 
last column in the first set of results shows the SDQ rate for all 
loans purchased or securitized by the Enterprises in that year. Thus, 
the difference between the first and last column show the cumulative 
estimated effect of the set of proposed QRM standards on SDQ for that 
cohort of loans. The intermediate columns show the SDQ rate for the 
population of loans in the relevant year that are estimated to meet 
every QRM standard other than the standard(s) indicated at the top of 
the column. For example, the second column, headed Product Type, shows 
the estimated effect of allowing low or no documentation loans, 
interest-only or negative amortization loans, loans with balloon 
payments, or ARM loans that permit payment shocks in excess of the 
range permitted by the proposed QRM standards, while still prohibiting 
loans with credit history (as proxied

[[Page 24141]]

through the use of credit scores), an LTV ratio, or debt-to-income 
ratios that would disqualify them for QRM status. These columns show 
the differences between the base QRM SDQ rate and the higher risk 
population within each column. The analysis is shown separately for all 
loans, for purchases, for rate and term refinances, and for cash out 
refinances.
    The second set of results shows the volume of Enterprise mortgages 
purchased or securitized that are estimated to have met the proposed 
QRM standards. The last column shows total dollar originations 
purchased or securitized by the Enterprises for each year. The first 
column shows the percent of that volume estimated to be QRM eligible. 
The intermediate columns show the estimated effect on that volume for 
the population of loans that are estimated to meet the proposed QRM 
standards other than the one identified at the top of the column. For 
example, the second column, headed Product Type, shows the estimated 
effect on the percentage of Enterprise volume that would be QRM 
eligible by allowing loans that do not conform to the Product Type 
standards for QRMs,\200\ while still prohibiting loans with a credit 
history (as proxied by credit scores), an LTV ratio, or debt-to-income 
ratios that would disqualify the loan for QRM status. These columns 
show the differences between the base QRM qualifying percentage and the 
higher risk population.
---------------------------------------------------------------------------

    \200\ That is, low or no documentation loans, interest-only or 
negative amortization loans, loans with a balloon payment, or ARM 
loans that permit payment shocks in excess of the range permitted by 
the proposed QRM standards.

                                                                        All Loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                              QRM        Product type       PTI/DTI           LTV            FICO             All loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................           0.42%          +0.05%          +0.39%          +0.61%          +3.08%                 +2.30%
1998.............................................           0.39%          +0.10%          +0.31%          +0.52%          +2.34%                 +1.68%
1999.............................................           0.44%          +0.13%          +0.34%          +0.78%          +3.12%                 +2.31%
2000.............................................           0.32%          +0.43%          +0.20%          +0.83%          +2.94%                 +2.77%
2001.............................................           0.31%          +0.35%          +0.27%          +0.59%          +2.52%                 +2.27%
2002.............................................           0.33%          +0.41%          +0.32%          +0.73%          +2.34%                 +2.09%
2003.............................................           0.55%          +0.64%          +0.66%          +1.06%          +2.95%                 +2.40%
2004.............................................           0.95%          +1.72%          +1.16%          +1.58%          +4.27%                 +4.33%
2005.............................................           1.86%          +5.30%          +2.36%          +2.31%          +6.46%                 +8.13%
2006.............................................           2.72%          +7.49%          +3.35%          +3.73%          +7.90%                +13.93%
2007.............................................           2.37%          +6.34%          +3.59%          +4.39%          +8.66%                +17.12%
2008.............................................           0.68%          +1.48%          +1.64%          +1.68%          +5.15%                 +5.94%
2009.............................................           0.04%          +0.06%          +0.11%          +0.09%          +0.50%                 +0.24%
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................           0.69%          +2.99%          +1.38%          +0.99%          +3.73%                 +5.27%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................          20.44%          +3.75%         +13.04%         +13.74%          +5.81%       $286,497,878,371
1998.............................................          23.29%          +2.17%         +13.30%         +17.10%          +6.24%        691,033,994,509
1999.............................................          19.48%          +3.16%         +14.83%         +12.95%          +5.37%        481,450,519,442
2000.............................................          16.44%          +3.70%         +17.00%          +8.40%          +4.53%        356,779,731,420
2001.............................................          19.37%          +3.01%         +14.33%         +13.11%          +4.62%      1,039,412,013,403
2002.............................................          22.37%          +4.28%         +15.35%         +10.72%          +4.62%      1,385,056,256,240
2003.............................................          24.57%          +4.55%         +16.68%         +10.02%          +4.98%      1,924,265,340,603
2004.............................................          17.03%          +6.35%         +17.68%          +6.25%          +4.34%        937,643,914,289
2005.............................................          14.41%          +6.74%         +18.78%          +5.45%          +3.36%        939,069,358,457
2006.............................................          11.52%          +7.11%         +17.59%          +3.91%          +2.73%        887,443,942,464
2007.............................................          10.72%          +5.44%         +16.14%          +4.95%          +2.24%      1,027,460,511,244
2008.............................................          17.39%          +4.64%         +22.01%          +9.22%          +2.12%        793,136,249,487
2009.............................................          30.52%          +3.38%         +24.47%         +15.26%          +1.74%      1,176,445,135,548
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................          19.79%          +4.62%         +17.36%          +9.86%          +3.91%     11,925,694,845,477
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                     Purchase Loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                              QRM        Product type       PTI/DTI           LTV            FICO             All loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................           0.42%          +0.03%          +0.36%          +0.80%          +3.13%                 +2.44%
1998.............................................           0.46%          +0.04%          +0.30%          +0.90%          +2.70%                 +2.13%
1999.............................................           0.40%          +0.12%          +0.30%          +0.98%          +3.05%                 +2.23%
2000.............................................           0.29%          +0.38%          +0.17%          +0.83%          +2.51%                 +2.29%
2001.............................................           0.38%          +0.35%          +0.28%          +0.97%          +2.72%                 +2.59%
2002.............................................           0.48%          +0.50%          +0.32%          +1.28%          +2.61%                 +2.70%
2003.............................................           0.93%          +0.72%          +0.78%          +1.84%          +3.29%                 +3.50%
2004.............................................           1.16%          +1.97%          +1.24%          +2.53%          +3.93%                 +4.71%
2005.............................................           2.13%          +6.18%          +2.49%          +2.87%          +5.94%                 +8.61%

[[Page 24142]]

 
2006.............................................           2.76%          +8.69%          +3.28%          +3.29%          +6.78%                +13.63%
2007.............................................           2.33%          +6.76%          +3.31%          +4.33%          +6.79%                +16.51%
2008.............................................           0.64%          +1.36%          +1.42%          +2.10%          +4.73%                 +5.62%
2009.............................................           0.07%          +0.09%          +0.09%          +0.07%          +0.63%                 +0.23%
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Total........................................           1.01%          +3.84%          +1.56%          +1.28%          +3.69%                 +6.39%
                                                  ------------------------------------------------------------------------------------------------------
                      Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................          20.74%          +4.40%         +14.02%         +12.11%          +5.55%       $171,316,168,314
1998.............................................          22.08%          +2.99%         +15.33%         +13.09%          +6.23%        243,827,154,269
1999.............................................          19.86%          +4.02%         +17.29%         +10.39%          +4.93%        252,736,885,540
2000.............................................          18.17%          +4.21%         +19.37%          +7.56%          +4.45%        259,462,348,244
2001.............................................          19.57%          +4.20%         +18.76%          +7.94%          +4.92%        334,671,388,428
2002.............................................          18.43%          +5.80%         +18.86%          +6.12%          +4.51%        378,648,800,742
2003.............................................          18.03%          +6.81%         +19.38%          +5.32%          +4.42%        428,404,858,343
2004.............................................          16.71%          +9.21%         +20.88%          +3.25%          +3.78%        397,943,548,815
2005.............................................          15.67%         +10.22%         +22.25%          +2.51%          +2.92%        433,917,427,310
2006.............................................          13.57%          +9.37%         +21.75%          +2.02%          +2.48%        459,040,004,449
2007.............................................          12.39%          +6.88%         +19.94%          +3.27%          +1.95%        504,879,485,500
2008.............................................          17.33%          +6.08%         +26.06%          +6.40%          +1.86%        321,485,446,505
2009.............................................          27.06%          +7.02%         +33.83%          +8.18%          +1.89%        225,983,942,704
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................          17.57%          +6.69%         +20.69%          +5.89%          +3.63%      4,412,317,459,162
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                No Cash-Out Refinancings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                              QRM        Product type       PTI/DTI           LTV            FICO             All loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................           0.37%          +0.06%          +0.43%          +0.32%          +2.94%                 +2.00%
1998.............................................           0.33%          +0.11%          +0.27%          +0.36%          +2.15%                 +1.41%
1999.............................................           0.46%          +0.17%          +0.43%          +0.66%          +3.26%                 +2.47%
2000.............................................           0.40%          +0.66%          +0.31%          +0.70%          +3.69%                 +4.11%
2001.............................................           0.27%          +0.32%          +0.24%          +0.50%          +2.21%                 +1.97%
2002.............................................           0.28%          +0.27%          +0.28%          +0.65%          +2.01%                 +1.63%
2003.............................................           0.46%          +0.42%          +0.54%          +0.88%          +2.69%                 +1.71%
2004.............................................           0.77%          +1.01%          +0.97%          +1.25%          +4.09%                 +3.36%
2005.............................................           1.43%          +3.09%          +1.92%          +1.96%          +6.46%                 +6.54%
2006.............................................           2.74%          +6.44%          +3.70%          +3.72%          +8.57%                +13.99%
2007.............................................           2.86%          +7.94%          +5.20%          +5.39%         +10.27%                +19.45%
2008.............................................           0.70%          +1.80%          +1.94%          +1.55%          +5.25%                 +5.78%
2009.............................................           0.04%          +0.03%          +0.11%          +0.10%          +0.48%                 +0.24%
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................           0.44%          +1.65%          +0.90%          +0.82%          +3.11%                 +3.47%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................          21.04%          +3.12%         +11.92%         +15.76%          +6.12%        $72,883,400,278
1998.............................................          25.24%          +1.92%         +12.34%         +18.72%          +6.40%        302,723,323,315
1999.............................................          20.34%          +2.44%         +12.42%         +14.98%          +6.23%        140,480,199,806
2000.............................................          13.66%          +2.31%         +11.72%         +10.37%          +5.06%         48,878,241,470
2001.............................................          22.56%          +2.89%         +13.21%         +15.14%          +4.72%        390,566,245,690
2002.............................................          28.69%          +4.46%         +15.27%         +11.65%          +4.90%        584,998,514,202
2003.............................................          31.06%          +4.48%         +16.76%         +11.22%          +5.22%        920,098,549,172
2004.............................................          22.37%          +5.15%         +16.81%          +8.76%          +5.07%        269,562,391,201
2005.............................................          16.42%          +4.93%         +16.06%          +8.46%          +3.82%        169,162,254,192
2006.............................................          10.24%          +6.22%         +13.03%          +6.20%          +2.73%        131,792,837,483
2007.............................................           9.41%          +5.15%         +12.27%          +6.36%          +2.16%        196,852,210,903
2008.............................................          20.16%          +4.61%         +20.18%         +10.87%          +2.06%        231,714,054,542
2009.............................................          32.80%          +3.01%         +22.10%         +16.44%          +1.63%        637,544,819,174
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................          25.50%          +3.95%         +16.25%         +12.53%          +4.23%      4,097,257,041,427
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 24143]]

                                                                  Cash-Out Refinancings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                              QRM        Product type       PTI/DTI           LTV            FICO             All loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................           0.51%          +0.18%          +0.48%          +0.54%          +3.12%                 +2.20%
1998.............................................           0.39%          +0.20%          +0.37%          +0.42%          +2.09%                 +1.44%
1999.............................................           0.52%          +0.23%          +0.42%          +0.56%          +3.05%                 +2.27%
2000.............................................           0.51%          +0.70%          +0.41%          +0.81%          +4.26%                 +3.88%
2001.............................................           0.31%          +0.33%          +0.23%          +0.52%          +2.67%                 +2.30%
2002.............................................           0.31%          +0.40%          +0.28%          +0.61%          +2.57%                 +2.15%
2003.............................................           0.51%          +0.64%          +0.60%          +1.12%          +3.11%                 +2.57%
2004.............................................           0.89%          +1.29%          +1.08%          +1.51%          +4.92%                 +4.71%
2005.............................................           1.70%          +2.71%          +2.22%          +2.55%          +7.11%                 +8.34%
2006.............................................           2.61%          +3.77%          +3.34%          +4.05%          +9.06%                +14.42%
2007.............................................           2.14%          +3.46%          +3.37%          +3.84%          +9.99%                +16.66%
2008.............................................           0.72%          +1.39%          +1.73%          +1.44%          +5.47%                 +6.52%
2009.............................................           0.03%          +0.05%          +0.10%          +0.07%          +0.44%                 +0.24%
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................           0.70%          +2.01%          +1.40%          +1.12%          +4.50%                 +5.85%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................          18.17%          +2.23%         +10.98%         +16.86%          +6.32%        $42,298,309,778
1998.............................................          21.25%          +1.30%         +11.88%         +20.45%          +5.91%        144,483,516,925
1999.............................................          17.05%          +1.84%         +11.63%         +17.04%          +5.28%         88,233,434,096
2000.............................................          10.03%          +2.40%          +9.66%         +10.90%          +4.46%         48,439,141,706
2001.............................................          15.19%          +1.90%         +11.01%         +16.10%          +4.18%        314,174,379,286
2002.............................................          17.13%          +2.67%         +12.30%         +13.58%          +4.33%        421,408,941,296
2003.............................................          19.05%          +2.99%         +14.53%         +11.60%          +5.00%        575,761,933,088
2004.............................................          12.16%          +3.34%         +13.83%          +8.15%          +4.43%        270,137,974,274
2005.............................................          11.77%          +3.14%         +15.67%          +7.74%          +3.71%        335,989,676,955
2006.............................................           8.93%          +4.00%         +13.17%          +5.81%          +3.12%        296,611,100,532
2007.............................................           8.93%          +3.39%         +12.61%          +6.70%          +2.75%        325,728,814,842
2008.............................................          14.78%          +2.75%         +18.34%         +11.41%          +2.52%        239,936,748,440
2009.............................................          28.36%          +1.52%         +22.56%         +17.99%          +1.87%        312,916,373,670
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................          15.81%          +2.75%         +14.39%         +11.78%          +3.89%      3,416,120,344,887
--------------------------------------------------------------------------------------------------------------------------------------------------------

VII. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, sec. 
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The Federal banking agencies invite 
your comments on how to make this proposal easier to understand. For 
example:
     Have we organized the material to suit your needs? If not, 
how could this material be better organized?
     Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be more clearly stated?
     Does the proposed regulation contain language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes to the format would make the regulation 
easier to understand?
     What else could we do to make the regulation easier to 
understand?

VIII. Administrative Law Matters

A. Regulatory Flexibility Act

    OCC: The Regulatory Flexibility Act (RFA) generally requires that, 
in connection with a notice of proposed rulemaking, an agency prepare 
and make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small 
entities.\201\ However, the regulatory flexibility analysis otherwise 
required under the RFA is not required if an agency certifies that the 
rule will not have a significant economic impact on a substantial 
number of small entities (defined in regulations promulgated by the 
Small Business Administration to include banking organizations with 
total assets of less than or equal to $175 million) and publishes its 
certification and a short, explanatory statement in the Federal 
Register together with the rule.
---------------------------------------------------------------------------

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

    As of September 30, 2010, there were approximately 590 small 
national banks. For the reasons provided below, the OCC certifies that 
the proposed rule, if adopted in final form, would not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required.
    As discussed in the ``Supplementary Information'' above, section 
941 of the Dodd-Frank Act \202\ generally requires the Federal banking 
agencies and the Commission, and, in the case of the securitization of 
any residential mortgage asset, together with HUD and FHFA, to jointly 
prescribe regulations, that (i) require a securitizer to retain not 
less than 5 percent of the credit risk of any asset that the 
securitizer, through the issuance of an asset-backed security (ABS), 
transfers, sells, or conveys to a third party; and (ii) prohibit a 
securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to retain 
under section 15G. Although the proposed rule would apply directly only 
to securitizers,

[[Page 24144]]

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.
---------------------------------------------------------------------------

    \202\ Codified at section 15G of the Exchange Act, 17 U.S.C. 
78o-11.
---------------------------------------------------------------------------

    Section 15G provides a total exemption from the risk retention 
requirements for securitizers of certain securitization transactions, 
such as an ABS issuance collateralized exclusively by ``qualified 
residential mortgage'' (QRM) loans, and further authorizes the Agencies 
to establish a lower risk retention requirement for securitizers of ABS 
issuances collateralized by other asset types, such as commercial, 
commercial real estate (CRE), and automobile loans, which satisfy 
underwriting standards established by the Federal banking agencies.
    The risk retention requirements of section 15G apply generally to a 
``securitizer'' of ABS, where securitizer is defined to mean (i) an 
issuer of an ABS; or (ii) a person who organizes and initiates an 
asset-backed transaction by selling or transferring assets, either 
directly or indirectly, including through an affiliate, to the issuer. 
Section 15G also defines an ``originator'' as a person who (i) through 
the extension of credit or otherwise, creates a financial asset that 
collateralizes an asset-backed security; and (ii) sells an asset 
directly or indirectly to a securitizer.
    The proposed rule implements the credit risk retention requirements 
of section 15G. Section 15G requires the Agencies to establish risk 
retention requirements for ``securitizers''. The proposal would, as a 
general matter, require that a ``sponsor'' of a securitization 
transaction retain the credit risk of the securitized assets in the 
form and amount required by the proposed rule. The Agencies believe 
that imposing the risk retention requirement on the sponsor of the 
ABS--as permitted by section 15G--is appropriate in light of the active 
and direct role that a sponsor typically has in arranging a 
securitization transaction and selecting the assets to be securitized. 
The OCC is aware of only six small banking organizations that currently 
sponsor securitizations (one of which is a national bank, two are state 
member banks, and three are state nonmember banks based on September 
30, 2010 information) and, therefore, the risk retention requirements 
of the proposed rule, as generally applicable to sponsors, would not 
have a significant economic impact on a substantial number of small 
national banks.
    Under the proposed rule a sponsor may offset the risk retention 
requirement by the amount of any vertical risk retention ABS interests 
or eligible horizontal residual interest acquired by an originator of 
one or more securitized assets if certain requirements are satisfied, 
including, the originator must originate at least 20 percent of the 
securitized assets, as measured by the aggregate unpaid principal 
balance of the asset pool. In determining whether the allocation 
provisions of the proposal would have a significant economic impact on 
a substantial number of small banking organizations, the Federal 
banking agencies reviewed September 30, 2010 Call Report data to 
evaluate the securitization activity and approximate the number of 
small banking organizations that potentially could retain credit risk 
under allocation provisions of the proposal.\203\
---------------------------------------------------------------------------

    \203\ Call Report Schedule RC-S provides information on the 
servicing, securitization, and asset sale activities of banking 
organizations. For purposes of the RFA analysis, the Agencies 
gathered and evaluated data regarding (1) net securitization income, 
(2) the outstanding principal balance of assets sold and securitized 
by the reporting entity with servicing retained or with recourse or 
other seller-provided credit enhancements, and (3) assets sold with 
recourse or other seller-provided credit enhancements and not 
securitized by the reporting bank.
---------------------------------------------------------------------------

    The Call Report data indicates that approximately 329 small banking 
organizations, 54 of which are national banks, originate loans for 
securitization, namely ABS issuances collateralized by one-to-four 
family residential mortgages. The majority of these originators sell 
their loans either to Fannie Mae or Freddie Mac, which retain credit 
risk through agency guarantees and would not be able to allocate credit 
risk to originators under this proposed rule. Additionally, based on 
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.\204\ Accordingly, under the proposed rule a sponsor could 
potentially allocate a portion of the risk retention requirement to a 
small banking organization only if such organization originated at 
least 20 percent ($100 million) of the securitized mortgages. As of 
September 30, 2010, only one small banking organization reported an 
outstanding principal balance of assets sold and securitized of $100 
million or more.\205\
---------------------------------------------------------------------------

    \204\ Based on the data provided in Table 1, page 29 of the 
Board's ``Report to the Congress on Risk Retention'', it appears 
that the average MBS issuance is collateralized by a pool of 
approximately $620 million in mortgage loans (for prime MBS 
issuances) or approximately $690 million in mortgage loans (for 
subprime MBS issuances). For purposes of the RFA analysis, the 
agencies used an average asset pool size $500 million to account for 
reductions in mortgage securitization activity following 2007, and 
to add an element of conservatism to the analysis.
    \205\ The OCC notes that this finding assumes that no portion of 
the assets originated by small banking organizations were sold to 
securitizations that qualify for an exemption from the risk 
retention requirements under the proposed rule.
---------------------------------------------------------------------------

    The OCC seeks comments on whether the proposed rule, if adopted in 
final form, would impose undue burdens, or have unintended consequences 
for, small national banks and whether there are ways such potential 
burdens or consequences could be minimized in a manner consistent with 
section 15G of the Exchange Act.
    Board: The Regulatory Flexibility Act (5 U.S.C. 603(b)) generally 
requires that, in connection with a notice of proposed rulemaking, an 
agency prepare and make available for public comment an initial 
regulatory flexibility analysis that describes the impact of a proposed 
rule on small entities.\206\ Under regulations promulgated by the Small 
Business Administration, a small entity includes a commercial bank or 
bank holding company with assets of $175 million or less (each, a small 
banking organization).\207\ The Board has considered the potential 
impact of the proposed rules on small banking organizations supervised 
by the Board in accordance with the Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \206\ See 5 U.S.C. 601 et seq.
    \207\ 13 CFR 121.201.
---------------------------------------------------------------------------

    For the reasons discussed in Part II of this Supplementary 
Information, the proposed rules define a securitizer as a ``sponsor'' 
in a manner consistent with the definition of that term in the 
Commission's Regulation AB and provide that the sponsor of a 
securitization transaction is generally responsible for complying with 
the risk retention requirements established under section 15G. The 
Board is unaware of any small banking organization under the 
supervision of the Board that has acted as a sponsor of an ABS 
transaction \208\ (based on September 30, 2010 data).\209\ As of 
September 30, 2010, there were approximately 2861 small banking 
organizations supervised by the Board, which includes 2412 bank holding 
companies, 398 state member banks, 9 Edge and agreement corporations 
and 42

[[Page 24145]]

U.S. offices of foreign banking organizations.
---------------------------------------------------------------------------

    \208\ For purposes of the proposed rules, this would include a 
small bank holding company; state member bank; Edge corporation; 
agreement corporation; foreign banking organization; and any 
subsidiary of the foregoing.
    \209\ Call 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.
---------------------------------------------------------------------------

    The proposed rules permit, but do not require, a sponsor to 
allocate a portion of its risk retention requirement to one or more 
originators of the securitized assets, subject to certain conditions 
being met. In particular, a sponsor may offset the risk retention 
requirement by the amount of any vertical risk retention ABS interests 
or eligible horizontal residual interest acquired by an originator of 
one or more securitized assets if certain requirements are satisfied, 
including, the originator must originate at least 20 percent of the 
securitized assets, as measured by the aggregate unpaid principal 
balance of the asset pool. A sponsor using this risk retention option 
remains responsible for ensuring that the originator has satisfied the 
risk retention requirements. In light of this option, the Board has 
considered the impact of the proposed rules on originators that are 
small banking organizations.
    The September 30, 2010 regulatory report data \210\ indicates that 
approximately 329 small banking organizations, 37 of which are small 
banking organizations that are supervised by the Board, originate loans 
for securitization, namely ABS issuances collateralized by one-to-four 
family residential mortgages. The majority of these originators sell 
their loans either to Fannie Mae or Freddie Mac, which retain credit 
risk through agency guarantees and would not be able to allocate credit 
risk to originators under this proposed rule. Additionally, based on 
publicly-available market data, it appears that most residential 
mortgage-backed securities offerings are collateralized by a pool of 
mortgages with an unpaid aggregate principal balance of at least $500 
million.\211\ Accordingly, under the proposed rule a sponsor could 
potentially allocate a portion of the risk retention requirement to a 
small banking organization only if such organization originated at 
least 20 percent ($100 million) of the securitized mortgages. As of 
September 30, 2010, only one small banking organization supervised by 
the Board reported an outstanding principal balance of assets sold and 
securitized of $100 million or more.\212\
---------------------------------------------------------------------------

    \210\ Call Report Schedule RC-S provides information on the 
servicing, securitization, and asset sale activities of banking 
organizations. For purposes of the RFA analysis, the Agencies 
gathered and evaluated data regarding (1) net securitization income, 
(2) the outstanding principal balance of assets sold and securitized 
by the reporting entity with servicing retained or with recourse or 
other seller-provided credit enhancements, and (3) assets sold with 
recourse or other seller-provided credit enhancements and not 
securitized by the reporting bank.
    \211\ Based on the data provided in Table 1, page 29 of the 
Board's ``Report to the Congress on Risk Retention'', it appears 
that the average MBS issuance is collateralized by a pool of 
approximately $620 million in mortgage loans (for prime MBS 
issuances) or approximately $690 million in mortgage loans (for 
subprime MBS issuances). For purposes of the RFA analysis, the 
agencies used an average asset pool size $500 million to account for 
reductions in mortgage securitization activity following 2007, and 
to add an element of conservatism to the analysis.
    \212\ The 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.
---------------------------------------------------------------------------

    In light of the foregoing, the proposed rules would not appear to 
have a significant economic impact on sponsors or originators 
supervised by the Board. The Board seeks comment on whether the 
proposed rules would impose undue burdens on, or have unintended 
consequences for, small banking organizations, and whether there are 
ways such potential burdens or consequences could be minimized in a 
manner consistent with section 15G of the Exchange Act.
    FDIC: The Regulatory Flexibility Act (RFA) generally requires that, 
in connection with a notice of proposed rulemaking, an agency prepare 
and make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small 
entities.\213\ However, a regulatory flexibility analysis is not 
required if the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities 
(defined in regulations promulgated by the Small Business 
Administration to include banking organizations with total assets of 
less than or equal to $175 million) and publishes its certification and 
a short, explanatory statement in the Federal Register together with 
the rule.
---------------------------------------------------------------------------

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

    As of September 30, 2010, there were approximately 2,768 small 
FDIC-supervised institutions, which includes 2,639 state nonmember 
banks and 129 state chartered savings banks. For the reasons provided 
below, the FDIC certifies that the proposed rule, if adopted in final 
form, would not have a significant economic impact on a substantial 
number of small entities. Accordingly, a regulatory flexibility 
analysis is not required.
    As discussed in the SUPPLEMENTARY INFORMATION above, section 941 of 
the Dodd-Frank Act \214\ generally requires the Federal banking 
agencies and the Commission, and, in the case of the securitization of 
any residential mortgage asset, together with HUD and FHFA, to jointly 
prescribe regulations, that (i) require a securitizer to retain not 
less than 5 percent of the credit risk of any asset that the 
securitizer, through the issuance of an asset-backed security (ABS), 
transfers, sells, or conveys to a third party; and (ii) prohibit a 
securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to retain 
under section 15G. Although the proposed rule would apply directly only 
to securitizers, subject to certain considerations, section 15G 
authorizes the Agencies to permit securitizers to allocate at least a 
portion of the risk retention requirement to the originator(s) of the 
securitized assets.
---------------------------------------------------------------------------

    \214\ Codified at section 15G of the Exchange Act, 17 U.S.C. 
78o-11.
---------------------------------------------------------------------------

    Section 15G provides a total exemption from the risk retention 
requirements for securitizers of certain securitization transactions, 
such as an ABS issuance collateralized exclusively by ``qualified 
residential mortgage'' (QRM) loans, and further authorizes the Agencies 
to establish a lower risk retention requirement for securitizers of ABS 
issuances collateralized by other asset types, such as commercial, 
commercial real estate (CRE), and automobile loans, which satisfy 
underwriting standards established by the Federal banking agencies.
    The risk retention requirements of section 15G apply generally to a 
``securitizer'' of ABS, where securitizer is defined to mean (i) an 
issuer of an ABS; or (ii) a person who organizes and initiates an 
asset-backed transaction by selling or transferring assets, either 
directly or indirectly, including through an affiliate, to the issuer. 
Section 15G also defines an ``originator'' as a person who (i) through 
the extension of credit or otherwise, creates a financial asset that 
collateralizes an asset-backed security; and (ii) sells an asset 
directly or indirectly to a securitizer.
    The proposed rule implements the credit risk retention requirements 
of section 15G. The proposal would, as a general matter, require that a 
``sponsor'' of a securitization transaction retain the credit risk of 
the securitized assets in the form and amount required by the proposed 
rule. The Agencies believe that imposing the risk retention requirement 
on the sponsor of the ABS--as permitted by section 15G--is appropriate 
in view of the active and direct role that a sponsor typically has in 
arranging a securitization transaction and selecting the assets to be 
securitized. The FDIC is aware of only six small banking organizations 
that currently sponsor securitizations (one of which is a national 
bank, two are state

[[Page 24146]]

member banks, and three are state nonmember banks based on September 
30, 2010 information) and, therefore, the risk retention requirements 
of the proposed rule, as generally applicable to sponsors, would not 
have a significant economic impact on a substantial number of small 
state nonmember banks.
    Under the proposed rule a sponsor may offset the risk retention 
requirement by the amount of any vertical risk retention ABS interests 
or eligible horizontal residual interest acquired by an originator of 
one or more securitized assets if certain requirements are satisfied, 
including, the originator must originate at least 20 percent of the 
securitized assets, as measured by the aggregate unpaid principal 
balance of the asset pool. In determining whether the allocation 
provisions of the proposal would have a significant economic impact on 
a substantial number of small banking organizations, the Federal 
banking agencies reviewed September 30, 2010 Call Report data to 
evaluate the securitization activity and approximate the number of 
small banking organizations that potentially could retain credit risk 
under allocation provisions of the proposal.\215\
---------------------------------------------------------------------------

    \215\ Call Report Schedule RC-S provides information on the 
servicing, securitization, and asset sale activities of banking 
organizations. For purposes of the RFA analysis, the Agencies 
gathered and evaluated data regarding (1) net securitization income, 
(2) the outstanding principal balance of assets sold and securitized 
by the reporting entity with servicing retained or with recourse or 
other seller-provided credit enhancements, and (3) assets sold with 
recourse or other seller-provided credit enhancements and not 
securitized by the reporting bank.
---------------------------------------------------------------------------

    The Call Report data indicates that approximately 329 small banking 
organizations, 241 of which are state nonmember banks, originate loans 
for securitization, namely ABS issuances collateralized by one-to-four 
family residential mortgages. The majority of these originators sell 
their loans either to Fannie Mae or Freddie Mac, which retain credit 
risk through agency guarantees, and therefore would not be allocated 
credit risk under the proposed rule. Additionally, based on 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.\216\ 
Accordingly, under the proposed rule a sponsor could potentially 
allocate a portion of the risk retention requirement to a small banking 
organization only if such organization originated at least 20 percent 
($100 million) of the securitized mortgages. As of September 30, 2010, 
only one small banking organization reported an outstanding principal 
balance of assets sold and securitized of $100 million or more.\217\
---------------------------------------------------------------------------

    \216\ Based on the data provided in Table 1, page 29 of the 
Board's ``Report to the Congress on Risk Retention'', it appears 
that the average MBS issuance is collateralized by a pool of 
approximately $620 million in mortgage loans (for prime MBS 
issuances) or approximately $690 million in mortgage loans (for 
subprime MBS issuances). For purposes of the RFA analysis, the 
agencies used an average asset pool size $500 million to account for 
reductions in mortgage securitization activity following 2007, and 
to add an element of conservatism to the analysis.
    \217\ The 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.
---------------------------------------------------------------------------

    The FDIC seeks comment on whether the proposed rule, if adopted in 
final form, would impose undue burdens, or have unintended consequences 
for, small state nonmember banks and whether there are ways such 
potential burdens or consequences could be minimized in a manner 
consistent with section 15G of the Exchange Act.
    SEC: The Commission hereby certifies, pursuant to 5 U.S.C. 605(b), 
that the proposed rule, if adopted, would not have a significant 
economic impact on a substantial number of small entities. The proposed 
rule implements the risk retention requirements of section 15G of the 
Exchange Act, which, in general, requires the securitizer of a asset-
backed securities (ABS) to retain not less than five percent of the 
credit risk of the assets collateralizing the ABS.\218\ Under the 
proposed rule, the risk retention requirements would apply to 
``sponsors'', as defined in the proposed rule. Based on our data, we 
found only one sponsor that would meet the definition of a small 
broker-dealer for purposes of the Regulatory Flexibility Act.\219\ 
Accordingly, the Commission does not believe that the proposed rule, if 
adopted, would have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \218\ See 17 U.S.C. 78o-11.
    \219\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    FHFA: Pursuant to section 605(b) of the Regulatory Flexibility Act, 
FHFA hereby certifies that the proposed rule will not have a 
significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

1. Request for Comment on Proposed Information Collection
    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501-3521. In accordance 
with the requirements of the PRA, the Agencies may not conduct or 
sponsor, and the respondent is not required to respond to, an 
information collection unless it displays a currently valid Office of 
Management and Budget (OMB) control number. The information collection 
requirements contained in this joint notice of proposed rulemaking have 
been submitted by the FDIC, OCC, and the Commission to OMB for approval 
under section 3506 of the PRA and section 1320.11 of OMB's implementing 
regulations (5 CFR part 1320). The Board reviewed the proposed rule 
under the authority delegated to the Board by OMB.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the agencies' functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collections, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Commenters may 
submit comments on aspects of this notice that may affect disclosure 
requirements and burden estimates at the addresses listed in the 
ADDRESSES section of this Supplementary Information. A copy of the 
comments may also be submitted to the OMB desk officer for the 
agencies: By mail to U.S. Office of Management and Budget, 725 17th 
Street, NW., 10235, Washington, DC 20503 or by facsimile to 
202-395-6974, Attention, Commission and Federal Banking Agency Desk 
Officer.
2. Proposed Information Collection
    Title of Information Collection: Credit Risk Retention.
    Frequency of response: Event generated.
    Affected Public: \220\

    \220\ The affected public of the FDIC, OCC, and Board is 
assigned generally in accordance with the entities covered by the 
scope and authority section of their respective proposed rule. The 
affected public of the Commission is based on those entities not 
already accounted for by the FDIC, OCC, and Board.

---------------------------------------------------------------------------

[[Page 24147]]

    FDIC: Insured state non-member banks, insured state branches of 
foreign banks, and certain subsidiaries of these entities.
    OCC: National banks, Federal savings associations, Federal branches 
or agencies of foreign banks, or any operating subsidiary thereof.
    Board: FDIC-insured state member banks. For Sec.  --.15(d)(13) the 
Board's respondents also include bank holding companies, foreign 
banking organizations, Edge or agreement corporations, any nonbank 
financial company (as defined in Sec.  --.1(c)(5)), savings and loan 
holding companies, (as defined in 12 U.S.C. 1467a, on and after the 
transfer date established under section 311 of the Dodd-Frank Act (12 
U.S.C. 5411)), or any subsidiary of the foregoing.
    SEC: All entities other than those assigned to the FDIC, OCC, or 
Board.
    Abstract: The notice sets forth permissible forms of risk retention 
for securitizations that involve issuance of asset-backed securities. 
The information requirements in joint regulations proposed by the three 
Federal banking agencies and the Commission are found in Sec. Sec.  
--.4, --.5, --.6, --.7, --.8, --.9, --.10, --.12, --.13, --.15, --.18, 
--.19, and --.20. The Agencies believe that the disclosure and 
recordkeeping requirements associated with the various forms of risk 
retention will enhance market discipline, help ensure the quality of 
the assets underlying a securitization transaction, and assist 
investors in evaluating transactions. Compliance with the information 
collections would be mandatory. Responses to the information 
collections would not be kept confidential and, except as provided 
below, there would be no mandatory retention period for proposed 
collections of information.

Section-by-Section Analysis

    Section --.4 sets forth the conditions that must be met by sponsors 
electing to use the vertical risk retention option. Section --.4(b)(1) 
requires disclosure of the amount of each class of ABS interests 
retained and required to be retained by the sponsor and Sec.  
--.4(b)(2) requires disclosure of material assumptions used to 
determine the aggregate dollar amount of ABS interests issued in the 
transaction.
    Section --.5 specifies the conditions that must be met by sponsors 
using the horizontal risk retention option, including disclosure of the 
amount of the eligible horizontal residual interest retained by the 
sponsor and the amount required to be retained (Sec.  --.5(c)(1)(i)); 
disclosure of the material terms of the eligible horizontal residual 
interest (Sec.  --.5(c)(1)(ii)); disclosure of the dollar amount to be 
placed in a cash reserve account and the amount required to be placed 
in the account (Sec.  --.5(c)(2)(i)), if applicable; disclosure of the 
material terms governing the cash reserve account (Sec.  
--.5(c)(2)(ii)), if applicable; and disclosure of material assumptions 
and methodology used in determining the aggregate dollar amount of ABS 
interests issued in the transaction (Sec.  --.5(c)(3)).
    Section --.6 identifies the requirements for sponsors opting to use 
the hybrid L-shaped risk retention method, including disclosures in 
compliance with those set forth for the vertical and horizontal risk 
retention methods (Sec.  --.6(b)).
    Section --.7 requires sponsors using a revolving master trust 
structure for securitizations to disclose the amount of seller's 
interest retained by the sponsor and the amount the sponsor is required 
to retain (Sec.  --.7(b)(1)); the material terms of the seller's 
interest retained by the sponsor (Sec.  --.7(b)(2)); and the material 
assumptions and methodology used in determining the aggregate dollar 
amount of ABS issued in the transaction (Sec.  --.7(b)(3)).
    Section --.8 discusses the representative sample method of risk 
retention and requires that the sponsor adopt and adhere to policies 
and procedures to, among other things, document the material 
characteristics used to identify the designated pool and randomly 
select assets using a process that does not take account of any asset 
characteristic other than the unpaid balance (Sec.  --.8(c)); 
maintaining, until all ABS interests are paid in full, documentation 
that clearly identifies the assets included in the representative 
sample (Sec.  --.8(c)); obtaining an agreed upon procedures report from 
an independent public accounting firm (Sec.  --.8(d)(1)); disclose the 
amount of assets included in the representative sample and retained by 
the sponsor and the amount of assets required to be retained by the 
sponsor (Sec.  --.8(g)(1)(i)); disclose prior to sale a description of 
the material characteristics of the designated pool (Sec.  
--.8(g)(1)(ii)); disclose prior to sale a description of the policies 
and procedures used by the sponsor to ensure compliance with random 
selection and equivalent risk determination requirements (Sec.  
--.8(g)(1)(iii)); confirm prior to sale that the required agreed upon 
procedures report was obtained (Sec.  --.8(g)(1)(iv)); disclose the 
material assumptions and methodology used in determining the aggregate 
dollar amount of ABS interests issued in the transaction (Sec.  
--.8(g)(1)(v)); and disclose after sale the performance of the pool of 
assets in the securitization transaction as compared to performance of 
assets in the representative sample (Sec.  --.8(g)(2)); and disclose to 
holders of the asset-backed securities information concerning the 
assets in the representative sample (Sec.  --.8(g)(3)).
    Section --.9 addresses the requirements for sponsors utilizing the 
ABCP conduit risk retention approach. The requirements for the ABCP 
conduit risk retention approach include disclosure of each originator-
seller with a retained eligible horizontal residual interest and the 
form, amount, and nature of the interest (Sec.  --.9(b)(1)); disclosure 
of each regulated liquidity provider providing liquidity support to the 
ABCP conduit and the form, amount, and nature of the support (Sec.  
--.9(b)(2)); maintenance of policies and procedures that are reasonably 
designed to monitor regulatory compliance by each originator-seller of 
the eligible ABCP conduit (Sec.  --.9(c)(2)(i)); and notice to holders 
of the ABS interests issued in the transaction in the event of 
originator-seller regulatory non-compliance (Sec.  --.9(c)(2)(ii)).
    Section --.10 sets forth the requirements for sponsors utilizing 
the commercial mortgage-backed securities risk retention option, and 
includes disclosures of the name and form of organization of the third-
party purchaser (Sec.  --.10(a)(5)(i)), the third-party purchaser's 
experience (Sec.  --.10(a)(5)(ii)), other material information (Sec.  
--.10(a)(5)(iii)), the amount and purchase price of eligible horizontal 
residual interest retained by the third-party purchaser and the amount 
that the sponsor would have been required to retain (Sec.  
--.10(a)(5)(iv) and (v)), a description of the material terms of the 
eligible residual horizontal interest retained by the third-party 
purchaser (Sec.  --.10(a)(5)(vi)), the material assumptions and 
methodology used to determine the aggregate amount of ABS interests 
issued by the issuing entity (Sec.  --.10(a)(5)(vii)), representations 
and warranties concerning the securitized assets and factors used to 
determine the assets should be included in the pool (Sec.  
--.10(a)(5)(viii)); sponsor maintenance of policies and procedures to 
monitor third-party compliance with regulatory requirements (Sec.  
--.10(b)(2)(A)); and sponsor notice to holders of ABS interests in the 
event of third-party non-compliance with

[[Page 24148]]

regulatory requirements (Sec.  --.10(b)(2)(B)).
    Section --.12 requires the establishment of a premium cash reserve 
account, in addition to the sponsor's base risk retention requirement, 
in instances where the sponsor structures a securitization to monetize 
excess spread on the underlying assets. The premium cash reserve 
account would be used to ``capture'' the premium received on sale of 
such tranches for purposes of covering losses on the underlying assets 
and would require the sponsor to make disclosures regarding the dollar 
amount required by regulation to be placed in the account and any other 
amounts placed in the account by the sponsor (Sec.  --.12(d)(1)) and 
the material assumptions and methodology used in determining fair value 
of any ABS interest that does not have a par value and that was used in 
calculating the amount required for the premium capture cash reserve 
account (Sec.  --.12(d)(2)).
    Section --.13 sets forth the conditions that apply when the sponsor 
of a securitization allocates to originators of securitized assets a 
portion of the credit risk it is required to retain, including 
disclosure of the name and form of organization of any originator with 
an acquired and retained interest (Sec.  --.13(a)(2)); maintenance of 
policies and procedures that are reasonably designed to monitor 
originator compliance with retention amount and hedging, transferring 
and pledging requirements (Sec.  --.13(b)(2)(A)); and notice to holders 
of ABS interests in the transaction in the event of originator non-
compliance with regulatory requirements (Sec.  --.13(b)(2)(B)).
    Section --.15 provides an exemption from the risk retention 
requirements for qualified residential mortgages that meet certain 
specified criteria including certification by the depositor of the 
asset-backed security that it has evaluated the effectiveness of its 
internal supervisory controls and concluded that the controls are 
effective (Sec.  --.15(b)(4)(i)), and sponsor disclosure prior to sale 
of asset-backed securities in the issuing entity of a copy of the 
certification to potential investors (Sec.  --.15(b)(4)(iii)). In 
addition Sec.  --.15(e)(3) provides that a sponsor that has relied upon 
the exemption shall not lose the exemption if it complies with certain 
specified requirements, including prompt notice to the holders of the 
asset-backed securities of any loan repurchased by the sponsor. Section 
--.15 also contains additional information collection requirements on 
the mortgage originator to include terms in the mortgage transaction 
documents under which the creditor commits to having servicing policies 
and procedures (Sec.  --.15(d)(13)(i)) and to provide disclosure of the 
foregoing default mitigation commitments to the borrower at or prior to 
the closing of the mortgage transaction (Sec.  --.15(d)(13)(ii)).
    Sections --.18, --.19, and --.20 provide exemptions from the risk 
retention requirements for qualifying commercial real estate loans, 
commercial mortgages, and auto loans that meet specified criteria. Each 
section requires that the depositor of the asset-backed security 
certify that it has evaluated the effectiveness of its internal 
supervisory controls and concluded that its controls are effective 
(Sec. Sec.  --.18(b)(7)(i), --.19(b)(10)(i), and --.20(b)(9)(i)); that 
the sponsor provide a copy of the certification to potential investors 
prior to the sale of asset-backed securities (Sec. Sec.  
--.18(b)(7)(iii), --.19(b)(10)(iii), and --.20(b)(9)(iii)); and that 
the sponsor promptly notify the holders of the securities of any loan 
included in the transaction that is required to be repurchased by the 
sponsor (Sec. Sec.  --.18(c)(3), --.19(c)(3), and --.20(c)(3)).

Estimated Paperwork Burden

    Estimated Burden per Response:
Sec.  --.4--Vertical risk retention: disclosures--2 hours.
Sec.  --.5--Horizontal risk retention: disclosures--2.5 hours.
Sec.  --.6--L-Shaped risk retention: disclosures--3 hours.
Sec.  --.7--Revolving master trusts: disclosures--2.5 hours.
Sec.  --.8--Representative sample: recordkeeping--120 hours; 
disclosures--23.25 hours.
Sec.  --.9--Eligible ABCP conduits: recordkeeping--20 hours; 
disclosures--3 hours.
Sec.  --.10--Commercial mortgage-backed securities: recordkeeping--20 
hours; disclosures--19.75 hours.
Sec.  --.12--Premium capture cash reserve account: disclosures--1.75 
hours.
Sec.  --.13--Allocation of risk retention: recordkeeping--20 hours; 
disclosures--2.5 hours.
Sec.  --.15--Exemption for qualified residential mortgages: 
recordkeeping--40 hours; disclosures--9.25 hours.
Sec.  --.18--Exemption for qualifying CRE loans: recordkeeping--40 
hours; disclosures--1.25 hours.
Sec.  --.19--Exemption for qualifying commercial mortgages: 
recordkeeping--40 hours; disclosures--1.25 hours.
Sec.  --.20--Exemption for qualifying auto loans: recordkeeping--40 
hours; disclosures--1.25 hours.

FDIC

    Number of Respondents: 90 sponsors and 4,715 creditors.
    Total Estimated Annual Burden: 59,463 hours.

OCC

    Number of Respondents: 30 sponsors and 1,650 creditors.
    Total Estimated Annual Burden: 20,483 hours.

Board

    Number of Respondents: 20 sponsors and 7,636 creditors.
    Total Estimated Annual Burden: 70,430 hours.

Commission

    Number of Respondents: 104 sponsors and 1,500 creditors.
    Total Estimated Annual Burden: 37,166 hours.
    Commission's explanation of the calculation:
    To determine the total paperwork burden for the requirements 
contained in this proposed rule the Agencies first estimated the 
universe of sponsors that would be required to comply with the proposed 
disclosure and recordkeeping requirements. The Agencies estimate that 
approximately 243 unique sponsors conduct ABS offerings per year. This 
estimate was based on 2010 data reported on the commercial bank Call 
Report (FFIEC 031 and 041) and from the ABS database AB Alert. Of the 
243 sponsors, the Agencies have assigned 8 percent of these sponsors to 
the Board, 12 percent to the OCC, 37 percent to the FDIC, and 43 
percent to the Commission.
    Next, the Agencies estimated the burden per response that would be 
associated with each disclosure and recordkeeping requirement. In some 
cases, the proposed rule is estimated to incur only an incremental 
burden on respondents. For example, in the representative sample 
option, the proposed rule requires that the sponsor cause to be 
disclosed information regarding the securitized assets, but the 
Agencies believe similar information regarding the securitized assets 
are already being made to investors, and therefore the proposed rule 
would only incur an incremental burden on sponsors.
    Next, the Agencies estimated how frequent the entities would make 
the required disclosure by estimating the proportionate amount of 
offerings per year for each agency. In making this determination, the 
estimate was based on the average number of ABS offerings from 2004 
through 2009, and therefore, we estimate the total number of annual

[[Page 24149]]

offerings per year to be 1,700.\221\ We also made the following 
additional estimates:
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    \221\ We use the ABS issuance data from Asset-Backed Alert on 
the initial terms of offerings, and we supplement that data with 
information from Securities Data Corporation (SDC). This estimate 
includes registered offerings and offerings made under Securities 
Act Rule 144A. We also note that this estimate is for offerings that 
are not exempted under Sec. Sec.  --.21 and --.22 of the proposed 
rule.
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     12 offerings per year will be subject to disclosure and 
recordkeeping requirements under sections Sec.  --.12 and Sec.  --.13, 
which are divided equally among the four agencies (i.e., 3 offering per 
year per agency);
     100 offerings per year will be subject to disclosure and 
recordkeeping requirements under section Sec.  --.15, which are divided 
proportionately among the agencies based on the entity percentages 
described above (i.e., 8 offerings per year subject to Sec.  --.15 for 
the Board; 12 offerings per year subject to Sec.  --.15 for the OCC; 37 
offerings per year subject to Sec.  --.15 for the FDIC; and 43 
offerings per year subject to Sec.  --.15 for the Commission); and
     40 offerings per year will be subject to disclosure and 
recordkeeping requirements under Sec.  --.18, Sec.  --.19, and Sec.  
--.20, respectively, which are divided proportionately among the 
agencies based on the entity percentages described above (i.e., 3 
offerings per year subject to each section for the Board, 5 offerings 
per year subject to each section for the OCC; 15 offerings per year 
subject to each section for the FDIC, and 17 offerings per year subject 
to each section for the Commission).
    To obtain the estimated number of responses (equal to the number of 
offerings) for each option in Part B of the proposed rule, the Agencies 
multiplied the number of offerings estimated to be subject to the base 
risk retention requirements (i.e., 1,480) \222\ by the sponsor 
percentages described above. The result was the number of base risk 
retention offerings per year per agency. For the Commission, this was 
calculated by multiplying 1,480 offerings per year by 43 percent, which 
equals 636 offerings per year. This number was then divided by the 
number of base risk retention options (7) to arrive at the estimate of 
the number of offerings per year per agency per base risk retention 
option. For the Commission, this was calculated by dividing 636 
offerings per year by 7 options, resulting in 91 offerings per year per 
base risk retention option.
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    \222\ Estimate of 1,700 offerings per year minus the estimate of 
the number of offerings qualifying for an exemption under Sec.  
--.15, Sec.  --.18, Sec.  --.19, and Sec.  --.20 (220 total).
---------------------------------------------------------------------------

    The total estimated annual burden for each Agency was then 
calculated by multiplying the number of offerings per year per section 
for such Agency (except with respect to the recordkeeping burden hours 
under Sec.  --.8 and Sec.  --.15(d)(13) as described below) by the 
number of burden hours estimated for the respective section, then 
adding these subtotals together. For example, under Sec.  --.4, the 
Commission multiplied the estimated number of offerings per year per 
Sec.  --.4 (i.e., 91 offerings per year) by the disclosure burden hour 
estimate for Sec.  --.4 of 2.0 hours. Thus, the estimated annual burden 
hours for respondents to which the Commission accounts for the burden 
hours under Sec.  --.4 is 182 hours (91 * 2.0 hours = 182 hours). For 
the recordkeeping burden estimate under Sec. Sec.  --.8(c) 
and--.8(d)(2), instead of using the number of offerings per year per 
base risk retention option, the Agencies multiplied the number of 
recordkeeping burden hours by the number of unique sponsors assigned to 
such Agency per year (i.e., 104 in the case of the Commission).\223\ 
The reason for this is that the Agencies considered it possible that 
sponsors may establish these policies and procedures during the year 
independent on whether an offering was conducted, with a corresponding 
agreed upon procedures report obtained from a public accounting firm 
each time such policies and procedures are established.
---------------------------------------------------------------------------

    \223\ 243 * 43% = 104.
---------------------------------------------------------------------------

    To obtain an estimate for the number of burden hours required by 
Sec.  --.15(d)(13), the Agencies multiplied the estimate of the number 
of creditors assigned to such Agency for purposes of this risk 
retention rule by an estimate of the number of hours that it will take 
creditors to perform a one-time update to their systems to account for 
the requirements of this section, which we estimate to be 8 hours.\224\ 
This estimate was added to the other disclosure and recordkeeping 
burden estimates as described above to achieve a total estimated annual 
burden for respondents assigned to the Commission.
---------------------------------------------------------------------------

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

    For disclosures made at the time of the securitization 
transaction,\225\ the Commission allocates 25 percent of these hours 
(1,009 hours) to internal burden for all sponsors. For the remaining 75 
percent of these hours, (3,028 hours), the Commission uses an estimate 
of $400 per hour for external costs for retaining outside professionals 
totaling $1,211,200. For disclosures made after the time of sale in a 
securitization transaction,\226\ the Commission allocated 75 percent of 
the total estimated burden hours (892 hours) to internal burden for all 
sponsors. For the remaining 25 percent of these hours (297 hours), the 
Commission uses an estimate of $400 per hour for external costs for 
retaining outside professionals totaling $118,800. With respect to the 
agreed upon procedures report by an independent public accounting firm 
under the representative sample option, the Commission allocated 100 
percent of the total estimated burden hours (4,160 hours \227\) to 
retaining outside professionals at an estimate of $400 per hour, for a 
total cost of $1,664,000.
---------------------------------------------------------------------------

    \225\ These are the disclosures required by Sec. Sec.  
--.4(b)(1)-(2); --.5(c)(1)(i)-(ii), (2)(i)-(ii), and (3); --.6(b); 
--.7(b)(1)-(3); --.8(g)(1)(i)-(iv) and (g)(3); --.9(b)(1)-(2); 
--.10(a)(5)(i)-(viii); --.12(d)(1)-(3); --.13(a)(2); 
--.15(b)(4)(iii); --.18(b)(7)(iii); --.19(b)(10)(iii); and 
--.20(b)(9)(iii).
    \226\ These are the disclosures required by Sec. Sec.  
--.8(g)(2); --.9(c)(2)(ii); --.10(b)(2)(B); --.13(b)(2)(B); --
15(e)(3); --.18(c)(3); --19(c)(3); and --.20(c)(3).
    \227\ 40 * 104 = 4,160 hours.
---------------------------------------------------------------------------

    FHFA: The proposed regulation does not contain any FHFA information 
collection requirement that requires the approval of OMB under the 
Paperwork Reduction Act.
    HUD: The proposed regulation does not contain any HUD information 
collection requirement that requires the approval of OMB under the 
Paperwork Reduction Act.

C. Commission Economic Analysis

1. Introduction
    As discussed above, Section 15G of the Exchange Act, as added by 
section 941(b) of the Dodd-Frank Act, generally requires the Agencies 
to jointly prescribe regulations, that (i) require a sponsor to retain 
not less than five percent of the credit risk of any asset that the 
sponsor, through the issuance of an ABS, transfers, sells, or conveys 
to a third party, and (ii) prohibit a sponsor from directly or 
indirectly hedging or otherwise transferring the credit risk that the 
sponsor is required to retain under section 15G and the Agencies' 
implementing rules.\228\
---------------------------------------------------------------------------

    \228\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
---------------------------------------------------------------------------

    Section 15G of the Exchange Act exempts certain types of 
securitization transactions from these risk retention requirements and 
authorizes the Agencies to exempt or establish a lower risk retention 
requirement for other types of securitization transactions. For 
example, section 15G specifically provides that a sponsor shall not be 
required to retain any part of the credit risk for an asset that is 
transferred, sold, or conveyed through the issuance of

[[Page 24150]]

ABS by the sponsor, if all of the assets that collateralize the ABS are 
qualified residential mortgages (QRMs), as that term is jointly defined 
by the Agencies.\229\ In addition, section 15G states that the Agencies 
must permit a sponsor to retain less than five percent of the credit 
risk of commercial mortgages, commercial loans, and automobile loans 
that are transferred, sold, or conveyed through the issuance of ABS by 
the sponsor if the loans meet underwriting standards established by the 
Federal banking agencies.\230\
---------------------------------------------------------------------------

    \229\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B).
    \230\ See id. at Sec.  78o-11(c)(1)(B)(ii) and (2).
---------------------------------------------------------------------------

    Section 15G requires the Agencies to prescribe risk retention 
requirements for ``securitizers,'' which the Agencies interpret are 
depositors or sponsors of ABS. The proposal would require that a 
``sponsor'' of a securitization transaction to retain the credit risk 
of the securitized assets in the form and amount required by the 
proposed rule. The Agencies believe that imposing the risk retention 
requirement on the sponsor of the ABS is appropriate in light of the 
active and direct role that a sponsor typically has in arranging a 
securitization transaction and selecting the assets to be securitized.
    In developing the proposed rules, the Agencies have taken into 
account the diversity of assets that are securitized, the structures 
historically used in securitizations, and the manner in which sponsors 
may have retained exposure to the credit risk of the assets they 
securitize. The proposed rules provide several options sponsors may 
choose from in meeting the risk retention requirements of section 15G, 
including, but not limited to, retention of a five percent ``vertical'' 
slice of each class of interests issued in the securitization or 
retention of a five percent ``horizontal'' first-loss interest in the 
securitization, as well as other risk retention options that take into 
account the manners in which risk retention often has occurred in 
credit card receivable and automobile loan and lease securitizations 
and in connection with the issuance of asset-backed commercial paper. 
The proposed rules also include a special ``premium capture'' mechanism 
designed to prevent a sponsor from structuring an ABS transaction in a 
manner that would allow the sponsor to effectively negate or reduce its 
retained economic exposure to the securitized assets by immediately 
monetizing the excess spread created by the securitization transaction. 
In designing these options and the proposed rules in general, the 
Agencies have sought to ensure that the amount of credit risk retained 
is meaningful--consistent with the purposes of section 15G--while 
reducing the potential for the proposed rules to negatively affect the 
availability and costs of credit to consumers and businesses.
    As required by section 15G, the proposed rules provide a complete 
exemption from the risk retention requirements for ABS that is 
collateralized solely by QRMs and establish the terms and conditions 
under which a residential mortgage would qualify as a QRM. In 
developing the proposed definition of a QRM, the Agencies carefully 
considered the terms and purposes of section 15G, public input, and the 
potential impact of a broad or narrow definition of QRMs on the housing 
and housing finance markets.
    As discussed in greater detail in Part IV of this Supplementary 
Information, the proposed rule would generally prohibit QRMs from 
having product features that contributed significantly to the high 
levels of delinquencies and foreclosures since 2007--such as terms 
permitting negative amortization, interest-only payments, or 
significant interest rate increases--and also would establish 
underwriting standards designed to ensure that QRMs are of very high 
credit quality consistent with their exemption from risk retention 
requirements. These underwriting standards include, among other things, 
maximum front-end and back-end debt-to-income ratios of 28 percent and 
36 percent, respectively; a maximum loan-to-value ratio of 80 percent 
in the case of a purchase transaction (with a lesser combined LTV 
permitted for refinance transactions); a 20 percent down payment 
requirement in the case of a purchase transaction; and credit history 
restrictions.
    The proposed rules also would not require a sponsor to retain any 
portion of the credit risk associated with a securitization transaction 
if the ABS issued are exclusively collateralized by qualified assets 
(QAs)--commercial loans, commercial mortgages, or automobile loans that 
meet underwriting standards included in the proposed rule for the 
individual asset class.
    The Commission is sensitive to the costs and benefits imposed by 
its rules. The discussion below focuses on the costs and benefits of 
the decisions made by the Commission, together with the other Agencies, 
to fulfill the mandates of the Dodd-Frank Act within its permitted 
discretion, rather than the costs and benefits of the mandates of the 
Dodd-Frank Act itself. For instance, the analysis below assumes as a 
baseline that a standard for QRM is in place, since such a standard is 
mandated by statute. Rather than assessing the economic costs and 
benefits of implementing such a standard, the analysis below focuses on 
the relative costs and benefits of alternative QRM standards. 
Similarly, the analysis assumes the following: A risk retention 
requirement of at least 5 percent for non-qualified mortgages and non-
qualified assets, 0% for QRMs and less than 5 percent for qualified 
assets. Thus, our analysis below examines the costs and benefits of 
alternative implementations of a risk retention requirement meeting the 
mandates of the Dodd-Frank Act, rather than the existence of a risk 
retention requirement. Although our intent is to limit the economic 
analysis of this rule to decisions made by the Commission, to the 
extent that the Commission's discretion is exercised to further the 
benefits intended by the Dodd-Frank Act, the two types of benefits 
might not be entirely separable.
    Section 23(a)(2) of the Exchange Act requires the Commission, when 
making rules under the Exchange Act, to consider the impact on 
competition that the rules would have, and prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.\231\ 
Further, Section 2(b) of the Securities Act of 1933\81\ and Section 
3(f) of the Exchange Act requires the Commission,\232\ when engaging in 
rulemaking where we are required to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider, 
in addition to the protection of investors, whether the action will 
promote efficiency, competition and capital formation. The Commission 
has considered and discussed below the effects of the proposed rules on 
efficiency, competition, and capital formation, as well as the benefits 
and costs associated with the Commission's decisions in the proposed 
rulemaking.
---------------------------------------------------------------------------

    \231\ 15 U.S.C. 78w(a).
    \232\ 17 U.S.C. 78c(f).
---------------------------------------------------------------------------

2. Risk Retention Methods for Non-QRMs and Non-Qualifying Assets 
(``QAs'')
    The proposed rules require not less than 5 percent risk retention 
for all non-QRMs and non-QAs. The form of the retention is to be chosen 
from a menu of options, which should provide flexibility to sponsors in 
meeting the

[[Page 24151]]

risk retention requirement mandated by Section 15G, as added by the 
Dodd-Frank Act. Section 15G directs the Agencies to set appropriate 
risk retention rules, which will require the retention of no less than 
5 percent of the credit risk in the securitized assets for all ABS 
classes not exempt from the requirement. Section 15G provides for a 
risk retention exemption for sponsors of ABS backed solely by QRMs and 
for certain other sponsors or ABS asset classes as discussed below and 
a less than five percent risk retention requirement for QAs.
    Empirical evidence points to a significant heterogeneity of 
securitization structures, practices and risk characteristics across 
ABS asset classes.\233\ Accordingly, allowing sponsors to choose a form 
of risk retention from a menu of options provides them with the 
flexibility of choosing the form that best suits their operational and 
financing preferences. By including most of the risk retention forms 
currently observed in the marketplace, the Agencies' proposal benefits 
sponsors, originators, and investors alike by limiting disruption to 
current securitization practices to the extent possible. Historically, 
most sponsors have been exposed to some level of credit risk by 
retaining an economic interest in the pools they securitize in the form 
of first-loss or pro-rata positions.\234\ Thus, the proposed rule 
allows sponsors that have existing risk retention programs to minimize 
their compliance costs resultant from the statute's mandate. Without 
the flexibility allowed by a broad menu-of-options approach, there 
likely would be an increase in borrowing costs to sponsors and to the 
borrowers whose loans are in the securitized pools. In some cases, this 
increase could be large enough to make certain types of securitizations 
economically unfeasible.
---------------------------------------------------------------------------

    \233\ See Board of Governors of the Federal Reserve System, 
Report to the Congress on Risk Retention, October 2010 available at 
http://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf.
    \234\ For example, Chen, Liu, and Ryan (2008) show that banks 
retain more risk when loans have higher or less externally 
verifiable credit risk. See Characteristics of Securitizations that 
Determine Issuers' Retention of the Risks of the Securitized, Weitzu 
Chen, Chi-Chun Liu, and Stephen Ryan (2008), The Accounting Review, 
2008.83.5.1181.
---------------------------------------------------------------------------

    It is possible that the flexibility allowed by the proposed 
approach to implementing the risk retention mandate of Section 15G 
might result in some sponsors choosing risk retention methods that do 
not align fully their incentives with those of investors. In such 
cases, underwriting standards and pool selection procedures may not 
improve. If investors are reluctant to invest in ABS where a sponsor 
has selected such a suboptimal risk retention method, risk retention 
might not have the effect of facilitating capital formation. To the 
extent that such reluctance on part of investors provides sponsors with 
the incentive to choose risk retention methods that investors demand, 
this effect on capital formation is mitigated.
    An integral part of the proposed rules are new risk retention 
disclosure requirements specifically tailored to each of the 
permissible forms of risk retention. The required disclosure would 
provide investors with information on the sponsor's retained interest 
in an ABS transaction, such as the amount and form of the interest 
retained and the assumptions used in determining the aggregate value of 
ABS to be issued. This information would benefit investors by providing 
them with an efficient mechanism to monitor compliance with the 
proposed rules and make informed investment decisions. However, 
compliance costs to sponsors would increase, since sponsors would now 
have to prepare and provide these disclosures to investors.
    Therefore, the Commission believes that the proposed menu-of-
options approach and the accompanying disclosures will have no 
competitive effects, and will implement the mandates of Section 15G 
without causing economic inefficiencies or hindering capital 
formation.\235\
---------------------------------------------------------------------------

    \235\ As discussed in the introduction, this statement refers to 
the choice made by the Commission and other agencies by having 
proposed a menu of options rather than the statutory mandate to 
require risk retention.
---------------------------------------------------------------------------

    Vertical Risk Retention Method
    By requiring the retention of five percent of each interest backed 
by the securitized asset pool, regardless of whether the interest is 
certificated or not, the vertical risk retention method is the most 
straightforward method to implement. The transparency and ease of 
verification of this method will likely benefit investors to the extent 
that they view their ability to discern a sponsor's risk retention 
important. This provides the sponsor an interest in the entire 
structure of the securitization transaction. However, the vertical risk 
retention method requires a sponsor to bear only a small fraction of 
the losses incurred by the pool, thus possibly failing to align 
sufficiently originators' and sponsors' interests with those of 
investors when it comes to the origination and underwriting of riskier 
asset classes. Since 5 percent is a lower bound on the risk required to 
be retained, it is possible some sponsors may hold more if it were 
economically optimal.
Horizontal Risk Retention Method
    This method exposes a sponsor to the first 5 percent of all pool-
asset losses and thus results in the sponsor retaining substantially 
more than five percent of the credit risk in a securitization. That is, 
a sponsor will be exposed to 100 percent of all losses as long as those 
losses are up to 5 percent. Therefore, this method imposes a 
significant disincentive on sponsors of poorly underwritten assets. As 
a result, the horizontal method of risk retention should benefit 
investors by aligning their incentives with those of originators and 
sponsors when originating and underwriting riskier asset classes.
    Since the retention of a horizontal first-loss position in 
securitizations leaves the sponsor holding a significant amount of 
risk, it is possible that for less risky asset classes a 5 percent risk 
retention might be unnecessarily high. For such asset classes, a 
sponsor might be constrained to raising external financing for only 95 
percent of the asset pool, while the market might have allowed for a 
smaller equity interest. As a result, the sponsor might have to incur 
additional financing costs which would have the effect of impeding 
capital formation.
    The retention of a first-loss position has been a common market 
practice for many asset classes, so this method should not be 
unnecessarily disruptive and should therefore impose limited additional 
costs on sponsors. The effect would be that of no decrease in 
efficiency and no new impediment to capital formation.
Premium Capture Cash Reserve Account
    Securitization transactions often contain pools of assets that are 
expected to earn substantially higher returns compared to the financing 
rates on the ABS issued in the securitization. This is generally 
referred to as excess spread. In situations where there is substantial 
excess spread, the sponsor can obtain significant economic income by 
selling an interest based on the excess spread. If the sponsor is able 
to recover more than 5 percent of the balance of the pool in a short 
period of time, then the sponsor would be left with limited economic 
interest in the securitization. This is particularly true if defaults 
occur later in the life of pool assets. For this reason, the proposed 
rules prohibit the cash flows from the excess spread (or cash proceeds 
from selling it) to be distributed to the sponsor. This benefits 
investors by helping to ensure that the incentive-alignment objectives 
of the

[[Page 24152]]

proposed rules are achieved. However, this may reduce the flexibility 
of sponsors in structuring their deals, thus imposing a cost.
L-Shaped Method
    Another risk retention option in the proposed rules would allow a 
sponsor, subject to certain conditions, to use an equal combination of 
a vertical risk retention and horizontal risk retention as a means of 
retaining the required five percent exposure to the credit risk of the 
securitized assets. This form of risk retention is referred to as an 
``L-Shaped'' form of risk retention because it combines both vertical 
and horizontal forms. Overall, this has the benefits and costs 
associated with the two approaches as described above. Also, the 
proposed requirement that the sponsor retain 50 percent vertical and 50 
percent horizontal facilitates the monitoring of the risk retention 
compliance by investors, Agencies and other market participants.
Representative Sample Method
    The representative sample method requires risk retention of a 
randomly selected loan pool that is ``similar'' in risk attributes to 
the securitized loans prior to a securitization. Since it may be costly 
to ensure the true ``randomness'' of the selection or 
``representativeness'' of the sample, and since sponsors' prior 
knowledge of the sample selection bias might alter their incentives to 
put well-underwritten assets into the pool, this method may not fulfill 
its incentive-alignment benefits without mechanisms in place to ensure 
there is no selection bias. Thus, the proposed rules require that 
sponsors have plans and procedures in place, maintain documentation, 
and have the sampling procedures agreed upon by an independent auditing 
firm. In addition, the proposed rules would require ongoing disclosures 
about the performance of the assets in the representative sample in the 
same form, level, and manner as is provided concerning the securitized 
assets. Although this will increase sponsors' compliance costs, the 
Commission believes that it will also further the incentive-alignment 
benefits contemplated in Section 15G of the Exchange Act.
    For some asset classes, such as automobile loans, retaining a 
portion of the loans that would ordinarily be securitized has been used 
as a method of risk retention. Therefore, permitting a representative 
sample risk retention option with the appropriate safeguards will 
likely benefit sponsors of such asset classes, whose compliance costs--
other than reporting costs--will not increase as a result of the 
proposed rules. Furthermore, the borrowers whose loans back such 
securitizations will also likely experience no increase in their 
borrowing costs.
Seller's Interest Method
    Securitizations of revolving lines of credit, such as credit card 
accounts or dealer floorplan loans, are typically structured using a 
revolving master trust, which issues more than one series of ABS backed 
by a single pool of revolving assets. The proposed rule would allow a 
sponsor of a revolving asset master trust that is collateralized by 
revolving loans or other extensions of revolving credit to meet its 
risk retention requirement by retaining a seller's interest in an 
amount not less than 5 percent of the unpaid principal balance of the 
pool assets held by the issuer. The definitions of a seller's interest 
and a revolving asset master trust are intended to be consistent with 
market practices and, with respect to seller's interest, designed to 
help ensure that any seller's interest retained by a sponsor under the 
proposal would expose the sponsor to the credit risk of the underlying 
assets. This should benefit all parties to the securitization by 
balancing implementation costs for sponsors utilizing the master trust 
structure with incentive-alignment benefits for investors.
3. Definition of Qualified Residential Mortgages
    Section 15G requires the Commission, along with the other Agencies, 
to jointly specify underwriting standards for QRMs that take into 
consideration underwriting and product features that historical loan 
performance data indicate result in lower risk of default. Section 15G 
exempts ABS entirely backed by QRMs from the risk retention mandated by 
Section 15G. In defining QRMs, the Agencies examined data on mortgage 
performance supplied by Lender Processing Services' (``LPS'') Applied 
Analytics division (formerly McDash Analytics). To minimize performance 
differences arising from unobservable changes across products, and to 
focus on loan performance through stressful environments, the analysis 
generally used prime fixed-rate loans originated from 2005 to 2008. 
Since the LPS data do not include detailed borrower information, the 
Agencies also analyzed data from the triennial Survey of Consumer 
Finances (``SCF'') for the 1992-2007 period. To isolate the borrower 
characteristics closest in time to the mortgage origination, the 
analysis was limited to the approximately 1,500 families, who purchased 
their homes in the year prior to or of the survey. The Agencies also 
examined a combined data set of loans purchased or securitized by the 
Enterprises from 1997 to 2009. This data set consisted of more than 78 
million mortgages, and included data on loan products and terms, 
borrower characteristics (e.g., income and credit score), and 
performance data through the third quarter of 2010.
    The analysis of the data described above and the conclusions of 
numerous academic studies support a definition of QRM that takes into 
account the following underwriting and product features: the borrower's 
ability to repay the mortgage (as captured the borrower's debt-to-
income ratio); the borrower's credit history; the borrower's down 
payment amount and sources; the loan-to-value ratio for the loan; the 
form of valuation used in underwriting the loan; the type of mortgage 
involved; and the owner-occupancy status of the property securing the 
mortgage.\236\ The Commission believes that selecting this subset of 
features will be beneficial to loan originators, because these are the 
features typically considered in the mortgage underwriting process. 
Although there might be factors among those listed above that loan 
originators had not previously used in their lending decisions, the 
Commission believes that this is unlikely. Thus, the Commission expects 
that loan originators would not have to incur significant new or 
additional costs to collect information on these specific underwriting 
and product features, which should have the effect of not unnecessarily 
disrupting existing lending practices. As a result,

[[Page 24153]]

the Commission expects that mortgage rates would not be adversely 
impacted by the Agencies' choice of the features used to define QRMs 
and therefore this choice would not have a negative effect on 
efficiency and capital formation.
---------------------------------------------------------------------------

    \236\ See Demyanyk, Yuliya, and Otto Van Hemert, ``Understanding 
the Subprime Crisis,'' Working paper. St. Louis, Missouri: Federal 
Reserve Bank of St. Louis (2008); Quercia, Roberto, Michael Stegman, 
and Walter R. Davis, ``Residential Mortgage Default: A Review of the 
Literature,'' Journal of Housing Research 3(2): 341-379 (2005); 
Ambrose, Brent W., Michael LaCour-Little, and Zsuzsa Huszar, ``A 
Note on Hybrid Mortgages,'' Real Estate Economics 33(4): 765-782 
(2005); Anderson, Dennis Capozza and Robert Van Order, 
``Deconstructing the Mortgage Meltdown: A Methodology for 
Decomposing Underwriting Quality,'' Social Science Research Network. 
http://ssrn.com/abstract=1411782 (2009); Gerardi, Kristopher, 
Andreas Lehnert, Shane Sherlund, and Paul Willen ``Making Sense of 
the Subprime Crisis,'' Brookings Papers on Economic Activity (Fall 
2008), 59-145; Austin Kelly, ``Skin in the Game: Zero Down Payment 
Mortgage Default,'' Federal Housing Finance Agency, Journal of 
Housing Research, Vol. 19, No. 2 (2008); Neil Bhutta, Jane Dokko and 
Hui Shan, ``The Depth of Negative Equity and Mortgage Default 
Decisions,'' Finance and Economics Discussion Series, Federal 
Reserve Board, 2010-35 (2010); Deng, Yongheng, John M. Quigley and 
Robert van Order (2000), ``Mortgage Terminations, Heterogeneity and 
the Exercise of Mortgage Options,'' Econometrica, Vol. 68, No. 2 
(2000), pp. 275-307.
---------------------------------------------------------------------------

    The Agencies also have sought to make the standards applicable to 
QRMs transparent to, and verifiable by, originators, securitizers, 
investors and supervisors. The Commission believes that investors will 
also benefit from the proposed approach to defining QRMs using the 
above subset of mortgage features, since these include the factors most 
commonly considered by the market as determinants of loan quality and 
expected mortgage default. Therefore, investors will likely be familiar 
with them, which will have the effect of facilitating investors' 
interpretation and understanding of the QRM standard as proposed.
    When considering the underwriting and product features to be used 
in the QRM definition, the Agencies selected features that are 
transparent or verifiable. The Commission believes that this will 
benefit all entities involved in the securitization process. Loan 
originators will be able to easily discern whether a mortgage is a QRM 
during the underwriting process. Sponsors will be able to unambiguously 
determine whether an ABS is backed by QRMs alone and therefore 
qualifies for the risk retention exemption. And finally, investors will 
be able to assess without difficulty whether they are investing in a 
QRM ABS or not. Thus, the Commission expects that as a result of the 
transparency and verifiability of the mortgage features used to define 
QRMs, there will be no reduction in efficiency or impediment to capital 
formation.
    Some of the QRM standards proposed by the Agencies rely on 
definitions and calculations which may be defined in multiple ways. To 
provide clarity, the Agencies are proposing the use of definitions of 
key terms as established in the U.S. Department of Housing and Urban 
Development (HUD) Handbook 4155.1 (New Version), Mortgage Credit 
Analysis for Mortgage Insurance, as in effect on December 31, 2010. 
Since the HUD definitions have been time-tested and are well understood 
by the market, the Commission believes this approach will be efficient 
and beneficial to both investors and sponsors. On the other hand, loan 
originators and sponsors who have been using alternative definitions 
might incur adjustment costs, if they have to modify their loan 
origination systems and processes. These new lending costs might be 
passed onto borrowers in the form of higher mortgage rates or fees, 
thus impeding capital formation.
    The QRM standards that the Agencies are proposing prescribe fixed 
thresholds for several borrower and loan features. For instance, a QRM 
cannot have a front-end debt-to-income ratio higher than 28 percent or 
a loan-to-value ratio higher than 80 percent. The thresholds chosen in 
the proposed rule reflect a balance between setting standards that are 
over- or under-conservative with regard to mortgage default risk. If 
the Agencies had been more conservative in their choices of thresholds 
such that fewer mortgages were QRMs, more sponsors would have incurred 
compliance costs for risk retention for non-QRMs. These additional 
costs would likely be passed on to borrowers whose loans comprise the 
securitized pool, which would have the effect of increasing mortgage 
rates for a larger proportion of home buyers. On the other hand, QRM 
standards that are more restrictive and that result in more non-QRMs 
would likely create a larger and therefore more liquid secondary market 
for non-QRMs, and thus reduce the liquidity premium for non-QRM ABS. 
The reduced liquidity premium, which would decrease non-QRM rates, 
might counteract the possible increase in non-QRM rates resulting from 
risk retention compliance costs.
    The opposite would also have been true. If the Agencies had been 
less conservative in their choices of thresholds such that a larger 
fraction of mortgages would have qualified as QRMs, then non-QRMs might 
face illiquidity in the secondary market. However, fewer borrowers 
would have had to face increased mortgage rates resulting from 
compliance costs for risk retention.
4. Risk Retention Allocation for Non-QRMs and Non-QAs
    Many securitization transactions are brought to the market by 
aggregators who purchase assets from one or many originators, combine 
these assets in a pool, and then issue securities backed by the assets 
to investors. This securitization chain allows for the possibility of 
implementing risk retention at either the originator or the sponsor 
level. Risk retention imposed directly on originators may be more 
effective in improving underwriting standards than if imposed on 
sponsors. On the other hand, many of the risk retention forms discussed 
earlier would be unfeasible to implement due to the complexity 
introduced by the two-stage nature of a securitization by an 
aggregator. Nonetheless, the Agencies believe that the imposition of 
risk retention on sponsors should still have the effect of improving 
underwriting standards. Sponsors would have strong incentives to 
monitor the lending practices of originators and consider these 
practices when acquiring pool assets. This likely will align 
originators' interests with those of sponsors, whose interests would 
now be aligned with those of investors through risk retention.
    The proposed rules allow sponsors to allocate some of their risk 
retention responsibilities to originators, which would provide 
additional flexibility in complying with the requirements. However, the 
proposed rules do not allow the allocation of risk to an originator 
contributing a small share of assets to the securitized pool. Thus, the 
proposed allocation of risk retention is likely to benefit small loan 
originators by not allowing sponsors to pass onto them their own risk 
retention costs.
    The Agencies are also proposing to allow risk retention allocation 
to a third-party purchaser in the securitization of commercial real 
estate loans. It has been a common market practice for a third-party 
purchaser to retain the first-loss position in commercial mortgage-
backed transactions. This third-party buyer, also known as ``B-piece 
buyer,'' is typically involved in the securitization early on and thus 
can significantly affect pool asset selection. The B-piece buyer 
reviews the loans and corresponding mortgage properties, and may ask 
for loans to be removed from the pool if underwriting issues are 
uncovered. Thus, the Agencies' decision to allow a B-piece buyer to 
meet a sponsor's risk retention obligations under Section 15G of the 
Exchange Act, will likely benefit both sponsors and investors. It 
accommodates existing market practices, thus minimizing sponsors' 
compliance costs while aligning the interests of investors with those 
of parties performing due diligence on the pool assets. In this way, 
the proposal should provide incentives for good underwriting and 
origination practices. Since a sponsor's risk retention obligation can 
be met by a B-piece buyer only under certain conditions described 
earlier, these conditions may increase B-piece buyers' cost of 
participating in CMBS transactions. B-piece buyers may be able to pass 
these costs to borrowers with an adverse effect on capital formation. 
However, the Commission preliminary believes that the conditions help 
ensure that the B-piece buyer's risk retention is consistent with the 
intent of Section 15G and would benefit investors, and ultimately 
facilitating capital formation.
    As noted earlier, the B-piece buyer in CMBS transactions often acts 
in the

[[Page 24154]]

capacity of a special servicer, which can create conflicts of interest 
between the B-piece buyer and senior tranche holders. To mitigate these 
conflicts of interest, the Agencies are proposing to have an operating 
adviser oversee the servicing activities of the B-piece buyer when the 
B-piece buyer acts in a capacity of a special servicer. While such a 
requirement would increase compliance costs, it should have the benefit 
of minimizing B-piece buyers' ability to manipulate cash flows through 
special servicing and by limiting B-piece buyers' ability to offset the 
consequences of poor underwriting through special servicing. In 
addition, it should incentivize B-piece buyers to avoid adding into the 
pool poorly underwritten or originated assets. This would be consistent 
with the purpose of Section 15G and would benefit investors, thus 
facilitating capital formation.
    The Agencies are proposing yet another option for risk retention 
allocation, which is specifically designed for asset-backed commercial 
paper (``ABCP'') conduits. This option takes into account the special 
structures through which this type of ABS is typically issued, as well 
as the manner in which exposure to the credit risk of the underlying 
assets is typically retained.
    Although the proposal would allow the originator-sellers (rather 
than the sponsor) to retain the required eligible horizontal residual 
interest, the proposal also imposes certain obligations directly on the 
sponsor in recognition of the key role the sponsor plays in organizing 
and operating an eligible ABCP conduit. Most importantly, the proposal 
provides that the sponsor of an eligible ABCP conduit that issues ABCP 
in reliance on this option would be the securitization party ultimately 
responsible for compliance with the risk retention requirements of 
Section 15G of the Exchange Act. The proposal allows for an ABCP 
sponsor to be in compliance if each originator-seller retains a five-
percent horizontal residual interest in each intermediate SPV 
established by or on behalf of that originator-seller for purposes of 
issuing interests to an eligible ABCP conduit. Since eligible ABCP 
conduits also provide full liquidity guarantees to commercial-paper 
investors by regulated liquidity providers, the flexibility allowed by 
the proposed rule benefits ABCP sponsors by allowing them to avoid 
costly duplicative risk retention and should have the effect of 
promoting capital formation in this important segment of the 
securitization market.
    Further, the proposed rule avoids an outcome in which one 
originator-seller would have to be exposed to risks underwritten by 
other originator-sellers. Each originator-seller would be required to 
retain credit exposure only to its own receivables, thus properly 
aligning its incentives with those of ABCP investors.
5. Hedging Prohibitions
    Hedging helps sponsors manage and mitigate their exposure to 
unwanted risks. For example, a securitizer may want to mitigate the 
interest rate risk of its ABS portfolio. Hedging is also a beneficial 
activity from a systemic risk perspective because it helps market 
participants redistribute risk. Given the benefits from hedging, the 
proposed rule aims to implement the risk retention mandate of Section 
15G without unduly limiting a sponsor's risk management activities. 
This is accomplished by prohibiting hedging only to the extent that 
hedging would result in a sponsor no longer being exposed to the risk 
required to be retained by Section 15G of the Exchange Act.
    The ability to hedge interest rate risk and similar risks increases 
economic efficiency and facilitates capital formation, because it 
allows securitizers to direct their capital and efforts towards 
activities of comparative advantage. For instance, a securitizer might 
have a superior ability of assessing the credit risk of residential 
mortgages, but be less skilled in forecasting interest-rate changes. 
Such a securitizer might find it more efficient to hedge the interest-
rate risk of the residential mortgages collateralizing an RMBS rather 
than invest resources in improving its ability to understand and price 
this interest-rate risk. Furthermore, since interest-rate fluctuations 
are unrelated to underwriting deficiencies in the loan origination 
process, allowing a securitizer to hedge interest-rate risk will not 
compromise the incentive alignment contemplated by the Act. The ability 
to hedge also may help competition, because by hedging less diversified 
companies may be able to compete with more diversified companies that 
have weaker hedging incentives. Therefore, the proposed rules are 
designed to promote efficiency, competition and capital formation.
6. Treatment of Government-Sponsored Enterprises
    The proposed rules, which allows the guarantees of Fannie Mae and 
Freddie Mac to satisfy the risk retention requirements while they are 
operating under the conservatorship or receivership of FHFA with 
capital support from the United States, as well as for any limited-life 
regulated entity succeeding to the charter and also operating with such 
capital support, avoid unnecessary costs to be incurred by sponsors 
until the statutory and regulatory framework for the Enterprises 
becomes clearer. The Commission believes that the capital support 
provided by the United States government makes additional risk 
retention unnecessary because as a result of the support investors in 
GSE ABS are not exposed to any credit losses. Thus, there would be no 
incremental benefit to be gained by requiring GSEs to retain risk.
7. Resecuritization Transactions
    The Agencies have identified certain resecuritizations where 
duplicative risk retention requirements would provide no added benefit. 
Resecuritizations collateralized only by existing 15G-compliant ABS and 
financed through the issuance of a single class of securities so that 
all principal and interest payments received are evenly distributed to 
all security holders, are a unique category of resecuritizations. For 
them, the resecuritization process would neither increase nor 
reallocate the credit risk of the underlying ABS. Therefore, there 
would be no cost to investors from incentive misalignment with the 
securitizing sponsor. Furthermore, because this type of 
resecuritization may be used to aggregate 15G-compliant ABS backed by 
small asset pools, the exemption for this type of resecuritization 
could improve access to credit at reasonable terms to consumers and 
businesses by allowing for the creation of an additional investment 
vehicle for these smaller asset pools. The exemption would allow the 
creation of ABS that may be backed by more geographically diverse pools 
than those that can be achieved by the pooling of individual assets as 
part of the issuance of the underlying 15G-compliant ABS. Again, this 
will likely improve access to credit on reasonable terms.
    Under the proposed rule, sponsors of resecuritizations that do not 
have the structure described above would not be exempted from risk 
retention. Resecuritization transactions, which re-tranche the credit 
risk of the underlying ABS, would be subject to risk retention 
requirements in addition to the risk retention requirement imposed on 
the underlying ABS. In such transactions, there is the possibility of 
incentive misalignment between investors and sponsors just as when 
structuring the underlying ABS. For such

[[Page 24155]]

resecuritizations, the proposed rule seeks to ensure that this 
misalignment is addressed by not granting these resecuritizations with 
an exemption from risk retention. However, the proposed rules may have 
an adverse impact on capital formation and efficiency if they make some 
types of resecuritization transactions costlier or infeasible to 
conduct as a result of risk retention costs.

D. Executive Order 12866 Determination

    The Office of Management and Budget (OMB) reviewed this proposed 
rule as it relates to programs and activities of the Department of 
Housing and Urban Development (HUD) under Executive Order 12866 
(entitled ``Regulatory Planning and Review''), and determined the rule 
as it relates to HUD to be an economically significant regulatory 
action, as provided in section 3(f)(1) of the Order. The docket file is 
available for public inspection in the Regulations Division, Office of 
General Counsel, Department of Housing and Urban Development, 451 7th 
Street, SW., Room 10276 Washington, DC 20410-0500. Due to security 
measures at the HUD Headquarters building, please schedule an 
appointment to review the docket file by calling the Regulations 
Division at 202-402-3055 (this is not a toll-free number). Individuals 
with speech or hearing impairments may access this number via TTY by 
calling the Federal Information Relay Service at 800-877-8339.

E. OCC Unfunded Mandates Reform Act of 1995 Determination

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million (adjusted for inflation) or more in any one year. The current 
inflation-adjusted expenditure threshold is $126.4 million. If a 
budgetary impact statement is required, section 205 of the UMRA also 
requires an agency to identify and consider a reasonable number of 
regulatory alternatives before promulgating a rule.
    Based on current and historical supervisory data on national bank 
securitization activity, the OCC estimates that, pursuant to the 
proposed rule, national banks would be required to retain approximately 
$2.8 billion of credit risk, after taking into consideration the 
proposed exemptions for qualified residential mortgages and other 
qualified assets. The cost of retaining this risk amount has two 
components. The first is the loss of origination and servicing fees on 
the reduced amount of origination activity necessitated by the need to 
hold the $2.8 billion retention amount on the bank's balance sheet. 
Typical origination fees are 1 percent and typical servicing fees are 
another half of a percentage point. To capture any additional lost 
fees, the OCC conservatively estimated that the total cost of lost fees 
to be two percent of the retained amount, or approximately $56 million. 
The second component of the retention cost is the opportunity cost of 
earning the return on these retained assets versus the return that the 
bank would earn if these funds were put to other use. Because of the 
variety of assets and returns on the securitized assets, the OCC 
assumes that this interest opportunity cost nets to zero. In addition 
to the cost of retaining the assets under the proposed rule, the 
overall cost of the proposed rule includes the administrative costs 
associated with implementing the rule and providing required 
disclosures. The OCC estimates that implementation and disclosure will 
require approximately 480 hours per institution, or at $100 per hour, 
approximately $48,000 per institution. The OCC estimates that the rule 
will apply to approximately 25 national banking organizations. Thus, 
the estimate of the total administrative cost of the proposed rule is 
approximately $1.2 million. Thus, the estimated total cost of the 
proposed rule applied to ABS is $57.2 million.
    The OCC has determined that its portion of the final rules will not 
result in expenditures by State, local, and tribal governments, or by 
the private sector, of $126.4 million or more. Accordingly, the OCC has 
not prepared a budgetary impact statement or specifically addressed the 
regulatory alternatives considered.

F. Commission: Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \237\ the Commission solicits data to 
determine whether the proposal constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in:
---------------------------------------------------------------------------

    \237\ 5 U.S.C. 603.
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    We request comment on the potential impact of the proposal on the 
U.S. economy on an annual basis, any potential increase in costs or 
prices for consumers or individual industries, and any potential effect 
on competition, investment or innovation. Commenters are requested to 
provide empirical data and other factual support for their views if 
possible.

G. FHFA: Considerations of Differences Between the Federal Home Loan 
Banks and the Enterprises

    Section 1313 of the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992 requires the Director of FHFA, when 
promulgating regulations relating to the Federal Home Loan Banks 
(Banks), to consider the following differences between the Banks and 
the Enterprises (Fannie Mae and Freddie Mac): cooperative ownership 
structure; mission of providing liquidity to members; affordable 
housing and community development mission; capital structure; and joint 
and several liability.\238\ The Director also may consider any other 
differences that are deemed appropriate. In preparing the portions of 
this proposed rule over which FHFA has joint rulemaking authority, the 
Director considered the differences between the Banks and the 
Enterprises as they relate to the above factors. FHFA requests comments 
from the public about whether differences related to these factors 
should result in any revisions to the proposal.
---------------------------------------------------------------------------

    \238\ See 12 U.S.C. 4513.
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Text of the Proposed Common Rules (All Agencies)

    The text of the proposed common rules appears below:

Part ------Credit Risk Retention

Subpart A--Authority, Purpose, Scope and Definitions

Sec.

----.1 [Reserved]
----.2 Definitions.

Subpart B--Credit Risk Retention

----.3 Base risk retention requirement.
----.4 Vertical risk retention.
----.5 Horizontal risk retention.
----.6 L-Shaped risk retention.
----.7 Revolving asset master trusts.
----.8 Representative sample.
----.9 Eligible ABCP conduits.
----.10 Commercial mortgage-backed securities.

[[Page 24156]]

----.11 Federal National Mortgage Association and Federal Home Loan 
Mortgage Corporation ABS.
----.12 Premium capture cash reserve account.

Subpart C--Transfer of Risk Retention

----.13 Allocation of risk retention to an originator.
----.14 Hedging, transfer and financing prohibitions.

Subpart D--Exceptions and Exemptions

----.15 Exemption for qualified residential mortgages.
----.16 Definitions applicable to qualifying commercial loans, 
commercial mortgages, and auto loans.
----.17 Exceptions for qualifying commercial loans, commercial 
mortgages, and auto loans.
----.18 Underwriting standards for qualifying commercial loans.
----.19 Underwriting standards for qualifying CRE loans.
----.20 Underwriting standards for qualifying auto loans.
----.21 General exemptions.
----.22 Safe harbor for certain foreign-related transactions.
----.23 Additional exemptions.
Appendix A to Part -------- Additional QRM Standards; Standards for 
Determining Acceptable Sources of Borrower Funds, Borrower's Monthly 
Gross Income, Monthly Housing Debt, and Total Monthly Debt

Subpart A--Authority, Purpose, Scope and Definitions

Sec.  ----.1 [Reserved]

Sec.  ----.2 Definitions.

    For purposes of this part, the following definitions apply:
    ABCP means asset-backed commercial paper that has a maturity at the 
time of issuance not exceeding nine months, exclusive of days of grace, 
or any renewal thereof the maturity of which is likewise limited.
    ABS interest:
    (1) Includes any type of interest or obligation issued by an 
issuing entity, whether or not in certificated form, including a 
security, obligation, beneficial interest or residual interest, 
payments on which are primarily dependent on the cash flows of the 
collateral owned or held by the issuing entity; and
    (2) Does not include common or preferred stock, limited liability 
interests, partnership interests, trust certificates, or similar 
interests that:
    (i) Are issued primarily to evidence ownership of the issuing 
entity; and
    (ii) The payments, if any, on which are not primarily dependent on 
the cash flows of the collateral held by the issuing entity.
    Affiliate. An affiliate of, or a person affiliated with, a 
specified person means a person that directly, or indirectly through 
one or more intermediaries, controls, or is controlled by, or is under 
common control with, the person specified.
    Appropriate Federal banking agency has the same meaning as in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
    Asset means a self-liquidating financial asset (including but not 
limited to a loan, lease, mortgage, or receivable).
    Asset-backed security has the same meaning as in section 3(a)(77) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)).
    Collateral with respect to any issuance of ABS interests means the 
assets or other property that provide the cash flow (including cash 
flow from the foreclosure or sale of the assets or property) for the 
ABS interests irrespective of the legal structure of issuance, 
including security interests in assets or other property of the issuing 
entity, fractional undivided property interests in the assets or other 
property of the issuing entity, or any other property interest in such 
assets or other property.
    Collateralize. Assets or other property collateralize an issuance 
of ABS interests if the assets or property serve as collateral for such 
issuance.
    Commercial real estate loan has the same meaning as in Sec.  --.16 
of this part.
    Commission means the Securities and Exchange Commission.
    Consolidated affiliate means, with respect to a sponsor, an entity 
(other than the issuing entity) the financial statements of which are 
consolidated with those of:
    (1) The sponsor under applicable accounting standards; or
    (2) Another entity the financial statements of which are 
consolidated with those of the sponsor under applicable accounting 
standards.
    Control including the terms ``controlling,'' ``controlled by'' and 
``under common control with''
    (1) Means the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
person, whether through the ownership of voting securities, by 
contract, or otherwise.
    (2) Without limiting the foregoing, a person shall be considered to 
control a company if the person:
    (i) Owns, controls or holds with power to vote 25 percent or more 
of any class of voting securities of the company; or
    (ii) Controls in any manner the election of a majority of the 
directors, trustees or persons performing similar functions of the 
company.
    Credit risk means:
    (1) The risk of loss that could result from the failure of the 
borrower in the case of a securitized asset, or the issuing entity in 
the case of an ABS interest in the issuing entity, to make required 
payments of principal or interest on the asset or ABS interest on a 
timely basis;
    (2) The risk of loss that could result from bankruptcy, insolvency, 
or a similar proceeding with respect to the borrower or issuing entity, 
as appropriate; or
    (3) The effect that significant changes in the underlying credit 
quality of the asset or ABS interest may have on the market value of 
the asset or ABS interest.
    Depositor means:
    (1) The person that receives or purchases and transfers or sells 
the securitized assets to the issuing entity;
    (2) The sponsor, in the case of a securitization transaction where 
there is not an intermediate transfer of the assets from the sponsor to 
the issuing entity; or
    (3) The person that receives or purchases and transfers or sells 
the securitized assets to the issuing entity in the case of a 
securitization transaction where the person transferring or selling the 
securitized assets directly to the issuing entity is itself a trust.
    Eligible ABCP conduit means an issuing entity that issues ABCP 
provided that:
    (1) The issuing entity is bankruptcy remote or otherwise isolated 
for insolvency purposes from the sponsor of the issuing entity and from 
any intermediate SPV;
    (2) The interests issued by an intermediate SPV to the issuing 
entity are collateralized solely by the assets originated by a single 
originator-seller;
    (3) All of the interests issued by an intermediate SPV are 
transferred to one or more ABCP conduits or retained by the originator-
seller; and
    (4) A regulated liquidity provider has entered into a legally 
binding commitment to provide 100 percent liquidity coverage (in the 
form of a lending facility, an asset purchase agreement, a repurchase 
agreement, or other similar arrangement) to all the ABCP issued by the 
issuing entity by lending to, or purchasing assets from, the issuing 
entity in the event that funds are required to repay maturing ABCP 
issued by the issuing entity.
    Eligible horizontal residual interest means, with respect to any 
securitization transaction, an ABS interest in the issuing entity that:

[[Page 24157]]

    (1) Is allocated all losses on the securitized assets (other than 
losses that are first absorbed through the release of funds from a 
premium capture cash reserve account, if such an account is required to 
be established under Sec.  --.12 of this part) until the par value of 
such ABS interest is reduced to zero;
    (2) Has the most subordinated claim to payments of both principal 
and interest by the issuing entity; and
    (3) Until all other ABS interests in the issuing entity are paid in 
full, is not entitled to receive any payments of principal made on a 
securitized asset, provided, however, an eligible horizontal residual 
interest may receive its current proportionate share of scheduled 
payments of principal received on the securitized assets in accordance 
with the transaction documents.
    Federal banking agencies means the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, and the 
Federal Deposit Insurance Corporation.
    Intermediate SPV means, with respect to an originator-seller, a 
special purpose vehicle that:
    (1) Is bankruptcy remote or otherwise isolated for insolvency 
purposes from the originator-seller;
    (2) Purchases assets from the originator-seller; and
    (3) Issues interests collateralized by such assets to one or more 
ABCP conduits.
    Issuing entity means, with respect to a securitization transaction, 
the trust or other entity:
    (1) That is created at the direction of the sponsor;
    (2) That owns or holds the pool of assets to be securitized; and
    (3) In whose name the asset-backed securities are issued.
    Originator means a person who:
    (1) Through an extension of credit or otherwise, creates an asset 
that collateralizes an asset-backed security; and
    (2) Sells the asset directly or indirectly to a securitizer.
    Originator-seller means an entity that creates assets through one 
or more extensions of credit and sells those assets (and no other 
assets) to an intermediate SPV, which in turn sells interests 
collateralized by those assets to one or more ABCP conduits.
    Regulated liquidity provider means:
    (1) A depository institution (as defined in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813));
    (2) A bank holding company (as defined in 12 U.S.C. 1841), or a 
subsidiary thereof;
    (3) A savings and loan holding company (as defined in 12 U.S.C. 
1467a), provided all or substantially all of the holding company's 
activities are permissible for a financial holding company under 12 
U.S.C. 1843(k), or a subsidiary thereof; or
    (4) A foreign bank whose home country supervisor (as defined in 
Sec.  211.21 of the Federal Reserve Board's Regulation K (12 CFR 
211.21)) has adopted capital standards consistent with the Capital 
Accord of the Basel Committee on Banking Supervision, as amended, and 
that is subject to such standards, or a subsidiary thereof.
    Retaining sponsor means, with respect to a securitization 
transaction, the sponsor that has retained or caused to be retained an 
economic interest in the credit risk of the securitized assets pursuant 
to subpart B of this part.
    Revolving asset master trust means an issuing entity that is:
    (1) A master trust; and
    (2) Established to issue more than one series of asset-backed 
securities all of which are collateralized by a single pool of 
revolving securitized assets that are expected to change in composition 
over time.
    Securitization transaction means a transaction involving the offer 
and sale of asset-backed securities by an issuing entity.
    Securitized asset means an asset that:
    (1) Is transferred, sold, or conveyed to an issuing entity; and
    (2) Collateralizes the ABS interests issued by the issuing entity.
    Securitizer with respect to a securitization transaction shall mean 
either:
    (1) The depositor of the asset-backed securities; or
    (2) A sponsor of the asset-backed securities.
    Seller's interest means an ABS interest:
    (1) In all of the assets that:
    (i) Are owned or held by the issuing entity; and
    (ii) Do not collateralize any other ABS interests issued by the 
issuing entity;
    (2) That is pari passu with all other ABS interests issued by the 
issuing entity with respect to the allocation of all payments and 
losses prior to an early amortization event (as defined in the 
transaction documents); and
    (3) That adjusts for fluctuations in the outstanding principal 
balances of the securitized assets.
    Servicer means any person responsible for the management or 
collection of the securitized assets or making allocations or 
distributions to holders of the ABS interests, but does not include a 
trustee for the issuing entity or the asset-backed securities that 
makes allocations or distributions to holders of the ABS interests if 
the trustee receives such allocations or distributions from a servicer 
and the trustee does not otherwise perform the functions of a servicer.
    Sponsor means a person who organizes and initiates a securitization 
transaction by selling or transferring assets, either directly or 
indirectly, including through an affiliate, to the issuing entity.
    U.S. person:
    (1) Means--
    (i) Any natural person resident in the United States;
    (ii) Any partnership, corporation, limited liability company, or 
other organization or entity organized or incorporated under the laws 
of the United States;
    (iii) Any estate of which any executor or administrator is a U.S. 
person;
    (iv) Any trust of which any trustee is a U.S. person;
    (v) Any agency or branch of a foreign entity located in the United 
States;
    (vi) Any non-discretionary account or similar account (other than 
an estate or trust) held by a dealer or other fiduciary for the benefit 
or account of a U.S. person;
    (vii) Any discretionary account or similar account (other than an 
estate or trust) held by a dealer or other fiduciary organized, 
incorporated, or (if an individual) resident in the United States; and
    (viii) Any partnership, corporation, limited liability company, or 
other organization or entity if:
    (A) Organized or incorporated under the laws of any foreign 
jurisdiction; and
    (B) Formed by a U.S. person principally for the purpose of 
investing in securities not registered under the Act.
    (2) Does not include--
    (i) Any discretionary account or similar account (other than an 
estate or trust) held for the benefit or account of a non-U.S. person 
by a dealer or other professional fiduciary organized, incorporated, or 
(if an individual) resident in the United States;
    (ii) Any estate of which any professional fiduciary acting as 
executor or administrator is a U.S. person if:
    (A) An executor or administrator of the estate who is not a U.S. 
person has sole or shared investment discretion with respect to the 
assets of the estate; and
    (B) The estate is governed by foreign law;
    (iii) Any trust of which any professional fiduciary acting as 
trustee is a U.S. person, if a trustee who is not a U.S. person has 
sole or shared investment discretion with respect to

[[Page 24158]]

the trust assets, and no beneficiary of the trust (and no settlor if 
the trust is revocable) is a U.S. person;
    (iv) An employee benefit plan established and administered in 
accordance with the law of a country other than the United States and 
customary practices and documentation of such country;
    (v) Any agency or branch of a U.S. person located outside the 
United States if:
    (A) The agency or branch operates for valid business reasons; and
    (B) The agency or branch is engaged in the business of insurance or 
banking and is subject to substantive insurance or banking regulation, 
respectively, in the jurisdiction where located;
    (vi) The International Monetary Fund, the International Bank for 
Reconstruction and Development, the Inter-American Development Bank, 
the Asian Development Bank, the African Development Bank, the United 
Nations, and their agencies, affiliates and pension plans, and any 
other similar international organizations, their agencies, affiliates 
and pension plans.
    (3) For purposes of the definition of a U.S. person, the term 
United States means the United States of America, its territories and 
possessions, any State of the United States, and the District of 
Columbia.

Subpart B--Credit Risk Retention

Sec.  ----.3 Base risk retention requirement.

    (a) Base risk retention requirement. Except as otherwise provided 
in this part, the sponsor of a securitization transaction shall retain 
an economic interest in the credit risk of the securitized assets in 
accordance with any one of Sec.  ----.4 through Sec.  ----.11 of this 
part.
    (b) Multiple sponsors. If there is more than one sponsor of a 
securitization transaction, it shall be the responsibility of each 
sponsor to ensure that at least one of the sponsors of the 
securitization transaction retains an economic interest in the credit 
risk of the securitized assets in accordance with any one of Sec.  --
--.4 through Sec.  ----.11 of this part.

Sec.  ----.4 Vertical risk retention.

    (a) In general. At the closing of the securitization transaction, 
the sponsor retains not less than five percent of each class of ABS 
interests in the issuing entity issued as part of the securitization 
transaction.
    (b) Disclosures. A sponsor utilizing this section shall provide, or 
cause to be provided, to potential investors a reasonable period of 
time prior to the sale of the asset-backed securities in the 
securitization transaction and, upon request, to the Commission and to 
its appropriate Federal banking agency, if any, the following 
disclosure in written form under the caption ``Credit Risk Retention'':
    (1) The amount (expressed as a percentage and dollar amount) of 
each class of ABS interests in the issuing entity that the sponsor will 
retain (or did retain) at the closing of the securitization transaction 
and the amount (expressed as a percentage and dollar amount) of each 
class of ABS interests in the issuing entity that the sponsor is 
required to retain under this section; and
    (2) The material assumptions and methodology used in determining 
the aggregate dollar amount of ABS interests issued by the issuing 
entity in the securitization transaction, including those pertaining to 
any estimated cash flows and the discount rate used.

Sec.  ----.5 Horizontal risk retention.

    (a) General requirement. At the closing of the securitization 
transaction, the sponsor retains an eligible horizontal residual 
interest in an amount that is equal to at least five percent of the par 
value of all ABS interests in the issuing entity issued as part of the 
securitization transaction.
    (b) Option to hold base amount in horizontal cash reserve account. 
In lieu of retaining an eligible horizontal residual interest in the 
amount required by paragraph (a) of this section, the sponsor may, at 
closing of the securitization transaction, cause to be established and 
funded, in cash, a horizontal cash reserve account in the amount 
specified in paragraph (a), provided that the account meets all of the 
following conditions:
    (1) The account is held by the trustee (or person performing 
similar functions) in the name and for the benefit of the issuing 
entity;
    (2) Amounts in the account are invested only in:
    (i) United States Treasury securities with maturities of 1 year or 
less; or
    (ii) Deposits in one or more insured depository institutions (as 
defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813)) that are fully insured by federal deposit insurance; and
    (3) Until all ABS interests in the issuing entity are paid in full 
or the issuing entity is dissolved:
    (i) Amounts in the account shall be released to satisfy payments on 
ABS interests in the issuing entity on any payment date on which the 
issuing entity has insufficient funds from any source (including any 
premium capture cash reserve account established pursuant to Sec.  --
--.12 of this part) to satisfy an amount due on any ABS interest; and
    (ii) No other amounts may be withdrawn or distributed from the 
account except that:
    (A) Amounts in the account may be released to the sponsor or any 
other person due to the receipt by the issuing entity of scheduled 
payments of principal on the securitized assets, provided that, the 
issuing entity distributes such payments of principal in accordance 
with the transaction documents and the amount released from the account 
on any date does not exceed the product of:
    (1) The amount of scheduled payments of principal received by the 
issuing entity and for which the release is being made; and
    (2) The ratio of the current balance in the horizontal cash reserve 
account to the aggregate remaining principal balance of all ABS 
interests in the issuing entity; and
    (B) Interest on investments made in accordance with paragraph 
(b)(2) may be released once received by the account.
    (c) Disclosures. A sponsor utilizing this section shall provide, or 
cause to be provided, to potential investors a reasonable period of 
time prior to the sale of the asset-backed securities in the 
securitization transaction and, upon request, to the Commission and its 
appropriate Federal banking agency, if any, the following disclosure in 
written form under the caption ``Credit Risk Retention'':
    (1) If the sponsor retains risk through an eligible horizontal 
residual interest:
    (i) The amount (expressed as a percentage and dollar amount) of the 
eligible horizontal residual interest the sponsor will retain (or did 
retain) at the closing of the securitization transaction, and the 
amount (expressed as a percentage and dollar amount) of the eligible 
horizontal residual interest that the sponsor is required to retain 
under this section; and
    (ii) A description of the material terms of the eligible horizontal 
residual interest to be retained by the sponsor;
    (2) If the sponsor retains risk through the funding of a horizontal 
cash reserve account:
    (i) The dollar amount to be placed (or placed) by the sponsor in 
the horizontal cash reserve account and the dollar amount the sponsor 
is required to place in such an account pursuant to this section; and
    (ii) A description of the material terms of the horizontal cash 
reserve account; and

[[Page 24159]]

    (3) The material assumptions and methodology used in determining 
the aggregate dollar amount of ABS interests issued by the issuing 
entity in the securitization transaction, including those pertaining to 
any estimated cash flows and the discount rate used.

Sec.  ----.6 L-Shaped risk retention.

    (a) General requirement. At the closing of the securitization 
transaction, the sponsor:
    (1) Retains not less than 2.5 percent of each class of ABS 
interests in the issuing entity issued as part of the securitization 
transaction; and
    (2) Retains an eligible horizontal residual interest in the issuing 
entity, or establishes and funds in cash a horizontal cash reserve 
account that meets all of the requirements of Sec.  ----.5(b) of this 
part, in an amount that in either case is equal to at least 2.564 
percent of the par value of all ABS interests in the issuing entity 
issued as part of the securitization transaction other than any portion 
of such ABS interests that the sponsor is required to retain pursuant 
to paragraph (a)(1) of this section.
    (b) Disclosure requirements. A sponsor utilizing this section shall 
comply with all of the disclosure requirements set forth in Sec.  --
--.4(b) and Sec.  ----.5(c) of this part.

Sec.  ----.7 Revolving asset master trusts.

    (a) General requirement. At the closing of the securitization 
transaction and until all ABS interests in the issuing entity are paid 
in full, the sponsor retains a seller's interest of not less than five 
percent of the unpaid principal balance of all the assets owned or held 
by the issuing entity provided that:
    (1) The issuing entity is a revolving asset master trust; and
    (2) All of the securitized assets are loans or other extensions of 
credit that arise under revolving accounts.
    (b) Disclosures. A sponsor utilizing this section shall provide, or 
cause to be provided, to potential investors a reasonable period of 
time prior to the sale of the asset-backed securities in the 
securitization transaction and, upon request, to the Commission and its 
appropriate Federal banking agency, if any, the following disclosure in 
written form under the caption ``Credit Risk Retention'':
    (1) The amount (expressed as a percentage and dollar amount) of the 
seller's interest that the sponsor will retain (or did retain) at the 
closing of the securitization transaction and the amount (expressed as 
a percentage and dollar amount) that the sponsor is required to retain 
pursuant to this section;
    (2) A description of the material terms of the seller's interest; 
and
    (3) The material assumptions and methodology used in determining 
the aggregate dollar amount of ABS interests issued by the issuing 
entity in the securitization transaction, including those pertaining to 
any estimated cash flows and the discount rate used.

Sec.  ----.8 Representative sample.

    (a) In general. At the closing of the securitization transaction, 
the sponsor retains ownership of a representative sample of the pool of 
assets that are designated for securitization in the securitization 
transaction and draws from such pool all of the securitized assets for 
the securitization transaction, provided that:
    (1) At the time of issuance of asset-backed securities by the 
issuing entity, the unpaid principal balance of the assets comprising 
the representative sample retained by the sponsor is equal to at least 
5.264 percent of the unpaid principal balance of all the securitized 
assets in the securitization transaction; and
    (2) The sponsor complies with paragraphs (b) through (g) of this 
section.
    (b) Construction of representative sample--(1) Designated pool. 
Prior to the sale of the asset-backed securities as part of the 
securitization transaction, the sponsor identifies a designated pool 
(the ``designated pool'') of assets:
    (i) That consists of a minimum of 1000 separate assets;
    (ii) From which the securitized assets and the assets comprising 
the representative sample are exclusively drawn; and
    (iii) That contains no assets other than those described in 
paragraph (b)(1)(ii) of this section.
    (2) Random selection from designated pool. (i) Prior to the sale of 
the asset-backed securities as part of the securitization transaction, 
the sponsor selects from the assets that comprise the designated pool a 
sample of such assets using a random selection process that does not 
take account of any characteristic of the assets other than the unpaid 
principal balance of the assets.
    (ii) The unpaid principal balance of the assets selected through 
the random selection process described in paragraph (b)(2)(i) of this 
section must represent at least 5 percent of the aggregate unpaid 
principal balance of all the assets that comprise the designated pool.
    (3) Equivalent risk determination. Prior to the sale of the asset-
backed securities as part of the securitization transaction, the 
sponsor determines, using a statistically valid methodology, that for 
each material characteristic of the assets in the designated pool, 
including the average unpaid principal balance of all the assets, that 
the mean of any quantitative characteristic, and the proportion of any 
characteristic that is categorical in nature, of the sample of assets 
randomly selected from the designated pool pursuant to paragraph (b)(2) 
of this section is within a 95 percent two-tailed confidence interval 
of the mean or proportion, respectively, of the same characteristic of 
the assets in the designated pool.
    (c) Sponsor policies, procedures and documentation. (1) The sponsor 
has in place, and adheres to, policies and procedures for:
    (i) Identifying and documenting the material characteristics of 
assets included in the designated pool;
    (ii) Selecting assets randomly in accordance with paragraph (b)(2) 
of this section;
    (iii) Testing the randomly-selected sample of assets for compliance 
with paragraph (b)(3) of this section;
    (iv) Maintaining, until all ABS interests are paid in full, 
documentation that clearly identifies the assets included in the 
representative sample established under paragraphs (b)(2) and (3) of 
this section; and
    (v) Prohibiting, until all ABS interests are paid in full, assets 
in the representative sample from being included in the designated pool 
of any other securitization transaction.
    (2) The sponsor maintains documentation that clearly identifies the 
assets in the representative sample established under paragraphs (b)(2) 
and (3) of this section.
    (d) Agreed upon procedures report. (1) Prior to the sale of the 
asset-backed securities as part of the securitization transaction, the 
sponsor has obtained an agreed upon procedures report that satisfies 
the requirements of paragraph (d)(2) of this section from an 
independent public accounting firm.
    (2) The independent public accounting firm providing the agreed 
upon procedures report required by paragraph (d)(1) of this section 
must at a minimum report on whether the sponsor has:
    (i) Policies and procedures that require the sponsor to identify 
and document the material characteristics of assets included in a 
designated pool of assets that meets the requirements of paragraph 
(b)(1) of this section;
    (ii) Policies and procedures that require the sponsor to select 
assets randomly in accordance with paragraph (b)(2) of this section;

[[Page 24160]]

    (iii) Policies and procedures that require the sponsor to test the 
randomly-selected sample of assets in accordance with paragraph (b)(3) 
of this section;
    (iv) Policies and procedures that require the sponsor to maintain, 
until all ABS interests are paid in full, documentation that identifies 
the assets in the representative sample established under paragraphs 
(b)(2) and (3) of this section; and
    (v) Policies and procedures that require the sponsor to prohibit, 
until all ABS interests are paid in full, assets in the representative 
sample from being included in the designated pool of any other 
securitization transaction.
    (e) Servicing. Until such time as all ABS interests in the issuing 
entity have been fully paid or the issuing entity has been dissolved:
    (1) Servicing of the assets included in the representative sample 
must be conducted by the same entity and under the same contractual 
standards as the servicing of the securitized assets; and
    (2) The individuals responsible for servicing the assets included 
in the representative sample or the securitized assets must not be able 
to determine whether an asset is owned or held by the sponsor or owned 
or held by the issuing entity.
    (f) Sale, hedging or pledging prohibited. Until such time as all 
ABS interests in the issuing entity have been fully paid or the issuing 
entity has been dissolved, the sponsor:
    (1) Shall comply with the restrictions in Sec.  ----.14 of this 
part with respect to the assets in the representative sample;
    (2) Shall not remove any assets from the representative sample; and
    (3) Shall not cause or permit any assets in the representative 
sample to be included in any designated pool or representative sample 
established in connection with any other issuance of asset-backed 
securities.
    (g) Disclosures--(1) Disclosure prior to sale. A sponsor utilizing 
this section shall provide, or cause to be provided, to potential 
investors a reasonable period of time prior to the sale of the asset-
backed securities as part of the securitization transaction and, upon 
request, to the Commission and its appropriate Federal banking agency, 
if any, the following disclosure with respect to the securitization 
transaction in written form under the caption ``Credit Risk 
Retention'':
    (i) The amount (expressed as a percentage of the designated pool 
and dollar amount) of assets included in the representative sample and 
to be retained (or retained) by the sponsor, and the amount (expressed 
as a percentage of the designated pool and dollar amount) of assets 
required to be included in the representative sample and retained by 
the sponsor pursuant to this section;
    (ii) A description of the material characteristics of the 
designated pool, including, but not limited to, the average unpaid 
principal balance of all the assets, the means of the quantitative 
characteristics and the proportions of categorical characteristics of 
the assets, appropriate introductory and explanatory information to 
introduce the characteristics, the methodology used in determining or 
calculating the characteristics, and any terms or abbreviations used;
    (iii) A description of the policies and procedures that the sponsor 
used for ensuring that the process for identifying the representative 
sample complies with paragraph (b)(2) of this section and that the 
representative sample has equivalent material characteristics as 
required by paragraph (b)(3) of this section;
    (iv) Confirmation that an agreed upon procedures report was 
obtained pursuant to paragraph (d) of this section; and
    (v) The material assumptions and methodology used in determining 
the aggregate dollar amount of ABS interests issued by the issuing 
entity in the securitization transaction, including those pertaining to 
any estimated cash flows and the discount rate used.
    (2) Disclosure after sale. A sponsor utilizing this section shall 
provide, or cause to be provided, to the holders of the asset-backed 
securities issued as part of the securitization transaction and, upon 
request, provide, or cause to be provided, to the Commission and its 
appropriate Federal banking agency, if any, at the end of each 
distribution period, as specified in the governing documents for such 
asset-backed securities, a comparison of the performance of the pool of 
securitized assets included in the securitization transaction for the 
related distribution period with the performance of the assets in the 
representative sample for the related distribution period.
    (3) Conforming disclosure of representative sample. A sponsor 
utilizing this section shall provide, or cause to be provided, to 
holders of the asset-backed securities issued as part of the 
securitization transaction and, upon request, provide to the Commission 
and its appropriate Federal banking agency, if any, disclosure 
concerning the assets in the representative sample in the same form, 
level, and manner as it provides, pursuant to rule or otherwise, 
concerning the securitized assets.

Sec.  ----.9 Eligible ABCP conduits.

    (a) In general. A sponsor satisfies the risk retention requirement 
of Sec.  ----.3 of this part with respect to the issuance of ABCP by an 
eligible ABCP conduit in a securitization transaction if:
    (1) Each originator-seller of the ABCP conduit:
    (i) Retains an eligible horizontal residual interest in each 
intermediate SPV established by or on behalf of that originator-seller 
for purposes of issuing interests collateralized by assets of such 
intermediate SPV to the eligible ABCP conduit in the same form, amount, 
and manner as would be required under Sec.  ----.5(a) of this part if 
the originator-seller was the only sponsor of the intermediate SPV; and
    (ii) Complies with the provisions of Sec.  ----.14 of this part 
with respect to the eligible horizontal residual interest retained 
pursuant to paragraph (a)(1)(i) of this section as if it were a 
retaining sponsor with respect to such interest;
    (2) The sponsor:
    (i) Establishes the eligible ABCP conduit;
    (ii) Approves each originator-seller permitted to sell or transfer 
assets, indirectly through an intermediate SPV, to the eligible ABCP 
conduit;
    (iii) Establishes criteria governing the assets that the 
originator-sellers referred to in paragraph (a)(2)(ii) of this section 
are permitted to sell or transfer to an intermediate SPV;
    (iv) Approves all interests in an intermediate SPV to be purchased 
by the eligible ABCP conduit;
    (v) Administers the eligible ABCP conduit by monitoring the 
interests in any intermediate SPV acquired by the conduit and the 
assets collateralizing those interests, arranging for debt placement, 
compiling monthly reports, and ensuring compliance with the conduit 
documents and with the conduit's credit and investment policy; and
    (vi) Maintains and adheres to policies and procedures for ensuring 
that the conditions in this paragraph (a) have been met.
    (b) Disclosures. A sponsor utilizing this section shall provide, or 
cause to be provided, to potential investors a reasonable period of 
time prior to the sale of any ABCP by the eligible ABCP conduit as part 
of the securitization transaction and, upon request, to the Commission 
and its appropriate Federal banking agency, if any, in written form 
under the caption ``Credit Risk Retention'', the name and form of 
organization of:
    (1) Each originator-seller that will retain (or has retained) an 
eligible

[[Page 24161]]

horizontal residual interest in the securitization transaction pursuant 
to this section, including a description of the form, amount (expressed 
as a percentage and as a dollar amount), and nature of such interest; 
and
    (2) Each regulated liquidity provider that provides liquidity 
support to the eligible ABCP conduit, including a description of the 
form, amount, and nature of such liquidity coverage.
    (c) Duty to comply.
    (1) The retaining sponsor shall be responsible for compliance with 
this section.
    (2) A retaining sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures that are 
reasonably designed to monitor compliance by each originator-seller of 
the eligible ABCP conduit with the requirements of paragraph (a)(1) of 
this section; and
    (ii) In the event that the sponsor determines that an originator-
seller no longer complies with the requirements of paragraph (a)(1) of 
this section, shall promptly notify the holders of the ABS interests 
issued in the securitization transaction of such noncompliance by such 
originator-seller.

Sec.  ----.10 Commercial mortgage-backed securities.

    (a) Third-Party Purchaser. A sponsor satisfies the risk retention 
requirements of Sec.  ----.3 of this part with respect to a 
securitization transaction if a third party purchases an eligible 
horizontal residual interest in the issuing entity in the same form, 
amount, and manner as would be required of the sponsor under Sec.  --
--.5(a) of this part and all of the following conditions are met:
    (1) Composition of collateral. At the closing of the securitization 
transaction, at least 95 percent of the total unpaid principal balance 
of the securitized assets in the securitization transaction are 
commercial real estate loans.
    (2) Source of funds. The third-party purchaser:
    (i) Pays for the eligible horizontal residual interest in cash at 
the closing of the securitization transaction; and
    (ii) Does not obtain financing, directly or indirectly, for the 
purchase of such interest from any other person that is a party to the 
securitization transaction (including, but not limited to, the sponsor, 
depositor, or an unaffiliated servicer), other than a person that is a 
party to the transaction solely by reason of being an investor.
    (3) Third-party review. The third-party purchaser conducts a review 
of the credit risk of each securitized asset prior to the sale of the 
asset-backed securities in the securitization transaction that 
includes, at a minimum, a review of the underwriting standards, 
collateral, and expected cash flows of each commercial real estate loan 
that is collateral for the asset-backed securities.
    (4) Affiliation and control rights. (i) Except as provided in 
paragraphs (a)(4)(ii) or (iii) of this section:
    (A) The third-party purchaser is not affiliated with any party to 
the securitization transaction (including, but not limited to, the 
sponsor, depositor, or servicer) other than investors in the 
securitization transaction; and
    (B) The third-party purchaser or an affiliate of such third-party 
purchaser does not have control rights in connection with the 
securitization transaction (including, but not limited to, acting as a 
servicer for the securitized assets) that are not collectively shared 
with all other investors in the securitization.
    (ii) Notwithstanding paragraph (a)(4)(i)(A) of this section, the 
third-party purchaser may be affiliated with one or more originators of 
the securitized assets so long as the assets originated by the 
affiliated originator or originators collectively comprise less than 10 
percent of the unpaid principal balance of the securitized assets 
included in the securitization transaction at closing of the 
securitization transaction.
    (iii) Paragraph (a)(4)(i) of this section shall not prevent the 
third-party purchaser from acting as, or being an affiliate of, a 
servicer for any of the securitized assets, and having such controls 
rights that are related to such servicing, if the underlying 
securitization transaction documents provide for the following:
    (A) The appointment of an operating advisor (the ``Operating 
Advisor'') that:
    (1) Is not affiliated with other parties to the securitization 
transaction;
    (2) Does not directly or indirectly have any financial interest in 
the securitization transaction other than in fees from its role as 
Operating Advisor; and
    (3) Is required to act in the best interest of, and for the benefit 
of, investors as a collective whole.
    (B) Any servicer for the securitized assets that is, or is 
affiliated with, the third-party purchaser must consult with the 
Operating Advisor in connection with, and prior to, any major decision 
in connection with the servicing of the securitized assets, including, 
without limitation:
    (1) Any material modification of, or waiver with respect to, any 
provision of a loan agreement (including a mortgage, deed of trust, or 
other security agreement);
    (2) Foreclosure upon or comparable conversion of the ownership of a 
property; or
    (3) Any acquisition of a property.
    (C) The Operating Advisor shall be responsible for reviewing the 
actions of any servicer that is, or is affiliated with, the third-party 
purchaser and for issuing a report to investors and the issuing entity 
on a periodic basis concerning:
    (1) Whether the Operating Advisor believes, in its sole discretion 
exercised in good faith, that such servicer is operating in compliance 
with any standard required of the servicer as provided in the 
applicable transaction documents; and
    (2) What, if any, standard(s) the Operating Advisor believes, in 
its sole discretion exercised in good faith, with which such servicer 
has failed to comply;
    (D) The Operating Advisor shall have the authority to recommend 
that a servicer that is, or is affiliated with, a third-party purchaser 
be replaced by a successor servicer if the Operating Advisor 
determines, in its sole discretion exercised in good faith, that:
    (1) The servicer that is, or is affiliated with, the third-party 
purchaser has failed to comply with a standard required of the servicer 
as provided in the transaction documents; and
    (2) Such replacement would be in the best interest of the investors 
as a collective whole; and
    (E) If a recommendation described in paragraph (a)(4)(iii)(D) of 
this section is made, the servicer that is, or is affiliated with, the 
third-party purchaser must be replaced unless a majority of each class 
of ABS interests in the issuing entity eligible to vote on the matter 
votes to retain the servicer.
    (5) Disclosures. The sponsor provides, or causes to be provided, to 
potential investors a reasonable period of time prior to the sale of 
the asset-backed securities as part of the securitization transaction 
and, upon request, to the Commission and its appropriate Federal 
banking agency, if any, the following disclosure in written form, and, 
with respect to paragraphs (a)(5)(i) through (vii) of this section, 
under the caption ``Credit Risk Retention'':
    (i) The name and form of organization of the third-party purchaser;
    (ii) A description of the third-party purchaser's experience in 
investing in commercial mortgage-backed securities;
    (iii) Any other information regarding the third-party purchaser or 
the third-party purchaser's retention of the eligible horizontal 
residual interest that is material to investors in light of the

[[Page 24162]]

circumstances of the particular securitization transaction;
    (iv) A description of the amount (expressed as a percentage and 
dollar amount) of the eligible horizontal residual interest that will 
be retained (or was retained) by the third-party purchaser, as well as 
the amount of the purchase price paid by the third-party purchaser for 
such interest;
    (v) The amount (expressed as a percentage and dollar amount) of the 
eligible horizontal residual interest in the securitization transaction 
that the sponsor would have been required to retain pursuant to Sec.  
----.5(a) of this part if the sponsor had relied on such section to 
meet the requirements of Sec.  ----.3 of this part with respect to the 
transaction;
    (vi) A description of the material terms of the eligible residual 
horizontal interest retained by the third-party purchaser;
    (vii) The material assumptions and methodology used in determining 
the aggregate amount of ABS interests issued by the issuing entity in 
the securitization transaction, including those pertaining to any 
estimated cash flows and the discount rate used; and
    (viii) The representations and warranties concerning the 
securitized assets, a schedule of any securitized assets that are 
determined do not comply with such representations and warranties, and 
what factors were used to make the determination that such securitized 
assets should be included in the pool notwithstanding that the 
securitized assets did not comply with such representations and 
warranties, such as compensating factors or a determination that the 
exceptions were not material.
    (6) Hedging, transfer and pledging. The third-party purchaser 
complies with the hedging and other restrictions in Sec.  ----.14 of 
this part as if it were the retaining sponsor with respect to the 
securitization transaction and had acquired the eligible horizontal 
residual interest pursuant to Sec.  ----.5 of this part.
    (b) Duty to comply. (1) The retaining sponsor shall be responsible 
for compliance with this section.
    (2) A retaining sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures to monitor 
the third-party purchaser's compliance with the requirements in 
paragraph (a) of this section (other than paragraphs (a)(1) and 
(a)(5)); and
    (ii) In the event that the sponsor determines that the third-party 
purchaser no longer complies with any of the requirements of paragraph 
(a) of this section (other than paragraphs (a)(1) and (a)(5)), shall 
promptly notify, or cause to be notified, the holders of the ABS 
interests issued in the securitization transaction of such 
noncompliance by the third-party purchaser.

Sec.  ----.11 Federal National Mortgage Association and Federal Home 
Loan Mortgage Corporation ABS.

    (a) In general. The sponsor fully guarantees the timely payment of 
principal and interest on all ABS interests issued by the issuing 
entity in the securitization transaction and is:
    (1) The Federal National Mortgage Association or the Federal Home 
Loan Mortgage Corporation operating under the conservatorship or 
receivership of the Federal Housing Finance Agency pursuant to section 
1367 of the Federal Housing Enterprises Financial Safety and Soundness 
Act of 1992 (12 U.S.C. 4617) with capital support from the United 
States; or
    (2) Any limited-life regulated entity succeeding to the charter of 
either the Federal National Mortgage Association or the Federal Home 
Loan Mortgage Corporation pursuant to section 1367(i) of the Federal 
Housing Enterprises Financial Safety and Soundness Act of 1992 (12 
U.S.C. 4617(i)), provided that the entity is operating with capital 
support from the United States.
    (b) Certain provisions not applicable. The provisions of Sec.  --
--.12 and Sec.  ----.14(b), (c), and (d) of this part shall not apply 
to a sponsor described in paragraph (a)(1) or (2) of this section, its 
affiliates, or the issuing entity with respect to a securitization 
transaction for which the sponsor has retained credit risk in 
accordance with the requirements of this section.
    (c) Disclosure. A sponsor utilizing this section shall provide to 
investors, in written form under the caption ``Credit Risk Retention'' 
and, upon request, to the Federal Housing Finance Agency and the 
Commission, a description of the manner in which it has met the credit 
risk retention requirements of this part.

Sec.  ----.12 Premium capture cash reserve account.

    (a) When creation of a premium capture cash reserve account is 
required and calculation of amount. In addition to the economic 
interest in the credit risk that a retaining sponsor is required to 
retain, or cause to be retained under Sec.  ----.3 of this part, the 
retaining sponsor shall, at closing of the securitization transaction, 
cause to be established and funded, in cash, a premium capture cash 
reserve account (as defined in paragraph (b) of this section) in an 
amount equal to the difference, if a positive amount, between:
    (1) The gross proceeds, net of closing costs paid by the sponsor(s) 
or issuing entity to unaffiliated parties, received by the issuing 
entity from the sale of ABS interests in the issuing entity to persons 
other than the retaining sponsor; and
    (2)(i) If the retaining sponsor has relied on Sec.  ----.4, Sec.  
----.5, Sec.  ----.6, or Sec.  ----.7 of this part with respect to the 
securitization transaction, 95 percent of the par value of all ABS 
interests in the issuing entity issued as part of the securitization 
transaction; or
    (ii) If the retaining sponsor has relied on Sec.  ----.8, Sec.  --
--.9, or Sec.  ----.10 of this part with respect to the securitization 
transaction, 100 percent of the par value of all ABS interests in the 
issuing entity issued as part of the securitization transaction.
    (b) Operation of premium capture cash reserve account. For purposes 
of this section, a premium capture cash reserve account means an 
account that meets all of the following conditions:
    (1) The account is held by the trustee (or person performing 
similar functions) in the name and for the benefit of the issuing 
entity;
    (2) Amounts in the account may be invested only in:
    (i) United States Treasury securities with maturities of 1 year or 
less; and
    (ii) Deposits in one or more insured depository institutions (as 
defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813)) that are fully insured by federal deposit insurance; and
    (3) Until all ABS interests in the issuing entity are paid in full 
or the issuing entity is dissolved, no funds may be withdrawn or 
distributed from the account except as follows:
    (i) Amounts in the account shall be released to satisfy payments on 
ABS interests in the issuing entity on any payment date on which the 
issuing entity has insufficient funds to satisfy an amount due on an 
ABS interest prior to the allocation of any losses to:
    (A) An eligible horizontal residual interest held pursuant to Sec.  
----.5, Sec.  ----.6, Sec.  ----.9, Sec.  ----.10, or Sec.  ----.13 of 
this part, if any; or
    (B) If an eligible horizontal residual interest in the issuing 
entity is not held pursuant to Sec.  ----.5, Sec.  ----.6, Sec.  --
--.9, Sec.  ----.10, or Sec.  ----.13 of this part, the class of ABS 
interests in the issuing entity that:
    (1) Is allocated losses before other classes; or
    (2) If the contractual terms of the securitization transaction do 
not provide for the allocation of losses by class, the class of ABS 
interests that has the most subordinate claim to payment

[[Page 24163]]

of principal or interest by the issuing entity; and
    (ii) Interest on investments made in accordance with paragraph 
(b)(2) of this section may be released to any person once received by 
the account.
    (c) Calculation of gross proceeds received by issuing entity--(1) 
Anti-evasion provision for certain resales and senior excess spread 
tranches. For purposes of paragraph (a)(1) of this section, the gross 
proceeds received by the issuing entity from the sale of ABS interests 
to persons other than the retaining sponsor shall include the par 
value, or if an ABS interest does not have a par value, the fair value, 
of any ABS interest in the issuing entity that is directly or 
indirectly transferred to the retaining sponsor in connection with the 
closing of the securitization transaction and that:
    (i) The retaining sponsor does not intend to hold to maturity; or
    (ii) Represents a contractual right to receive some or all of the 
interest and no more than a minimal amount of principal payments 
received by the issuing entity and that has priority of payment of 
interest (or principal, if any) senior to the most subordinated class 
of ABS interests in the issuing entity, provided, however, this 
paragraph (c)(1)(ii) shall not apply to any ABS interest that:
    (A) Does not have a par value;
    (B) Is held by a sponsor that is relying on Sec.  ----.4 or Sec.  
----.6 of this part with respect to the securitization transaction; and
    (C) The sponsor is required to retain pursuant to Sec.  ----.4 or 
Sec.  ----.6(a)(1) of this part.
    (d) Disclosures. A sponsor that is required to establish and fund a 
premium capture cash reserve account pursuant to this section shall 
provide, or cause to be provided, to potential investors a reasonable 
period of time prior to the sale of the asset-backed securities as part 
of the securitization transaction and, upon request, to the Commission 
and its appropriate Federal banking agency, if any, the following 
disclosure in written form under the caption ``Credit Risk Retention'':
    (1) The dollar amount required to be placed in the account pursuant 
to this section and any other amounts the sponsor will place (or has 
placed) in the account in connection with the securitization 
transaction; and
    (2) The material assumptions and methodology used in determining 
the fair value of any ABS interest in the issuing entity that does not 
have a par value and that was used in calculating the amount required 
for the premium capture cash reserve account pursuant to paragraph (c) 
of this section.

Subpart C--Transfer of Risk Retention

Sec.  ----.13 Allocation of risk retention to an originator

    (a) In general. A sponsor choosing to retain a portion of each 
class of ABS interests in the issuing entity under the vertical risk 
retention option in Sec.  ----.4 of this part or an eligible horizontal 
residual interest pursuant to Sec.  ----.5(a) of this part with respect 
to a securitization transaction may offset the amount of its risk 
retention requirements under Sec.  ----.4 or Sec.  ----.5(a) of this 
part, as applicable, by the amount of the ABS interests or eligible 
horizontal residual interest, respectively, acquired by an originator 
of one or more of the securitized assets if:
    (1) Amount of retention. At the closing of the securitization 
transaction:
    (i) The originator acquires and retains the ABS interests or 
eligible horizontal residual interest from the sponsor in the same 
manner as would have been retained by the sponsor under Sec.  ----.4 or 
Sec.  ----.5(a) of this part, as applicable;
    (ii) The ratio of the dollar amount of ABS interests or eligible 
horizontal residual interest acquired and retained by the originator to 
the total dollar amount of ABS interests or eligible horizontal 
residual interest otherwise required to be retained by the sponsor 
pursuant to Sec.  ----.4 or Sec.  ----.5(a) of this part, as 
applicable, does not exceed the ratio of:
    (A) The unpaid principal balance of all the securitized assets 
originated by the originator; to
    (B) The unpaid principal balance of all the securitized assets in 
the securitization transaction;
    (iii) The originator acquires and retains at least 20 percent of 
the aggregate risk retention amount otherwise required to be retained 
by the sponsor pursuant to Sec.  ----.4 or Sec.  ----.5(a) of this 
part, as applicable; and
    (iv) The originator purchases the ABS interests or eligible 
horizontal residual interest from the sponsor at a price that is equal, 
on a dollar-for-dollar basis, to the amount by which the sponsor's 
required risk retention is reduced in accordance with this section, by 
payment to the sponsor in the form of:
    (A) Cash; or
    (B) A reduction in the price received by the originator from the 
sponsor or depositor for the assets sold by the originator to the 
sponsor or depositor for inclusion in the pool of securitized assets.
    (2) Disclosures. In addition to the disclosures required pursuant 
to Sec.  ----.4(b) or Sec.  ----.5(c) of this part, the sponsor 
provides, or causes to be provided, to potential investors a reasonable 
period of time prior to the sale of the asset-backed securities as part 
of the securitization transaction and, upon request, to the Commission 
and its appropriate Federal banking agency, if any, in written form 
under the caption ``Credit Risk Retention'', the name and form of 
organization of any originator that will acquire and retain (or has 
acquired and retained) an interest in the transaction pursuant to this 
section, including a description of the form, amount (expressed as a 
percentage and dollar amount), and nature of the interest, as well as 
the method of payment for such interest under paragraph (a)(1)(iv).
    (3) Hedging, transferring and pledging. The originator complies 
with the hedging and other restrictions in Sec.  ----.14 of this part 
with respect to the interests retained by the originator pursuant to 
this section as if it were the retaining sponsor and was required to 
retain the interest under subpart B of this part.
    (b) Duty to comply. (1) The retaining sponsor shall be responsible 
for compliance with this section.
    (2) A retaining sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures that are 
reasonably designed to monitor the compliance by each originator that 
is allocated a portion of the sponsor's risk retention obligations with 
the requirements in paragraphs (a)(1) and (a)(3) of this section; and
    (ii) In the event the sponsor determines that any such originator 
no longer complies with any of the requirements in paragraphs (a)(1) 
and (a)(3) of this section, shall promptly notify, or cause to be 
notified, the holders of the ABS interests issued in the securitization 
transaction of such noncompliance by such originator.

Sec.  ----.14. Hedging, transfer and financing prohibitions.

    (a) Transfer. A retaining sponsor may not sell or otherwise 
transfer any interest or assets that the sponsor is required to retain 
pursuant to subpart B of this part to any person other than an entity 
that is and remains a consolidated affiliate.
    (b) Prohibited hedging by sponsor and affiliates. A retaining 
sponsor and its consolidated affiliates may not purchase or sell a 
security, or other financial instrument, or enter into an agreement, 
derivative or other position, with any other person if:

[[Page 24164]]

    (1) Payments on the security or other financial instrument or under 
the agreement, derivative, or position are materially related to the 
credit risk of one or more particular ABS interests, assets, or 
securitized assets that the retaining sponsor is required to retain 
with respect to a securitization transaction pursuant to subpart B of 
this part or one or more of the particular securitized assets that 
collateralize the asset-backed securities issued in the securitization 
transaction; and
    (2) The security, instrument, agreement, derivative, or position in 
any way reduces or limits the financial exposure of the sponsor to the 
credit risk of one or more of the particular ABS interests, assets, or 
securitized assets that the retaining sponsor is required to retain 
with respect to a securitization transaction pursuant to subpart B of 
this part or one or more of the particular securitized assets that 
collateralize the asset-backed securities issued in the securitization 
transaction.
    (c) Prohibited hedging by issuing entity. The issuing entity in a 
securitization transaction may not purchase or sell a security or other 
financial instrument, or enter into an agreement, derivative or 
position, with any other person if:
    (1) Payments on the security or other financial instrument or under 
the agreement, derivative or position are materially related to the 
credit risk of one or more particular interests, assets, or securitized 
assets that the retaining sponsor for the transaction is required to 
retain with respect to the securitization transaction pursuant to 
subpart B of this part; and
    (2) The security, instrument, agreement, derivative, or position in 
any way reduces or limits the financial exposure of the retaining 
sponsor to the credit risk of one or more of the particular interests 
or assets that the sponsor is required to retain pursuant to subpart B 
of this part.
    (d) Permitted hedging activities. The following activities shall 
not be considered prohibited hedging activities by a retaining sponsor, 
a consolidated affiliate or an issuing entity under paragraph (b) or 
(c) of this section:
    (1) Hedging the interest rate risk (which does not include the 
specific interest rate risk, known as spread risk, associated with the 
ABS interest that is otherwise considered part of the credit risk) or 
foreign exchange risk arising from one or more of the particular ABS 
interests, assets, or securitized assets required to be retained by the 
sponsor under subpart B of this part or one or more of the particular 
securitized assets that underlie the asset-backed securities issued in 
the securitization transaction; or
    (2) Purchasing or selling a security or other financial instrument 
or entering into an agreement, derivative, or other position with any 
third party where payments on the security or other financial 
instrument or under the agreement, derivative, or position are based, 
directly or indirectly, on an index of instruments that includes asset-
backed securities if:
    (i) Any class of ABS interests in the issuing entity that were 
issued in connection with the securitization transaction and that are 
included in the index represents no more than 10 percent of the dollar-
weighted average of all instruments included in the index; and
    (ii) All classes of ABS interests in all issuing entities that were 
issued in connection with any securitization transaction in which the 
sponsor was required to retain an interest pursuant to subpart B of 
this part and that are included in the index represent, in the 
aggregate, no more than 20 percent of the dollar-weighted average of 
all instruments included in the index.
    (e) Prohibited non-recourse financing. Neither a retaining sponsor 
nor any of its consolidated affiliates may pledge as collateral for any 
obligation (including a loan, repurchase agreement, or other financing 
transaction) any interest or asset that the sponsor is required to 
retain with respect to a securitization transaction pursuant to subpart 
B of this part unless such obligation is with full recourse to the 
sponsor or consolidated affiliate, respectively.

Subpart D--Exceptions and Exemptions

Sec.  ------.15 Exemption for qualified residential mortgages.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    Borrower includes any co-borrower, unless the context otherwise 
requires.
    Borrower funds means funds:
    (1) Derived from one or more sources identified as acceptable 
sources of funds in the Additional QRM Standards Appendix to this part; 
and
    (2) That are verified in accordance with the requirements set forth 
in the Additional QRM Standards Appendix to this part.
    Cash-out refinancing means a refinancing transaction in a principal 
amount that exceeds the sum of the amount used to:
    (1) Fully repay the balance outstanding on the borrower's existing 
first-lien mortgage that is secured by the one-to-four family property 
being refinanced;
    (2) Fully repay the balance outstanding as of the date of the 
mortgage transaction on any subordinate-lien mortgage that was used in 
its entirety to purchase such one-to-four family property;
    (3) Pay closing or settlement charges required to be included on 
the related HUD-1 or HUD-1A Settlement Statement or a successor form in 
accordance with 24 CFR Part 3500 or a successor regulation; and
    (4) Disburse up to $500 of cash to the borrower or any other payee.
    Closed-end credit means any consumer credit extended by a creditor 
other than open-end credit.
    Combined loan-to-value ratio means, with respect to a first-lien 
refinancing transaction on a one-to-four family property, the ratio 
(expressed as a percentage) of:
    (1) The sum of:
    (i) The principal amount of the first-lien mortgage transaction at 
the closing of the transaction;
    (ii) The unpaid principal amount of any other closed-end credit 
transaction that to the creditor's knowledge would exist at the closing 
of the refinancing transaction and that is or would be secured by the 
same one-to-four family property; and
    (iii) The face amount (as if fully drawn) of any open-end credit 
transaction that to the creditor's knowledge would exist at the closing 
of the refinancing transaction and that is or would be secured by the 
same one-to-four family property; to
    (2) The estimated market value of the one-to-four family property 
as determined by a qualifying appraisal.
    Consumer credit means credit offered or extended to a borrower 
primarily for personal, family, or household purposes.
    Consumer reporting agency that compiles and maintains files on 
consumers on a nationwide basis has the same meaning as in 15 U.S.C. 
1681a(p).
    Creditor has the same meaning as in 15 U.S.C. 1602(f).
    Currently performing means the borrower in the mortgage transaction 
is not currently thirty (30) days past due, in whole or in part, on the 
mortgage transaction.
    Loan-to-value ratio means, with respect to a mortgage transaction 
to purchase a one-to-four family property, the ratio (expressed as a 
percentage) of:
    (1) The principal amount of the first-lien mortgage transaction at 
the closing of the mortgage transaction; to
    (2) The lesser of:
    (i) The estimated market value of the one-to-four family property 
as

[[Page 24165]]

determined by a qualifying appraisal; and
    (ii) The purchase price of the one-to-four family property to be 
paid in connection with the mortgage transaction.
    Mortgage originator has the same meaning as in 15 U.S.C. 
1602(cc)(2) and the regulations issued thereunder.
    Mortgage transaction means a closed-end credit transaction to 
purchase or refinance a one-to-four family property at least one unit 
of which is the borrower's principal dwelling.
    One-to-four family property means real property that is held in fee 
simple, on leasehold under a lease for not less than 99 years which is 
renewable, or under a lease having a period of not less than 10 years 
to run beyond the maturity date of the mortgage and that is improved by 
a residential structure that contains one to four units, including but 
not limited to:
    (1) An individual condominium;
    (2) An individual cooperative unit; or
    (3) An individual manufactured home that is constructed in 
conformance with the National Manufactured Home Construction and Safety 
Standards, as evidenced by a certification label affixed to the 
exterior of the home, and that is erected on or that otherwise is 
affixed to a foundation in accordance with requirements established by 
the Federal Housing Administration.
    Open-end credit means any consumer credit extended by a creditor 
under a plan in which:
    (1) The creditor reasonably contemplates repeated consumer credit 
transactions;
    (2) The creditor may impose a finance charge from time to time on 
an outstanding unpaid balance; and
    (3) The amount of credit that may be extended to the borrower 
during the term of the plan (up to any limit set by the creditor) is 
generally made available to the extent that any outstanding balance is 
repaid.
    Points and fees means:
    (1) All items considered to be a finance charge under 12 CFR 
226.4(a) and 226.4(b), except:
    (i) Interest or the time-price differential; and
    (ii) Items excluded from the finance charge under 12 CFR 226.4(c), 
226.4(d) and 226.4(e), unless included in paragraphs (2) through (5) of 
this definition;
    (2) All compensation paid directly or indirectly by the borrower or 
creditor to a mortgage originator, including a mortgage originator that 
is also the creditor in a table-funded transaction;
    (3) All items (other than amounts held for future payment of taxes) 
listed in 12 CFR 226.4(c)(7) unless:
    (i) The charge is bona fide and reasonable;
    (ii) The creditor and mortgage originator receive no direct or 
indirect compensation in connection with the charge; and
    (iii) The charge is not paid to an affiliate of the creditor or 
mortgage originator;
    (4) Premiums or other charges payable at or before closing for any 
credit life, credit disability, credit unemployment, or credit property 
insurance, or any other accident, loss-of-income, life or health 
insurance, or any payments directly or indirectly for any debt 
cancellation or suspension agreement or contract; and
    (5) If the mortgage transaction refinances a previous loan made or 
currently held by the same creditor or an affiliate of the same 
creditor, all prepayment fees or penalties that are incurred by the 
consumer in connection with the payment of the previous loan.
    Prepayment penalty means a penalty imposed solely because the 
mortgage obligation is prepaid in full or in part. For purposes of this 
definition, a prepayment penalty does not include, for example, fees 
imposed for preparing and providing documents in connection with 
prepayment, such as a loan payoff statement, a reconveyance, or other 
document releasing the creditor's security interest in the one-to-four 
family property securing the loan.
    Principal dwelling means a one-to-four family property, or unit 
thereof, that is occupied or will be occupied by at least one borrower 
as a principal residence. For purposes of this definition, a borrower 
can only have one principal dwelling at a time; however, if a borrower 
buys a new dwelling that will become the borrower's principal dwelling 
within a year or upon the completion of construction, the new dwelling 
is considered the principal dwelling for purposes of applying this 
definition to a credit transaction to purchase the new dwelling.
    Qualifying appraisal means an appraisal that meets the requirements 
of Sec.  ----.15(d)(11) of this part.
    Rate and term refinancing means a refinancing transaction that is 
not a cash-out refinancing.
    Refinancing transaction means:
    (1) A closed-end credit transaction secured by a one-to-four family 
property that is entered into by the borrower that satisfies and 
replaces an existing credit transaction that was entered into by the 
same borrower and that is secured by the same one-to-four family 
property; or
    (2) A closed-end credit transaction secured by the borrower's 
principal dwelling on which there are no existing liens.
    Reverse mortgage means a nonrecourse consumer credit transaction in 
which:
    (1) A mortgage, deed of trust, or equivalent consensual security 
interest securing one or more advances is created in the borrower's 
principal dwelling; and
    (2) Any principal, interest, or shared appreciation or equity is 
due and payable (other than in the case of default) only after:
    (i) The borrower dies;
    (ii) The dwelling is transferred; or
    (iii) The borrower ceases to occupy the one-to-four family property 
as a principal dwelling.
    Total loan amount means the amount financed, as determined 
according to 12 CFR 226.18(b), less any cost listed in paragraphs (3), 
(4) and (5) of the definition of ``points of fees'' that is both 
included in the definition of points and fees and financed by the 
creditor.
    (b) Exemption. A sponsor shall be exempt from the risk retention 
requirements in subpart B of this part with respect to any 
securitization transaction, if:
    (1) All of the securitized assets that collateralize the asset-
backed securities are qualified residential mortgages;
    (2) None of the securitized assets that collateralize the asset-
backed securities are other asset-backed securities;
    (3) At the closing of the securitization transaction, each 
qualified residential mortgage collateralizing the asset-backed 
securities is currently performing; and
    (4)(i) The depositor of the asset-backed security certifies that it 
has evaluated the effectiveness of its internal supervisory controls 
with respect to the process for ensuring that all assets that 
collateralize the asset-backed security are qualified residential 
mortgages and has concluded that its internal supervisory controls are 
effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (b)(4)(i) of this 
section shall be performed, for each issuance of an asset-backed 
security in reliance on this section, as of a date within 60 days of 
the cut-off date or similar date for establishing the composition of 
the asset pool collateralizing such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (b)(4)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed

[[Page 24166]]

securities in the issuing entity, and, upon request, to the Commission 
and its appropriate Federal banking agency, if any.
    (c) Qualified residential mortgage. The term ``qualified 
residential mortgage'' means a closed-end credit transaction to 
purchase or refinance a one-to-four family property at least one unit 
of which is the principal dwelling of a borrower that:
    (1) Meets all of the criteria in paragraph (d) of this section; and
    (2) Is not:
    (i) Made to finance the initial construction of a dwelling;
    (ii) A reverse mortgage;
    (iii) A temporary or ``bridge'' loan with a term of twelve months 
or less, such as a loan to purchase a new dwelling where the borrower 
plans to sell a current dwelling within twelve months; or
    (iv) A timeshare plan described in 11 U.S.C. 101(53D).
    (d) Eligibility criteria--(1) First-lien required. The mortgage 
transaction is secured by a first lien:
    (i) On the one-to-four family property to be purchased or 
refinanced; and
    (ii) That is perfected in accordance with applicable law.
    (2) Subordinate liens. If the mortgage transaction is to purchase a 
one-to-four family property, no other recorded or perfected liens on 
the one-to-four family property would exist, to the creditor's 
knowledge at the time of the closing of the mortgage transaction, upon 
the closing of that transaction.
    (3) Original maturity. At the closing of the mortgage transaction, 
the maturity date of the mortgage transaction does not exceed 30 years.
    (4) Written Application. The borrower completed and submitted to 
the creditor a written application for the mortgage transaction that, 
as supplemented or amended prior to closing, includes an 
acknowledgement by the borrower that the information provided in the 
application is true and correct as of the date executed by the borrower 
and that any intentional or negligent misrepresentation of the 
information provided in the application may result in civil liability 
and/or criminal penalties under 18 U.S.C. 1001.
    (5) Credit history--(i) In general. The creditor has verified and 
documented that within ninety (90) days prior to the closing of the 
mortgage transaction:
    (A) The borrower is not currently 30 days or more past due, in 
whole or in part, on any debt obligation;
    (B) Within the previous twenty-four (24) months, the borrower has 
not been 60 days or more past due, in whole or in part, on any debt 
obligation; and
    (C) Within the previous thirty-six (36) months:
    (1) The borrower has not been a debtor in a case commenced under 
Chapter 7, Chapter 12, or Chapter 13 of Title 11, United States Code, 
or been the subject of any Federal or State judicial judgment for the 
collection of any unpaid debt;
    (2) The borrower has not had any personal property repossessed; and
    (3) No one-to-four family property owned by the borrower has been 
the subject of any foreclosure, deed-in-lieu of foreclosure, or short 
sale.
    (ii) Safe harbor. A creditor will be deemed to have met the 
requirements of paragraph (d)(5)(i) of this section if:
    (A) The creditor, no more than 90 days before the closing of the 
mortgage transaction, obtains a credit report regarding the borrower 
from at least two consumer reporting agencies that compile and maintain 
files on consumers on a nationwide basis;
    (B) Based on the information in such credit reports, the borrower 
meets all of the requirements of paragraph (d)(5)(i) of this section, 
and no information in a credit report subsequently obtained by the 
creditor before the closing of the mortgage transaction contains 
contrary information; and
    (C) The creditor maintains copies of such credit reports in the 
loan file for the mortgage transaction.
    (6) Payment terms. Based on the terms of the mortgage transaction 
at the closing of the transaction:
    (i) The regularly scheduled principal and interest payments on the 
mortgage transaction:
    (A) Would not result in an increase of the principal balance of the 
mortgage transaction; and
    (B) Do not allow the borrower to defer payment of interest or 
repayment of principal;
    (ii) No scheduled payment of principal and interest would be more 
than twice as large as any earlier scheduled payment of principal and 
interest;
    (iii) If the rate of interest applicable to the mortgage 
transaction may increase after the closing of the mortgage transaction, 
any such increase may not exceed:
    (A) 2 percent (200 basis points) in any twelve month period; and
    (B) 6 percent (600 basis points) over the life of the mortgage 
transaction; and
    (iv) The mortgage transaction does not include or provide for any 
prepayment penalty.
    (7) Points and fees. The total points and fees payable by the 
borrower in connection with the mortgage transaction shall not exceed 
three percent of the total loan amount.
    (8) Debt-to-income ratios--(i) In general. The creditor has 
determined that, as of a date that is no more than 60 days prior to the 
closing of the mortgage transaction, the ratio of:
    (A) The borrower's monthly housing debt to the borrower's monthly 
gross income does not exceed 28 percent; and
    (B) The borrower's total monthly debt to the borrower's monthly 
gross income does not exceed 36 percent.
    (ii) Applicable standards. For purposes of determining the 
borrower's compliance with the ratios set forth in paragraph (d)(8)(i) 
of this section, the creditor shall:
    (A) Verify, document, and determine the borrower's monthly gross 
income in accordance with the effective income standards established in 
the Additional QRM Standards Appendix to this part; and
    (B) Except as provided in paragraph (d)(8)(iii) of this section, 
verify, document, and determine the borrower's monthly housing debt and 
total monthly debt in accordance with the standards established in the 
Additional QRM Standards Appendix to this part.
    (iii) Housing debt. Notwithstanding paragraph (d)(8)(ii)(B) of this 
section, for purposes of determining the borrower's compliance with the 
ratios set forth in paragraph (d)(8)(i) of this section, the creditor 
shall:
    (A) Determine the borrower's monthly periodic payment for principal 
and interest on the mortgage transaction and, if the mortgage 
transaction is a refinancing transaction, any other credit transaction 
(including any open-end credit transaction as if fully drawn) that to 
the creditor's knowledge would exist at the closing of the refinancing 
transaction and that would be secured by the one-to-four family 
property being refinanced, based on:
    (1) The maximum interest rate that is permitted or required under 
any feature (including any conversion or other feature that allows a 
variable interest rate to convert to a fixed interest rate) of the 
relevant credit transaction documents during the first five years after 
the date on which the first regular periodic payment will be due; and
    (2) A payment schedule that fully amortizes the mortgage 
transaction over the term of the mortgage transaction; and
    (B) Include in the borrower's monthly housing debt and total 
monthly debt the monthly pro rata amount of the following, as 
applicable, with respect to the one-to-four family property being 
purchased or refinanced:
    (1) Real estate taxes;

[[Page 24167]]

    (2) Hazard insurance, flood insurance, mortgage guarantee 
insurance, and any other required insurance;
    (3) Homeowners' and condominium association dues;
    (4) Ground rent or leasehold payments; and
    (5) Special assessments.
    (9) Loan-to-value ratio--(i) Purchase mortgages. If the mortgage 
transaction is to purchase a one-to-four family property, at the 
closing of the mortgage transaction, the loan-to-value ratio of the 
mortgage transaction does not exceed 80 percent.
    (ii) Rate and term refinancings. If the mortgage transaction is a 
rate and term refinancing, at the closing of the mortgage transaction, 
the combined loan-to-value ratio of the mortgage transaction does not 
exceed 75 percent.
    (iii) Cash-out refinancings. If the mortgage transaction is a cash-
out refinancing, at the closing of the mortgage transaction, the 
combined loan-to-value ratio of the mortgage transaction does not 
exceed 70 percent.
    (10) Down payment. If the mortgage transaction is for the purchase 
of a one-to-four family property:
    (i) The borrower provides, at closing, a cash down payment in an 
amount equal to at least the sum of:
    (A) The closing costs payable by the borrower in connection with 
the mortgage transaction;
    (B) 20 percent of the lesser of:
    (1) The estimated market value of the one-to-four family property 
as determined by a qualifying appraisal; and
    (2) The purchase price of the one-to-four family property to be 
paid in connection with the mortgage transaction; and
    (C) The difference, if a positive amount, between:
    (1) The purchase price of the one-to-four family property to be 
paid in connection with the mortgage transaction; and
    (2) The estimated market value of the one-to-four family property 
as determined by a qualifying appraisal;
    (ii) The funds used by the borrower to satisfy the down payment 
required by paragraph (d)(10)(i) of this section:
    (A) Must come solely from borrower funds;
    (B) May not be subject to any contractual obligation by the 
borrower to repay; and
    (C) May not have been obtained by the borrower from a person or 
entity with an interest in the sale of the property (other than the 
borrower); and
    (iii) The creditor shall verify and document the borrower's 
compliance with the conditions set forth in paragraphs (d)(10)(i) and 
(d)(10)(ii) of this section.
    (11) Appraisal. The creditor obtained a written appraisal of the 
property securing the mortgage that was performed not more than 90 days 
prior to the closing of the mortgage transaction by an appropriately 
state-certified or state-licensed appraiser that conforms to generally 
accepted appraisal standards as evidenced by the Uniform Standards of 
Professional Appraisal Practice (USPAP) promulgated by the Appraisal 
Standards Board (ASB) of the Appraisal Foundation, the appraisal 
requirements of the Federal banking agencies, and applicable laws.
    (12) Assumability. The mortgage transaction is not assumable by any 
person that was not a borrower under the mortgage transaction at 
closing.
    (13) Default mitigation. The mortgage originator--
    (i) Includes terms in the mortgage transaction documents under 
which the creditor commits to have servicing policies and procedures 
under which the creditor shall--
    (A) Mitigate risk of default on the mortgage loan by taking loss 
mitigation actions, such as loan modification or other loss mitigation 
alternative, in the event the estimated resulting net present value of 
such action exceeds the estimated net present value of recovery through 
foreclosure, without regard to whether the particular action benefits 
the interests of a particular class of investors in a securitization;
    (B) Take into account the borrower's ability to repay and other 
appropriate underwriting criteria in such loss mitigation actions;
    (C) Initiate loss mitigation activities within 90 days after the 
mortgage loan becomes delinquent (if the delinquency has not been 
cured);
    (D) Implement or maintain servicing compensation arrangements 
consistent with the obligations under paragraphs (d)(13)(i)(A), (B), 
and (C) of this section;
    (E) Implement procedures for addressing any whole loan owned by the 
creditor (or any of its affiliates) and secured by a subordinate lien 
on the same property that secures the first mortgage loan if the 
borrower becomes more than 90 days past due on the first mortgage loan;
    (F) If the first mortgage loan will collateralize any asset-backed 
securities, disclose or require to be disclosed to potential investors 
within a reasonable period of time prior to the sale of the asset-
backed securities a description of the procedures to be implemented 
pursuant to paragraph (d)(13)(i)(E) of this section; and
    (G) Not sell, transfer or assign servicing rights for the mortgage 
loan unless the agreement requires the purchaser, transferee or 
assignee servicer to abide by the default mitigation commitments of the 
creditor under this paragraph (d)(13)(i) as if the purchaser, 
transferee or assignee were the creditor under this section.
    (ii) Provides disclosure of the foregoing default mitigation 
commitments to the borrower at or prior to the closing of the mortgage 
transaction.
    (e) Repurchase of loans subsequently determined to be non-qualified 
after closing. A sponsor that has relied on the exemption provided in 
paragraph (b) of this section with respect to a securitization 
transaction shall not lose such exemption with respect to such 
transaction if, after closing of the securitization transaction, it is 
determined that one or more of the residential mortgage loans 
collateralizing the asset-backed securities does not meet all of the 
criteria to be a qualified residential mortgage provided that:
    (1) The depositor complied with the certification requirement set 
forth in paragraph (b)(4) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at 
a price at least equal to the remaining aggregate unpaid principal 
balance and accrued interest on the loan(s) no later than 90 days after 
the determination that the loans do not satisfy the requirements to be 
a qualified residential mortgage; and
    (3) The sponsor promptly notifies, or causes to be notified, the 
holders of the asset-backed securities issued in the securitization 
transaction of any loan(s) included in such securitization transaction 
that is (or are) required to be repurchased by the sponsor pursuant to 
paragraph (e)(2) of this section, including the amount of such 
repurchased loan(s) and the cause for such repurchase.

Sec.  ----.16 Definitions applicable to qualifying commercial 
mortgages, commercial loans, and auto loans.

    The following definitions apply for purposes of Sec. Sec.  ----.17 
through ----.20 of this part:
    Appraisal Standards Board means the board of the Appraisal 
Foundation that establishes generally accepted standards for the 
appraisal profession.
    Automobile loan:
    (1) Means any loan to an individual to finance the purchase of, and 
is secured by a first lien on, a passenger car or other passenger 
vehicle, such as a minivan, van, sport-utility vehicle,

[[Page 24168]]

pickup truck, or similar light truck for personal, family, or household 
use; and
    (2) Does not include any:
    (i) Loan to finance fleet sales;
    (ii) Personal cash loan secured by a previously purchased 
automobile;
    (iii) Loan to finance the purchase of a commercial vehicle or farm 
equipment that is not used for personal, family, or household purposes;
    (iv) Lease financing; or
    (v) Loan to finance the purchase of a vehicle with a salvage title.
    Combined loan-to-value (CLTV) ratio means, at the time of 
origination, the sum of the principal balance of a first-lien 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 Sec.  ----.19(b)(2)(ii) of 
this part; or
    (2) For refinancing, the estimated market value of the real 
property based on an appraisal that meets the requirements set forth in 
Sec.  ----.19(b)(2)(ii) of this part.
    Commercial loan means a secured or unsecured loan to a company or 
an individual for business purposes, other than any:
    (1) Loan to purchase or refinance a one-to-four family residential 
property;
    (2) Loan for the purpose of financing agricultural production; or
    (3) Loan for which the primary source (fifty (50) percent or more) 
of repayment is expected to be derived from rents collected from 
persons or firms that are not affiliates of the borrower.
    Commercial real estate (CRE) loan:
    (1) Means a loan secured by a property with five or more single 
family units, or by nonfarm nonresidential real property, the primary 
source (fifty (50) percent or more) of repayment for which is expected 
to be derived from:
    (i) The proceeds of the sale, refinancing, or permanent financing 
of the property; or
    (ii) Rental income associated with the property other than rental 
income derived from any affiliate of the borrower; and
    (2) Does not include:
    (i) A land development and construction loan (including 1- to 4-
family residential or commercial construction loans);
    (ii) Any other land loan;
    (iii) A loan to a real estate investment trusts (REITs); or
    (iv) An unsecured loan to a developer.
    Debt service coverage (DSC) ratio means:
    (1) For qualifying leased CRE loans, qualifying multi-family loans, 
and other CRE loans, the ratio of:
    (i) The annual NOI less the annual replacement reserve of the CRE 
property at the time of origination of the CRE loans; to
    (ii) The sum of the borrower's annual payments for principal and 
interest on any debt obligation.
    (2) For commercial loans, the ratio of:
    (i) The borrower's EBITDA as of the most recently completed fiscal 
year; to
    (ii) The sum of the borrower's annual payments for principal and 
interest on any debt obligation.
    Debt to income (DTI) ratio means the ratio of:
    (1) The borrower's total debt (for automobile loans), including the 
monthly amount due on the automobile loan; to
    (2) The borrower's monthly income.
    Earnings before interest, taxes, depreciation, and amortization 
(EBITDA) means the annual income of a business before expenses for 
interest, taxes, depreciation and amortization, as determined in 
accordance with U.S. Generally Accepted Accounting Principles (GAAP).
    Environmental risk assessment means a process for determining 
whether a property is contaminated or exposed to any condition or 
substance that could result in contamination that has an adverse effect 
on the market value of the property or the realization of the 
collateral value.
    First lien means a lien or encumbrance on property that has 
priority over all other liens or encumbrances on the property.
    Junior lien means a lien or encumbrance on property that is lower 
in priority relative to other liens or encumbrances on the property.
    Leverage ratio means the ratio of:
    (1) The borrower's total debt (for commercial loans); to
    (2) The borrower's EBITDA.
    Machinery and equipment (M&E) collateral means collateral for a 
commercial loan that consists of machinery and equipment that is 
identifiable by make, model, and serial number.
    Model year means the year determined by the manufacturer and 
reflected on the vehicle's Motor Vehicle Title as part of the vehicle 
description.
    Net operating income (NOI) refers to the income a CRE property 
generates after all expenses have been deducted for federal income tax 
purposes, except for depreciation, debt service expenses, and federal 
and state income taxes, and excluding any unusual and nonrecurring 
items of income.
    New vehicle means any vehicle that:
    (1) Is not a used vehicle; and
    (2) Has not been previously sold to an end user.
    Payment-in-kind (PIK) means payments of principal or accrued 
interest that are not paid in cash when due, and instead are paid by 
increasing the principal or by providing shares or stock in the 
borrowing company. A PIK loan is a type of loan that typically does not 
provide for any cash payments of principal or interest from the 
borrower to the lender between the drawdown date and the maturity or 
refinancing date.
    Purchase price means:
    (1) For a new vehicle, the amount paid by the borrower for the new 
vehicle net of any incentive payments or manufacturer cash rebates; and
    (2) For a vehicle other than a new vehicle, the lesser of:
    (i) The purchase price as would be determined for a new vehicle; or
    (ii) The retail value of the used vehicle, as determined by a 
nationally recognized automobile pricing agency and based on the 
manufacturer, year, model, features, and condition of the vehicle.
    Qualified tenant means
    (1) A tenant with a triple net lease who has satisfied all 
obligations with respect to the property in a timely manner; or
    (2) A tenant who originally had a triple net lease that 
subsequently expired and currently is leasing the property on a month-
to-month basis, has occupied the property for at least three years 
prior to the date of origination, and has satisfied all obligations 
with respect to the property in a timely manner.
    Qualifying leased CRE loan means a CRE loan secured by commercial 
nonfarm real property, other than a multi-family property or a hotel, 
inn, or similar property:
    (1) That is occupied by one or more qualified tenants pursuant to a 
lease agreement with a term of no less than one (1) month; and
    (2) Where no more than 20 percent of the aggregate gross revenue of 
the property is payable from one or more tenants who:
    (i) Are subject to a lease that will terminate within six months 
following the date of origination; or
    (ii) Are not qualified tenants.
    Qualifying multi-family loan:
    (1) Means a CRE loan secured by any residential property (other 
than a hotel, motel, inn, hospital, nursing home, or other similar 
facility where dwellings are not leased to residents):

[[Page 24169]]

    (i) That consists of five or more dwelling units (including 
apartment buildings, condominiums, cooperatives and other similar 
structures) primarily for residential use; and
    (ii) Where at least seventy-five (75) percent of the NOI is derived 
from residential rents and tenant amenities (including income from 
parking garages, health or swim clubs, and dry cleaning), and not from 
other commercial uses.
    Replacement reserve means the monthly capital replacement or 
maintenance amount based on the property type, age, construction and 
condition of the property that is adequate to maintain the physical 
condition and NOI of the property.
    Salvage title means a form of vehicle title branding, which notes 
that the vehicle has been severely damaged and/or deemed a total loss 
and uneconomical to repair by an insurance company that paid a claim on 
the vehicle.
    Total debt, with respect to a borrower, means:
    (1) In the case of an automobile loan, the sum of:
    (i) All monthly housing payments (rent- or mortgage-related, 
including property taxes, insurance and home owners association fees); 
and
    (ii) Any of the following that are dependent upon the borrower's 
income for payment:
    (A) Monthly payments on other debt and lease obligations, such as 
credit card loans or installment loans, including the monthly amount 
due on the automobile loan;
    (B) Estimated monthly amortizing payments for any term debt, debts 
with other than monthly payments and debts not in repayment (such as 
deferred student loans, interest-only loans); and
    (C) Any required monthly alimony, child support or court-ordered 
payments; and
    (2) In the case of a commercial loan, the outstanding balance of 
all long-term debt (obligations that have a remaining maturity of more 
than one year) and the current portion of all debt that matures in one 
year or less.
    Total liabilities ratio means the ratio of:
    (1) The borrower's total liabilities, determined in accordance with 
U.S. GAAP; to
    (2) The sum of the borrower's total liabilities and equity, less 
the borrower's intangible assets, with each component determined in 
accordance with U.S. GAAP.
    Trade-in allowance means the amount a vehicle purchaser is given as 
a credit at the purchase of a vehicle for the fair exchange of the 
borrower's existing vehicle to compensate the dealer for some portion 
of the vehicle purchase price, except that such amount shall not exceed 
the trade-in value of the used vehicle, as determined by a nationally 
recognized automobile pricing agency and based on the manufacturer, 
year, model, features, and condition of the vehicle.
    Triple net lease means a lease pursuant to which the lessee is 
required to pay rent as well as all taxes, insurance, and maintenance 
expenses associated with the property.
    Uniform Standards of Professional Appraisal Practice (USPAP) means 
the standards issued by the Appraisal Standards Board for the 
performance of an appraisal, an appraisal review, or an appraisal 
consulting assignment.
    Used vehicle:
    (1) Means any vehicle driven more than the limited use necessary in 
transporting or road testing the vehicle prior to the initial sale of 
the vehicle; and
    (2) Does not include any vehicle sold only for scrap or parts 
(title documents surrendered to the State and a salvage certificate 
issued).

Sec.  ----.17 Exceptions for qualifying commercial loans, commercial 
mortgages, and auto loans.

    The risk retention requirements in subpart B of this part shall not 
apply to securitization transactions that satisfy the standards 
provided in Sec. Sec.  ----.18, ----.19, or ----.20 of this part.

Sec.  ----.18 Underwriting standards for qualifying commercial loans.

    (a) General. The securitization transaction--
    (1) Is collateralized solely (excluding cash and cash equivalents) 
by one or more commercial loans, each of which meets all of the 
requirements of paragraph (b) of this section; and
    (2) Does not permit reinvestment periods.
    (b) Underwriting, product and other standards. (1) Prior to 
origination of the commercial loan, the originator:
    (i) Verified and documented the financial condition of the 
borrower:
    (A) As of the end of the borrower's two most recently completed 
fiscal years; and
    (B) During the period, if any, since the end of its most recently 
completed fiscal year;
    (ii) Conducted an analysis of the borrower's ability to service its 
overall debt obligations during the next two years, based on reasonable 
projections;
    (iii) Determined that, based on the previous two years' actual 
performance, the borrower had:
    (A) A total liabilities ratio of 50 percent or less;
    (B) A leverage ratio of 3.0 or less; and
    (C) A DSC ratio of 1.5 or greater;
    (iv) Determined that, based on the two years of projections, which 
include the new debt obligation, following the closing date of the 
loan, the borrower will have:
    (A) A total liabilities ratio of 50 percent or less;
    (B) A leverage ratio of 3.0 or less;
    (C) A DSC ratio of 1.5 or greater; and
    (v) If the loan is originated on a secured basis, obtained a first-
lien security interest on all of the property pledged to collateralize 
the loan.
    (2) The loan documentation for the commercial loan includes 
covenants that:
    (i) Require the borrower to provide to the originator or subsequent 
holder, and the servicer, of the commercial loan the borrower's 
financial statements and supporting schedules on an ongoing basis, but 
not less frequently than quarterly;
    (ii) Prohibit the borrower from retaining or entering into a debt 
arrangement that permits payments-in-kind;
    (iii) Impose limits on:
    (A) The creation or existence of any other security interest with 
respect to any of the borrower's property;
    (B) The transfer of any of the borrower's assets; and
    (C) Any change to the name, location or organizational structure of 
the borrower, or any other party that pledges collateral for the loan;
    (iv) Require the borrower and any other party that pledges 
collateral for the loan to:
    (A) Maintain insurance that protects against loss on any collateral 
for the commercial loan at least up to the amount of the loan, and that 
names the originator or any subsequent holder of the loan as an 
additional insured or loss payee;
    (B) Pay taxes, charges, fees, and claims, where non-payment might 
give rise to a lien on any collateral;
    (C) Take any action required to perfect or protect the security 
interest of the originator or any subsequent holder of the loan in the 
collateral for the commercial loan or the priority thereof, and to 
defend the collateral against claims adverse to the lender's interest;
    (D) Permit the originator or any subsequent holder of the loan, and 
the servicer of the loan, to inspect the collateral for the commercial 
loan and the books and records of the borrower; and
    (E) Maintain the physical condition of any collateral for the 
commercial loan.

[[Page 24170]]

    (3) Loan payments required under the loan agreement are:
    (i) Based on straight-line amortization of principal and interest 
that fully amortize the debt over a term that does not exceed five 
years from the date of origination; and
    (ii) To be made no less frequently than quarterly over a term that 
does not exceed five years.
    (4) The primary source of repayment for the loan is revenue from 
the business operations of the borrower.
    (5) The loan was funded within the six (6) months prior to the 
closing of the securitization transaction.
    (6) At the closing of the securitization transaction, all payments 
due on the loan are contractually current.
    (7) (i) The depositor of the asset-backed security certifies that 
it has evaluated the effectiveness of its internal supervisory controls 
with respect to the process for ensuring that all assets that 
collateralize the asset-backed security meet all of the requirements 
set forth in paragraphs (b)(1) through (b)(6) of this section and has 
concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (b)(7)(i) of this 
section shall be performed, for each issuance of an asset-backed 
security, as of a date within 60 days of the cut-off date or similar 
date for establishing the composition of the asset pool collateralizing 
such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (b)(7)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any.
    (c) Buy-back requirement. A sponsor that has relied on the 
exception provided in paragraph (a) of this section with respect to a 
securitization transaction shall not lose such exception with respect 
to such transaction if, after the closing of the securitization 
transaction, it is determined that one or more of the loans 
collateralizing the asset-backed securities did not meet all of the 
requirements set forth in paragraphs (b)(1) through (b)(6) of this 
section provided that:
    (1) The depositor complied with the certification requirement set 
forth in paragraph (b)(7) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at 
a price at least equal to the remaining principal balance and accrued 
interest on the loan(s) no later than ninety (90) days after the 
determination that the loans do not satisfy all of the requirements of 
paragraphs (b)(1) through (b)(6) of this section; and
    (3) The sponsor promptly notifies, or causes to be notified, the 
holders of the asset-backed securities issued in the securitization 
transaction of any loan(s) included in such securitization transaction 
that is required to be repurchased by the sponsor pursuant to paragraph 
(c)(2) of this section, including the principal amount of such 
repurchased loan(s) and the cause for such repurchase.

Sec.  ----.19 Underwriting standards for qualifying CRE loans.

    (a) General. The securitization transaction is collateralized 
solely (excluding cash and cash equivalents) by one or more CRE loans, 
each of which meets all of the requirements of paragraph (b) of this 
section.
    (b) Underwriting, product and other standards.(1) The CRE loan must 
be secured by a first lien on the commercial real estate.
    (2) Prior to origination of the CRE loan, the originator:
    (i) Verified and documented the current financial condition of the 
borrower;
    (ii) Obtained a written appraisal of the real property securing the 
loan that:
    (A) Was performed not more than six months from the origination 
date of the loan by an appropriately state-certified or state-licensed 
appraiser;
    (B) Conforms to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice (USPAP) 
promulgated by the Appraisal Standards Board and the appraisal 
requirements of the Federal banking agencies (OCC: 12 CFR part 34, 
subpart C; FRB: 12 CFR part 208, subpart E, and 12 CFR part 225, 
subpart G; and FDIC: 12 CFR part 323); and
    (C) Provides an ``as is'' opinion of the market value of the real 
property, which includes an income valuation approach that uses a 
discounted cash flow analysis;
    (iii) Qualified the borrower for the CRE loan based on a monthly 
payment amount derived from a straight-line amortization of principal 
and interest over the term of the loan (but not exceeding 20 years);
    (iv) Conducted an environmental risk assessment to gain 
environmental information about the property securing the loan and took 
appropriate steps to mitigate any environmental liability determined to 
exist based on this assessment;
    (v) Conducted an analysis of the borrower's ability to service its 
overall debt obligations during the next two years, based on reasonable 
projections;
    (vi) Determined that, based on the previous two years' actual 
performance, the borrower had:
    (A) A DSC ratio of 1.5 or greater, if the loan is a qualifying 
leased CRE loan, net of any income derived from a tenant(s) who is not 
a qualified tenant(s);
    (B) A DSC ratio of 1.5 or greater, if the loan is a qualifying 
multi-family property loan; or
    (C) A DSC ratio of 1.7 or greater, if the loan is any other type of 
CRE loan;
    (vii) Determined that, based on two years of projections, which 
include the new debt obligation, following the origination date of the 
loan, the borrower will have:
    (A) A DSC ratio of 1.5 or greater, if the loan is a qualifying 
leased CRE loan, net of any income derived from a tenant(s) who is not 
a qualified tenant(s);
    (B) A DSC ratio of 1.5 or greater, if the loan is a qualifying 
multi-family property loan; or
    (C) A DSC ratio of 1.7 or greater, if the loan is any other type of 
CRE loan.
    (3) The loan documentation for the CRE loan includes covenants 
that:
    (i) Require the borrower to provide to the originator and any 
subsequent holder of the commercial loan, and the servicer, the 
borrower's financial statements and supporting schedules on an ongoing 
basis, but not less frequently than quarterly, including information on 
existing, maturing and new leasing or rent-roll activity for the 
property securing the loan, as appropriate; and
    (ii) Impose prohibitions on:
    (A) The creation or existence of any other security interest with 
respect to any collateral for the CRE loan;
    (B) The transfer of any collateral pledged to support the CRE loan; 
and
    (C) Any change to the name, location or organizational structure of 
the borrower, or any other party that pledges collateral for the loan;
    (iii) Require the borrower and any other party that pledges 
collateral for the loan to:
    (A) Maintain insurance that protects against loss on any collateral 
for the CRE loan, at least up to the amount of the loan, and names the 
originator or any subsequent holder of the loan as an additional 
insured or loss payee;
    (B) Pay taxes, charges, fees, and claims, where non-payment might 
give rise to a lien on any collateral for the CRE loan;
    (C) Take any action required to perfect or protect the security 
interest of the

[[Page 24171]]

originator or any subsequent holder of the loan in the collateral for 
the CRE loan or the priority thereof, and to defend such collateral 
against claims adverse to the originator's or subsequent holder's 
interest;
    (D) Permit the originator or any subsequent holder of the loan, and 
the servicer, to inspect the collateral for the CRE loan and the books 
and records of the borrower or other party relating to the collateral 
for the CRE loan;
    (E) Maintain the physical condition of the collateral for the CRE 
loan;
    (F) Comply with all environmental, zoning, building code, licensing 
and other laws, regulations, agreements, covenants, use restrictions, 
and proffers applicable to the collateral;
    (G) Comply with leases, franchise agreements, condominium 
declarations, and other documents and agreements relating to the 
operation of the collateral, and to not modify any material terms and 
conditions of such agreements over the term of the loan without the 
consent of the originator or any subsequent holder of the loan, or the 
servicer; and
    (H) Not materially alter the collateral for the CRE loan without 
the consent of the originator or any subsequent holder of the loan, or 
the servicer.
    (4) The loan documentation for the CRE loan prohibits the borrower 
from obtaining a loan secured by a junior lien on any property that 
serves as collateral for the CRE loan, unless such loan finances the 
purchase of machinery and equipment and the borrower pledges such 
machinery and equipment as additional collateral for the CRE loan.
    (5) The CLTV ratio for the loan is:
    (i) Less than or equal to 65 percent; or
    (ii) Less than or equal to 60 percent, if the capitalization rate 
used in an appraisal that meets the requirements set forth in paragraph 
(b)(2)(ii) of this section is less than or equal to the sum of:
    (A) The 10-year swap rate, as reported in the Federal Reserve Board 
H.15 Report as of the date concurrent with the effective date of an 
appraisal that meets the requirements set forth in paragraph (b)(2)(ii) 
of this section; and
    (B) 300 basis points.
    (6) All loan payments required to be made under the loan agreement 
are:
    (i) Based on straight-line amortization of principal and interest 
over a term that does not exceed 20 years; and
    (ii) To be made no less frequently than monthly over a term of at 
least ten years.
    (7) Under the terms of the loan agreement:
    (i) Any maturity of the note occurs no earlier than ten years 
following the date of origination;
    (ii) The borrower is not permitted to defer repayment of principal 
or payment of interest; and
    (iii) The interest rate on the loan is:
    (A) A fixed interest rate; or
    (B) An adjustable interest rate and the borrower, prior to or 
concurrently with origination of the CRE loan, obtained a derivative 
that effectively results in a fixed interest rate.
    (8) The originator does not establish an interest reserve at 
origination to fund all or part of a payment on the loan.
    (9) At the closing of the securitization transaction, all payments 
due on the loan are contractually current.
    (10) (i) The depositor of the asset-backed security certifies that 
it has evaluated the effectiveness of its internal supervisory controls 
with respect to the process for ensuring that all assets that 
collateralize the asset-backed security meet all of the requirements 
set forth in paragraphs (b)(1) through (9) of this section and has 
concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (b)(10)(i) of 
this section shall be performed, for each issuance of an asset-backed 
security, as of a date within 60 days of the cut-off date or similar 
date for establishing the composition of the asset pool collateralizing 
such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (b)(10)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any.
    (c) Buy-back requirement. A sponsor that has relied on the 
exception provided in paragraph (a) of this section with respect to a 
securitization transaction shall not lose such exception with respect 
to such transaction if, after the closing of the securitization 
transaction, it is determined that one or more of the CRE loans 
collateralizing the asset-backed securities did not meet all of the 
requirements set forth in paragraphs (b)(1) through (b)(9) of this 
section provided that:
    (1) The depositor has complied with the certification requirement 
set forth in paragraph (b)(10) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at 
a price at least equal to the remaining principal balance and accrued 
interest on the loan(s) no later than ninety (90) days after the 
determination that the loans do not satisfy all of the requirements of 
paragraphs (b)(1) through (b)(9) of this section; and
    (3) The sponsor promptly notifies, or causes to be notified, the 
holders of the asset-backed securities issued in the securitization 
transaction of any loan(s) included in such securitization transaction 
that is required to be repurchased by the sponsor pursuant to paragraph 
(c)(2) of this section, including the principal amount of such 
repurchased loan(s) and the cause for such repurchase.

Sec.  ----.20 Underwriting standards for qualifying auto loans.

    (a) General. The securitization transaction is collateralized 
solely (excluding cash and cash equivalents) by one or more automobile 
loans, each of which meets all of the requirements of paragraph (b) of 
this section.
    (b) Underwriting, product and other standards. (1) Prior to 
origination of the automobile loan, the originator:
    (i) Verified and documented that within 30 days of the date of 
origination:
    (A) The borrower was not currently 30 days or more past due, in 
whole or in part, on any debt obligation;
    (B) Within the previous twenty-four (24) months, the borrower has 
not been 60 days or more past due, in whole or in part, on any debt 
obligation;
    (C) Within the previous thirty-six (36) months, the borrower has 
not:
    (1) Been a debtor in a proceeding commenced under Chapter 7 
(Liquidation), Chapter 11 (Reorganization), Chapter 12 (Family Farmer 
or Family Fisherman plan), or Chapter 13 (Individual Debt Adjustment) 
of the U.S. Bankruptcy Code; or
    (2) Been the subject of any Federal or State judicial judgment for 
the collection of any unpaid debt;
    (D) Within the previous thirty-six (36) months, no one-to-four 
family property owned by the borrower has been the subject of any 
foreclosure, deed in lieu of foreclosure, or short sale; or
    (E) Within the previous thirty-six (36) months, the borrower has 
not had any personal property repossessed;
    (ii) Determined and documented that, upon the origination of the 
loan, the borrower's DTI ratio is less than or equal to thirty-six (36) 
percent. For the purpose of making the determination under paragraph 
(b)(1)(ii) of this section, the originator must:
    (A) Verify and document all income of the borrower that the 
originator

[[Page 24172]]

includes in the borrower's effective monthly income (using payroll 
stubs, tax returns, profit and loss statements, or other similar 
documentation); and
    (B) On or after the date of the borrower's written application and 
prior to origination, obtain a credit report regarding the borrower 
from a consumer reporting agency that compiles and maintain files on 
consumers on a nationwide basis (within the meaning of 15 U.S.C. 
1681a(p)) and verify that all outstanding debts reported in the 
borrower's credit report are incorporated into the calculation of the 
borrower's DTI ratio under paragraph (b)(1)(ii) of this section;
    (2) An originator will be deemed to have met the requirements of 
paragraph (b)(1)(i) of this section if:
    (i) The originator, no more than 90 days before the closing of the 
loan, obtains a credit report regarding the borrower from at least two 
consumer reporting agencies that compile and maintain files on 
consumers on a nationwide basis (within the meaning of 15 U.S.C. 
1681a(p));
    (ii) Based on the information in such credit reports, the borrower 
meets all of the requirements of paragraph (b)(1)(i) of this section, 
and no information in a credit report subsequently obtained by the 
originator before the closing of the mortgage transaction contains 
contrary information; and
    (iii) The originator obtains electronic or hard copies of such 
credit reports.
    (3) At closing of the automobile loan, the borrower makes a down 
payment from the borrower's personal funds and trade-in allowance, if 
any, that is at least equal to the sum of:
    (i) The full cost of the vehicle title, tax, and registration fees;
    (ii) Any dealer-imposed fees; and
    (iii) 20 percent of the vehicle purchase price.
    (4) The transaction documents require the originator, subsequent 
holder of the loan, or an agent of the originator or subsequent holder 
of the loan to maintain physical possession of the title for the 
vehicle until the loan is repaid in full and the borrower has otherwise 
satisfied all obligations under the terms of the loan agreement.
    (5) If the loan is for a new vehicle, the terms of the loan 
agreement provide a maturity date for the loan that does not exceed 5 
years from the date of origination.
    (6) If the loan is for a vehicle other than a new vehicle, the term 
of the loan (as set forth in the loan agreement) plus the difference 
between the current model year and the vehicle's model year does not 
exceed 5 years.
    (7) The terms of the loan agreement:
    (i) Specify a fixed rate of interest for the life of the loan;
    (ii) Provide for a monthly payment amount that:
    (A) Is based on straight-line amortization of principal and 
interest over the term of the loan; and
    (B) Do not permit the borrower to defer repayment of principal or 
payment of interest; and
    (C) Require the borrower to make the first payment on the 
automobile loan within 45 days of the date of origination.
    (8) At the closing of the securitization transaction, all payments 
due on the loan are contractually current; and
    (9) (i) The depositor of the asset-backed security certifies that 
it has evaluated the effectiveness of its internal supervisory controls 
with respect to the process for ensuring that all assets that 
collateralize the asset-backed security meet all of the requirements 
set forth in paragraphs (b)(1) through (b)(8) of this section and has 
concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (b)(9)(i) of this 
section shall be performed, for each issuance of an asset-backed 
security, as of a date within 60 days of the cut-off date or similar 
date for establishing the composition of the asset pool collateralizing 
such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (b)(9)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any.
    (c) Buy-back requirement. A sponsor that has relied on the 
exception provided in this paragraph (a) of this section with respect 
to a securitization transaction shall not lose such exception with 
respect to such transaction if, after the closing of the securitization 
transaction, it is determined that one or more of the automobile loans 
collateralizing the asset-backed securities did not meet all of the 
requirements set forth in paragraphs (b)(1) through (b)(8) of this 
section provided that:
    (1) The depositor has complied with the certification requirement 
set forth in paragraph (b)(9) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at 
a price at least equal to the remaining principal balance and accrued 
interest on the loan(s) no later than 90 days after the determination 
that the loans do not satisfy all of the requirements of paragraphs 
(b)(1) through (b)(8) of this section; and
    (3) The sponsor promptly notifies, or causes to be notified, the 
holders of the asset-backed securities issued in the securitization 
transaction of any loan(s) included in such securitization transaction 
that is required to be repurchased by the sponsor pursuant to paragraph 
(c)(2) of this section, including the principal amount of such 
repurchased loan(s) and the cause for such repurchase.

Sec.  --.21 General exemptions.

    (a) This part shall not apply to:
    (1) Any securitization transaction that:
    (i) Is collateralized solely (excluding cash and cash equivalents) 
by residential, multifamily, or health care facility mortgage loan 
assets that are insured or guaranteed as to the payment of principal 
and interest by the United States or an agency of the United States; or
    (ii) Involves the issuance of asset-backed securities that:
    (A) Are insured or guaranteed as to the payment of principal and 
interest by the United States or an agency of the United States; and
    (B) Are collateralized solely (excluding cash and cash equivalents) 
by residential, multifamily, or health care facility mortgage loan 
assets or interests in such assets.
    (2) Any securitization transaction that is collateralized solely 
(excluding cash and cash equivalents) by loans or other assets made, 
insured, guaranteed, or purchased by any institution that is subject to 
the supervision of the Farm Credit Administration, including the 
Federal Agricultural Mortgage Corporation;
    (3) Any asset-backed security that is a security issued or 
guaranteed by any State of the United States, or by any political 
subdivision of a State or territory, or by any public instrumentality 
of a State or territory that is exempt from the registration 
requirements of the Securities Act of 1933 by reason of section 3(a)(2) 
of that Act (15 U.S.C. 77c(a)(2)); and
    (4) Any asset-backed security that meets the definition of a 
qualified scholarship funding bond, as set forth in section 150(d)(2) 
of the Internal Revenue Code of 1986 (26 U.S.C. 150(d)(2)).
    (5) Any securitization transaction that:
    (i) Is collateralized solely (other than cash and cash equivalents) 
by existing

[[Page 24173]]

asset-backed securities issued in a securitization transaction:
    (A) For which credit risk was retained as required under subpart B 
of this part; or
    (B) That was exempted from the credit risk retention requirements 
of this part pursuant to subpart D of this part;
    (ii) Is structured so that it involves the issuance of only a 
single class of ABS interests; and
    (iii) Provides for the pass-through of all principal and interest 
payments received on the underlying ABS (net of expenses of the issuing 
entity) to the holders of such class.
    (b) This part shall not apply to any securitization transaction if 
the asset-backed securities issued in the transaction are:
    (1) Collateralized solely (excluding cash and cash equivalents) by 
obligations issued by the United States or an agency of the United 
States;
    (2) Collateralized solely (excluding cash and cash equivalents) by 
assets that are fully insured or guaranteed as to the payment of 
principal and interest by the United States or an agency of the United 
States (other than those referred to in paragraph (a)(1)(i) of this 
section); or
    (3) Fully guaranteed as to the timely payment of principal and 
interest by the United States or any agency of the United States;
    (c) Rule of construction. Securitization transactions involving the 
issuance of asset-backed securities that are either issued, insured, or 
guaranteed by, or are collateralized by obligations issued by, or loans 
that are issued, insured, or guaranteed by, the Federal National 
Mortgage Association, the Federal Home Loan Mortgage Corporation, or a 
Federal home loan bank shall not on that basis qualify for exemption 
under this section.

Sec.  --.22 Safe harbor for certain foreign-related transactions.

    (a) In general. This part shall not apply to a securitization 
transaction if all the following conditions are met:
    (1) The securitization transaction is not required to be and is not 
registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.);
    (2) No more than 10 percent of the dollar value by proceeds (or 
equivalent if sold in a foreign currency) of all classes of ABS 
interests sold in the securitization transaction are sold to U.S. 
persons or for the account or benefit of U.S. persons;
    (3) Neither the sponsor of the securitization transaction nor the 
issuing entity is:
    (i) Chartered, incorporated, or organized under the laws of the 
United States, any State of the United States, the District of 
Columbia, Puerto Rico, the Virgin Islands, or any other possession of 
the United States (each of the foregoing, a ``U.S. jurisdiction'');
    (ii) An unincorporated branch or office (wherever located) of an 
entity chartered, incorporated, or organized under the laws of a U.S. 
jurisdiction; or
    (iii) An unincorporated branch or office located in a U.S. 
jurisdiction of an entity that is chartered, incorporated, or organized 
under the laws of a jurisdiction other than a U.S. jurisdiction; and
    (4) If the sponsor or issuing entity is chartered, incorporated, or 
organized under the laws of a jurisdiction other than a U.S. 
jurisdiction, no more than 25 percent (as determined based on unpaid 
principal balance) of the assets that collateralize the ABS interests 
sold in the securitization transaction were acquired by the sponsor or 
issuing entity, directly or indirectly, from:
    (i) A consolidated affiliate of the sponsor or issuing entity that 
is chartered, incorporated, or organized under the laws of a U.S. 
jurisdiction; or
    (ii) An unincorporated branch or office of the sponsor or issuing 
entity that is located in a U.S. jurisdiction.
    (b) Evasions prohibited. In view of the objective of these rules 
and the policies underlying Section 15G of the Exchange Act, the safe 
harbor described in paragraph (a) of this section is not available with 
respect to any transaction or series of transactions that, although in 
technical compliance with such paragraph (a), is part of a plan or 
scheme to evade the requirements of section 15G and this Regulation. In 
such cases, compliance with section 15G and this part is required.

Sec.  --.23 Additional exemptions.

    (a) Securitization transactions. The federal agencies with 
rulewriting authority under section 15G(b) of the Exchange Act (15 
U.S.C. 78o-11(b)) with respect to the type of assets involved may 
jointly provide a total or partial exemption of any securitization 
transaction as such agencies determine may be appropriate in the public 
interest and for the protection of investors.
    (b) Exceptions, exemptions, and adjustments. The Federal banking 
agencies and the Commission, in consultation with the Federal Housing 
Finance Agency and the Department of Housing and Urban Development, may 
jointly adopt or issue exemptions, exceptions or adjustments to the 
requirements of this part, including exemptions, exceptions or 
adjustments for classes of institutions or assets in accordance with 
section 15G(e) of the Exchange Act (15 U.S.C. 78o-11(e)).

Appendix A to Part ------Additional QRM Standards; Standards for 
Determining Acceptable Sources of Borrower Funds, Borrower's Monthly 
Gross Income, Monthly Housing Debt, and Total Monthly Debt

I. Borrower Funds to Close

A. Cash and Savings/Checking Accounts as Acceptable Sources of Funds

1. Earnest Money Deposit
    a. The lender must verify with documentation, the deposit amount 
and source of funds, if the amount of the earnest money deposit:
    i. Exceeds 2 percent of the sales price, or
    ii. Appears excessive based on the borrower's history of 
accumulating savings. Satisfactory documentation includes:
    iii. A copy of the borrower's cancelled check
    iv. Certification from the deposit-holder acknowledging receipt of 
funds, or
    v. Separate evidence of the source of funds.
    b. Separate evidence includes a verification of deposit (VOD) or 
bank statement showing that the average balance was sufficient to cover 
the amount of the earnest money deposit, at the time of the deposit.
2. Savings and Checking Accounts
    a. A VOD, along with the most recent bank statement, may be used to 
verify savings and checking accounts.
    b. If there is a large increase in an account, or the account was 
recently opened, the lender must obtain from the borrower a credible 
explanation of the source of the funds.
3. Cash Saved at Home
    a. Borrowers who have saved cash at home and are able to adequately 
demonstrate the ability to do so, are permitted to have this money 
included as an acceptable source of funds to close the mortgage.
    b. To include cash saved at home when assessing the borrower's cash 
assets, the:
    i. Money must be verified, whether deposited in a financial 
institution, or held by the escrow/title company, and
    ii. Borrower must provide satisfactory evidence of the ability to 
accumulate such savings.

[[Page 24174]]

4. Verifying Cash Saved at Home
    Verifying the cash saved at home assets requires the borrower to 
explain in writing:
    a. How the funds were accumulated, and
    b. The amount of time it took to accumulate the funds.
    The lender must determine the reasonableness of the accumulation, 
based on the:
    c. Borrower's income stream
    d. Time period during which the funds were saved
    e. Borrower's spending habits, and
    f. Documented expenses and the borrower's history of using 
financial institutions.

    Note: Borrowers with checking and/or savings accounts are less 
likely to save money at home, than individuals with no history of 
such accounts.

5. Cash Accumulated With Private Savings Clubs
    a. Some borrowers may choose to use non-traditional methods to save 
money by making deposits into private savings clubs. Often, these 
private savings clubs pool resources for use among the membership.
    b. If a borrower claims that the cash to close mortgage is from 
savings held with a private savings club, he/she must be able to 
adequately document the accumulation of the funds with the club.
6. Requirements for Private Savings Clubs
    a. While private savings clubs are not supervised banking 
institutions, the clubs must, at a minimum, have:
    i. Account ledgers
    ii. Receipts from the club
    iii. Verification from the club treasurer, and
    iv. Identification of the club.
    b. The lender must reverify the information, and the underwriter 
must be able to determine that:
    i. It was reasonable for the borrower to have saved the money 
claimed, and
    ii. There is no evidence that the funds were borrowed with an 
expectation of repayment.

B. Investments as an Acceptable Source of Funds

1. IRAs, Thrift Savings Plans, and 401(k)s and Keogh Accounts
    Up to 60 percent of the value of assets such as IRAs, thrift 
savings plans, 401(k) and Keogh accounts may be included in the 
underwriting analysis, unless the borrower provides conclusive evidence 
that a higher percentage may be withdrawn, after subtracting any:
    a. Federal income tax, and
    b. Withdrawal penalties.
    Notes:
    i. Redemption evidence is required.
    ii. The portion of the assets not used to meet closing 
requirements, after adjusting for taxes and penalties may be counted as 
reserves.
2. Stocks and Bonds
    The monthly or quarterly statement provided by the stockbroker or 
financial institution managing the portfolio may be used to verify the 
value of stocks and bonds.

    Note: The actual receipt of funds must be verified and 
documented.

3. Savings Bonds
    Government issued bonds are counted at the original purchase price, 
unless eligibility for redemption and the redemption value are 
confirmed.

    Note: The actual receipt of funds at redemption must be 
verified.

C. Gifts as an Acceptable Source of Funds

1. Description of Gift Funds
    In order for funds to be considered a gift there must be no 
expected or implied repayment of the funds to the donor by the 
borrower.

    Note: The portion of the gift not used to meet closing 
requirements may be counted as reserves.

2. Who can provide a gift?
    An outright gift of the cash investment is acceptable if the donor 
is:
    a. The borrower's relative
    b. The borrower's employer or labor union
    c. A charitable organization
    d. A governmental agency or public entity that has a program 
providing home ownership assistance to
    i. Low- and moderate-income families
    ii. First-time homebuyers, or
    e. A close friend with a clearly defined and documented interest in 
the borrower.
3. Who cannot provide a gift?
    a. The gift donor may not be a person or entity with an interest in 
the sale of the property, such as:
    i. The seller
    ii. The real estate agent or broker
    iii. The builder, or
    iv. An associated entity.
    b. Gifts from these sources are considered inducements to purchase, 
and must be subtracted from the sales price.

    Note: This applies to properties where the seller is a 
government agency selling foreclosed properties, such as the US 
Department of Veterans Affairs (VA) or Rural Housing Services.

4. Lender Responsibility for Verifying the Acceptability of Gift Fund 
Sources
    a. Regardless of when gift funds are made available to a borrower, 
the lender must be able to determine that the gift funds were not 
provided by an unacceptable source, and were the donor's own funds.
    b. When the transfer occurs at closing, the lender is responsible 
for verifying that the closing agent received the funds from the donor 
for the amount of the gift, and that the funds were from an acceptable 
source.
5. Requirements Regarding Donor Source of Funds
    a. As a general rule, how a donor obtains gift funds is not of 
concern, provided that the funds are not derived in any manner from a 
party to the sales transaction.
    b. Donors may borrow gift funds from any other acceptable source, 
provided the mortgage borrowers are not obligors to any note to secure 
money borrowed to give the gift.
6. Equity Credit
    Only family members may provide equity credit as a gift on property 
being sold to other family members.
7. Payment of Consumer Debt Must Result in Sales Price Reduction
    a. The payment of consumer debt by third parties is considered to 
be an inducement to purchase.
    b. While sellers and other parties may make contributions subject 
to any percentage limitation of the sales price of a property toward a 
buyer's actual closing costs and financing concessions, this applies 
exclusively to the mortgage financing provision.
    c. When someone other than a family member has paid off debts or 
other expenses on behalf of the borrower:
    i. The funds must be treated as an inducement to purchase, and
    ii. There must be a dollar for dollar reduction to the sales price 
when calculating the maximum insurable mortgage.

    Note: The dollar for dollar reduction to the sales price also 
applies to gift funds not meeting the requirement that:
    i. The gift be for down payment assistance, and
    ii. That it be provided by an acceptable source.

8. Using Downpayment Assistance Programs
    a. Downpayment assistance programs providing gifts administered by

[[Page 24175]]

charitable organizations, such as nonprofits should be carefully 
monitored. Nonprofit entities should not provide gifts to pay off:
    i. Installment loans
    ii. Credit cards
    iii. Collections
    iv. Judgments, and
    v. Similar debts.
    b. Lenders must ensure that a gift provided by a charitable 
organization meets these requirements and that the transfer of funds is 
properly documented.
9. Gifts From Charitable Organizations That Lose or Give Up Their 
Federal Tax-Exempt Status
    If a charitable organization makes a gift that is to be used for 
all, or part, of a borrower's down payment, and the organization 
providing the gift loses or gives up its Federal tax exempt status, the 
gift will be recognized as an acceptable source of the down payment 
provided that:
    a. The gift is made to the borrower
    b. The gift is properly documented, and
    c. The borrower has entered into a contract of sale (including any 
amendments to purchase price) on, or before, the date the IRS 
officially announces that the charitable organization's tax exempt 
status is terminated.
10. Lender Responsibility for Ensuring That an Entity Is a Charitable 
Organization
    a. The lender is responsible for ensuring that an entity is a 
charitable organization as defined by Section 501(a) of the Internal 
Revenue Code (IRC) of 1986 (26 U.S.C. 150(d)(2)) pursuant to Section 
501(c)(3) of the IRC.
    b. One resource available to lenders for obtaining this information 
is the Internal Revenue Service (IRS) Publication 78, Cumulative List 
of Organizations described in Section 170(c) of the Internal Revenue 
Code of 1986, which contains a list of organizations eligible to 
receive tax-deductible charitable contributions.
    c. The IRS has an online version of this list that can help lenders 
and others conduct a search of these organizations. The online version 
can be found at http://apps.irs.gov/app/pub78 using the following 
instructions to obtain the latest update:
    i. Enter search data and click ``Search''
    ii. Click ``Search for Charities'' under the ``Charities & Non-
Profits Topics'' heading on the left-hand side of the page
    iii. Click ``Recent Revocations and Deletions from Cumulative 
List'' under the ``Additional Information'' heading in the middle of 
the page, and
    iv. Click the name of the organization if the name appears on the 
list displayed.

D. Gift Fund Required Documentation

1. Gift Letter Requirement
    A lender must document any borrower gift funds through a gift 
letter, signed by the donor and borrower. The gift letter must show the 
donor's name, address, telephone number, specify the dollar amount of 
the gift, and state the nature of the donor's relationship to the 
borrower and that no repayment is required. If sufficient funds 
required for closing are not already verified in the borrower's 
accounts, document the transfer of the gift funds to the borrower's 
accounts, in accordance with the instructions described in section 
(I)(D)(2).
2. Documenting the Transfer of Gift Funds
    The lender must document the transfer of the gift funds from the 
donor to the borrower. The table below describes the requirements for 
the transfer of gift funds.

------------------------------------------------------------------------
        If the gift funds . . .                     Then . . .
------------------------------------------------------------------------
 Are in the borrower's account.  Obtain
                                            A copy of the
                                         withdrawal document showing
                                         that the withdrawal is from the
                                         donor's account, and
                                            The borrower's
                                         deposit slip and bank statement
                                         showing the deposit.
 Are to be provided at closing,  Obtain a
 and                                      Bank statement showing
 Are in the form of a certified   the withdrawal from the
 check from the donor's account.          donor's account, and
                                          Copy of the certified
                                          check.
 Are to be provided at closing,  Have the donor provide a
 and                                      withdrawal document or
 Are in the form of a cashier's   cancelled check for the amount
 check, money order, official check, or   of the gift, showing that the
 other type of bank check.                funds came from the donor's
                                          personal account.
 Are to be provided at closing,  Have the donor provide
 and                                      documentation of the wire
 Are in the form of an            transfer.
 electronic wire transfer to the         Note: The lender must obtain
 closing agent.                           and keep the documentation of
                                          the wire transfer in its
                                          mortgage loan application
                                          binder. While the document
                                          does not need to be provided
                                          in the insurance binder, it
                                          must be available for
                                          inspection.
 Are being borrowed by the       Have the donor provide written
 donor, and                               evidence that the funds were
 Documentation from the bank or   borrowed from an acceptable
 other savings account is not available.  source, not from a party to
                                          the transaction, including the
                                          lender.
                                         IMPORTANT: Cash on hand is not
                                          an acceptable source of donor
                                          gift funds.
------------------------------------------------------------------------

E. Property Related Acceptable Sources of Funds

1. Type of Personal Property
    In order to obtain cash for closing, a borrower may sell various 
personal property items. The types of personal property items that a 
borrower can sell include
    a. Cars
    b. Recreational vehicles
    c. Stamps
    d. Coins, and
    e. Baseball card collections.
2. Sale of Personal Property Documentation Requirement
    a. If a borrower plans to sell personal property items to obtain 
funds for closing, he/she must provide
    i. Satisfactory estimate of the worth of the personal property 
items, and
    ii. Evidence that the items were sold.
    b. The estimated worth of the items being sold may be in the form 
of
    i. Published value estimates issued by organizations, such as 
automobile dealers, or philatelic or numismatic associations, or

[[Page 24176]]

    ii. A separate written appraisal by a qualified appraiser with no 
financial interest in the loan transaction.
    c. Only the lesser of the estimated value or actual sales prices 
are considered as assets to close.
3. Net Sales Proceeds From a Property
    a. The net proceeds from an arms-length sale of a currently owned 
property may be used for the cash investment on a new house. The 
borrower must provide satisfactory evidence of the accrued cash sales 
proceeds.
    b. If the property has not sold by the time of underwriting, 
condition loan approval by verifying the actual proceeds received by 
the borrower. The lender must document the
    i. Actual sale, and
    ii. Sufficiency of the net proceeds required for settlement.

    Note: If the property has not sold by the time of the subject 
settlement, the existing mortgage must be included as a liability 
for qualifying purposes.

4. Commission From the Sale of the Property
    a. If the borrower is a licensed real estate agent entitled to a 
real estate commission from the sale of the property being purchased, 
then he/she may use that amount for the cash investment, with no 
adjustment to the maximum mortgage required.
    b. A family member entitled to the commission may also provide gift 
funds to the borrower.
5. Trade Equity
    a. The borrower may agree to trade his/her real property to the 
seller as part of the cash investment. The amount of the borrower's 
equity contribution is determined by
    i. Using the lesser of the property's appraised value or sales 
price, and
    ii. Subtracting all liens against the property being traded, along 
with any real estate commission.
    b. In order to establish the property value, the borrower must 
provide
    i. A residential appraisal no more than six months old to determine 
the property's value, and
    ii. Evidence of ownership.

    Note: If the property being traded has an FHA-insured mortgage, 
assumption processing requirements and restrictions apply.

6. Rent Credit
    a. The cumulative amount of rental payments that exceed the 
appraiser's estimate of fair market rent may be considered accumulation 
of the borrower's cash investment.
    b. The following must be included in the endorsement package:
    i. Rent with option to purchase agreement, and
    ii. Appraiser's estimate of market rent.
    c. Conversely, treat the rent as an inducement to purchase with an 
appropriate reduction to the mortgage, if the sales agreement reveals 
that the borrower
    i. Has been living in the property rent-free, or
    ii. Has an agreement to occupy the property as a rental 
considerably below fair market value in anticipation of eventual 
purchase.
    d. Exception: An exception may be granted when a builder
    i. Fails to deliver a property at an agreed to time, and
    ii. Permits the borrower to occupy an existing or other unit for 
less than market rent until construction is complete.
7. Sweat Equity Considered a Cash Equivalent
    Labor performed, or materials furnished by the borrower before 
closing on the property being purchased (known as ``sweat equity''), 
may be considered the equivalent of a cash investment, to the amount of 
the estimated cost of the work or materials.

    Note: Sweat equity may also be ``gifted,'' subject to
    i. The additional requirements in section (I)(E)(8), and
    ii. The gift fund requirements described in section (I)(D).

8. Additional Sweat Equity Requirements
    The table below describes additional requirements for applying 
sweat equity as a cash equivalent and as an acceptable source of 
borrower funds.

------------------------------------------------------------------------
         Sweat Equity Category                     Requirement
------------------------------------------------------------------------
Existing Construction..................  Only repairs or improvements
                                          listed on the appraisal are
                                          eligible for sweat equity.
                                         Any work completed or materials
                                          provided before the appraisal
                                          are not eligible.
Proposed Construction..................  The sales contract must
                                          indicate the tasks to be
                                          performed by the borrower
                                          during construction.
Borrower's Labor.......................  The borrower must demonstrate
                                          his/her ability to complete
                                          the work in a satisfactory
                                          manner.
                                         The lender must document the
                                          contributory value of the
                                          labor either through
                                            The appraiser's
                                         estimate, or
                                            A cost-estimating
                                         service.
Delayed Work...........................  The following cannot be
                                          included as sweat equity:
                                            Delayed work (on-
                                         site escrow)
                                            Clean up
                                            Debris removal, and
                                            Other general
                                         maintenance.
Cash Back..............................  Cash back to the borrower in
                                          sweat equity transactions is
                                          not permitted.
Sweat Equity on Property Not Being       Sweat equity is not acceptable
 Purchased.                               on property other than the
                                          property being purchased.
                                         Compensation for work performed
                                          on other properties must be
                                            In cash, and
                                            Properly documented.
Source of Funds Evidence...............  Evidence of the following must
                                          be provided if the borrower
                                          furnishes funds and materials:
                                            Source of the funds,
                                         and
                                            Market value of the
                                         materials.
------------------------------------------------------------------------

[[Page 24177]]

9. Trade-In Manufactured Home
    An acceptable source of borrower cash investment commonly 
associated with manufactured homes is the sale or trade-in of another 
manufactured home that is not considered real estate. Trade-ins for 
cash funds are considered a seller inducement and are not permitted.

II. Borrower Eligibility

A. Stability of Income

1. Effective Income
    Income may not be used in calculating the borrower's income ratios 
if it comes from any source that cannot be verified, is not stable, or 
will not continue.
2. Verifying Employment History
    a. The lender must verify the borrower's employment for the most 
recent two full years, and the borrower must
    i. Explain any gaps in employment that span one or more months, and
    ii. Indicate if he/she was in school or the military for the recent 
two full years, providing Evidence supporting this claim, such as 
college transcripts, or discharge papers.
    b. Allowances can be made for seasonal employment, typical for the 
building trades and agriculture, if documented by the lender.

    Note:  A borrower with a 25 percent or greater ownership 
interest in a business is considered self employed and will be 
evaluated as a self employed borrower for underwriting purposes.

3. Analyzing a Borrower's Employment Record
    a. When analyzing the probability of continued employment, lenders 
must examine:
    i. The borrower's past employment record
    ii. Qualifications for the position
    iii. Previous training and education, and
    iv. The employer's confirmation of continued employment.
    b. Favorably consider a borrower for a mortgage if he/she changes 
jobs frequently within the same line of work, but continues to advance 
in income or benefits. In this analysis, income stability takes 
precedence over job stability.
4. Borrowers Returning to Work After an Extended Absence
    A borrower's income may be considered effective and stable when 
recently returning to work after an extended absence if he/she:
    a. Is employed in the current job for six months or longer, and
    b. Can document a two year work history prior to an absence from 
employment using
    i. Traditional employment verifications, and/or
    ii. Copies of W-2 forms or pay stubs.

    Note: An acceptable employment situation includes individuals 
who took several years off from employment to raise children, then 
returned to the workforce.

    c. Important: Situations not meeting the criteria listed above may 
only be considered as compensating factors. Extended absence is defined 
as six months.

B. Salary, Wage and Other Forms of Income

1. General Policy on Borrower Income Analysis
    a. The income of each borrower who will be obligated for the 
mortgage debt must be analyzed to determine whether his/her income 
level can be reasonably expected to continue through at least the first 
three years of the mortgage loan.
    b. In most cases, a borrower's income is limited to salaries or 
wages. Income from other sources can be considered as effective, when 
properly verified and documented by the lender.

    Notes: 
    i. Effective income for borrowers planning to retire during the 
first three-year period must include the amount of:
    a. Documented retirement benefits
    b. Social Security payments, or
    c. Other payments expected to be received in retirement.
    ii. Lenders must not ask the borrower about possible, future 
maternity leave.

2. Overtime and Bonus Income
    a. Overtime and bonus income can be used to qualify the borrower if 
he/she has received this income for the past two years, and it will 
likely continue. If the employment verification states that the 
overtime and bonus income is unlikely to continue, it may not be used 
in qualifying.
    b. The lender must develop an average of bonus or overtime income 
for the past two years. Periods of overtime and bonus income less than 
two years may be acceptable, provided the lender can justify and 
document in writing the reason for using the income for qualifying 
purposes.
3. Establishing an Overtime and Bonus Income Earning Trend
    a. The lender must establish and document an earnings trend for 
overtime and bonus income. If either type of income shows a continual 
decline, the lender must document in writing a sound rationalization 
for including the income when qualifying the borrower.
    b. A period of more than two years must be used in calculating the 
average overtime and bonus income if the income varies significantly 
from year to year.
4. Qualifying Part-Time Income
    a. Part-time and seasonal income can be used to qualify the 
borrower if the lender documents that the borrower has worked the part-
time job uninterrupted for the past two years, and plans to continue. 
Many low and moderate income families rely on part-time and seasonal 
income for day to day needs, and lenders should not restrict 
consideration of such income when qualifying these borrowers.
    b. Part-time income received for less than two years may be 
included as effective income, provided that the lender justifies and 
documents that the income is likely to continue.
    c. Part-time income not meeting the qualifying requirements may be 
considered as a compensating factor only.

    Note: For qualifying purposes, ``part-time'' income refers to 
employment taken to supplement the borrower's income from regular 
employment; part-time employment is not a primary job and it is 
worked less than 40 hours.

5. Income from Seasonal Employment
    a. Seasonal income is considered uninterrupted, and may be used to 
qualify the borrower, if the lender documents that the borrower:
    i. Has worked the same job for the past two years, and
    ii. Expects to be rehired the next season.
    b. Seasonal employment includes:
    i. Umpiring baseball games in the summer, or
    ii. Working at a department store during the holiday shopping 
season.
6. Primary Employment Less Than 40 Hour Work Week
    a. When a borrower's primary employment is less than a typical 40-
hour work week, the lender should evaluate the stability of that income 
as regular, on-going primary employment.
    b. Example: A registered nurse may have worked 24 hours per week 
for the last year. Although this job is less than the 40-hour work 
week, it is the borrower's primary employment, and should be considered 
effective income.

[[Page 24178]]

7. Commission Income
    a. Commission income must be averaged over the previous two years. 
To qualify commission income, the borrower must provide:
    i. Copies of signed tax returns for the last two years, and
    ii. The most recent pay stub.
    b. Commission income showing a decrease from one year to the next 
requires significant compensating factors before a borrower can be 
approved for the loan.
    c. Borrowers whose commission income was received for more than one 
year, but less than two years may be considered favorably if the 
underwriter can:
    i. Document the likelihood that the income will continue, and
    ii. Soundly rationalize accepting the commission income.

    Notes: 
    i. Unreimbursed business expenses must be subtracted from gross 
income.
    ii. A commissioned borrower is one who receives more than 25 
percent of his/her annual income from commissions.
    iii. A tax transcript obtained directly from the IRS may be used 
in lieu of signed tax returns, and the cost of the transcript may be 
charged to the borrower.

8. Qualifying Commission Income Earned for Less Than One Year
    a. Commission income earned for less than one year is not 
considered effective income. Exceptions may be made for situations in 
which the borrower's compensation was changed from salary to commission 
within a similar position with the same employer.
    b. A borrower may also qualify when the portion of earnings not 
attributed to commissions would be sufficient to qualify the borrower 
for the mortgage.
9. Employer Differential Payments
    If the employer subsidizes a borrower's mortgage payment through 
direct payments, the amount of the payments:
    a. Is considered gross income, and
    b. Cannot be used to offset the mortgage payment directly, even if 
the employer pays the servicing lender directly.
10. Retirement Income
    Retirement income must be verified from the former employer, or 
from Federal tax returns. If any retirement income, such as employer 
pensions or 401(k)s, will cease within the first full three years of 
the mortgage loan, the income may only be considered as a compensating 
factor.
 11. Social Security Income
    Social Security income must be verified by the Social Security 
Administration or on Federal tax returns. If any benefits expire within 
the first full three years of the loan, the income source may be 
considered only as a compensating factor.

    Notes: 
    i. The lender must obtain a complete copy of the current awards 
letter.
    ii. Not all Social Security income is for retirement-aged 
recipients; therefore, documented continuation is required.
    iii. Some portion of Social Security income may be ``grossed 
up'' if deemed nontaxable by the IRS.

12. Automobile Allowances and Expense Account Payments
    a. Only the amount by which the borrower's automobile allowance or 
expense account payments exceed actual expenditures may be considered 
income.
    b. To establish the amount to add to gross income, the borrower 
must provide the following:
    i. IRS Form 2106, Employee Business Expenses, for the previous two 
years, and
    ii. Employer verification that the payments will continue.
    c. If the borrower uses the standard per-mile rate in calculating 
automobile expenses, as opposed to the actual cost method, the portion 
that the IRS considers depreciation may be added back to income.
    d. Expenses that must be treated as recurring debt include:
    i. The borrower's monthly car payment, and
    ii. Any loss resulting from the calculation of the difference 
between the actual expenditures and the expense account allowance.

C. Borrowers Employed by a Family Owned Business

1. Income Documentation Requirement
    In addition to normal employment verification, a borrower employed 
by a family owned businesses are required to provide evidence that he/
she is not an owner of the business, which may include:
    a. Copies of signed personal tax returns, or
    b. A signed copy of the corporate tax return showing ownership 
percentage.

    Note: A tax transcript obtained directly from the IRS may be 
used in lieu of signed tax returns, and the cost of the transcript 
may be charged to the borrower.

D. General Information on Self Employed Borrowers and Income Analysis

1. Definition: Self Employed Borrower
    A borrower with a 25 percent or greater ownership interest in a 
business is considered self employed.
2. Types of Business Structures
    There are four basic types of business structures. They include:
    a. Sole proprietorships
    b. Corporations
    c. Limited liability or ``S'' corporations, and
    d. Partnerships.
3. Minimum Length of Self Employment
    a. Income from self employment is considered stable, and effective, 
if the borrower has been self employed for two or more years.
    b. Due to the high probability of failure during the first few 
years of a business, the requirements described in the table below are 
necessary for borrowers who have been self employed for less than two 
years.

------------------------------------------------------------------------
If the period of self employment is .
                 . .                               Then . . .
------------------------------------------------------------------------
Between one and two years............  To be eligible for a mortgage
                                        loan, the individual must have
                                        at least two years of documented
                                        previous successful employment
                                        in the line of work in which the
                                        individual is self employed, or
                                        in a related occupation.
                                       Note: A combination of one year
                                        of employment and formal
                                        education or training in the
                                        line of work in which the
                                        individual is self employed or
                                        in a related occupation is also
                                        acceptable.
Less than one year...................  The income from the borrower may
                                        not be considered effective
                                        income.
------------------------------------------------------------------------

[[Page 24179]]

4. General Documentation Requirements for Self Employed Borrowers
    Self employed borrowers must provide the following documentation:
    a. Signed, dated individual tax returns, with all applicable tax 
schedules for the most recent two years
    b. For a corporation, ``S'' corporation, or partnership, signed 
copies of Federal business income tax returns for the last two years, 
with all applicable tax schedules
    c. Year to date profit and loss (P&L) statement and balance sheet, 
and
    d. Business credit report for corporations and ``S'' corporations.
5. Establishing a Borrower's Earnings Trend
    a. When qualifying a borrower for a mortgage loan, the lender must 
establish the borrower's earnings trend from the previous two years 
using the borrower's tax returns.
    b. If a borrower:
    i. Provides quarterly tax returns, the income analysis may include 
income through the period covered by the tax filings, or
    ii. Is not subject to quarterly tax returns, or does not file them, 
then the income shown on the P&L statement may be included in the 
analysis, provided the income stream based on the P&L is consistent 
with the previous years' earnings.
    c. If the P&L statements submitted for the current year show an 
income stream considerably greater than what is supported by the 
previous year's tax returns, the lender must base the income analysis 
solely on the income verified through the tax returns.
    d. If the borrower's earnings trend for the previous two years is 
downward and the most recent tax return or P&L is less than the prior 
year's tax return, the borrower's most recent year's tax return or P&L 
must be used to calculate his/her income.
6. Analyzing the Business's Financial Strength
    a. To determine if the business is expected to generate sufficient 
income for the borrower's needs, the lender must carefully analyze the 
business's financial strength, including the:
    i. Source of the business's income
    ii. General economic outlook for similar businesses in the area.
    b. Annual earnings that are stable or increasing are acceptable, 
while businesses that show a significant decline in income over the 
analysis period are not acceptable.

E. Income Analysis: Individual Tax Returns (IRS Form 1040)

1. General Policy on Adjusting Income Based on a Review of IRS Form 
1040
    The amount shown on a borrower's IRS Form 1040 as adjusted gross 
income must either be increased or decreased based on the lender's 
analysis of the individual tax return and any related tax schedules.
2. Guidelines for Analyzing IRS Form 1040
    The table below contains guidelines for analyzing IRS Form 1040:

------------------------------------------------------------------------
        IRS Form 1040 heading                     Description
------------------------------------------------------------------------
Wages, Salaries and Tips.............  An amount shown under this
                                        heading may indicate that the
                                        individual
                                        Is a salaried employee
                                        of a corporation, or
                                        Has other sources of
                                        income.
                                       This section may also indicate
                                        that the spouse is employed, in
                                        which case the spouse's income
                                        must be subtracted from the
                                        borrower's adjusted gross
                                        income.
Business Income and Loss (from         Sole proprietorship income
 Schedule C).                           calculated on Schedule C is
                                        business income.
                                       Depreciation or depletion may be
                                        added back to the adjusted gross
                                        income.
Rents, Royalties, Partnerships (from   Any income received from rental
 Schedule E).                           properties or royalties may be
                                        used as income, after adding
                                        back any depreciation shown on
                                        Schedule E. xxx
Capital Gain and Losses (from          Capital gains or losses generally
 Schedule D).                           occur only one time, and should
                                        not be considered when
                                        determining effective income.
                                       However, if the individual has a
                                        constant turnover of assets
                                        resulting in gains or losses,
                                        the capital gain or loss must be
                                        considered when determining the
                                        income. Three years' tax returns
                                        are required to evaluate an
                                        earning trend. If the trend
                                          Results in a gain, it
                                       may be added as effective income,
                                       or
                                          Consistently shows a
                                       loss, it must be deducted from
                                       the total income.
                                       Lender must document anticipated
                                        continuation of income through
                                        verified assets.
                                       Example: A lender can consider
                                        the capital gains for an
                                        individual who purchases old
                                        houses, remodels them, and sells
                                        them for profit.
Interest and Dividend Income (from     This taxable/tax-exempt income
 Schedule B).                           may be added back to the
                                        adjusted gross income only if it
                                        Has been received for
                                        the past two years, and
                                        Is expected to continue.
                                       If the interest-bearing asset
                                        will be liquidated as a source
                                        of the cash investment, the
                                        lender must appropriately adjust
                                        the amount.
Farm Income or Loss (from Schedule F)  Any depreciation shown on
                                        Schedule F may be added back to
                                        the adjusted gross income.
IRA Distributions, Pensions,           The non-taxable portion of these
 Annuities, and Social Security         items may be added back to the
 Benefits.                              adjusted gross income, if the
                                        income is expected to continue
                                        for the first three years of the
                                        mortgage.
Adjustments to Income................  Adjustments to income may be
                                        added back to the adjusted gross
                                        income if they are
                                          IRA and Keogh
                                       retirement deductions
                                          Penalties on early
                                       withdrawal of savings
                                          Health insurance
                                       deductions, and
                                          Alimony payments.
Employee Business Expenses...........  Employee business expenses are
                                        actual cash expenses that must
                                        be deducted from the adjusted
                                        gross income.
------------------------------------------------------------------------

[[Page 24180]]

F. Income Analysis: Corporate Tax Returns (IRS Form 1120)

1. Description: Corporation
    A Corporation is a state-chartered business owned by its 
stockholders.
2. Need To Obtain Borrower Percentage of Ownership Information
    a. Corporate compensation to the officers, generally in proportion 
to the percentage of ownership, is shown on the
    i. Corporate tax return IRS Form 1120, and
    ii. Individual tax returns.
    b. When a borrower's percentage of ownership does not appear on the 
tax returns, the lender must obtain the information from the 
corporation's accountant, along with evidence that the borrower has the 
right to any compensation.
3. Analyzing Corporate Tax Returns
    a. In order to determine a borrower's self employed income from a 
corporation the adjusted business income must
    i. Be determined, and
    ii. Multiplied by the borrower's percentage of ownership in the 
business.
    b. The table below describes the items found on IRS Form 1120 for 
which an adjustment must be made in order to determine adjusted 
business income.

 
------------------------------------------------------------------------
           Adjustment item                 Description of adjustment
------------------------------------------------------------------------
Depreciation and Depletion...........  Add the corporation's
                                        depreciation and depletion back
                                        to the after-tax income.
Taxable Income.......................  Taxable income is the
                                        corporation's net income before
                                        Federal taxes. Reduce taxable
                                        income by the tax liability.
Fiscal Year vs. Calendar Year........  If the corporation operates on a
                                        fiscal year that is different
                                        from the calendar year, an
                                        adjustment must be made to
                                        relate corporate income to the
                                        individual tax return.
Cash Withdrawals.....................  The borrower's withdrawal of cash
                                        from the corporation may have a
                                        severe negative impact on the
                                        corporation's ability to
                                        continue operating.
------------------------------------------------------------------------

G. Income Analysis: ``S'' Corporation Tax Returns (IRS Form 1120S)

1. Description: ``S'' Corporation
    a. An ``S'' Corporation is generally a small, start-up business, 
with gains and losses passed to stockholders in proportion to each 
stockholder's percentage of business ownership.
    b. Income for owners of ``S'' corporations comes from W-2 wages, 
and is taxed at the individual rate. The IRS Form 1120S, Compensation 
of Officers line item is transferred to the borrower's individual IRS 
Form 1040.
2. Analyzing ``S'' Corporation Tax Returns
    a. ``S'' corporation depreciation and depletion may be added back 
to income in proportion to the borrower's share of the corporation's 
income.
    b. In addition, the income must also be reduced proportionately by 
the total obligations payable by the corporation in less than one year.
    c. IMPORTANT: The borrower's withdrawal of cash from the 
corporation may have a severe negative impact on the corporation's 
ability to continue operating, and must be considered in the income 
analysis.

H. Income Analysis: Partnership Tax Returns (IRS Form 1065)

1. Description: Partnership
    a. A Partnership is formed when two or more individuals form a 
business, and share in profits, losses, and responsibility for running 
the company.
    b. Each partner pays taxes on his/her proportionate share of the 
partnership's net income.
2. Analyzing Partnership Tax Returns
    a. Both general and limited partnerships report income on IRS Form 
1065, and the partners' share of income is carried over to Schedule E 
of IRS Form 1040.
    b. The lender must review IRS Form 1065 to assess the viability of 
the business. Both depreciation and depletion may be added back to the 
income in proportion to the borrower's share of income.
    c. Income must also be reduced proportionately by the total 
obligations payable by the partnership in less than one year.
    d. IMPORTANT: Cash withdrawals from the partnership may have a 
severe negative impact on the partnership's ability to continue 
operating, and must be considered in the income analysis.

III. Non-Employment Related Borrower Income

A. Alimony, Child Support, and Maintenance Income Criteria

    Alimony, child support, or maintenance income may be considered 
effective, if:
    1. Payments are likely to be received consistently for the first 
three years of the mortgage
    2. The borrower provides the required documentation, which includes 
a copy of the
    1. Final divorce decree
    ii. Legal separation agreement,
    iii. Court order, or
    iv. Voluntary payment agreement, and
    3. The borrower can provide acceptable evidence that payments have 
been received during the last 12 months, such as
    i. Cancelled checks
    ii. Deposit slips
    iii. Tax returns, or
    iv. Court records.
    Notes:
    i. Periods less than 12 months may be acceptable, provided the 
lender can adequately document the payer's ability and willingness to 
make timely payments.
    ii. Child support may be ``grossed up'' under the same provisions 
as non-taxable income sources.

B. Investment and Trust Income

1. Analyzing Interest and Dividends
    a. Interest and dividend income may be used as long as tax returns 
or account statements support a two-year receipt history. This income 
must be averaged over the two years.
    b. Subtract any funds that are derived from these sources, and are 
required for the cash investment, before calculating the projected 
interest or dividend income.
2. Trust Income
    a. Income from trusts may be used if guaranteed, constant payments 
will continue for at least the first three years of the mortgage term.
    b. Required trust income documentation includes a copy of the Trust 
Agreement or other trustee statement, confirming the
    i. Amount of the trust

[[Page 24181]]

    ii. Frequency of distribution, and
    iii. Duration of payments.
    c. Trust account funds may be used for the required cash investment 
if the borrower provides adequate documentation that the withdrawal of 
funds will not negatively affect income. The borrower may use funds 
from the trust account for the required cash investment, but the trust 
income used to determine repayment ability cannot be affected 
negatively by its use.
3. Notes Receivable Income
    a. In order to include notes receivable income to qualify a 
borrower, he/she must provide
    i. A copy of the note to establish the amount and length of 
payment, and
    ii. Evidence that these payments have been consistently received 
for the last 12 months through deposit slips, cancelled checks, or tax 
returns.
    b. If the borrower is not the original payee on the note, the 
lender must establish that the borrower is now a holder in due course, 
and able to enforce the note.
4. Eligible Investment Properties
    Follow the steps in the table below to calculate an investment 
property's income or loss if the property to be subject to a mortgage 
is an eligible investment property.

------------------------------------------------------------------------
               Step                                Action
------------------------------------------------------------------------
1.................................  Subtract the monthly payment (PITI)
                                     from the monthly net rental income
                                     of the subject property.
                                    Note: Calculate the monthly net
                                     rental by taking the gross rents,
                                     and subtracting the 25 percent
                                     reduction for vacancies and
                                     repairs.
2.................................  Does the calculation in Step 1 yield
                                     a positive number?
                                       If yes, add the number to
                                    the borrower's monthly gross income.
                                       If no, and the
                                    calculation yields a negative
                                    number, consider it a recurring
                                    monthly obligation.
------------------------------------------------------------------------

C. Military, Government Agency, and Assistance Program Income

1. Military Income
    a. Military personnel not only receive base pay, but often times 
are entitled to additional forms of pay, such as
    i. Income from variable housing allowances
    ii. Clothing allowances
    iii. Flight or hazard pay
    iv. Rations, and
    v. Proficiency pay.
    b. These types of additional pay are acceptable when analyzing a 
borrower's income as long as the probability of such pay to continue is 
verified in writing.

    Note: The tax-exempt nature of some of the above payments should 
also be considered.

2. VA Benefits
    a. Direct compensation for service-related disabilities from the 
Department of Veterans Affairs (VA) is acceptable, provided the lender 
receives documentation from the VA.
    b. Education benefits used to offset education expenses are not 
acceptable.
3. Government Assistance Programs
    a. Income received from government assistance programs is 
acceptable as long as the paying agency provides documentation 
indicating that the income is expected to continue for at least three 
years.
    b. If the income from government assistance programs will not be 
received for at least three years, it may be considered as a 
compensating factor.
    c. Unemployment income must be documented for two years, and there 
must be reasonable assurance that this income will continue. This 
requirement may apply to seasonal employment.
4. Mortgage Credit Certificates
    a. If a government entity subsidizes the mortgage payments either 
through direct payments or tax rebates, these payments may be 
considered as acceptable income.
    b. Either type of subsidy may be added to gross income, or used 
directly to offset the mortgage payment, before calculating the 
qualifying ratios.
5. Homeownership Subsidies
    a. A monthly subsidy may be treated as income, if a borrower is 
receiving subsidies under the housing choice voucher home ownership 
option from a public housing agency (PHA). Although continuation of the 
homeownership voucher subsidy beyond the first year is subject to 
Congressional appropriation, for the purposes of underwriting, the 
subsidy will be assumed to continue for at least three years.
    b. If the borrower is receiving the subsidy directly, the amount 
received is treated as income. The amount received may also be treated 
as non taxable income and be ``grossed up'' by 25 percent, which means 
that the amount of the subsidy, plus 25 percent of that subsidy may be 
added to the borrower's income from employment and/or other sources.
    c. Lenders may treat this subsidy as an ``offset'' to the monthly 
mortgage payment (that is, reduce the monthly mortgage payment by the 
amount of the home ownership assistance payment before dividing by the 
monthly income to determine the payment-to-income and debt-to-income 
ratios). The subsidy payment must not pass through the borrower's 
hands.
    d. The assistance payment must be:
    i. Paid directly to the servicing lender, or
    ii. Placed in an account that only the servicing lender may access.

    Note: Assistance payments made directly to the borrower must be 
treated as income.

D. Rental Income

1. Analyzing the Stability of Rental Income
    a. Rent received for properties owned by the borrower is acceptable 
as long as the lender can document the stability of the rental income 
through
    i. A current lease
    ii. An agreement to lease, or
    iii. A rental history over the previous 24 months that is free of 
unexplained gaps greater than three months (such gaps could be 
explained by student, seasonal, or military renters, or property 
rehabilitation).
    b. A separate schedule of real estate is not required for rental 
properties as long as all properties are documented on the URLA.

    Note: The underwriting analysis may not consider rental income 
from any property being vacated by the borrower, except under the 
circumstances described below.

2. Rental Income From Borrower Occupied Property
    a. The rent for multiple unit property where the borrower resides 
in one or more units and charges rent to tenants of other units may be 
used for qualifying purposes.
    b. Projected rent for the tenant-occupied units only may:
    i. Be considered gross income, only after deducting vacancy and 
maintenance factors, and
    ii. Not be used as a direct offset to the mortgage payment.

[[Page 24182]]

3. Income from Roommates in a Single Family Property
    a. Income from roommates in a single family property occupied as 
the borrower's primary residence is not acceptable. Rental income from 
boarders however, is acceptable, if the boarders are related by blood, 
marriage, or law.
    b. The rental income may be considered effective, if shown on the 
borrower's tax return. If not on the tax return, rental income paid by 
the boarder
    i. May be considered a compensating factor, and
    ii. Must be adequately documented by the lender.
4. Documentation Required To Verify Rental Income
    Analysis of the following required documentation is necessary to 
verify all borrower rental income:
    a. IRS Form 1040 Schedule E; and
    b. Current leases/rental agreements.
5. Analyzing IRS Form 1040 Schedule E
    a. The IRS Form 1040 Schedule E is required to verify all rental 
income. Depreciation shown on Schedule E may be added back to the net 
income or loss.
    b. Positive rental income is considered gross income for qualifying 
purposes, while negative income must be treated as a recurring 
liability.
    c. The lender must confirm that the borrower still owns each 
property listed, by comparing Schedule E with the real estate owned 
section of the URLA. If the borrower owns six or more units in the same 
general area, a map must be provided disclosing the locations of the 
units, as evidence of compliance with FHA's seven-unit limitation.
6. Using Current Leases To Analyze Rental Income
    a. The borrower can provide a current signed lease or other rental 
agreement for a property that was acquired since the last income tax 
filing, and is not shown on Schedule E.
    b. In order to calculate the rental income:
    i. Reduce the gross rental amount by 25 percent for vacancies and 
maintenance
    ii. Subtract PITI and any homeowners' association dues, and
    iii. Apply the resulting amount to income, if positive, or 
recurring debts, if negative.
7. Exclusion of Rental Income From Property Being Vacated by the 
Borrower
    Underwriters may not consider any rental income from a borrower's 
principal residence that is being vacated in favor of another principal 
residence, except under the conditions described below:

    Notes: i. This policy assures that a borrower either has 
sufficient income to make both mortgage payments without any rental 
income, or has an equity position not likely to result in defaulting 
on the mortgage on the property being vacated.
    ii. This applies solely to a principal residence being vacated 
in favor of another principal residence. It does not apply to 
existing rental properties disclosed on the loan application and 
confirmed by tax returns (Schedule E of form IRS 1040).

8. Policy Exceptions Regarding the Exclusion of Rental Income From a 
Principal Residence Being Vacated by a Borrower
    When a borrower vacates a principal residence in favor of another 
principal residence, the rental income, reduced by the appropriate 
vacancy factor, may be considered in the underwriting analysis under 
the circumstances listed in the table below.

------------------------------------------------------------------------
              Exception                           Description
------------------------------------------------------------------------
Relocations..........................  The borrower is relocating with a
                                        new employer, or being
                                        transferred by the current
                                        employer to an area not within
                                        reasonable and locally-
                                        recognized commuting distance.
                                       A properly executed lease
                                        agreement (that is, a lease
                                        signed by the borrower and the
                                        lessee) of at least one year's
                                        duration after the loan is
                                        closed is required.
                                       Note: Underwriters should also
                                        obtain evidence of the security
                                        deposit and/or evidence the
                                        first month's rent was paid to
                                        the homeowner.
Sufficient Equity in Vacated Property  The borrower has a loan-to-value
                                        ratio of 75 percent or less, as
                                        determined either by
                                          A current (no more
                                       than six months old) residential
                                       appraisal, or
                                          Comparing the unpaid
                                       principal balance to the original
                                       sales price of the property.
                                       Note: The appraisal, in addition
                                        to using forms Fannie Mae1004/
                                        Freddie Mac 70, may be an
                                        exterior-only appraisal using
                                        form Fannie Mae/Freddie Mac
                                        2055, and for condominium units,
                                        form Fannie Mae 1075/Freddie Mac
                                        466.
------------------------------------------------------------------------

E. Non Taxable and Projected Income

1. Types of Non Taxable Income
    Certain types of regular income may not be subject to Federal tax. 
Such types of non taxable income include
    a. Some portion of Social Security, some Federal government 
employee retirement income, Railroad Retirement Benefits, and some 
state government retirement income
    b. Certain types of disability and public assistance payments
    c. Child support
    d. Military allowances, and
    e. Other income that is documented as being exempt from Federal 
income taxes.
2. Adding Non Taxable Income to a Borrower's Gross Income
    a. The amount of continuing tax savings attributed to regular 
income not subject to Federal taxes may be added to the borrower's 
gross income.
    b. The percentage of non-taxable income that may be added cannot 
exceed the appropriate tax rate for the income amount. Additional 
allowances for dependents are not acceptable.
    c. The lender:
    i. Must document and support the amount of income grossed up for 
any non-taxable income source, and
    ii. Should use the tax rate used to calculate the borrower's last 
year's income tax.

    Note: If the borrower is not required to file a Federal tax 
return, the tax rate to use is 25 percent.

3. Analyzing Projected Income
    a. Projected or hypothetical income is not acceptable for 
qualifying purposes. However, exceptions are permitted for income from 
the following sources:
    i. Cost-of-living adjustments
    ii. Performance raises, and
    iii. Bonuses.
    b. For the above exceptions to apply, the income must be
    i. Verified in writing by the employer, and
    ii. Scheduled to begin within 60 days of loan closing.

[[Page 24183]]

4. Project Income for New Job
    a. Projected income is acceptable for qualifying purposes for a 
borrower scheduled to start a new job within 60 days of loan closing if 
there is a guaranteed, non-revocable contract for employment.
    b. The lender must verify that the borrower will have sufficient 
income or cash reserves to support the mortgage payment and any other 
obligations between loan closing and the start of employment. Examples 
of this type of scenario are teachers whose contracts begin with the 
new school year, or physicians beginning a residency after the loan 
closes fall under this category.
    c. The loan is not eligible for endorsement if the loan closes more 
than 60 days before the borrower starts the new job. To be eligible for 
endorsement, the lender must obtain from the borrower a pay stub or 
other acceptable evidence indicating that he/she has started the new 
job.

IV. Borrower Liabilities: Recurring Obligations

1. Types of Recurring Obligations

    Recurring obligations include:
    a. All installment loans
    b. Revolving charge accounts
    c. Real estate loans
    d. Alimony
    e. Child support, and
    f. Other continuing obligations.

2. Debt to Income Ratio Computation for Recurring Obligations

    a. The lender must include the following when computing the debt to 
income ratios for recurring obligations:
    i. Monthly housing expense, and
    ii. Additional recurring charges extending ten months or more, such 
as
    a. Payments on installment accounts
    b. Child support or separate maintenance payments
    c. Revolving accounts, and
    d. Alimony.
    b. Debts lasting less than ten months must be included if the 
amount of the debt affects the borrower's ability to pay the mortgage 
during the months immediately after loan closing, especially if the 
borrower will have limited or no cash assets after loan closing.

    Note: Monthly payments on revolving or open-ended accounts, 
regardless of the balance, are counted as a liability for qualifying 
purposes even if the account appears likely to be paid off within 10 
months or less.

3. Revolving Account Monthly Payment Calculation

    If the credit report shows any revolving accounts with an 
outstanding balance but no specific minimum monthly payment, the 
payment must be calculated as the greater of
    a. 5 percent of the balance, or
    b. $10.

    Note: If the actual monthly payment is documented from the 
creditor or the lender obtains a copy of the current statement 
reflecting the monthly payment, that amount may be used for 
qualifying purposes.

4. Reduction of Alimony Payment for Qualifying Ratio Calculation

    Since there are tax consequences of alimony payments, the lender 
may choose to treat the monthly alimony obligation as a reduction from 
the borrower's gross income when calculating qualifying ratios, rather 
than treating it as a monthly obligation.

V. Borrower Liabilities: Contingent Liability

1. Definition: Contingent Liability

    A contingent liability exists when an individual is held 
responsible for payment of a debt if another party, jointly or 
severally obligated, defaults on the payment.

2. Application of Contingent Liability Policies

    The contingent liability policies described in this topic apply 
unless the borrower can provide conclusive evidence from the debt 
holder that there is no possibility that the debt holder will pursue 
debt collection against him/her should the other party default.

3. Contingent Liability on Mortgage Assumptions

    Contingent liability must be considered when the borrower remains 
obligated on an outstanding FHA-insured, VA-guaranteed, or conventional 
mortgage secured by property that:
    a. Has been sold or traded within the last 12 months without a 
release of liability, or
    b. Is to be sold on assumption without a release of liability being 
obtained.

4. Exemption From Contingent Liability Policy on Mortgage Assumptions

    When a mortgage is assumed, contingent liabilities need not be 
considered if the
    a. Originating lender of the mortgage being underwritten obtains, 
from the servicer of the assumed loan, a payment history showing that 
the mortgage has been current during the previous 12 months, or
    b. Value of the property, as established by an appraisal or the 
sales price on the HUD-1 Settlement Statement from the sale of the 
property, results in a loan-to-value (LTV) ratio of 75 percent or less.

5. Contingent Liability on Cosigned Obligations

    a. Contingent liability applies, and the debt must be included in 
the underwriting analysis, if an individual applying for a mortgage is 
a cosigner/co-obligor on:
    i. A car loan
    ii. A student loan
    iii. A mortgage, or
    iv. Any other obligation.
    b. If the lender obtains documented proof that the primary obligor 
has been making regular payments during the previous 12 months, and 
does not have a history of delinquent payments on the loan during that 
time, the payment does not have to be included in the borrower's 
monthly obligations.

VI. Borrower Liabilities: Projected Obligations and Obligations Not 
Considered Debt

1. Projected Obligations

    a. Debt payments, such as a student loan or balloon note scheduled 
to begin or come due within 12 months of the mortgage loan closing, 
must be included by the lender as anticipated monthly obligations 
during the underwriting analysis.
    b. Debt payments do not have to be classified as projected 
obligations if the borrower provides written evidence that the debt 
will be deferred to a period outside the 12-month timeframe.
    c. Balloon notes that come due within one year of loan closing must 
be considered in the underwriting analysis.

2. Obligations Not Considered Debt

    Obligations not considered debt, and therefore not subtracted from 
gross income, include
    a. Federal, state, and local taxes
    b. Federal Insurance Contributions Act (FICA) or other retirement 
contributions, such as 401(k) accounts (including repayment of debt 
secured by these funds)
    c. Commuting costs
    d. Union dues
    e. Open accounts with zero balances
    f. Automatic deductions to savings accounts
    g. Child care, and
    h.Voluntary deductions.

END OF COMMON RULE

Adoption of the Common Rule Text

    The proposed adoption of the common rules by the agencies, as 
modified by agency-specific text, is set forth below:

[[Page 24184]]

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

List of Subjects in 12 CFR Part 43

    Banks and banking, Credit risk, National banks, Reporting and 
recordkeeping requirements, Risk retention, Securitization, Mortgages, 
Commercial loans, Commercial real estate, Auto loans.

Authority and Issuance

    For the reasons stated in the Common Preamble, the Office of the 
Comptroller of the Currency proposes to amend chapter I of Title 12, 
Code of Federal Regulations as follows:

PART 43--CREDIT RISK RETENTION

    1. The authority citation for part 43 is added to read as follows:

    Authority: 12 U.S.C. 1 et seq., 93a, 161, 1818, and 15 U.S.C. 
78o-11.

    2. Part 43 is added as set forth at the end of the Common Preamble.
    3. Section 43.1 is added to read as follows:

Sec.  43.1  Authority, purpose, scope, and reservation of authority.

    (a) Authority. This part is issued under the authority of 12 U.S.C. 
1 et seq., 93a, 161, 1818, and 15 U.S.C. 78o-11.
    (b) Purpose. (1) This part requires securitizers to retain an 
economic interest in a portion of the credit risk for any asset that 
the securitizer, through the issuance of an asset-backed security, 
transfers, sells, or conveys to a third party. This part specifies the 
permissible types, forms, and amounts of credit risk retention, and it 
establishes certain exemptions for securitizations collateralized by 
assets that meet specified underwriting standards.
    (2) Nothing in this part shall be read to limit the authority of 
the OCC to take supervisory or enforcement action, including action to 
address unsafe or unsound practices or conditions, or violations of 
law.
    (c) Scope. This part applies to any securitizer that is a national 
bank, a Federal branch or agency of a foreign bank, or an operating 
subsidiary thereof.
    (d) Effective dates. This part shall become effective:
    (1) With respect to any securitization transaction collateralized 
by residential mortgages, one year after the date on which final rules 
under section 15G(b) of the Exchange Act (15 U.S.C. 78o-11(b)) are 
published in the Federal Register; and
    (2) With respect to any other securitization transaction, two years 
after the date on which final rules under section 15G(b) of the 
Exchange Act (15 U.S.C. 78o-11(b)) are published in the Federal 
Register.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

12 CFR Chapter II

List of Subjects in 12 CFR Part 244

    Banks and banking, Bank holding companies, State member banks, 
Foreign banking organizations, Edge and agreement corporations, Credit 
risk, Reporting and recordkeeping requirements, Risk retention, 
Securitization, Mortgages, Commercial loans, Commercial real estate, 
Auto loans.

Authority and Issuance

    For the reasons set forth in the Supplementary Information, the 
Board of Governors of the Federal Reserve System proposes to add the 
text of the common rule as set forth at the end of the Supplementary 
Information as Part 244 to chapter II of Title 12, Code of Federal 
Regulations, modified as follows:

PART 244--CREDIT RISK RETENTION (REGULATION RR)

    4. The authority citation for part 244 is added to read as follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3103 et 
seq., and 15 U.S.C. 78o-11.
    5. Section 244.1 is added to read as follows:

Sec.  244.1  Authority, purpose, and scope

    (a) Authority. (1) In general. This part (Regulation RR) is issued 
by the Board of Governors of the Federal Reserve System under section 
15G of the Securities Exchange Act of 1934, as amended (Exchange Act) 
(15 U.S.C. 78o-11), as well as under the Federal Reserve Act, as 
amended (12 U.S.C. 221 et seq.); section 8 of the Federal Deposit 
Insurance Act (FDI Act), as amended (12 U.S.C. 1818); the Bank Holding 
Company Act of 1956, as amended (BHC Act) (12 U.S.C. 1841 et seq.); and 
the International Banking Act of 1978, as amended (12 U.S.C. 3101 et 
seq.).
    (2) Nothing in this part shall be read to limit the authority of 
the Board to take action under provisions of law other than 15 U.S.C. 
78o-11, including action to address unsafe or unsound practices or 
conditions, or violations of law or regulation, under section 8 of the 
FDI Act.
    (b) Purpose. This part requires any securitizer to retain an 
economic interest in a portion of the credit risk for any asset that 
the securitizer, through the issuance of an asset-backed security, 
transfers, sells, or conveys to a third party in a transaction within 
the scope of section 15G of the Exchange Act. This part specifies the 
permissible types, forms, and amounts of credit risk retention, and 
establishes certain exemptions for securitizations collateralized by 
assets that meet specified underwriting standards or that otherwise 
qualify for an exemption.
    (c) Scope. (1) This part applies to any securitizer that is:
    (i) A state member bank (as defined in 12 CFR 208.2(g)); or
    (ii) Any subsidiary of a state member bank.
    (2) Section 15G of the Exchange Act and the rules issued thereunder 
apply to any securitizer that is:
    (i) A bank holding company (as defined in 12 U.S.C. 1842);
    (ii) A foreign banking organization (as defined in 12 CFR 
211.21(o));
    (iii) An Edge or agreement corporation (as defined in 12 CFR 
211.1(c)(2) and (3));
    (iv) A nonbank financial company that the Financial Stability 
Oversight Council has determined under section 113 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (12 
U.S.C. 5323) shall be supervised by the Board and for which such 
determination is still in effect; or
    (v) Any subsidiary of the foregoing. The Federal Reserve will 
enforce section 15G of the Exchange Act and the rules issued thereunder 
under section 8 of the FDI Act against any of the foregoing entities.
    (3) On and after the transfer date established under section 311 of 
the Dodd-Frank Act (12 U.S.C. 5411), the Federal Reserve will enforce 
section 15G of the Exchange Act and the rules issued thereunder under 
section 8 of the FDI Act against any securitizer that is a savings and 
loan holding company and any subsidiary thereof (as defined in 12 
U.S.C. 1467a).

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

List of Subjects in 12 CFR Part 373

    Banks, Banking, State nonmember banks, Credit risk, Reporting and 
recordkeeping requirements, Risk retention, Securitization, Mortgages, 
Commercial loans, Commercial real estate, Auto loans.

[[Page 24185]]

Authority and Issuance

    For the reasons set forth in the Supplementary Information, the 
Federal Deposit Insurance Corporation proposes to add the text of the 
common rule as set forth at the end of the Supplementary Information as 
Part 373 to chapter III of Title 12, Code of Federal Regulations, 
modified as follows:

PART 373--CREDIT RISK RETENTION

    6. The authority citation for part 373 is added to read as follows:

    Authority: 12 U.S.C. 1801 et seq. and 3103 et seq., and 15 
U.S.C. 78o-11.

    7. Section 373.1 is added to read as follows:

Sec.  373.1  Purpose and scope.

    (a) Authority. (1) In general. This part is issued by the Federal 
Deposit Insurance Corporation (FDIC) under section 15G of the 
Securities Exchange Act of 1934, as amended (Exchange Act) (15 U.S.C. 
78o-11), as well as the Federal Deposit Insurance Act (12 U.S.C. 1801 
et seq.) and the International Banking Act of 1978, as amended (12 
U.S.C. 3101 et seq.).
    (2) Nothing in this part shall be read to limit the authority of 
the FDIC to take action under provisions of law other than 15 U.S.C. 
78o-11, including to address unsafe or unsound practices or conditions, 
or violations of law or regulation under section 8 of the Federal 
Deposit Insurance Act (12 U.S.C. 1818).
    (b) Purpose. This part requires securitizers to retain an economic 
interest in a portion of the credit risk for any asset that the 
securitizer, through the issuance of an asset-backed security, 
transfers, sells, or conveys to a third party in a transaction within 
the scope of section 15G of the Exchange Act. This part specifies the 
permissible types, forms, and amounts of credit risk retention, and it 
establishes certain exemptions for securitizations collateralized by 
assets that meet specified underwriting standards or that otherwise 
qualify for an exemption.
    (c) Scope. This part applies to any securitizer that is:
    (1) A state nonmember bank (as defined in 12 U.S.C. 1813(e)(2));
    (2) An insured federal or state branch of a foreign bank (as 
defined in 12 CFR 347.202); or
    (3) Any subsidiary of the foregoing.

FEDERAL HOUSING FINANCE AGENCY

List of Subjects in 12 CFR Part 1234

    Government sponsored enterprises, Mortgages, Securities.

Authority and Issuance

    For the reasons stated in the Supplementary Information, and under 
the authority of 12 U.S.C. 4526, the Federal Housing Finance Agency 
proposes to add the text of the common rule as set forth at the end of 
the Supplementary Information as Part 1234 of subchapter B of chapter 
XII of title 12 of the Code of Federal Regulations, modified as 
follows:

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

SUBCHAPTER B--ENTITY REGULATIONS

PART 1234--CREDIT RISK RETENTION

    8. The authority citation for part 1234 is added to read as 
follows:

    Authority: 12 U.S.C. 4511(b), 4526, 4617; 15 U.S.C. 78o-
11(b)(2).

    9. Section 1234.1 is added to read as follows:

Sec.  1234.1  Purpose, scope and reservation of authority.

    (a) Purpose. This part requires securitizers to retain an economic 
interest in a portion of the credit risk for any residential mortgage 
asset that the securitizer, through the issuance of an asset-backed 
security, transfers, sells, or conveys to a third party in a 
transaction within the scope of section 15G of the Exchange Act. This 
part specifies the permissible types, forms, and amounts of credit risk 
retention, and it establishes certain exemptions for securitizations 
collateralized by assets that meet specified underwriting standards or 
that otherwise qualify for an exemption.
    (b) Scope. Effective [DATE ONE YEAR AFTER PUBLICATION IN THE 
FEDERAL REGISTER AS A FINAL RULE], this part will apply to any 
securitizer that is an entity regulated by the Federal Housing Finance 
Agency.
    (c) Reservation of authority. Nothing in this part shall be read to 
limit the authority of the Director of the Federal Housing Finance 
Agency to take supervisory or enforcement action, including action to 
address unsafe or unsound practices or conditions, or violations of 
law.
    10. Amend Sec.  1234.16 as follows:
    a. Revise the section heading to read as set forth below.
    b. In the introductory text, remove the words ``Sec.  1234.17 
through Sec.  1234.20'' and add in their place the words ``Sec.  
1234.19''.
    c. Remove the definitions of ``Automobile loan'', ``Commercial 
loan'', ``Debt to income (DTI) ratio'', ``Earnings before interest, 
taxes, depreciation, and amortization (EBITDA)'', ``Leverage Ratio'', 
``Machinery and equipment (M&E) collateral'', ``Model year'', ``New 
vehicle'', ``Payment-in-kind (PIK)'', ``Purchase price'', ``Salvage 
title'', ``Total debt'', ``Total liabilities ratio'', ``Trade-in 
allowance'' and ``Used vehicle''.
    d. Revise the definition of ``Debt service coverage (DSC) ratio'' 
to read as follows:

Sec.  1234.16  Definitions applicable to qualifying commercial 
mortgages.

* * * * *
    Debt service coverage (DSC) ratio means the ratio of:
    (1) The annual NOI less the annual replacement reserve of the CRE 
property at the time of origination of the CRE loans; to
    (2) The sum of the borrower's annual payments for principal and 
interest on any debt obligation.
* * * * *

Sec. Sec.  1234.17, 1234.18, and 1234.20  [Removed and reserved]

    11. Remove and reserve Sec. Sec.  1234.17, 1234.18 and 1234.20.
    12. Amend Sec.  1234.19 as follows:
    a. Revise the section heading to read as set forth below.
    b. Add introductory text to read as set forth below.

Sec.  1234.19  Exception for qualifying CRE loans.

    The risk retention requirements in subpart B of this part shall not 
apply to securitization transactions that satisfy the standards 
provided in this section.
* * * * *

SECURITIES AND EXCHANGE COMMISSION

17 CFR Chapter II

List of Subjects in 17 CFR Part 246

    Reporting and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons stated in the Supplementary Information, the 
Securities and Exchange Commission proposes the amendments to 17 CFR 
chapter II under the authority set forth in Sections 7, 10, 19(a), and 
28 of the Securities Act and Sections 3, 13, 15, 15G, 23 and 36 of the 
Exchange Act.

PART 246--CREDIT RISK RETENTION

    13. The authority citation for part 246 is added to read as 
follows:

    Authority: 15 U.S.C. 77g, 77j, 77s, 77z-3, 78c, 78m, 78o, 78o-
11, 78w, 78mm.

    14. Part 246 is added as set forth at the end of the Common 
Preamble.
    15. Section 246.1 is added to read as follows:

[[Page 24186]]

Sec.  246.1  Authority, purpose and scope.

    (a) Authority and purpose. This part (Regulation RR) is issued by 
the Securities and Exchange Commission (``Commission'') jointly with 
the Board of Governors of the Federal Reserve System, the Federal 
Deposit Insurance Corporation, the Office of the Comptroller of the 
Currency, and, in the case of the securitization of any residential 
mortgage asset, together with the Secretary of Housing and Urban 
Development and the Federal Housing Finance Agency, pursuant to Section 
15G of the Securities Exchange Act of 1934 (15 U.S.C. 78o-11). The 
Commission also is issuing this part pursuant to its authority under 
Sections 7, 10, 19(a), and 28 of the Securities Act and Sections 3, 13, 
15, 23, and 36 of the Exchange Act. This part requires securitizers to 
retain an economic interest in a portion of the credit risk for any 
asset that the securitizer, through the issuance of an asset-backed 
security, transfers, sells, or conveys to a third party. This part 
specifies the permissible types, forms, and amounts of credit risk 
retention, and establishes certain exemptions for securitizations 
collateralized by assets that meet specified underwriting standards or 
otherwise qualify for an exemption.
    (b) The authority of the Commission under this part shall be in 
addition to the authority of the Commission to otherwise enforce the 
federal securities laws, including, without limitation, the antifraud 
provisions of the securities laws.

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 267

List of Subjects in 24 CFR Part 267

    Mortgages.

Authority and Issuance

    For the reasons stated in the SUPPLEMENTARY INFORMATION, HUD 
proposes to add the text of the common rule as set forth at the end of 
the SUPPLEMENTARY INFORMATION to 24 CFR chapter II, subchapter B, as a 
new part 267 to read as follows:

PART 267--CREDIT RISK RETENTION

    16. The authority citation for part 267 is added to read as 
follows:

    Authority: 15 U.S.C. 78-o-11; 42 U.S.C. 3535(d).

    17. Section 267.1 is added to read as follows:

Sec.  267.1  Credit risk retention exceptions and exemptions for HUD 
programs.

    The credit risk retention regulations codified at 12 CFR part 43 
(Office of the Comptroller of the Currency); 12 CFR part 244 (Federal 
Reserve System); 12 CFR part 373 (Federal Deposit Insurance 
Corporation); 17 CFR part 246 (Securities and Exchange Commission); and 
12 CFR part 1234 (Federal Housing Finance Agency) include exceptions 
and exemptions in Subpart D of each of these codified regulations for 
certain transactions involving programs and entities under the 
jurisdiction of the Department of Housing and Urban Development.

    Dated: March 28, 2011.
John Walsh,
Acting Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, March 30, 2011.
Jennifer J. Johnson,
Secretary of the Board.
    Dated at Washington, DC, this 29th of March 2011.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: March 29, 2011.
Edward J. Demarco,
Acting Director, Federal Housing Finance Agency.
    By the Securities and Exchange Commission.

    Dated: March 30, 2011.
Elizabeth M. Murphy,
Secretary.
    Jointly prescribed with the Agencies.

    By the Department of Housing and Urban Development.

    Dated: March 31, 2011.
Shaun Donovan,
Secretary.
[FR Doc. 2011-8364 Filed 4-28-11; 8:45 am]
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