[Federal Register Volume 78, Number 183 (Friday, September 20, 2013)]
[Proposed Rules]
[Pages 57928-58048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-21677]



[[Page 57927]]

Vol. 78

Friday,

No. 183

September 20, 2013

Part II





Department of the Treasury





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 Office of the Comptroller of the Currency





Federal Reserve System





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Federal Deposit Insurance Corporation





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Federal Housing Finance Agency





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Securities and Exchange Commission





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Department of Housing and Urban Development





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12 CFR Parts 43, 244, 373, et al.

17 CFR Part 246

24 CFR Part 267





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 Credit Risk Retention; Proposed Rule

  Federal Register / Vol. 78 , No. 183 / Friday, September 20, 2013 / 
Proposed Rules  

[[Page 57928]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 43

[Docket No. OCC-2013-0010]
RIN 1557-AD40

FEDERAL RESERVE SYSTEM

12 CFR Part 244

[Docket No. R-1411]
RIN 7100-AD70

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 373

RIN 3064-AD74

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1234

RIN 2590-AA43

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 246

[Release Nos. 34-70277]
RIN 3235-AK96

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 267

RIN 2501-AD53


Credit Risk Retention

AGENCY: 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 seeking comment on a joint proposed rule (the proposed rule, or the 
proposal) to revise the proposed rule the agencies published in the 
Federal Register on April 29, 2011, and 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 (Dodd-Frank Act). 
Section 15G generally requires the securitizer of asset-backed 
securities to retain not less than 5 percent of the credit risk of the 
assets collateralizing the asset-backed securities. Section 15G 
includes a variety of exemptions from these requirements, including an 
exemption for asset-backed securities that are collateralized 
exclusively by residential mortgages that qualify as ``qualified 
residential mortgages,'' as such term is defined by the agencies by 
rule.

DATES: Comments must be received by October 30, 2013.

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 
email, 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. Enter ``Docket ID OCC-2013-0010'' in the 
Search Box and click ``Search''. Results can be filtered using the 
filtering tools on the left side of the screen. Click on ``Comment 
Now'' to submit public comments. Click on the ``Help'' tab on the 
Regulations.gov home page to get information on using Regulations.gov.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., Suite 
3E-218, Mail Stop 9W-11, Washington, DC 20219.
     Fax: (571) 465-4326.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
Mail Stop 9W-11, Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket Number OCC-2013-0010'' 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, email 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. Enter ``Docket ID OCC-2013-0010'' in the Search 
box and click ``Search''. Comments can be filtered by agency using the 
filtering tools on the left side of the screen. Click on the ``Help'' 
tab on the Regulations.gov home page to get information on using 
Regulations.gov, including instructions for viewing public comments, 
viewing other supporting and related materials, and viewing the docket 
after the close of the comment period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th 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) 649-
6700. 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.
     Email: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Robert deV. Frierson, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW., Washington, DC 20551.

[[Page 57929]]

    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 
9:00 a.m. and 5:00 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. Follow instructions for submitting comments on the agency Web 
site.
     Email: [email protected]. Include RIN 3064-AD74 in 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/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7:00 a.m. and 5:00 p.m.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Instructions: All comments will be posted without change to http://
www.fdic.gov/regulations/laws/federal, including any personal 
information provided. Paper copies of public comments may be ordered 
from the Public Information Center by telephone at (877) 275-3342 or 
(703) 562-2200.
    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 email to [email protected]. 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 email 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 Web site 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 
10:00 a.m. and 3:00 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:
     Email: Comments to Alfred M. Pollard, General Counsel, may 
be sent by email at [email protected]. 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 email 
to FHFA at [email protected] 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, Constitution Center, (OGC) Eighth Floor, 400 
7th Street SW., Washington, DC 20024.
     Hand Delivery/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA43, 
Federal Housing Finance Agency, Constitution Center, (OGC) Eighth 
Floor, 400 7th Street SW., Washington, DC 20024. A hand-delivered 
package should be logged in at the Seventh Street entrance Guard Desk, 
First Floor, on business days between 9:00 a.m. and 5:00 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 Web site 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. at the Federal 
Housing Finance Agency, Constitution Center, 400 7th Street SW., 
Washington, DC 20024. To make an appointment to inspect comments please 
call the Office of General Counsel at (202) 649-3804.
    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 above docket number and title. 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 Web site 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

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800-877-8339. Copies of all comments submitted are available for 
inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:
    OCC: Kevin Korzeniewski, Attorney, Legislative and Regulatory 
Activities Division, (202) 649-5490, Office of the Comptroller of the 
Currency, 400 7th Street SW., Washington, DC 20219.
    Board: Benjamin W. McDonough, Senior Counsel, (202) 452-2036; April 
C. Snyder, Senior Counsel, (202) 452-3099; Brian P. Knestout, Counsel, 
(202) 452-2249; David W. Alexander, Senior Attorney, (202) 452-2877; or 
Flora H. Ahn, Senior Attorney, (202) 452-2317, Legal Division; Thomas 
R. Boemio, Manager, (202) 452-2982; Donald N. Gabbai, Senior 
Supervisory Financial Analyst, (202) 452-3358; Ann P. McKeehan, Senior 
Supervisory Financial Analyst, (202) 973-6903; or Sean M. Healey, 
Senior Financial Analyst, (202) 912-4611, Division of Banking 
Supervision and Regulation; Karen Pence, Assistant Director, Division 
of Research & Statistics, (202) 452-2342; or Nikita Pastor, Counsel, 
(202) 452-3667, Division of Consumer and Community Affairs, Board of 
Governors of the Federal Reserve System, 20th and C Streets NW., 
Washington, DC 20551.
    FDIC: Rae-Ann Miller, Associate Director, (202) 898-3898; George 
Alexander, Assistant Director, (202) 898-3718; Kathleen M. Russo, 
Supervisory Counsel, (703) 562-2071; or Phillip E. Sloan, Counsel, 
(703) 562-6137, Federal Deposit Insurance Corporation, 550 17th Street 
NW., Washington, DC 20429.
    Commission: Steven Gendron, Analyst Fellow; Arthur Sandel, Special 
Counsel; David Beaning, Special Counsel; or Katherine Hsu, Chief, (202) 
551-3850, in the Office of Structured Finance, Division of Corporation 
Finance, U.S. Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-3628.
    FHFA: Patrick J. Lawler, Associate Director and Chief Economist, 
[email protected], (202) 649-3190; Ronald P. Sugarman, Principal 
Legislative Analyst, [email protected], (202) 649-3208; Phillip 
Millman, Principal Capital Markets Specialist, 
[email protected], (202) 649-3080; or Thomas E. Joseph, 
Associate General Counsel, [email protected], (202) 649-3076; 
Federal Housing Finance Agency, Constitution Center, 400 7th Street 
SW., Washington, DC 20024. The telephone number for the 
Telecommunications Device for the Hearing Impaired is (800) 877-8339.
    HUD: Michael P. Nixon, Office of Housing, Department of Housing and 
Urban Development, 451 7th Street SW., Room 10226, Washington, DC 
20410; telephone number 202-402-5216 (this is not a toll-free number). 
Persons with hearing or speech impairments may access this number 
through TTY by calling the toll-free Federal Information Relay Service 
at 800-877-8339.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Overview of the Original Proposal and Public Comment
    C. Overview of the Proposed Rule
II. General Definitions and Scope
    A. Overview of Significant Definitions in the Original Proposal 
and Comments
    1. Asset-Backed Securities, Securitization Transactions, and ABS 
Interests
    2. Securitizer, Sponsor, and Depositor
    3. Originator
    4. Servicing Assets, Collateral
    B. Proposed General Definitions
III. General Risk Retention Requirement
    A. Minimum Risk Retention Requirement
    B. Permissible Forms of Risk Retention--Menu of Options
    1. Standard Risk Retention
    2. Revolving Master Trusts
    3. Representative Sample
    4. Asset-Backed Commercial Paper Conduits
    5. Commercial Mortgage-Backed Securities
    6. Government-Sponsored Enterprises
    7. Open Market Collateralized Loan Obligations
    8. Municipal Bond ``Repackaging'' Securitizations
    9. Premium Capture Cash Reserve Account
    C. Allocation to the Originator
    D. Hedging, Transfer, and Financing Restrictions
IV. General Exemptions
    A. Exemption for Federally Insured or Guaranteed Residential, 
Multifamily, and Health Care Mortgage Loan Assets
    B. Exemption for Securitizations of Assets Issued, Insured, or 
Guaranteed by the United States or Any Agency of the United States 
and Other Exemptions
    C. Exemption for Certain Resecuritization Transactions
    D. Other Exemptions From Risk Retention Requirements
    1. Utility Legislative Securitizations
    2. Seasoned Loans
    3. Legacy Loan Securitizations
    4. Corporate Debt Repackagings
    5. ``Non-Conduit'' CMBS Transactions
    6. Tax Lien-Backed Securities Sponsored by a Municipal Entity
    7. Rental Car Securitizations
    E. Safe Harbor for Foreign Securitization Transactions
    F. Sunset on Hedging and Transfer Restrictions
    G. Federal Deposit Insurance Corporation Securitizations
V. Reduced Risk Retention Requirements and Underwriting Standards 
for ABS Backed by Qualifying Commercial, Commercial Real Estate, or 
Automobile Loans
    A. Qualifying Commercial Loans
    B. Qualifying Commercial Real Estate Loans
    1. Ability To Repay
    2. Loan-to-Value Requirement
    3. Collateral Valuation
    4. Risk Management and Monitoring
    C. Qualifying Automobile Loans
    1. Ability To Repay
    2. Loan Terms
    3. Reviewing Credit History
    4. Loan-to-Value
    D. Qualifying Asset Exemption
    E. Buyback Requirement
VI. Qualified Residential Mortgages
    A. Overview of Original Proposal and Public Comments
    B. Approach to Defining QRM
    1. Limiting Credit Risk
    2. Preserving Credit Access
    C. Proposed Definition of QRM
    D. Exemption for QRMs
    E. Repurchase of Loans Subsequently Determined To Be Non-
Qualified After Closing
    F. Alternative Approach to Exemptions for QRMs
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. OCC Unfunded Mandates Reform Act of 1995 Determination
    E. Commission: Small Business Regulatory Enforcement Fairness 
Act
    F. FHFA: Considerations of Differences Between the Federal Home 
Loan Banks and the Enterprises

I. Introduction

    The agencies are requesting comment on a proposed rule that re-
proposes with modifications a previously proposed rule to implement the 
requirements of section 941 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the Act, or Dodd-Frank Act).\1\ 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 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

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securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to retain 
under section 15G and the agencies' implementing rules.\2\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010). Section 941 of 
the Dodd-Frank Act amends the Securities Exchange Act of 1934 (the 
Exchange Act) and adds a new section 15G of the Exchange Act. 15 
U.S.C. 78o-11.
    \2\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
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    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.\3\ In addition, section 15G provides that a 
securitizer may retain less than 5 percent of the credit risk of 
commercial mortgages, commercial loans, and automobile loans that are 
transferred, sold, or conveyed through the issuance of ABS by the 
securitizer if the loans meet underwriting standards established by the 
Federal banking agencies.\4\
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    \3\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (e)(4)(A) and (B).
    \4\ See id. at section 78o-11(c)(1)(B)(ii) and (2).
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    In April 2011, the agencies published a joint notice of proposed 
rulemaking that proposed to implement section 15G of the Exchange Act 
(original proposal).\5\ The proposed rule revises the original 
proposal, as described in more detail below.
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    \5\ Credit Risk Retention; Proposed Rule, 76 FR 24090 (April 29, 
2011) (Original Proposal).
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    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.\6\ 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,\7\ 
and are authorized to adopt rules in several specific areas under 
section 15G.\8\ In addition, the Federal banking agencies are jointly 
responsible for establishing, by rule, 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 risk retention requirement of less than 5 percent.\9\ 
Accordingly, when used in this Notice of Proposed Rulemaking, 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.
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    \6\ See id. at section 78o-11(b)(2), (e)(4)(A) and (B).
    \7\ See id. at section 78o-11(b)(1).
    \8\ See, e.g. id. at sections 78o-11(b)(1)(E) (relating to the 
risk retention requirements for ABS collateralized by commercial 
mortgages); (b)(1)(G)(ii) (relating to additional exemptions for 
assets issued or guaranteed by the United States or an agency of the 
United States); (d) (relating to the allocation of risk retention 
obligations between a securitizer and an originator); and (e)(1) 
(relating to additional exemptions, exceptions or adjustments for 
classes of institutions or assets).
    \9\ See id. at section 78o-11(b)(2)(B).
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    For ease of reference, the re-proposed rules of the agencies are 
referenced using a common designation of Sec.  ----.1 to Sec.  ----.21 
(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.\10\ Section ----.1 of each agency's rule 
identifies the entities or transactions subject to such agency's rule.
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    \10\ 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); 12 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. Because the proposed rules would 
exempt the programs and entities under HUD's jurisdiction from the 
requirements of the proposed rules, HUD does not propose to codify 
the rules into its title of the CFR at the time the rules are 
adopted in final form.
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    The preamble to the original proposal described the agencies' 
intention to jointly approve any written interpretations, written 
responses to requests for no-action letters and general counsel 
opinions, or other written interpretive guidance (written 
interpretations) concerning the scope or terms of section 15G of the 
Exchange Act and the final rules issued thereunder that are intended to 
be relied on by the public generally. The agencies also intended for 
the appropriate agencies to jointly approve any exemptions, exceptions, 
or adjustments to the final rules. 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, exception, 
or adjustment.
    Consistent with section 15G of the Exchange Act, the risk retention 
requirements would become effective, for securitization transactions 
collateralized by residential mortgages, one year after the date on 
which final rules are published in the Federal Register, and two years 
after that date for any other securitization transaction.

A. Background

    As the agencies observed in the preamble to the original proposal, 
the securitization markets are an important link in the chain of 
entities providing credit to U.S. households and businesses, and state 
and local governments.\11\ When properly structured, securitization 
provides economic benefits that can lower the cost of credit to 
households and businesses.\12\ However, when incentives are not 
properly aligned and there is a lack of discipline in the credit 
origination process, securitization can result in harmful consequences 
to investors, consumers, financial institutions, and the financial 
system.
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    \11\ 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 from a single pool of 
assets that appeal to a broad range of investors. Moreover, 
securitization that involves the transfer of credit risk allows 
financial institutions that primarily originate loans to particular 
classes of borrowers, or in particular geographic areas, to limit 
concentrated exposure to these idiosyncratic risks on their balance 
sheets.
    \12\ 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).
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    During the financial crisis, securitization transactions displayed 
significant vulnerabilities to informational and incentive problems 
among various parties involved in the process.\13\ Investors did not 
have access to the same information about the assets collateralizing 
ABS as other parties in the securitization chain (such as the sponsor 
of the securitization transaction or an originator of the securitized 
loans).\14\ In addition, assets were resecuritized into complex 
instruments, such as collateralized debt obligations (CDOs) and CDOs-
squared, which made it difficult for investors to discern the

[[Page 57932]]

true value of, and risks associated with, an investment in the 
securitization.\15\ 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 loans.\16\
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    \13\ See Board Report at 8-9.
    \14\ See S. Rep. No. 111-176, at 128 (2010).
    \15\ See id.
    \16\ See id.
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    Congress intended the risk retention requirements added by section 
15G to help address problems in the securitization markets by requiring 
that securitizers, as a general matter, retain an economic interest in 
the credit risk of the assets they securitize. By requiring that the 
securitizer retain a portion of the credit risk of the assets being 
securitized, the requirements of section 15G provide securitizers an 
incentive to monitor and ensure the quality of the assets underlying a 
securitization transaction, and, thus, help 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 help to ensure the assets pose 
low credit risk, the statute provides or permits an exemption.\17\
---------------------------------------------------------------------------

    \17\ See 15 U.S.C. 78o-11(c)(1)(B)(ii), (e)(1)-(2).
---------------------------------------------------------------------------

    Accordingly, the credit risk retention requirements of section 15G 
are an important part of the legislative and regulatory efforts to 
address weaknesses and failures in the securitization process and the 
securitization markets. Section 15G complements other parts of the 
Dodd-Frank Act intended to improve the securitization markets. Such 
other parts include provisions that strengthen the regulation and 
supervision of national recognized statistical rating organizations 
(NRSROs) and improve the transparency of credit ratings; \18\ provide 
for issuers of registered ABS offerings to perform a review of the 
assets underlying the ABS and disclose the nature of the review; \19\ 
and require issuers of ABS to disclose the history of the requests they 
received and repurchases they made related to their outstanding 
ABS.\20\
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    \18\ See, e.g. sections 932, 935, 936, 938, and 943 of the Dodd-
Frank Act (15 U.S.C. 78o-7, 78o-8).
    \19\ See section 945 of the Dodd-Frank Act (15 U.S.C. 77g).
    \20\ See section 943 of the Dodd-Frank Act (15 U.S.C. 78o-7).
---------------------------------------------------------------------------

B. Overview of the Original Proposal and Public Comment

    In developing the original proposal, the agencies took into account 
the diversity of assets that are securitized, the structures 
historically used in securitizations, and the manner in which 
securitizers \21\ have retained exposure to the credit risk of the 
assets they securitize.\22\ The original proposal provided several 
options from which sponsors could choose to meet section 15G's risk 
retention requirements, including, for example, retention of a 5 
percent ``vertical'' interest in each class of ABS interests issued in 
the securitization, retention of a 5 percent ``horizontal'' first-loss 
interest in the securitization, and other options designed to reflect 
the way in which market participants have historically structured 
credit card receivable and asset-backed commercial paper conduit 
securitizations. The original proposal also included a special 
``premium capture'' mechanism designed to prevent a sponsor from 
structuring a securitization transaction in a manner that would allow 
the sponsor to offset or minimize its retained economic exposure to the 
securitized assets by monetizing the excess spread created by the 
securitization transaction.
---------------------------------------------------------------------------

    \21\ As discussed in the original proposal and further below, 
the agencies propose that a ``sponsor,'' as defined in a manner 
consistent with the definition of that term in the Commission's 
Regulation AB, would be a ``securitizer'' for the purposes of 
section 15G.
    \22\ 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.'').
---------------------------------------------------------------------------

    The original proposal also included disclosure requirements that 
were specifically tailored to each of the permissible forms of risk 
retention. The disclosure requirements were an integral part of the 
original proposal because they would have provided investors with 
pertinent information concerning the sponsor's retained interests in a 
securitization transaction, such as the amount and form of interest 
retained by sponsors.
    As required by section 15G, the original proposal provided a 
complete exemption from the risk retention requirements for ABS that 
are collateralized solely by QRMs and established the terms and 
conditions under which a residential mortgage would qualify as a QRM. 
In developing the proposed definition of a QRM, the agencies considered 
the terms and purposes of section 15G, public input, and the potential 
impact of a broad or narrow definition of QRM on the housing and 
housing finance markets. In addition, the agencies developed the QRM 
proposal to be consistent with the requirement of section 15G 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, \23\ and regulations adopted 
thereunder.\24\
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    \23\ See 15 U.S.C. 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.'').
    \24\ See 78 FR 6408 (January 30, 2013), as amended by 78 FR 
35430 (June 12, 2013). These two final rules were preceded by a 
proposed rule defining QM, issued by the Board and published in the 
Federal Register. See 76 FR 27390 (May 11, 2011). The Board had 
initial responsibility for administration and oversight of TILA 
prior to transfer to the Consumer Financial Protection Bureau.
---------------------------------------------------------------------------

    The original proposal would generally have prohibited QRMs from 
having product features that were observed to contribute significantly 
to the high levels of delinquencies and foreclosures since 2007. These 
included features permitting negative amortization, interest-only 
payments, or significant interest rate increases. The QRM definition in 
the original proposal also included other underwriting standards 
associated with lower risk of default, including a down payment 
requirement of 20 percent in the case of a purchase transaction, 
maximum loan-to-value ratios of 75 percent on rate and term refinance 
loans and 70 percent for cash-out refinance loans, as well as credit 
history criteria (or requirements). The QRM standard in the original 
proposal also included maximum front-end and back-end debt-to-income 
ratios. As explained in the original proposal, the agencies intended 
for the QRM proposal to reflect very high quality underwriting 
standards, and the agencies expected that a large market for non-QRM 
loans would continue to exist, providing ample liquidity to mortgage 
lenders.
    Consistent with the statute, the original proposal also provided 
that sponsors would not have to hold risk retention for securitized 
commercial, commercial real estate, and automobile loans that met 
proposed underwriting

[[Page 57933]]

standards that incorporated features and requirements historically 
associated with very low credit risk in those asset classes.
    With respect to securitization transactions sponsored by the 
Federal National Mortgage Association (Fannie Mae) and the Federal Home 
Loan Mortgage Corporation (Freddie Mac) (jointly, the Enterprises), the 
agencies proposed to recognize the 100 percent guarantee of principal 
and interest payments by the Enterprises on issued securities as 
meeting the risk retention requirement. However, this recognition would 
only remain in effect for as long as the Enterprises operated under the 
conservatorship or receivership of FHFA with capital support from the 
United States.
    In response to the original proposal, the agencies received 
comments from over 10,500 persons, institutions, or groups, including 
nearly 300 unique comment letters. The agencies received a significant 
number of comments regarding the appropriate amount and measurement of 
risk retention. Many commenters generally supported the proposed menu-
based approach of providing sponsors flexibility to choose from a 
number of permissible forms of risk retention, although several argued 
for more flexibility in selecting risk retention options, including 
using multiple options simultaneously. Comments on the disclosure 
requirements in the original proposal were limited.
    Many commenters expressed significant concerns with the proposed 
standards for horizontal risk retention and the premium capture cash 
reserve account (PCCRA), which were intended to ensure meaningful risk 
retention. Many commenters asserted that these proposals would lead to 
significantly higher costs for sponsors, possibly discouraging them 
from engaging in new securitization transactions. However, some 
commenters supported the PCCRA concept, arguing that the more 
restrictive nature of the account would be offset by the requirement's 
contribution to more conservative underwriting practices.
    Other commenters expressed concerns with respect to standards in 
the original proposal for specific asset classes, such as the proposed 
option for third-party purchasers to hold risk retention in commercial 
mortgage-backed securitizations instead of sponsors (as contemplated by 
section 15G). Many commenters also expressed concern about the 
underwriting standards for non-residential asset classes, generally 
criticizing them as too conservative to be utilized effectively by 
sponsors. Several commenters criticized application of the original 
proposal to managers of certain collateralized loan obligation (CLO) 
transactions and argued that the original proposal would lead to more 
concentration in the industry and reduce access to credit for many 
businesses.
    An overwhelming majority of commenters criticized the agencies' 
proposed QRM standard. Many of these commenters asserted that the 
proposed definition of QRM, particularly the 20 percent down payment 
requirement, would significantly increase the costs of credit for most 
home buyers and restrict access to credit. Some of these commenters 
asserted that the proposed QRM standard would become a new 
``government-approved'' standard, and that lenders would be reluctant 
to originate mortgages that did not meet the standard. Commenters also 
argued that this proposed standard would make it more difficult to 
reduce the participation of the Enterprises in the mortgage market. 
Commenters argued that the proposal was inconsistent with legislative 
intent and strongly urged the agencies to eliminate the down payment 
requirement, make it substantially smaller, or allow private mortgage 
insurance to substitute for the requirement within the QRM standard. 
Commenters also argued that the agencies should align the QRM 
definition with the definition of QM, as implemented by the Consumer 
Financial Protection Bureau (CFPB).\25\
---------------------------------------------------------------------------

    \25\ See 78 FR 6407 (January 30, 2013), as amended by 78 FR 
35429 (June 12, 2013) and 78 FR 44686 (July 24, 2013).
---------------------------------------------------------------------------

    Various commenters also criticized the agencies' proposed treatment 
of the Enterprises. A commenter asserted that the agencies' recognition 
of the Enterprises' guarantee as retained risk (while in 
conservatorship or receivership with capital support from the United 
States) would impede the policy goal of reducing the role of the 
Enterprises and the government in the mortgage securitization market 
and encouraging investment in private residential mortgage 
securitizations. A number of other commenters, however, supported the 
proposed approach for the Enterprises.
    The preamble to the original proposal described the agencies' 
intention to jointly approve certain types of written interpretations 
concerning the scope of section 15G and the final rules issued 
thereunder. Several commenters on the original proposal expressed 
concern about the agencies' processes for issuing written 
interpretations jointly and the possible uncertainty about the rules 
that may arise due to this process.
    The agencies have endeavored to provide specificity and clarity in 
the proposed rule to avoid conflicting interpretations or uncertainty. 
In the future, if the heads of the agencies determine that further 
guidance would be beneficial for market participants, they may jointly 
publish interpretive guidance documents, as the federal banking 
agencies have done in the past. In addition, the agencies note that 
market participants can, as always, seek guidance concerning the rules 
from their primary federal banking regulator or, if such market 
participant is not a depository institution or a government-sponsored 
enterprise, the Commission. In light of the joint nature of the 
agencies' rule writing authority, the agencies continue to view the 
consistent application of the final rule as a benefit and intend to 
consult with each other when adopting staff interpretations or guidance 
on the final rule that would be shared with the public generally. The 
agencies are considering whether to require that such staff 
interpretations and guidance be jointly issued by the agencies with 
rule writing authority and invite comment.\26\
---------------------------------------------------------------------------

    \26\ These items would not include interpretation and guidance 
in staff comment letters and other staff guidance directed to 
specific institutions that is not intended to be relied upon by the 
public generally. Nor would it include interpretations and guidance 
contained in administrative or judicial enforcement proceedings by 
the agencies, or in an agency report of examination or inspection or 
similar confidential supervisory correspondence.
---------------------------------------------------------------------------

    The specific provisions of the original proposal and public 
comments received thereon are discussed in further detail below.

C. Overview of the Proposed Rule

    The agencies have carefully considered the many comments received 
on the original proposal as well as engaged in further analysis of the 
securitization and lending markets in light of the comments. As a 
result, the agencies believe it would be appropriate to modify several 
important aspects of the original proposal and are issuing a new 
proposal incorporating these modifications. The agencies have concluded 
that a new proposal would give the public the opportunity to review and 
provide comment on the agencies' revised design of the risk retention 
regulatory framework and assist the agencies in determining whether the 
revised framework is appropriately structured.
    The proposed rule takes account of the comments received on the 
original proposal. In developing the proposed

[[Page 57934]]

rule, the agencies consistently have sought to ensure that the amount 
of credit risk required of a sponsor would be meaningful, consistent 
with the purposes of section 15G. The agencies have also sought to 
minimize the potential for the proposed rule to negatively affect the 
availability and costs of credit to consumers and businesses.
    As described in detail below, the proposed rule would significantly 
increase the degree of flexibility that sponsors would have in meeting 
the risk retention requirements of section 15G. For example, the 
proposed rule would permit a sponsor to satisfy its obligation by 
retaining any combination of an ``eligible vertical interest'' and an 
``eligible horizontal residual interest'' to meet the 5 percent minimum 
requirement. The agencies are also proposing that horizontal risk 
retention be measured by fair value, reflecting market practice, and 
are proposing a more flexible treatment for payments to a horizontal 
risk retention interest than that provided in the original proposal. In 
combination with these changes, the agencies propose to remove the 
PCCRA requirement.\27\ The agencies have incorporated proposed 
standards for the expiration of the hedging and transfer restrictions 
and proposed new exemptions from risk retention for certain 
resecuritizations, seasoned loans, and certain types of securitization 
transactions with low credit risk. In addition, the agencies propose a 
new risk retention option for CLOs that is similar to the allocation to 
originator concept proposed for sponsors generally.
---------------------------------------------------------------------------

    \27\ The proposal would also eliminate the ``representative 
sample'' option, which commenters had argued would be impractical.
---------------------------------------------------------------------------

    Furthermore, the agencies are proposing revised standards with 
respect to risk retention by a third-party purchaser in commercial 
mortgage-backed securities (CMBS) transactions and an exemption that 
would permit transfer (by a third-party purchaser or sponsor) of a 
horizontal interest in a CMBS transaction after five years, subject to 
standards described below.
    The agencies have carefully considered the comments received on the 
QRM standard in the original proposal as well as various ongoing 
developments in the mortgage markets, including mortgage regulations. 
For the reasons discussed more fully below, the agencies are proposing 
to revise the QRM definition in the original proposal to equate the 
definition of a QRM with the definition of QM adopted by the CFPB.\28\
---------------------------------------------------------------------------

    \28\ See 78 FR 6407 (January 30, 2013), as amended by 78 FR 
35429 (June 12, 2013) and 78 FR 44686 (July 24, 2013).
---------------------------------------------------------------------------

    The agencies invite comment on all aspects of the proposed rule, 
including comment on whether any aspects of the original proposal 
should be adopted in the final rule. Please provide data and 
explanations supporting any positions offered or changes suggested.

II. General Definitions and Scope

A. Overview of Significant Definitions in the Original Proposal and 
Comments

1. Asset-Backed Securities, Securitization Transactions, and ABS 
Interests
    The original proposal provided that the proposed risk retention 
requirements would have applied to sponsors in securitizations that 
involve the issuance of ``asset-backed securities'' and defined the 
terms ``asset-backed security'' and ``asset'' consistent with the 
definitions of those terms in the Exchange Act. The original proposal 
noted that section 15G does not appear to distinguish between 
transactions that are registered with the Commission under the 
Securities Act of 1933 (the Securities Act) and those that are exempt 
from registration under the Securities Act. It further noted that the 
proposed definition of ABS, which would have been broader than that of 
the Commission's Regulation AB,\29\ included securities that are 
typically sold in transactions that are exempt from registration under 
the Securities Act, such as CDOs and securities issued or guaranteed by 
an Enterprise. As a result, the proposed risk retention requirements 
would have applied to securitizers of ABS offerings regardless of 
whether the offering was registered with the Commission under the 
Securities Act.
---------------------------------------------------------------------------

    \29\ See 17 CFR 229.1100 through 17 CFR 229.1123.
---------------------------------------------------------------------------

    Under the original proposal, risk retention requirements would have 
applied to the securitizer in each ``securitization transaction,'' 
defined as a transaction involving the offer and sale of ABS by an 
issuing entity. The original proposal also explained that the term 
``ABS interest'' would refer to all types of interests or obligations 
issued by an issuing entity, whether or not in certificated form, 
including a security, obligation, beneficial interest, or residual 
interest, but would not include interests, such as common or preferred 
stock, in an issuing entity that are issued primarily to evidence 
ownership of the issuing entity, and the payments, if any, which are 
not primarily dependent on the cash flows of the collateral held by the 
issuing entity.
    With regard to these three definitions, some commenters were 
critical of what they perceived to be the overly broad scope of the 
terms and advocated for express exemptions or exclusions from their 
application. Some commenters expressed concern that the definition of 
``asset-backed securities'' could be read to be broader than intended 
and requested clarification as to the precise contours of the 
definition. For example, certain commenters were concerned that the 
proposed ABS definition could unintentionally include securities that 
do not serve the same purpose or present the same set of risks as 
``asset-backed securities,'' such as securities which are, either 
directly or through a guarantee, full-recourse corporate obligations of 
a creditworthy entity that is not a special-purpose vehicle (SPV), but 
are also secured by a pledge of financial assets. Other commenters 
suggested that the agencies provide a bright-line safe harbor that 
defines conditions under which risk retention is not required even if a 
security is collateralized by self-liquidating assets and advocated 
that certain securities be expressly excluded from the proposed rule's 
definition of ABS.
    Similarly, a number of commenters requested clarification with 
regard to the scope of the definition of ``ABS interest,'' stating that 
its broad definition could potentially capture a number of items not 
traditionally considered ``interests'' in a securitization, such as 
non-economic residual interests, servicing and special servicing fees, 
and amounts payable by the issuing entity under a derivatives contract. 
With regard to the definition of ``securitization transaction,'' a 
commenter recommended that transactions undertaken solely to manage 
financial guarantee insurance related to the underlying obligations not 
be considered ``securitizations.''
2. Securitizer, Sponsor, and Depositor
    Section 15G stipulates that its risk retention requirements be 
applied to a ``securitizer'' of an ABS and, in turn, that a securitizer 
is both an issuer of an ABS or a person who organizes and initiates a 
securitization transaction by selling or transferring assets, either 
directly or indirectly, including through an affiliate or issuer. The 
original proposal noted that the second prong of this definition is 
substantially identical to the definition of a ``sponsor'' of a 
securitization transaction in the

[[Page 57935]]

Commission's Regulation AB.\30\ Accordingly, the original proposal 
would have defined the term ``sponsor'' in a manner consistent with the 
definition of that term in the Commission's Regulation AB.\31\
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    \30\ 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.'').
    \31\ As discussed in the original proposal, when used in the 
federal securities laws, the term ``issuer'' may have different 
meanings depending on the context in which it is used. For the 
purposes of section 15G, the original proposal provided that the 
agencies would have interpreted an ``issuer'' of an asset-back 
security to refer to the ``depositor'' of an ABS, consistent with 
how that term has been defined and used under the federal securities 
laws in connection with an ABS.
---------------------------------------------------------------------------

    Other than issues concerning CLOs, which are discussed in Part 
III.B.7 of this Supplementary Information, comments with regard to 
these terms were generally limited to requests that the final rules 
provide that certain specified persons--such as underwriting sales 
agents--be expressly excluded from the definition of securitizer or 
sponsor for the purposes of the risk retention requirements.
3. Originator
    The original proposal would have defined the term ``originator'' in 
the same manner as section 15G, namely, as a person who, through the 
extension of credit or otherwise, creates a financial asset that 
collateralizes an ABS, and sells the asset directly or indirectly to a 
securitizer (i.e., a sponsor or depositor). The original proposal went 
on to note that because this definition refers to the person that 
``creates'' a loan or other receivable, only the original creditor 
under a loan or receivable--and not a subsequent purchaser or 
transferee--would have been an originator of the loan or receivable for 
purposes of section 15G.
4. Securitized Assets, Collateral
    The original proposal referred to the assets underlying a 
securitization transaction as the ``securitized assets,'' meaning 
assets that are transferred to the SPV that issues the ABS interests 
and that stand as collateral for those ABS interests. ``Collateral'' 
would be defined as the property that provides the cash flow for 
payment of the ABS interests issued by the issuing entity. Taken 
together, these definitions were meant to suggest coverage of the 
loans, leases, or similar assets that the depositor places into the 
issuing SPV at the inception of the transaction, though it would have 
also included other assets such as pre-funded cash reserve accounts. 
Commenters pointed out that, in addition to this property, the issuing 
entity may hold other assets. For example, the issuing entity may 
acquire interest rate derivatives to convert floating rate interest 
income to fixed rate, or the issuing entity may accrete cash or other 
liquid assets in reserve funds that accumulate cash generated by the 
securitized assets. As another example, commenters noted that an asset-
backed commercial paper conduit may hold a liquidity guarantee from a 
bank on some or all of its securitized assets.

B. Proposed General Definitions

    The agencies have carefully considered all of the comments raised 
with respect to the general definitions of the original proposal. The 
agencies do not believe that significant changes to these definitions 
are necessary and, accordingly, are proposing to maintain the general 
definitions in substantially the same form as they were presented in 
the original proposal, with one exception.\32\
---------------------------------------------------------------------------

    \32\ Regarding comments about what securities constitutes an ABS 
interest under the proposed definition, the agencies preliminarily 
believe that non-economic residual interests would constitute ABS 
interests. However, as the proposal makes clear, fees for services 
such as servicing fees would not fall under the definition of an ABS 
interest.
---------------------------------------------------------------------------

    To describe the additional types of property that could be held by 
an issuing entity, the agencies are proposing a definition of 
``servicing assets,'' which would be any rights or other assets 
designed to assure the servicing, timely payment, or timely 
distribution of proceeds to security holders, or assets related or 
incidental to purchasing or otherwise acquiring and holding the issuing 
entity's securitized assets. These may include cash and cash 
equivalents, contract rights, derivative agreements of the issuing 
entity used to hedge interest rate and foreign currency risks, or the 
collateral underlying the securitized assets. As noted in the rule 
text, it also includes proceeds of assets collateralizing the 
securitization transactions, whether in the form of voluntary payments 
from obligors on the assets or otherwise (such as liquidation 
proceeds). The agencies are proposing this definition in order to 
ensure that the provisions of the proposal appropriately accommodate 
the need, in administering a securitization transaction on an ongoing 
basis, to hold various assets other than the loans or similar assets 
that are transferred into the asset pool by the securitization 
depositor. The proposed definition is similar to elements of the 
definition of ``eligible assets'' in Rule 3a-7 under the Investment 
Company Act of 1940, which specifies conditions under which the issuer 
of non-redeemable fixed-income securities backed by self-liquidating 
financial assets will not be deemed to be an investment company.
    To facilitate the agencies revised proposal for the QRM definition, 
the agencies are proposing to define the term ``residential mortgage'' 
by reference to the definition of ``covered transaction'' to be found 
in the CFPB's Regulation Z.\33\ Accordingly, for purposes of the 
proposed rule, a residential mortgage would mean a consumer credit 
transaction that is secured by a dwelling, as such term is also defined 
in Regulation Z \34\ (including any real property attached to a 
dwelling) and any transaction that is exempt from the definition of 
``covered transaction'' under the CFPB's Regulation Z.\35\ Therefore, 
the term ``residential mortgage'' would include home equity lines of 
credit, reverse mortgages, mortgages secured by interests in timeshare 
plans, and temporary loans. By defining residential mortgage in this 
way, the agencies seek to ensure that relevant definitions in the 
proposed rule and in the CFPB's rules on and related to QM are 
harmonized to reduce compliance burden and complexity, and the 
potential for conflicting definitions and interpretations where the 
proposed rule and the QM standard intersect. Additionally, the agencies 
are proposing to include those loans excluded from the definition of 
``covered transaction'' in the definition of ``residential mortgage'' 
for purposes of risk retention so that those categories of loans would 
be subject to risk retention requirements that are applied to 
residential mortgage securitizations under the proposed rule.
---------------------------------------------------------------------------

    \33\ See 78 FR 6584 (January 30, 2013), to be codified at 12 CFR 
1026.43.
    \34\ 12 CFR 1026.2(a)(19).
    \35\ Id.
---------------------------------------------------------------------------

III. General Risk Retention Requirement

A. Minimum Risk Retention Requirement

    Section 15G of the Exchange Act generally requires that the 
agencies jointly prescribe regulations that require a securitizer to 
retain not less than 5 percent of the credit risk for any asset that 
the securitizer, through the issuance of 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

[[Page 57936]]

by QRMs). Consistent with the statute, the original proposal generally 
required that a sponsor retain an economic interest equal to at least 5 
percent of the aggregate credit risk of the assets collateralizing an 
issuance of ABS (the base risk retention requirement). Under the 
original proposal, the base risk retention requirement would have 
applied to all securitization transactions that are within the scope of 
section 15G, regardless of whether the sponsor were an insured 
depository institution, a bank holding company or subsidiary thereof, a 
registered broker-dealer, or other type of entity.\36\
---------------------------------------------------------------------------

    \36\ Synthetic securitizations and securitizations that meet the 
requirements of the foreign safe harbor are examples of 
securitization transactions that are not within the scope of section 
15G.
---------------------------------------------------------------------------

    The agencies requested comment on whether the minimum 5 percent 
risk retention requirement was appropriate or whether a higher risk 
retention requirement should be established. Several commenters 
expressed support for the minimum 5 percent risk retention requirement, 
with some commenters supporting a higher risk retention requirement. 
However, other commenters suggested tailoring the risk retention 
requirement to the specific risks of distinct asset classes.
    Consistent with the original proposal, the proposed rule would 
apply a minimum 5 percent base risk retention requirement to all 
securitization 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 entity, and regardless of whether the sponsor 
is a supervised entity.\37\ The agencies continue to believe that this 
exposure should provide a sponsor with an incentive to monitor and 
control the underwriting of assets being securitized and help align the 
interests of the sponsor with those of investors in the ABS. In 
addition, the sponsor also would be prohibited from hedging or 
otherwise transferring its retained interest prior to the applicable 
sunset date, as discussed in Part III.D of this SUPPLEMENTARY 
INFORMATION.
---------------------------------------------------------------------------

    \37\ See proposed rule at Sec. Sec.  ----.3 through ----.10. 
Similar to the original proposal, the proposed rule, in some 
instances, would 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, 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.
---------------------------------------------------------------------------

    The agencies note that the base risk retention requirement under 
the proposed rule would be a regulatory minimum. The sponsor, 
originator, or other party to a securitization may retain additional 
exposure to the credit risk of assets that the sponsor, originator, or 
other party helps securitize beyond that required by the proposed rule, 
either on its own initiative or in response to the demands or 
requirements of private market participants.

B. Permissible Forms of Risk Retention--Menu of Options

    Section 15G expressly provides the agencies the authority to 
determine the permissible forms through which the required amount of 
risk retention must be held.\38\ Accordingly, the original proposal 
provided sponsors with multiple options to satisfy the risk retention 
requirements of section 15G. The flexibility provided in the original 
proposal's menu of options for complying with the risk retention 
requirement was designed to take into account the heterogeneity of 
securitization markets and practices and to reduce the potential for 
the proposed rules to negatively affect the availability and costs of 
credit to consumers and businesses. The menu of options approach was 
designed to be consistent with the various ways in which a sponsor or 
other entity, in historical market practices, may have retained 
exposure to the credit risk of securitized assets.\39\ Historically, 
whether or how a sponsor retained exposure to the credit risk of the 
assets it securitized was determined by a variety of factors including 
the rating requirements of the NRSROs, investor preferences or demands, 
accounting and regulatory capital considerations, and whether there was 
a market for the type of interest that might ordinarily be retained (at 
least initially by the sponsor).
---------------------------------------------------------------------------

    \38\ 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.'').
    \39\ 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.
---------------------------------------------------------------------------

    The agencies requested comment on the appropriateness of the menu 
of options in the original proposal and the permissible forms of risk 
retention that were proposed. Commenters generally supported the menu-
based approach of providing sponsors with the flexibility to choose 
from a number of permissible forms of risk retention. Many commenters 
requested that sponsors be permitted to use multiple risk retention 
options in any percentage combination, as long as the aggregate 
percentage of risk retention would be at least 5 percent.
    The agencies continue to believe that providing options for risk 
retention is appropriate in order to accommodate the variety of 
securitization structures that would be subject to the proposed rule. 
Accordingly, subpart B of the proposed rule would maintain a menu of 
options approach to risk retention. Additionally, the agencies have 
considered commenters' concerns about flexibility in combining forms of 
risk retention and are proposing modifications to the various forms of 
risk retention, and how they may be used, to increase flexibility and 
facilitate different circumstances that may accompany various 
securitization transactions. Additionally, the permitted forms of risk 
retention in the proposal would be 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 5 percent of the 
credit risk of the securitized assets. Each of the forms of risk 
retention being proposed by the agencies is described below.
1. Standard Risk Retention
a. Overview of Original Proposal and Public Comments
    In the original proposal, to fulfill risk retention for any 
transactions (standard risk retention), the agencies proposed to allow 
sponsors to use one of three methods: (i) Vertical risk retention; (ii) 
horizontal risk retention; and (iii) L-shaped risk retention.
    Under the vertical risk retention option in the original proposal, 
a sponsor could satisfy its risk retention requirement by retaining at 
least 5 percent of each class of ABS interests issued as part of the 
securitization transaction. As discussed in the original proposal, this 
would provide the sponsor with an interest in the entire securitization 
transaction. The agencies received numerous comments supporting the 
vertical risk retention option as an appropriate way to align the 
interests of the sponsor with those of the investors in the ABS in a 
manner that would be easy to calculate. However, some commenters 
expressed concern that the vertical risk retention option would expose 
the sponsor to

[[Page 57937]]

substantially less risk of loss than if the sponsor had retained risk 
under the horizontal risk retention option, thereby making risk 
retention less effective.
    Under the horizontal risk retention option in the original 
proposal, a sponsor could satisfy its risk retention obligations by 
retaining a first-loss ``eligible horizontal residual interest'' in the 
issuing entity in an amount equal to at least 5 percent of the par 
value of all ABS interests in the issuing entity that were issued as 
part of the securitization transaction. In lieu of holding an eligible 
horizontal residual interest, the original proposal allowed a sponsor 
to cause to be established and funded, in cash, a reserve account at 
closing (horizontal cash reserve account) in an amount equal to at 
least 5 percent of the par value of all the ABS interests issued as 
part of the transaction (i.e., the same dollar amount (or corresponding 
amount in the foreign currency in which the ABS are issued, as 
applicable) as would be required if the sponsor held an eligible 
horizontal residual interest).
    Under the original proposal, an interest qualified as an eligible 
horizontal residual interest only if it was an ABS interest that was 
allocated all losses on the securitized assets until the par value of 
the class was reduced to zero and had the most subordinated claim to 
payments of both principal and interest by the issuing entity. While 
the original proposal would have permitted the eligible horizontal 
residual interest to receive its pro rata share of scheduled principal 
payments on the underlying assets in accordance with the relevant 
transaction documents, the eligible horizontal residual interest 
generally could not receive any other payments of principal made on a 
securitized asset (including prepayments) until all other ABS interests 
in the issuing entity were paid in full.
    The agencies solicited comment on the structure of the eligible 
horizontal residual interest, including the proposed approach to 
measuring the size of the eligible horizontal residual interest and the 
proposal to restrict unscheduled payments of principal to the sponsor 
holding horizontal risk retention. Several commenters expressed support 
for the horizontal risk retention option and believed that it would 
effectively align the interests of the sponsor with those of the 
investors in the ABS. However, many commenters raised concerns about 
the agencies' proposed requirements for the eligible horizontal 
residual interest. Many commenters requested clarification as to the 
definition of ``par value'' and how sponsors should calculate the 
eligible horizontal residual interest when measuring it against 5 
percent of the par value of the ABS interests. Moreover, several 
commenters recommended that the agencies use different approaches to 
the measurement of the eligible horizontal residual interest. A few of 
these commenters recommended the agencies take into account the ``fair 
value'' of the ABS interests as a more appropriate economic measure of 
risk retention.
    Several commenters pointed out that the restrictions in the 
original proposal on principal payments to the eligible horizontal 
residual interest would be impractical to implement. For example, some 
commenters expressed concern that the restriction would prevent the 
normal operation of a variety of ABS structures, where servicers do not 
distinguish which part of a monthly payment is interest or principal 
and which parts of principal payments are scheduled or unscheduled.
    The original proposal also contained an ``L-shaped'' risk retention 
option, whereby a sponsor, subject to certain conditions, could use an 
equal combination of vertical risk retention and horizontal risk 
retention to meet its 5 percent risk retention requirement.\40\
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    \40\ Specifically, the original proposal would have allowed a 
sponsor to meet its risk retention obligations under the rules by 
retaining: (1) 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 (2) 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).
---------------------------------------------------------------------------

    The agencies requested comment on whether a higher proportion of 
the risk retention held by a sponsor under this option should be 
composed of a vertical component or a horizontal component. Many 
commenters expressed general support for the L-shaped option, but 
recommended that the agencies allow sponsors to utilize multiple risk 
retention options in different combinations or in any percentage 
combination as long as the aggregate percentage of risk retained is at 
least 5 percent. Commenters suggested that the flexibility would permit 
sponsors to fulfill the risk retention requirements by selecting a 
method that would minimize the costs of risk retention to sponsors and 
any resulting increase in costs to borrowers.
b. Proposed Combined Risk Retention Option
    The agencies carefully considered all of the comments on the 
horizontal, vertical, and L-shaped risk retention with respect to the 
original proposal.
    In the proposed rule, to provide more flexibility to accommodate 
various sponsors and securitization transactions and in response to 
comments, the agencies are proposing to combine the horizontal, 
vertical, and L-shaped risk retention options into a single risk 
retention option with a flexible structure.\41\ Additionally, to 
provide greater clarity for the measurement of risk retention and to 
help prevent sponsors from structuring around their risk retention 
requirement by negating or reducing the economic exposure they are 
required to maintain, the proposal would require sponsors to measure 
their risk retention requirement using fair value, determined in 
accordance with U.S. generally accepted accounting principles 
(GAAP).\42\
---------------------------------------------------------------------------

    \41\ See proposed rule at Sec.  ----.4.
    \42\ Cf. Financial Accounting Standards Board Accounting 
Standards Codification Topic 820.
---------------------------------------------------------------------------

    The proposed rule would provide for a combined standard risk 
retention option that would permit a sponsor to satisfy its risk 
retention obligation by retaining an ``eligible vertical interest,'' an 
``eligible horizontal residual interest,'' or any combination thereof, 
in a total amount equal to no less than 5 percent of the fair value of 
all ABS interests in the issuing entity that are issued as part of the 
securitization transaction. The eligible horizontal residual interest 
may consist of either a single class or multiple classes in the issuing 
entity, provided that each interest qualifies, individually or in the 
aggregate, as an eligible horizontal residual interest.\43\ In the case 
of multiple classes, this requirement would mean that the classes must 
be in consecutive order based on subordination level. For example, if 
there were three levels of subordinated classes and the two most 
subordinated classes had a combined fair value equal to 5 percent of 
all ABS interests, the sponsor would be required to retain these two 
most subordinated classes if it were going to discharge its risk 
retention obligations by holding only eligible horizontal residual 
interests. As discussed below, the agencies are proposing to refine the 
definitions of the eligible vertical interest and the eligible 
horizontal residual interest as well.
---------------------------------------------------------------------------

    \43\ See proposed rule at Sec.  ----.2 (definition of ``eligible 
horizontal residual interest'').
---------------------------------------------------------------------------

    This standard risk retention option would provide sponsors with 
greater flexibility in choosing how to structure their retention of 
credit risk in a manner compatible with the practices of the 
securitization markets. For example, in

[[Page 57938]]

securitization transactions where the sponsor would typically retain 
less than 5 percent of an eligible horizontal residual interest, the 
standard risk retention option would permit the sponsor to hold the 
balance of the risk retention as a vertical interest. In addition, the 
flexible standard risk retention option should not in and of itself 
result in a sponsor having to consolidate the assets and liabilities of 
a securitization vehicle onto its own balance sheet because the 
standard risk retention option does not mandate a particular proportion 
of horizontal to vertical interest or require retention of a minimum 
eligible horizontal residual interest. Under the proposed rule, a 
sponsor would be free to hold more of an eligible vertical interest in 
lieu of an eligible horizontal residual interest. The inclusion of more 
of a vertical interest could reduce the significance of the risk 
profile of the sponsor's economic exposure to the securitization 
vehicle. The significance of the sponsor's exposure is one of the 
characteristics the sponsor evaluates when determining whether to 
consolidate the securitization vehicle for accounting purposes.
    As proposed, a sponsor may satisfy its risk retention requirements 
with respect to a securitization transaction by retaining at least 5 
percent of the fair value of each class of ABS interests issued as part 
of the securitization transaction. A sponsor using this approach must 
retain at least 5 percent of the fair value 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 5 percent of the fair value of each such class or 
interest.
    A sponsor may also satisfy its risk retention requirements under 
the vertical option by retaining a ``single vertical security.'' A 
single vertical security would be an ABS interest entitling the holder 
to a specified percentage (e.g., 5 percent) of the principal and 
interest paid on each class of ABS interests in the issuing entity 
(other than such single vertical security) that result in the security 
representing the same percentage of fair value of each class of ABS 
interests. By permitting the sponsor to hold the vertical form of risk 
retention as a single security, the agencies intend to provide sponsors 
an option that is simpler than carrying multiple securities 
representing a percentage share of every series, tranche, and class 
issued by the issuing entity, each of which might need to be valued by 
the sponsor on its financial statements every financial reporting 
period. The single vertical security option provides the sponsor with 
the same principal and interest payments (and losses) as the vertical 
stack, in the form of one security to be held on the sponsor's books.
    The agencies considered the comments on the measurement of the 
eligible horizontal residual interest in the original proposal and are 
proposing a fair value framework for calculating the standard risk 
retention because it uses methods more consistent with market 
practices. The agencies' use of par value in the original proposal 
sought to establish a simple and transparent measure, but the PCCRA 
requirement, which the agencies proposed to ensure that the eligible 
horizontal residual interest had true economic value, tended to 
introduce other complexities. In addition, the use of fair value as 
defined in GAAP provides a consistent framework for calculating 
standard risk retention across very different securitization 
transactions and different classes of interests within the same type of 
securitization structure.
    However, fair value is a methodology susceptible to yielding a 
range of results depending on the key variables selected by the sponsor 
in determining fair value. Accordingly, as part of the agencies' 
proposal to rely on fair value as a measure that will adequately 
reflect the amount of a sponsor's economic ``skin in the game,'' the 
agencies propose to require disclosure of the sponsor's fair value 
methodology and all significant inputs used to measure its eligible 
horizontal residual interest, as discussed below in this section. 
Sponsors that elect to utilize the horizontal risk retention option 
must disclose the reference data set or other historical information 
which would meaningfully inform third parties of the reasonableness of 
the key cash flow assumptions underlying the measure of fair value. For 
the purposes of this requirement, key assumptions may include default, 
prepayment, and recovery. The agencies believe these key metrics will 
help investors assess whether the fair value measure used by the 
sponsor to determine the amount of its risk retention are comparable to 
market expectations.
    The agencies are also proposing limits on payments to holders of 
the eligible horizontal residual interest, but the limits differ from 
those in the original proposal, based on the fair value measurement. 
The agencies continue to believe that limits are necessary to establish 
economically meaningful horizontal risk retention that better aligns 
the sponsor's incentives with those of investors. However, the agencies 
also intend for sponsors to be able to satisfy their risk retention 
requirements with the retention of an eligible horizontal residual 
interest in a variety of ABS structures, including those structures 
that, in contrast to mortgage-backed securities transactions, do not 
distinguish between principal and interest payments and between 
principal losses and other losses.
    The proposed restriction on projected cash flows to be paid to the 
eligible horizontal residual interest would limit how quickly the 
sponsor can recover the fair value amount of the eligible horizontal 
residual interest in the form of cash payments from the securitization 
(or, if a horizontal cash reserve account is established, released to 
the sponsor or other holder of such account). The proposed rule would 
prohibit the sponsor from structuring a deal where it receives such 
amounts at a faster rate than the rate at which principal is paid to 
investors in all ABS interests in the securitization, measured for each 
future payment date. Since the cash flows projected to be paid to 
sponsors (or released to the sponsor or other holder of the horizontal 
cash reserve account) and all ABS interests would already be calculated 
at the closing of the transactions as part of the fair value 
calculation, it should not be unduly complex or burdensome for sponsors 
to project the cash flows to be paid to the eligible horizontal 
residual interest (or released to the sponsor or other holder of the 
horizontal cash reserve account) and the principal to be paid to all 
ABS interests on each payment date. To compute the fair value of 
projected cash flows to be paid to the eligible horizontal residual 
interest (or released to the sponsor or other holder of the horizontal 
cash reserve account) on each payment date, the sponsor would discount 
the projected cash flows to the eligible horizontal residual interest 
on each payment date (or released to the sponsor or other holder of the 
horizontal cash reserve account) using the same discount rate that was 
used in the fair value calculation (or the amount that must be placed 
in an eligible horizontal cash reserve account, equal to the fair value 
of an eligible horizontal residual

[[Page 57939]]

interest). To compute the cumulative fair value of cash flows projected 
to be paid to the eligible horizontal residual interest through each 
payment date, the sponsor would add the fair value of cash flows to the 
eligible horizontal residual interest (or released to the sponsor or 
other holder of the horizontal cash reserve account) from issuance 
through each payment date (or the termination of the horizontal cash 
reserve account). The ratio of the cumulative fair value of cash flows 
projected to be paid to the eligible horizontal residual interest (or 
released to the sponsor or other holder of the horizontal cash reserve 
account) at each payment date divided by the fair value of the eligible 
horizontal residual interest (or the amount that must be placed in an 
eligible horizontal cash reserve account, equal to the fair value of an 
eligible horizontal residual interest) at issuance (the EHRI recovery 
percentage) measures how quickly the sponsor can be projected to 
recover the fair value of the eligible horizontal residual interest. To 
measure how quickly investors as a whole are projected to be repaid 
principal through each payment date, the sponsor would divide the 
cumulative amount of principal projected to be paid to all ABS 
interests through each payment date by the total principal of ABS 
interests at issuance (ABS recovery percentage).
    In order to comply with the proposed rule, the sponsor, prior to 
the issuance of the eligible horizontal residual interest (or funding a 
horizontal cash reserve account), or at the time of any subsequent 
issuance of ABS interests, as applicable, would have to certify to 
investors that it has performed the calculations required by section 
4(b)(2)(i) of the proposed rule and that the EHRI recovery percentages 
are not expected to be larger than the ABS recovery percentages for any 
future payment date.\44\ In addition, the sponsor would have to 
maintain record of such calculations and certifications in written form 
in its records and must provide disclosure upon request to the 
Commission and its appropriate Federal banking agency, if any, until 
three years after all ABS interests are no longer outstanding. If this 
test fails for any payment date, meaning that the eligible horizontal 
residual interest is projected to recover a greater percentage of its 
fair value than the percentage of principal projected to be repaid to 
all ABS interests with respect to such future payment date, the 
sponsor, absent provisions in the cash flow waterfall that prohibit 
such excess projected payments from being made on such payment date, 
would not be in compliance with the requirements of section 4(b)(2) of 
the proposed rule. For example, the schedule of target 
overcollateralization in an automobile loan securitization might need 
to be adjusted so that the sponsor's retained interest satisfies the 
eligible horizontal residual interest repayment restriction.
---------------------------------------------------------------------------

    \44\ See proposed rule at Sec.  ----.4(b).
---------------------------------------------------------------------------

    The cash flow projection would be a one-time calculation performed 
at issuance on projected cash flows. This is in part to limit 
operational burdens and to allow for sponsors to receive the upside 
from a transaction performing above expectations in a timely fashion. 
It should also minimize increases in the cost of credit to borrowers as 
a result of the risk retention requirement. At the same time, the 
restriction that a sponsor cannot structure a transaction in which the 
sponsor is projected to recover the fair value of the eligible 
horizontal residual interest any faster than all investors are repaid 
principal should help to maintain the alignment of interests of the 
sponsor with those of investors in the ABS, while providing flexibility 
for various types of securitization structures. Moreover, the 
restriction would permit a transaction to be structured so that the 
sponsor could receive a large, one-time payment, which is a feature 
common in deals where certain cash flows that would otherwise be paid 
to the eligible horizontal residual interest are directed to pay other 
classes, such as a money market tranche in an automobile loan 
securitization, provided that such payment did not cause a failure to 
satisfy the projected payment test.
    On the other hand, the restriction would prevent the sponsor from 
structuring a transaction in which the sponsor is projected to be paid 
an amount large enough to increase the leverage of the transaction by 
more than the amount which existed at the issuance of the asset-backed 
securities. In other words, the purpose of the restriction is to 
prevent sponsors from structuring a transaction in which the eligible 
horizontal residual interest is projected to receive such a 
disproportionate amount of money that the sponsor's interests are no 
longer aligned with investors' interests. For example, if the sponsor 
has recovered all of the fair value of an eligible horizontal residual 
interest, the sponsor effectively has no retained risk if losses on the 
securitized assets occur later in the life of the transaction.
    In addition, in light of the fact that the EHRI recovery percentage 
calculation is determined one time, before closing of the transaction, 
based on the sponsor's projections, the agencies are proposing to 
include an additional disclosure requirement about the sponsor's past 
performance in respect to the EHRI recovery percentage calculation. For 
each transaction that includes an EHRI, the sponsor will be required to 
make a disclosure that looks back to all other EHRI transactions the 
sponsor has brought out under the requirements of the risk retention 
rules for the previous five years, and disclose the number of times the 
actual payments made to the sponsor under the EHRI exceeded the amounts 
projected to be paid to the sponsor in determining the Closing Date 
Projected Cash Flow Rate (as defined in section 4(a) of the proposed 
rule).
    Similar to the original proposal, the proposed rule would allow a 
sponsor, in lieu of holding all or part of its risk retention in the 
form of an eligible horizontal residual interest, to cause to be 
established and funded, in cash, a reserve account at closing 
(horizontal cash reserve account) in an amount equal to the same dollar 
amount (or corresponding amount in the foreign currency in which the 
ABS are issued, as applicable) as would be required if the sponsor held 
an eligible horizontal residual interest.\45\
---------------------------------------------------------------------------

    \45\ See proposed rule at Sec.  ----.4(c).
---------------------------------------------------------------------------

    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. Some commenters on the original proposal 
recommended relaxing the investment restrictions on the horizontal cash 
reserve account to accommodate foreign transactions. The proposed rule 
includes several important restrictions and limitations on such a 
horizontal cash reserve account to ensure that a sponsor that 
establishes a horizontal cash reserve account would be exposed to the 
same amount and type of credit risk on the underlying assets as would 
be the case if the sponsor held an eligible horizontal residual 
interest. For securitization transactions where the underlying loans or 
the ABS interests issued are denominated in a foreign currency, the 
amounts in the account may be invested in sovereign bonds issued in 
that foreign currency or in fully insured deposit accounts denominated 
in the foreign currency in a foreign bank (or a subsidiary thereof) 
whose home country supervisor (as defined in section 211.21 of the 
Board's Regulation K) \46\ has adopted capital standards consistent 
with the Capital Accord of the Basel Committee on Banking Supervision, 
as amended, provided the foreign bank is

[[Page 57940]]

subject to such standards.\47\ In addition, amounts that could be 
withdrawn from the account to be distributed to a holder of the account 
would be restricted to the same degree as payments to the holder of an 
eligible horizontal residual interest (such amounts to be determined as 
though the account was an eligible horizontal residual interest), and 
the sponsor would be required to comply with all calculation 
requirements that it would have to perform with respect to an eligible 
horizontal residual interest in order to determine permissible 
distributions from the cash account.
---------------------------------------------------------------------------

    \46\ 12 CFR 211.21.
    \47\ Otherwise, as in the original proposal, amounts in a 
horizontal cash reserve account may only be invested in: (1) United 
States Treasury securities with remaining maturities of one year or 
less; and (2) 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 rule at Sec.  ----.4(c)(2).
---------------------------------------------------------------------------

    Disclosure requirements would also be required with respect to a 
horizontal cash reserve account, including the fair value and 
calculation disclosures required with respect to an eligible horizontal 
residual interest, as discussed below.
    The original proposal included tailored disclosure requirements for 
the vertical, horizontal, and L-shaped risk retention options. A few 
commenters recommended deleting the proposed requirement that the 
sponsor disclose the material assumptions and methodology used in 
determining the aggregate dollar amount of ABS interests issued by the 
issuing entity in the securitization. In the proposed rule, the 
agencies are proposing disclosure requirements similar to those in the 
original proposal, with some modifications, and are proposing to add 
new requirements for the fair value measurement and to reflect the 
structure of the proposed standard risk retention option.
    The proposed rule would require sponsors to provide or cause to be 
provided to potential investors a reasonable time prior to the sale of 
ABS interests in the issuing entity and, upon request, to the 
Commission and its appropriate Federal banking agency (if any) 
disclosure of:
     The fair value (expressed as a percentage of the fair 
value of all ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS are issued, as applicable)) of the eligible horizontal residual 
interest that will be retained (or was retained) by the sponsor at 
closing, and the fair value (expressed as a percentage of the fair 
value of all ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS are issued, as applicable)) 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 to be retained by the sponsor;
     A description of the methodology used to calculate the 
fair value of all classes of ABS interests;
     The key inputs and assumptions used in measuring the total 
fair value of all classes of ABS interests and the fair value of the 
eligible horizontal residual interest retained by the sponsor 
(including the range of information considered in arriving at such key 
inputs and assumptions and an indication of the weight ascribed 
thereto) and the sponsor's technique(s) to derive the key inputs;
     For sponsors that elect to utilize the horizontal risk 
retention option, the reference data set or other historical 
information that would enable investors and other stakeholders to 
assess the reasonableness of the key cash flow assumptions underlying 
the fair value of the eligible horizontal residual interest. Examples 
of key cash flow assumptions may include default, prepayment, and 
recovery;
     Whether any retained vertical interest is retained as a 
single vertical security or as separate proportional interests;
     Each class of ABS interests in the issuing entity 
underlying the single vertical security at the closing of the 
securitization transaction and the percentage of each class of ABS 
interests in the issuing entity that the sponsor would have been 
required to retain if the sponsor held the eligible vertical interest 
as a separate proportional interest in each class of ABS interest in 
the issuing entity; and
     The fair value (expressed as a percentage of the fair 
value of all ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS are issued, as applicable)) of any single vertical security or 
separate proportional interests that will be retained (or was retained) 
by the sponsor at closing, and the fair value (expressed as a 
percentage of the fair value of all ABS interests issued in the 
securitization transaction and dollar amount (or corresponding amount 
in the foreign currency in which the ABS are issued, as applicable)) of 
the single vertical security or separate proportional interests 
required to be retained by the sponsor in connection with the 
securitization transaction.
    Consistent with the original proposal, 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
    1(a). Should the agencies require a minimum proportion of risk 
retention held by a sponsor under the standard risk retention option to 
be composed of a vertical component or a horizontal component? 1(b). 
Why or why not?
    2(a). The agencies observe that horizontal risk retention, as 
first-loss residual position, generally would impose the most economic 
risk on a sponsor. Should a sponsor be required to hold a higher 
percentage of risk retention if the sponsor retains only an eligible 
vertical interest under this option or very little horizontal risk 
retention? 2(b). Why or why not?
    3. Are the disclosures proposed sufficient to provide investors 
with all material information concerning the sponsor's retained 
interest in a securitization transaction and the methodology used to 
calculate fair value, as well as enable investors and the agencies to 
monitor whether the sponsor has complied with the rule?
    4(a). Is the requirement for sponsors that elect to utilize the 
horizontal risk retention option to disclose the reference data set or 
other historical information that would enable investors and other 
stakeholders to assess the reasonableness of the key cash flow 
assumptions underlying the fair value of the eligible horizontal 
residual interest useful? 4(b). Would the requirement to disclose this 
information impose a significant cost or undue burden to sponsors? 
4(c). Why or why not? 4(d). If not, how should proposed disclosures be 
modified to better achieve those objectives?
    5(a). Does the proposal require disclosure of any information that 
should not be made publicly available? 5(b). If so, should such 
information be made available to the Commission and Federal banking 
agencies upon request?
    6. Are there any additional factors that the agencies should 
consider with respect to the standard risk retention?
    7. To what extent would the flexible standard risk retention option 
address concerns about a sponsor having to consolidate a securitization 
vehicle for accounting purposes due to the risk retention requirement 
itself, given that

[[Page 57941]]

the standard risk retention option does not require a particular 
proportion of horizontal to vertical interest?
    8(a). Is the proposed approach to measuring risk retention 
appropriate? 8(b). Why or why not?
    9(a). Would a different measurement of risk retention be more 
appropriate? 9(b). Please provide details and data supporting any 
alternative measurement methodologies.
    10(a). Is the restriction on certain projected payments to the 
sponsor with respect to the eligible horizontal residual interest 
appropriate and sufficient? 10(b). Why or why not?
    11(a). The proposed restriction on certain projected payments to 
the sponsor with respect to the eligible horizontal residual interest 
compares the rate at which the sponsor is projected to recover the fair 
value of the eligible horizontal residual interest with the rate which 
all other investors are projected to be repaid their principal. Is this 
comparison of two different cash flows an appropriate means of 
providing incentives for sound underwriting of ABS? 11(b). Could it 
increase the cost to the sponsor of retaining an eligible horizontal 
residual interest? 11(c). Could sponsors or issuers manipulate this 
comparison to reduce the cost to the sponsor of retaining an eligible 
horizontal residual interest? How? 11(d). If so, are there adjustments 
that could be made to this requirement that would reduce or eliminate 
such possible manipulation? 11(e). Would some other cash flow 
comparison be more appropriate? 11(f). If so, which cash flows should 
be compared? 11(g). Does the proposed requirement for the sponsor to 
disclose, for previous ABS transactions, the number of times the 
sponsor was paid more than the issuer predicted for such transactions 
reach the right balance of incremental burden to the sponsor while 
providing meaningful information to investors? 11(h). If not, how 
should it be modified to better achieve those objectives?
    12(a). Does the proposed form of the single vertical security 
accomplish the agencies' objective of providing a way for sponsors to 
hold vertical risk retention without the need to perform valuation of 
multiple securities for accounting purposes each financial reporting 
period? 12(b). Is there a different approach that would be more 
efficient?
    13(a). Is three years after all ABS interests are no longer 
outstanding an appropriate time period for the sponsors' record 
maintenance requirement with respect to the calculations and other 
requirements in section 4? 13(b). Why or why not? 13(c). If not, what 
would be a more appropriate time period?
    14(a). Would the calculation requirements in section 4 of the 
proposed rule likely be included in agreed upon procedures with respect 
to an interest retained pursuant to the proposed rule? 14(b). Why or 
why not? 14(c). If so, what costs may be associated with such a 
practice?
c. Alternative Eligible Horizontal Residual Interest Proposal
    The agencies have also considered, and request comment on, an 
alternative provision relating to the amount of principal payments 
received by the eligible horizontal residual interest. Under this 
alternative, on any payment date, in accordance with the transaction's 
governing documents, the cumulative amount paid to an eligible 
horizontal residual interest may not exceed a proportionate share of 
the cumulative amount paid to all holders of ABS interests in the 
transaction. The proportionate share would equal the percentage, as 
measured on the date of issuance, of the fair value of all of the ABS 
interests issued in the transaction that is represented by the fair 
value of the eligible horizontal residual interest.
    For purposes of this calculation, fees and expenses paid to service 
providers would not be included in the cumulative amounts paid to 
holders of ABS interests. All other amounts paid to holders of ABS 
would be included in the calculations, including principal repayment, 
interest payments, excess spread and residual payments. The transaction 
documents would not allow distribution to the eligible horizontal 
residual interest any amounts payable to the eligible horizontal 
residual interest that would exceed the eligible horizontal residual 
interest's permitted proportionate share. Such excess amounts could be 
paid to more senior classes, placed into a reserve account, or 
allocated in any manner that does not otherwise result in payments to 
the holder of the eligible horizontal residual interest that would 
exceed the allowed amount.
    By way of illustration, assume the fair value of the eligible 
horizontal residual interest for a particular transaction was equal to 
10 percent of the fair value of all ABS interests issued in that 
transaction. In order to meet the requirements of the proposal, the 
cumulative amount paid to the sponsor in its capacity as holder of the 
eligible horizontal residual interest on any given payment date could 
not exceed 10 percent of the cumulative amount paid to all holders of 
ABS interests, excluding payment of expenses and fees to service 
providers. This would allow large payments to the eligible horizontal 
residual interest so long as such payments do not otherwise result in 
payments to the holder of the eligible horizontal residual interest 
that would exceed the allowed amount.
    The agencies request comment on this alternative mechanism for 
allowing the eligible horizontal residual interest to receive 
unscheduled principal payments, including whether the agencies should 
adopt the alternative proposal instead of the proposed mechanism for 
these payments described above.
Request for Comment
    15(a). Other than a cap in the priority of payments on amounts to 
be paid to the eligible horizontal residual interest and related 
calculations on distribution dates and related provisions to allocate 
any amounts above the cap, would there be any additional steps 
necessary to comply with the alternative proposal? 15(b). If so, please 
describe those additional steps and any associated costs.
    16. Would the cost and difficulty of compliance with the 
alternative proposal, including monitoring compliance, be higher or 
lower, than with the proposal?
    17(a). Does the alternative proposal accommodate more or less of 
the current market practice than the proposal? 17(b). If there is a 
difference, please provide data with respect to the scale of that 
difference.
    18. With respect to the alternative proposal, should amounts other 
than payment of expenses and fees to service providers be excluded from 
the calculations?
    19(a). Does the alternative proposal adequately accommodate 
structures with unscheduled payments of principal, such as scheduled 
step downs? 19(b). Does the alternative adequately address structures 
which do not distinguish between interest and principal received from 
underlying assets for purposes of distributions?
    20(a). Are there asset classes or transaction structures for which 
the alternative proposal would not be economically viable? 20(b). Are 
there asset classes or transaction structures for which the alternative 
proposal would be more economically feasible than the proposal?
    21. Should both the proposal and the alternative proposal be made 
available to sponsors?
    22(a). The proposal includes a restriction on how payments on an 
eligible horizontal residual interest must be structured but does not 
restrict actual

[[Page 57942]]

payments to the eligible horizontal residual interest, which could be 
different than the projected payments if losses are higher or lower 
than expected. The alternative proposal for payments on eligible 
horizontal residual interests does not place restrictions on structure 
but does restrict actual payments to the eligible horizontal residual 
interest. Does the proposal or the alternative proposal better align 
the sponsor's interests with investors' interests? 22(b). Why or why 
not?
2. Revolving Master Trusts
a. Overview
    Securitization sponsors frequently use a revolving master trust 
when they seek to issue more than one series of ABS collectively backed 
by a common pool of assets that change over time.\48\ Pursuant to the 
original proposal, the seller's interest form of risk retention would 
only be available to revolving master trusts.
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    \48\ In a revolving master trust securitization, assets (e.g., 
credit card receivables or dealer floorplan financings) are 
periodically added to the pool to collateralize current and future 
issuances of the securities backed by the pool. Often, but not 
always, the assets are receivables generated by revolving lines of 
credit originated by the sponsor. A major exception would be the 
master trusts used in the United Kingdom to finance residential 
mortgages.
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    The seller's interest is an undivided interest held by the master 
trust securitization sponsor in the pool of receivables or loans held 
in the trust. It entitles the sponsor to a percentage of all payments 
of principal, interest, and fees, as well as recoveries from defaulted 
assets that the trust periodically receives on receivables and loans 
held in the trust, as well as the same percentage of all payment 
defaults on those assets. Investors in the various series of ABS issued 
by the trust have claims on the remaining principal and interest, as a 
source of repayment for the ABS interests they hold.\49\ Typically, the 
seller's interest is pari passu to the investors' interest with respect 
to collections and losses on the securitized assets, though in some 
revolving master trusts, it is subordinated to the investors' interest 
in this regard. If the seller's interest is pari passu, it generally 
becomes subordinated to investors' interests in the event of an early 
amortization of the ABS interests held by investors, as discussed more 
below. Commenters representing the interests of securitization sponsors 
generally favored the seller's interest approach but requested certain 
modifications.
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    \49\ Generally, the trust sponsor retains the right to any 
excess cash flow from payments of interest and fees received by the 
trust that exceeds the amount owed to ABS investors. Excess cash 
flow from payments of principal is paid to the sponsor in exchange 
for newly generated receivables in the trust's existing revolving 
accounts. However, the specific treatment of excess interest, fees, 
and principal payments with respect to any ABS series within the 
trust is a separate issue, discussed in connection with the 
agencies' proposal to give sponsors credit for some forms of 
eligible horizontal risk retention at the series level, as explained 
in further detail below.
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    The agencies are proposing to maintain the seller's interest as the 
specific risk retention option for master trusts, with changes from the 
original proposal that reflect many of the comments received, as 
discussed in further detail below. The modifications to this option are 
intended to refine this method of risk retention to better reflect the 
way revolving master trust securitizations operate in the current 
market.
    As discussed in greater detail below, among other things, the 
agencies are proposing to modify the original proposal with respect to 
master trusts by:
     Allowing sponsors that hold a first-loss exposure in every 
series of ABS issued by a master trust to count the percent of such 
interest that is held consistently across all ABS series toward the 
minimum 5 percent seller's interest requirement;
     Removing the restriction in the original proposal that 
prohibited the use of the seller's interest risk retention option for 
master trust securitizations backed by non-revolving assets;
     Clarifying how the seller's interest can be used in 
connection with multi-level legacy trusts and master trusts in which 
some of the seller's interest corresponds to loans or receivables held 
in a legacy master trust;
     Revising the calculation of the 5 percent seller's 
interest amount so it is based on the trust's amount of outstanding ABS 
rather than the amount of trust assets;
     Clarifying the rules regarding the use of certain 
structural features, including delinked credit enhancement structures, 
where series-specific credit enhancements that do not support the 
seller's interest-linked structures, and the limited use of assets that 
are not part of the seller's interest to administer the features of the 
ABS issued to investors; and
     Clarify how the rule would apply to a revolving master 
trust in early amortization.
b. Definitions of Revolving Master Trust and Seller's Interest
    The seller's interest form of retention would only be available to 
revolving master trusts. These are trusts established to issue ABS 
interests on multiple issuance dates out of the same trust. In some 
instances the trust will issue to investors a series with multiple 
classes of tranched ABS periodically. In others, referred to as 
``delinked credit enhancement structures,'' the master trust maintains 
one or more series, but issues tranches of ABS of classes in the series 
periodically, doing so in amounts that maintain levels of subordination 
between classes as required in the transaction documents. The revolving 
master trust risk retention option is designed to accommodate both of 
these structures.
    The agencies' original proposal would require that all securitized 
assets in the master trust must be loans or other extensions of credit 
that arise under revolving accounts. The agencies received comments 
indicating that a small number of securitizers in the United States, 
such as insurance premium funding trusts, use revolving trusts to 
securitize short-term loans, replacing loans as they mature with new 
loans, in order to sustain cash flow and collateral support to longer-
term securities. In response to commenters, the agencies are proposing 
to expand the securitized asset requirement to include non-revolving 
loans.\50\ Nevertheless, as with the original proposal, all ABS 
interests issued by the master trust must be collateralized by the 
master trust's common pool of receivables or loans. Furthermore, the 
common pool's principal balance must revolve so that cash representing 
principal remaining after payment of principal due, if any, to 
outstanding ABS on any payment date, as well as cash flow from 
principal payments allocated to seller's interest is reinvested in new 
extensions of credit at a price that is predetermined at the 
transaction and new receivables or loans are added to the pool from 
time to time to collateralize existing series of ABS issued by the 
trust. The seller's interest option would not be available to a trust 
that issues series of ABS at different times backed by segregated 
independent pools of securitized assets within the trust as a series 
trust, or a trust that issues shorter-term ABS interests backed by a 
static pool of long-term loans, or a trust with a re-investment period 
that precedes an ultimate amortization period.
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    \50\ Revolving master trusts are also used in the United Kingdom 
to securitize mortgages, and U.S. investors may invest in RMBS 
issued by these trusts. This proposed change would make it easier 
for these issuers to structure their securitizations in compliance 
with section 15G for such purpose.
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    In general, the seller's interest represents the seller/sponsor's 
interest in the portion of the receivables or loans that does not 
collateralize outstanding

[[Page 57943]]

investors' interests in ABS issued under series. Investor interests 
include any sponsor/seller's retained ABS issued under a series. As 
discussed above, a seller's interest is a typical form of risk 
retention in master trusts, whereby the sponsor of a master trust holds 
an undivided interest in the securitized assets. The original proposal 
defined ``seller's interest'' consistent with these features, 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 proposal would define ``seller's interest'' similarly to the 
original proposal. However, in response to comments, the agencies have 
made changes to the definition from the original proposal to reflect 
market practice. The first change would modify the definition to 
reflect the fact that the seller's interest is pari passu with 
investors' interests at the series level, not at the level of all 
investors' interests collectively. The agencies are proposing this 
change because each series in a revolving master trust typically uses 
senior-subordinate structures under which investors are entitled to 
different payments out of that series' percentage share of the 
collections on the trust's asset pool, so some investors in 
subordinated classes are subordinate to the seller's interest. The 
second change would modify the definition to reflect the fact that, in 
addition to the receivables and loans that collateralize the trust's 
ABS interests, a master trust typically includes servicing assets.\51\ 
To the extent these assets are allocated as collateral only for a 
specific series, these assets are not part of the seller's 
interest.\52\ Furthermore, the proposal clarifies that the seller's 
interest amount is the unpaid principal balance of the seller's 
interest in the common pool of receivables or loans. The seller's 
interest amount must at least equal the required minimum seller's 
interest.
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    \51\ The definition of ``servicing assets'' is discussed in Part 
II.B of this Supplementary Information.
    \52\ Although this language allows certain assets held by the 
trust to be allocated as collateral only for a specific series and 
excluded from the seller's interest, it does not allow a trust to 
claim eligibility for the seller's interest form of risk retention 
unless the seller's interest is, consistent with the revolving 
master trust definition, generally collateralized by a common pool 
of assets, the composition of which changes over time, and that 
securitizes all ABS interests in the trust. Absent broad exposure to 
the securitized assets, the seller's interest ceases to be a 
vertical form of risk retention. The proposed language is designed 
to accommodate limited forms of exclusion from the seller's interest 
in connection with administering the trust, dealing with the 
revolving versus amortizing periods for investor ABS series, 
implementation of interest rate features, and similar aspects of 
these securitization transactions.
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    In addition, the agencies are considering whether they should make 
additional provisions for subordinated seller's interests. In some 
revolving master trusts, there is an interest similar to a seller's 
interest, except that instead of the interest being pari passu with the 
investors' interest with respect to principal collections and interest 
and fee collections, the sponsor's (or depositor's) share of the 
collections in the interest are subordinated, to enhance the ABS 
interests issued to investors at the series level. The agencies are 
considering whether to permit these subordinated interests to count 
towards the 5 percent seller's interest treatment, since they perform a 
loss-absorbing function that is analogous to a horizontal interest 
(whereas a typical seller's interest is analogous to a vertical 
interest, and typically is only subordinated in the event of early 
amortization). Because they are subordinated, however, the agencies are 
considering requiring them be counted toward the 5 percent requirement 
on a fair value basis, instead of the face value basis applied for 
regular, unsubordinated seller's interests.\53\ The sponsor would be 
required to apply the same fair value standards as the rule imposes 
under the general risk retention requirement.
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    \53\ The fair value determination would be for purposes of the 
amount of subordinated seller's interest included in the numerator 
of the 5 percent ratio. The denominator would be the unpaid 
principal balance of all outstanding investors' ABS interests, as is 
proposed for regular, unsubordinated seller's interests.
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    In addition to these definitional changes, the agencies are 
proposing modifications to the overall structure of the master trust 
risk retention option as it was proposed in the original proposal, in 
light of comments concerning the manner in which the seller's interest 
is held. In some cases, the seller's interest may be held by the 
sponsor, as was specified in the original proposal, but in other 
instances, it may be held by another entity, such as the depositor, or 
two or more originators may sponsor a single master trust to securitize 
receivables generated by both firms, with each firm holding a portion 
of the seller's interest. Accordingly, the agencies are proposing to 
allow the seller's interest to be held by any wholly-owned affiliate of 
the sponsor.\54\
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    \54\ The requirement for the holder to be a wholly-owned 
affiliate of the sponsor is consistent with the restrictions on 
permissible transferees of risk retention generally required to be 
held by the sponsor under the rule. See Part III.D.2 of this 
Supplementary Information.
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    In response to comments, the agencies are also proposing to allow 
the seller's interest to be retained in multiple interests, rather than 
a single interest. This approach is intended to address legacy trust 
structures and would impose requirements on the division of the 
seller's interest in such structures. In these structures, a sponsor 
that controls an older revolving master trust that no longer issues ABS 
to investors keeps the trust in place, with the credit lines that were 
designated to the trust over the years still in operation and 
generating new receivables for the legacy trust. The legacy trust 
issues certificates collateralized by these receivables to a newer 
issuing trust, which typically also has credit lines designated to the 
trust, providing the issuing trust with its own pool of receivables. 
The issuing trust issues investors' ABS interests backed by receivables 
held directly by the issuing trust and also indirectly in the legacy 
trust (as evidenced by the collateral certificates held by the issuing 
trust).
    The proposal would permit the seller's interest for the legacy 
trust's receivables to be held separately, but still be considered 
eligible risk retention, by the sponsor at the issuing trust level 
because it functions as though it were part of the seller's interest 
associated with all the securitized assets held by the issuing trust 
(i.e., its own receivables and the collateral certificates). However, 
the portion of the seller's interest held through the legacy trust must 
be proportional to the percentage of assets the collateral certificates 
comprise of the issuing trust's assets. If the sponsor held more, and 
the credit quality of the receivables feeding the issuing trust turned 
out to be inferior to the credit lines feeding the legacy trust, the 
sponsor would be able to avoid the full effect of those payment 
defaults at the issuing trust level.
    The proposal would require the sponsor to retain a minimum seller's 
interest in the receivables or loans held by the trust representing at 
least 5 percent of the total unpaid principal balance of the investors' 
ABS interests issued by the trust and outstanding.\55\

[[Page 57944]]

The sponsor would be required to meet this 5 percent test at the 
closing of each issuance of securities by the master trust, and at 
every seller's interest measurement date specified under the 
securitization transaction documents, but no less than monthly. The 
sponsor would remain subject to its obligation to meet the seller's 
interest requirement on these measurement dates until the trust no 
longer has ABS interests outstanding to any third party.
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    \55\ The agencies originally proposed 5 percent of the total 
receivables and loans in the trust, but are persuaded by commenters 
that this is disproportionate to the base risk retention requirement 
in some cases. Revolving master trusts may hold receivables far in 
excess of the amount of investors' ABS interests outstanding, for 
example, when the sponsor has other funding sources at more 
favorable costs than those available from investors in the master 
trust's ABS.
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    The agencies are proposing to include the principal balance instead 
of the fair value of outstanding ABS interests as the basis for the 
calculation of the minimum seller's interest requirement. The agencies 
currently consider this approach to be sufficiently conservative, 
because sponsors of revolving master trusts do not include senior 
interest-only bonds or premium bonds in their ABS structures. If this 
were not the case, it would be more appropriate to require the minimum 
seller's interest requirement to be included based on the fair value 
basis of outstanding ABS interests. However, the fair value 
determination would create additional complexity and costs, especially 
given the frequency of the measurements required. In consideration of 
this, the agencies would expect to include in any final rule a 
prohibition against the seller's interest approach for any revolving 
trust that includes senior interest-only bonds or premium bonds in the 
ABS interest it issues to investors.
Request for Comment
    23(a). Is such prohibition appropriate? 23(b). If not, what is a 
better approach, and why? Commenters proposing an alternative approach 
should provide specific information about which revolving trusts in the 
marketplace currently include such interests in their capital 
structures, and the manner in which they could comply with a fair value 
approach.
    24. In revising the definition of ``seller's interest'' the 
agencies have modified the rule text to exclude ``assets that 
collateralize other specified ABS interests issued by the issuing 
entity'' as well as rule text excluding ``servicing assets,'' which is 
a defined term under the proposal. Are such exclusions redundant, or 
would they exclude rights to assets or cash flow that are commonly 
included as seller's interest?
c. Combining Seller's Interest With Horizontal Risk Retention at the 
Series Level
    The original proposal for revolving asset master trusts focused 
primarily on the seller's interest form of risk retention. Commenters 
requested that the agencies modify the original proposal to recognize 
as risk retention the various forms of subordinated exposures sponsors 
hold in master trust securitization transactions. The proposal would 
permit sponsors to combine the seller's interest with either of two 
horizontal types of risk retention held at the series level, one of 
which meets the same criteria as the standard risk retention 
requirement, and the other of which is eligible under the special 
conditions discussed below.
    To be eligible to combine the seller's interest with horizontal 
risk retained at the series level, the sponsor would be required to 
maintain a specified amount of horizontal risk retention in every 
series issued by the trust. If the sponsor retained these horizontal 
interests in every series across the trust, the sponsor would be 
permitted to reduce its seller's interest by a corresponding 
percentage. For example, if the sponsor held 2 percent, on a fair value 
basis, of all the securities issued in each series in either of the two 
forms of permitted horizontal interests, the sponsor's seller's 
interest requirement would be reduced to 3 percent of the unpaid 
principal balance of all investor interests outstanding, instead of 5 
percent. However, if the sponsor ever subsequently issued a series (or 
additional classes or tranches out of an existing series of a delinked 
structure) that did not meet this 2 percent minimum horizontal interest 
requirement, the sponsor would be required to increase its minimum 
seller's interest up to 5 percent for the entire trust (i.e., 5 percent 
of the total unpaid principal balance of all the investors' ABS 
interest outstanding in every series, not just the series for which the 
sponsor decided not to hold the minimum 2 percent horizontal interest).
    The agencies propose to permit the sponsor to hold horizontal 
interests at the series level in the form of a certificated or 
uncertificated ABS interest. The interest in the series would need to 
be issued in a form meeting the definition of an eligible horizontal 
residual interest or a specialized horizontal form, available only to 
revolving master trusts. The residual interest held by sponsors of 
revolving trusts at the series level typically does not meet the 
requirement of the proposed definition of eligible horizontal residual 
interest which would limit the rate of payments to the sponsor to the 
rate of payments made to the holders of senior ABS interests.
    Many revolving asset master trusts are collateralized with 
receivables that pay relatively high rates of interest, such as credit 
and charge card receivables or floor plan financings. The ABS interests 
sold to investors are structured so there is an initial revolving 
period, under which the series' share of borrower repayments of 
principal on the receivables are used by the trust to purchase new, 
replacement receivables. Subsequently, during the ``controlled 
amortization'' phase, principal payments are accumulated for the 
purpose of amortizing and paying off the securities on an expected 
maturity date. Under the terms of the transaction, principal payments 
are handled in a separate waterfall from interest payments. The series' 
share of interest payments received by the trust each period (typically 
a month) is used to pay trust expenses and the interest due to holders 
of ABS interests.\56\ Because the series' share of cash flow from 
interest payments is generally in excess of amounts needed to pay 
principal and interest, it is used to cover the series' share of losses 
on receivables that were charged-off during the period and a surplus 
typically still remains. This residual interest is returned to the 
sponsor (though it may, under the terms of the transaction, first be 
made available to other series in the trust to cover shortfalls in 
interest due and receivable losses during the period that were not 
covered by other series' shares of the trust's proceeds).
---------------------------------------------------------------------------

    \56\ In some trusts the expenses are senior in priority, but 
this varies.
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    This subordinated claim to residual interest by the sponsor is a 
form of horizontal risk retention; the residual interest is payable to 
the sponsor only to the extent it exceeds the amount needed to cover 
principal losses on more senior securities in the series. The agencies 
therefore believe it would be appropriate to recognize this form of 
risk retention as an acceptable method of meeting a sponsor's risk 
retention requirement for revolving master trusts. Accordingly, the 
agencies are proposing to recognize the fair value of the sponsor's 
claim to this residual interest as a permissible form of horizontal 
risk retention for revolving master trust structures, for which the 
sponsor could take credit against the seller's interest requirement in 
the manner described above. Under the proposal, the sponsor would 
receive credit for the residual interest whether it is certificated or

[[Page 57945]]

uncertificated, subject to the following requirements:
     Each series distinguishes between the series' share of 
collection of interest, fees, and principal from the securitized assets 
(separate waterfalls);
     The sponsor's claim to any of the series' share of 
interest and fee proceeds each period pursuant to the horizontal 
residual interest is subordinated to all interest due to all ABS 
interests in the series for that period, and further reduced by the 
series' share of defaults on principal of the trust's securitized 
assets for that period (that is, charged-off receivables);
     The horizontal residual interest, to the extent it has 
claims to any part of the series' share of principal proceeds, has the 
most subordinated claim; and
     The horizontal residual interest is only eligible for 
recognition as risk retention so long as the trust is a revolving 
trust.
    Some commenters on the original proposal also requested that the 
sponsor be permitted to combine the seller's interest with other 
vertical forms of risk retention at the series level. The agencies are 
not aware of any current practice of vertical holding at the series 
level. The agencies would consider including, as part of the seller's 
interest form of risk retention, vertical forms of risk retention 
(subject to an approach similar to the one described in this proposal 
for horizontal interests) if it was, in fact, market practice to hold 
vertical interests in every series of ABS issued by revolving master 
trusts. The agencies have considered this possibility but, especially 
in light of the lack of market practice, are not proposing to allow 
sponsors to meet their risk retention requirement in this manner.
    In addition, the sponsor would need to make the calculations and 
disclosures on every measurement date required under the rule for the 
seller's interest and horizontal interest, as applicable, under the 
proposed rule. Furthermore, the sponsor would be required to retain the 
disclosures in its records and make them available to the Commission or 
supervising Federal banking agency (as applicable) until three years 
after all ABS interests issued in a series are no longer outstanding.
Request for Comment
    25(a). Is there a market practice of retaining vertical forms of 
risk retention at the series level? 25(b). What advantages and 
disadvantages would there be in allowing sponsors to meet their risk 
retention requirement through a combination of seller's interest and 
vertical holdings at the series level?
    26(a). Are the disclosure and recordkeeping requirements in the 
proposal appropriate? 26(b). Why or why not? 26(c). Is there a 
different time frame that would be more appropriate and if so, what 
would it be?
d. Early Amortization
    The original proposal did not address the impact of early 
amortization on the seller's interest risk retention option. As noted 
above, revolving master trusts issue ABS interests with a revolving 
period, during which each series' share of principal collections on the 
trust's receivables are used to purchase replacement receivables from 
the sponsor. The terms of the revolving trust securitization describe 
various circumstances under which all series will stop revolving and 
principal collections will be used to amortize investors' ABS interests 
as quickly as possible. These terms are designed to protect investors 
from declines in the credit quality of the trust's asset pool. Early 
amortization is exceedingly rare, but when it occurs, the seller's 
interest may fall below its minimum maintenance level, especially if 
the terms of the securitization subordinate the seller's interest to 
investor interests either through express subordination or through a 
more beneficial reallocation to other investors of collections that 
would otherwise have been allocated to the seller's interest. 
Accordingly, the agencies are revising the proposed rule to address the 
circumstances under which a sponsor would fall out of compliance with 
risk retention requirements after such a reduction in the seller's 
interest in the early amortization context.
    Under the proposed rule, a sponsor that suffers a decline in its 
seller's interest during an early amortization period caused by an 
unsecured adverse event would not violate the rule's risk retention 
requirements as a result of such decline, provided that each of the 
following four requirements were met:
     The sponsor was in full compliance with the risk retention 
requirements on all measurement dates before the early amortization 
trigger occurred;
     The terms of the seller's interest continue to make it 
pari passu or subordinate to each series of investor ABS with respect 
to allocation of losses;
     The master trust issues no additional ABS interests after 
early amortization is initiated to any person not wholly-owned by the 
sponsor; \57\ and
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    \57\ In other words, the sponsor is not prohibited from repaying 
all outstanding investors' ABS interests and maintaining the trust 
as a legacy trust, which could be used at a later date to issue 
collateral certificates to a new issuing trust.
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     To the extent that the sponsor is relying on any 
horizontal interests of the type described in the preceding subsection 
to reduce the percentage of its required seller's interest, those 
interests continue to absorb losses as described above.
    The ability of a sponsor to avoid a violation of the risk retention 
in this way is only available to sponsors of master trusts comprised of 
revolving assets. If securitizers of ordinary non-revolving assets were 
permitted to avail themselves of the seller's interest and this early 
amortization treatment, they could create master trust transactions 
that revolved only briefly, with ``easy'' early amortization triggers, 
and thereby circumvent the cash distribution restrictions otherwise 
applicable to risk retention interests under section 4 of the proposed 
rule.
    As an ancillary provision to this proposed early amortization 
treatment, the agencies are proposing to recognize so-called excess 
funding accounts as a supplement to the seller's interest. An excess 
funding account is a segregated account in the revolving master trust, 
to which certain collections on the securitized assets that would 
otherwise be payable to the holder of the seller's interest are 
diverted if the amount of the seller's interest falls below the minimum 
specified in the deal documentation.\58\ If an early amortization event 
for the trust is triggered, the cash in the excess funding account is 
distributed to investors' ABS interests in the same manner as 
collections on the securitized assets. Accordingly, funding of an 
excess funding account would typically be temporary, eventually 
resolved either by the sponsor adding new securitized assets to restore 
the trust to its minimum seller's interest amount (and the funds 
trapped in the excess funding account subsequently would be paid to the 
sponsor), or by the subsequent early amortization of the trust for 
failure to attain the minimum seller's interest over multiple 
measurement dates.
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    \58\ Ordinarily, if the seller's interest would not meet the 
minimum amount required under a formula contained in the deal 
documentation, the sponsor is required to designate additional 
eligible credit plans to the transaction and transfer the 
receivables from those credit plans into the trust to restore the 
securitized assets in the trust to the specified ratio. If the 
sponsor cannot do this for some reason, the excess funding account 
activates to trap certain funds that would otherwise be paid to the 
sponsor out of the trust.
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    As a general matter, the agencies would not propose to confer 
eligible risk retention status on an account that is funded by cash 
flow from securitized

[[Page 57946]]

assets. However, for the other forms of risk retention proposed by the 
agencies, the amount of retention is measured and set at the inception 
of the transaction. Due to the revolving nature of the master trusts, 
periodic measurement of risk retention at the trust level is necessary 
for an effective seller's interest option.
    The agencies are therefore proposing the above-described early 
amortization treatment for trusts that enter early amortization, 
analogous to the measurement at inception under the other approaches. 
If a revolving trust breaches its minimum seller's interest, the excess 
funding account (under the conditions described in the proposed rule) 
functions as an interim equivalent to the seller's interest for a brief 
period and gives the sponsor an opportunity to restore securitized 
asset levels to normal levels.\59\ Under the proposed rule, the amount 
of the seller's interest may be reduced on a dollar-for-dollar basis by 
the amount of cash retained in an excess funding account triggered by 
the trust's failure to meet the minimum seller's interest, if the 
account is pari passu with (or subordinate to) each series of the 
investors' ABS interests and funds in the account are payable to 
investors in the same manner as collections on the securitized assets.
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    \59\ In addition, the only excess funding account that is 
eligible for consideration under the proposed rule is one that is 
triggered from the trust's failure to meet its collateral tests in a 
given period; this is materially different than a violation of, for 
example, a base rate trigger, which signals unexpected problems with 
the credit quality of the securitized assets in the pool.
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Request for Comment
    27(a). Are there changes the agencies should consider making to the 
proposed early amortization and excess funding account provisions in 
order to align them better with market practice while still serving the 
agencies' stated purpose of these sections? 27(b). If so, what changes 
should the agencies consider?
e. Compliance by the Effective Date
    Commenters requested that they only be required to maintain a 5 
percent seller's interest for the amount of the investors' ABS 
interests issued after the effective date of the regulations. As a 
general principle, the agencies also do not seek to apply risk 
retention to ABS issued before the effective date of the regulations. 
On the other hand, the agencies believe that the treatment requested by 
commenters is not appropriate, because the essence of the seller's 
interest form of risk retention is that it is a pro rata, pari passu 
exposure to the entire asset pool. Accordingly, at present, the 
agencies propose to require sponsors relying on the seller's interest 
approach to comply with the rule with respect to the entirety of the 
unpaid principal balance of the trust's outstanding investors' ABS 
interests after the effective date of the rule, without regard to 
whether the investors' ABS interests were issued before or after the 
rule's effective date.
    If the terms of the agreements under which an existing master trust 
securitization operates do not require the sponsor to hold a minimum 
seller's interest to the exact terms of the proposed rule, then the 
sponsor could find revising the terms of outstanding series to conform 
to the rule's exact requirements to be difficult or impracticable. 
Therefore, the agencies propose to recognize a sponsor's compliance 
with the risk retention requirements based on the sponsor's actual 
conduct. If a sponsor has the ability under the terms of the master 
trust's documentation to retain a level of seller's interest (adjusted 
by qualifying horizontal interests at the series level, if any), and 
does not retain a level of seller's interest as required, the agencies 
would consider this to be failure of compliance with the proposed 
rule's requirements.
Request for Comment
    28(a). The agencies request comment as to how long existing 
revolving master trusts would need to come into compliance with the 
proposed risk retention rule under the conditions described above. Do 
existing master trust agreements effectively prohibit compliance? 
28(b). Why or why not? 28(c). From an investor standpoint, what are the 
implications of the treatment requested by sponsor commenters, under 
which sponsors would only hold a seller's interest with respect to 
post-effective date issuances of ABS interests out of the trust?
    29(a). Should the agencies approve exceptions on a case by case 
basis during the post-adoption implementation period, subject to case-
specific conditions appropriate to each trust? 29(b). How many trusts 
would need relief and under what circumstances should such relief be 
granted?
    30. The agencies seek to formulate the seller's interest form of 
risk retention in a fashion that provides meaningful risk retention on 
par with the base forms of risk retention under the rule, and at the 
same time accommodates prudent features of existing market structures. 
The agencies request comment whether the proposal accomplishes both 
these goals and, if not, what additional changes the agencies should 
consider to that end.
3. Representative Sample
a. Overview of Original Proposal and Public Comment
    The original proposal would have provided that a sponsor could 
satisfy its risk retention requirement for a securitization transaction 
by retaining ownership of a randomly selected representative sample of 
assets, equal to at least 5 percent of the unpaid principal balance of 
all pool assets initially identified for securitizing that is 
equivalent in all material respects to the securitized assets. To 
ensure that the sponsor retained exposure to substantially the same 
type of credit risk as investors in the securitized transaction, the 
sponsor electing to use the representatives sample option would have 
been required to construct a ``designated pool'' of assets consisting 
of at least 1,000 separate assets from which the securitized assets and 
the assets comprising the representative sample would be drawn and 
containing no assets other than securitized assets or assets comprising 
the representative sample. The proposed rule would have required a 
sponsor to select a sample of assets from the designated pool using a 
random selection process that would not take into account any 
characteristics other than unpaid principal balance and to then assess 
that representative sample to ensure that, for each material 
characteristic of the assets in the pool, the mean of any quantitative 
characteristic and the proportion of any categorical characteristic is 
within a 95 percent two-tailed confidence interval of the mean or 
proportion of the same characteristics of the assets in the designated 
pool. If the representative sample did not satisfy this requirement, 
the proposal stipulated that a sponsor repeat the random selection 
process until it selected a qualifying sample or opt to use another 
risk retention form.
    The original proposal set forth a variety of safeguards meant to 
ensure that a sponsor using the representative sample option created 
the representative pool in conformance with the requirements described 
above. These included a requirement to obtain a report regarding 
agreed-upon procedures from an independent public accounting firm 
describing whether the sponsor has the required procedures in place for 
selecting the assets to be retained, maintains documentation that 
clearly identifies the assets in the representative sample, and ensures 
that the retained assets are not included in the designated pool of any 
other

[[Page 57947]]

securitizations. The proposed rule also would have required, until all 
of the securities issued in the related securitization had been paid in 
full or the related issuing entity had been dissolved, that servicing 
of the assets in the representative sample and in the securitization 
pool be performed by the same entity under the same contractual 
standards and that the individuals responsible for this servicing must 
not be able to identify an asset as being part of the representative 
sample or the securitization pool. In addition, the sponsor would have 
been required to make certain specified disclosures.
    While some commenters were supportive of the proposal's inclusion 
of the representative sample option, many commenters were critical of 
the option. A number of commenters stated that it would be impractical 
to implement this option for a variety of reasons, including that it 
would be unworkable with respect to various asset classes, would be 
subject to manipulation, and was too burdensome with respect to its 
disclosure requirements. Other commenters recommended that the option 
be limited for use with automobile loans and other loans that are not 
identified at origination for sale through securitization. A number of 
commenters expressed concerns regarding the required size of the 
designated pool, including that the pool size was too large to be 
practical, that it would favor larger lenders, and that it would not 
work well with larger loans, such as jumbo residential mortgage-backed 
securities and commercial mortgages.
    Commenters were generally critical of the proposed requirement for 
a procedures report, contending that the report would impose costs upon 
a sponsor without a commensurate benefit. Additionally, commenters 
representing accounting firms and professionals questioned the value of 
the procedures report and stated that if not provided to investors in 
the securitized transaction, the report could run afoul of certain 
rules governing the professional standards of accountants. Commenters 
also recommended that the blind servicing requirement of the option be 
modified to allow for certain activities, such as loss mitigation, 
assignment of loans to special servicers, disclosure of loan level 
data, and remittance of funds to appropriate parties.
b. Proposed Treatment
    The agencies have considered the comments on the representative 
sample option in the original proposal and are concerned that, based on 
observations by commenters, the representative sample option would be 
difficult to implement and may result in the costs of its utilization 
outweighing its benefits. Therefore, the agencies are not proposing to 
include a representative sample option in the re-proposed rule. The 
agencies believe that the other proposed risk retention options would 
be better able to achieve the purposes of section 15G, including the 
standard risk retention option, while reducing the potential to 
negatively affect the availability and costs of credit to consumers and 
businesses.
Request for Comment
    31(a). Should the agencies include a representative sample option 
as a form of risk retention? 31(b). If so, how should such an option be 
constructed, consistent with establishing a statistically 
representative sample? 31(c). What benefits would including such an 
option provide to the securitization market, investors, borrowers, or 
others?
4. Asset-Backed Commercial Paper Conduits
a. Overview of the Original Proposal and Public Comments
    The original proposal included a risk retention option specifically 
designed for asset-backed commercial paper (ABCP) structures. As 
explained in the original proposal, ABCP is a type of liability that is 
typically issued by a special purpose vehicle (commonly referred to as 
a ``conduit'') sponsored by a financial institution or other sponsor. 
The commercial paper issued by the 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 securitized assets 
collateralizing the ABS interests that support the ABCP may consist of 
a wide range of assets including automobile loans, commercial loans, 
trade receivables, credit card receivables, student loans, and other 
loans. 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.\60\ The original proposal was designed to 
take into account the special structures through which some conduits 
typically issue ABCP, as well as the manner in which participants in 
the securitization chain of these conduits typically retain exposure to 
the credit risk of the underlying assets.
---------------------------------------------------------------------------

    \60\ See Original Proposal at Sec.  ----.9.
---------------------------------------------------------------------------

    Under the original proposal, this risk retention option would have 
been available only for short-term ABCP collateralized by asset-backed 
securities that were issued or initially sold exclusively to ABCP 
conduits and supported by a liquidity facility that provides 100 
percent liquidity coverage from a banking institution. The option would 
not have been available to ABCP conduits that lack 100 percent 
liquidity coverage or ABCP conduits that operate purchased securities 
or arbitrage programs \61\ in the secondary market.
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    \61\ 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 coverage, though terms are more limited than those of the 
ABCP conduits eligible for special treatment pursuant to the 
proposed rule.
---------------------------------------------------------------------------

    In a typical ABCP conduit, the sponsor of the ABCP conduit approves 
the originators whose loans or receivables will collateralize the ABS 
interests that support the ABCP issued by the conduit. Banks can use 
ABCP conduits that they sponsor to meet the borrowing needs of a bank 
customer and offer that customer a more attractive cost of funds than a 
commercial loan or a traditional debt or equity financing. In such a 
transaction, the customer (an ``originator-seller'') may sell loans or 
receivables to an intermediate, bankruptcy remote SPV 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 ABS interest that is purchased by the ABCP conduit and a 
residual ABS interest that absorbs first losses on the receivables and 
that is retained by the originator-seller. The residual ABS interest 
retained by the originator-seller typically is sized with the intention 
that it be sufficiently large to absorb all losses on the underlying 
receivables.
    The ABCP conduit, in turn, issues short-term ABCP that is 
collateralized by the senior ABS interests purchased from one or more 
intermediate SPVs (which are supported by the subordination provided by 
the residual ABS interests retained by the originator-sellers). The 
sponsor of this type of ABCP conduit, which is usually a bank or other 
regulated financial institution or an affiliate or subsidiary of a bank 
or other regulated financial institution, also typically provides (or 
arranges for another regulated financial institution or group of 
financial institution to provide) 100 percent liquidity coverage on the 
ABCP issued by the conduit. This liquidity coverage typically requires 
the

[[Page 57948]]

support provider to provide funding to, or purchase assets or ABCP 
from, the ABCP conduit in the event that the conduit lacks the funds 
necessary to repay maturing ABCP issued by the conduit.
    The original proposal included several conditions designed to 
ensure that this option would be available only to the type of ABCP 
conduits that do not purchase securities in the secondary market, as 
described above. For example, this option would have been available 
only with respect to ABCP issued by an ``eligible ABCP conduit,'' as 
defined by the original proposal. The original proposal defined an 
eligible ABCP conduit as an issuing entity that issues ABCP and that 
meets each of the following criteria.\62\ First, the issuing entity 
would have been required to have been 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 would have been required to be collateralized solely by assets 
originated by a single originator-seller.\63\ Third, all the interests 
issued by an intermediate SPV would have been required to be 
transferred to one or more ABCP conduits or retained by the originator-
seller. Fourth, a regulated liquidity provider would have been required 
to enter into a legally binding commitment to provide 100 percent 
liquidity coverage (in the form of a lending facility, an asset 
purchase agreement, a repurchase agreement, or similar arrangement) to 
all of the ABCP issued by the issuing entity by lending to, or 
purchasing assets or ABCP from, the issuing entity in the event that 
funds were required to repay maturing ABCP issued by the issuing 
entity.\64\
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    \62\ See Original Proposal at Sec.  ----.2 (definition of 
``eligible ABCP conduit'').
    \63\ Under the original proposal, an originator-seller would 
mean an entity that creates financial assets through one or more 
extensions of credit or otherwise and sells those financial 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 original proposal defined 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 Original Proposal at Sec.  
----.2 (definitions of ``originator-seller'' and ``intermediate 
SPV'').
    \64\ The original proposal defined 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 original proposal, the sponsor of an eligible ABCP 
conduit would have been permitted to satisfy its base risk retention 
obligations if each originator-seller that transferred assets to 
collateralize the ABS interests that supported the ABCP issued by the 
conduit retained the same amount and type of credit risk as would be 
required under the horizontal risk retention option under the original 
proposal as if the originator-seller was the sponsor of the 
intermediate SPV. Specifically, the original proposal provided that a 
sponsor of an ABCP securitization transaction could satisfy its base 
risk retention requirement with respect to the issuance of ABCP by an 
eligible ABCP conduit if each originator-seller retained an eligible 
horizontal residual interest in each intermediate SPV established by or 
on 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 would have been required to equal at 
least 5 percent of the par value of all interests issued by the 
intermediate SPV.
    Accordingly, each originator-seller would have been required to 
retain credit exposure to the receivables sold by that originator-
seller to support issuance of the ABCP. The originator-seller also 
would have been prohibited from selling, transferring, or hedging the 
eligible horizontal residual interest that it is required to retain. 
This option was designed to accommodate the special structure and 
features of these types of ABCP programs.
    The original proposal also would have imposed certain obligations 
directly on the sponsor in recognition of the key role the sponsor 
plays in organizing and operating an eligible ABCP conduit. First, the 
original proposal provided that the sponsor of an eligible ABCP conduit 
that issues ABCP in reliance on the option would have been responsible 
for compliance with the requirements of this risk retention option. 
Second, the sponsor would have been required to maintain policies and 
procedures to monitor the originator-sellers' compliance with the 
requirements of the proposal.
    The sponsor also would have been required 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 retained an 
interest in the securitization transaction pursuant to section 9 of the 
original proposal (including a description of the form, amount, and 
nature of such interest), and of the regulated liquidity provider that 
provided liquidity coverage 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.\65\ In developing the risk 
retention option for eligible ABCP conduits in the original proposal, 
the agencies considered the factors set forth in section 15G(d)(2) of 
the Exchange Act.\66\ The original proposal included conditions 
designed to ensure that the interests in the intermediate SPVs sold to 
an eligible ABCP conduit would have low credit risk, and to ensure that 
originator-sellers had 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 original proposal was designed to 
effectuate the risk retention requirements of section 15G of the 
Exchange Act in a manner that facilitated 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 have been subject to the same restrictions on 
transferring or hedging the retained eligible horizontal residual 
interest to a third party as applied to sponsors under the original 
proposal.
---------------------------------------------------------------------------

    \65\ See 15 U.S.C. 78o-11(c)(1)(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).
    \66\ See id. at Section 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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b. Comments on the Original Proposal
    Commenters generally supported including an option specifically for 
ABCP structures. Commenters

[[Page 57949]]

expressed concern, however, about several aspects of the option. Many 
commenters recommended allowing the credit enhancements usually found 
in ABCP conduit programs (i.e., 100 percent liquidity facilities or 
program-wide credit enhancement) to qualify as a form of risk 
retention, in addition to the proposed option, because sponsors that 
provide this level of protection to their conduit programs are already 
exposed to as much (or more) risk of loss as a sponsor that holds an 
eligible horizontal residual interest. Several commenters also 
requested that the agencies permit originator-sellers to also use the 
other permitted menu options, such as master trusts.
    Commenters generally did not support the restrictions in the 
definition of ``eligible ABCP conduit'' in the original proposal 
because these restrictions would prevent ABCP multi-seller conduits 
from financing ABS that was collateralized by securitized assets 
originated by more than one originator. In particular, the restriction 
that assets held by an intermediate SPV must have been ``originated by 
a single originator-seller'' would, as these commenters asserted, 
preclude funding assets that an originator-seller acquires from a third 
party or from multiple affiliated originators under a corporate group, 
which commenters asserted was a common market practice. Many commenters 
noted that the requirement that all of the interests issued by the 
intermediate SPV be transferred to one or more ABCP conduits or 
retained by the originator-seller did not take into account that, in 
many cases, an intermediate SPV may also sell interests to investors 
other than ABCP conduits.
    Some commenters also observed that the original proposal did not 
appear to accommodate ABCP conduit transactions where originator-
sellers sell their entire interest in the securitized receivables to an 
intermediate SPV in exchange for cash consideration and an equity 
interest in the SPV. The SPV, in turn, would hold the retained 
interest. Therefore, these commenters recommended that the rule permit 
an originator-seller to retain its interest through its or its 
affiliate's ownership of the equity in the intermediate SPV, rather 
than directly. In addition, a commenter requested that the agencies 
revise the ABCP option to accommodate structures where the intermediate 
SPV is the originator. A few commenters requested that the agencies 
expand the definition of eligible liquidity provider to include 
government entities, and to allow multiple liquidity providers for one 
sponsor. Some commenters also criticized the monitoring and disclosure 
requirements for the ABCP option in the original proposal. A few 
commenters recommended that the ABCP option be revised so that ABCP 
with maturities of up to 397 days could use the ABCP option.
c. Proposed ABCP Option
    The agencies are proposing an option for ABCP securitization 
transactions that retains the basic structure of the original proposal 
with modifications to a number of requirements intended to address 
issues raised by commenters.\67\ As with the original proposal, the 
proposal permits the sponsor to satisfy its base risk retention 
requirement 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 as if the originator-
seller was the sponsor of the intermediate SPV. The agencies continue 
to believe that such an approach, as modified by the proposal, is 
appropriate in light of the considerations set forth in section 
15G(d)(2) of the Exchange Act.\68\ These modifications are intended to 
allow the ABCP option to accommodate certain of the wider variety of 
market practices observed in the comments on the original proposal 
while establishing a meaningful risk retention requirement. In summary, 
these modifications are designed to permit somewhat more flexibility on 
behalf of originator-sellers that finance through ABCP conduits 
extensions of credit they create in connection with their business 
operations. The additional flexibility granted under the revised 
proposal permits affiliated groups of originator-sellers to finance 
credits through a combined intermediate SPV. It also permits additional 
flexibility where an originator seller uses an intermediate SPV not 
only to finance credits through an ABCP conduit, but also other ABS 
channels, such as direct private placements in the investor market. The 
proposal also permits additional flexibility to accommodate the 
structures of intermediate SPVs, such as revolving master trusts and 
pass-through intermediate special purpose vehicles (ISPVs). 
Nevertheless, the revised proposal retains the original proposal's core 
requirements, including the 100 percent liquidity coverage requirement. 
The revised proposal also does not accommodate ``aggregators'' who use 
ABCP to finance assets acquired in the market; the assets underlying 
each intermediate SPV must be created by the respective originator-
seller.
---------------------------------------------------------------------------

    \67\ As with the original proposal, the proposal permits the 
sponsor to satisfy its base risk retention requirement 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 as if the originator-seller was the 
sponsor of the intermediate SPV, provided that all other conditions 
to this option are satisfied. The agencies continue to believe that 
such an approach, as modified by the proposal, is appropriate in 
light of the considerations set forth in section 15G(d)(2) of the 
Exchange Act. See note 66, supra. In developing the risk retention 
option for eligible ABCP conduits in the original proposal, the 
agencies considered the factors set forth in section 15G(d)(2) of 
the Exchange Act. The proposal include conditions designed to ensure 
that the interests in the intermediate SPVs sold to an eligible ABCP 
conduit would have low credit risk, and to ensure that originator-
sellers had 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 or hedging 
the retained interest to a third party as applied to sponsors of 
securitization transactions.
    \68\ See note 66, supra.
---------------------------------------------------------------------------

    First, the proposal would introduce the concept of a ``majority-
owned originator-seller affiliate'' (OS affiliate), which would be 
defined under the proposal as an entity that, directly or indirectly, 
majority controls, is majority controlled by, or is under common 
majority control with, an originator-seller participating in an 
eligible ABCP conduit. For purposes of this definition, majority 
control would mean ownership of more than 50 percent of the equity of 
an entity or ownership of any other controlling financial interest in 
the entity (as determined under GAAP). Under the proposal, both an 
originator-seller and a majority-owned OS affiliate could sell or 
transfer assets that these entities have originated to an intermediate 
SPV.\69\ However, intermediate SPVs could not acquire assets directly 
from non-affiliates. This modification addresses the agencies' concern 
about asset aggregators that acquire loans and receivables from 
multiple sources in the market, place them in an intermediate SPV, and 
issue interests to ABCP conduits. Where, as in

[[Page 57950]]

the case of an eligible ABCP conduit, a banking institution provides 
100 percent liquidity coverage to the conduit, the Federal banking 
agencies are concerned that the aggregation model could interfere with 
the liquidity provider's policies and practices for monitoring and 
managing the risk exposure of the guarantee. In light of the purposes 
of section 15G, the Federal banking agencies do not believe that 
extending the ABCP option to ABCP conduits that are used to finance the 
purchase and securitization of receivables purchased in the secondary 
market would consistently help ensure high quality underwriting of ABS.
---------------------------------------------------------------------------

    \69\ With the majority ownership standard, the agencies are 
proposing to require a high level of economic identity of interest 
between firms that are permitted to use a common intermediate SPV as 
a vehicle to finance their assets. The agencies are concerned that a 
lower standard of affiliation in this regard could make it more 
difficult for the conduit sponsor and liquidity provider to 
understand the credit quality of assets backing the conduit. 
Moreover, a lower standard of affiliation creates opportunities for 
an originator-seller to act as an aggregator by securitizing 
purchased assets through special-purpose vehicles the originator-
seller creates and controls for such purposes, and putting the ABS 
issued by those special-purpose vehicles into the intermediate SPV.
---------------------------------------------------------------------------

    Second, the proposal would allow for multiple intermediate SPVs 
between an originator-seller and a majority-owned OS affiliate. As 
indicated in the comments on the original proposal, there are instances 
where, for legal or other purposes, there is a need for multiple 
intermediate SPVs. Under the proposal, an intermediate SPV would be 
defined to be a direct or indirect wholly-owned affiliate \70\ of the 
originator-seller that is bankruptcy remote or otherwise isolated for 
insolvency purposes from the eligible ABCP conduit, the originator-
seller, and any majority-controlled OS affiliate that, directly or 
indirectly, sells or transfers assets to such intermediate SPV. The 
intermediate SPV would be permitted to acquire assets originated by the 
originator-seller or its majority-controlled OS affiliate from the 
originator-seller or majority-controlled OS affiliate, or it could also 
acquire assets or asset-backed securities from another controlled 
intermediate SPV collateralized solely by securitized assets originated 
by the originator-seller or its majority-controlled OS affiliate and 
servicing assets. Finally, intermediate SPVs in structures with 
multiple intermediate SPVs that do not issue asset-backed securities 
collateralized solely by ABS interests must be pass-through entities 
that either transfer assets to other SPVs in anticipation of 
securitization (e.g., a depositor) or transfer ABS interests to the 
ABCP conduit or another intermediate SPV. Finally, under the proposal, 
all ABS interests held by an eligible ABCP conduit must be issued in a 
securitization transaction sponsored by an originator-seller and 
supported by securitized assets originated or created by an originator-
seller or one or more majority-owned OS affiliates of the originator-
seller.
---------------------------------------------------------------------------

    \70\ See proposed rule at Sec.  ----.2 (definition of 
``affiliate'').
---------------------------------------------------------------------------

    Third, the proposed rule, in contrast to the original proposal, 
would allow an intermediate SPV to sell asset-backed securities that it 
issues to third parties other than ABCP conduits. For example, the 
agencies believe that some originator-sellers operate a revolving 
master trust to finance extensions of credit the originator-seller 
creates in connection with its business operations. The master trust 
sometimes issues a series of ABS backed by an interest in those credits 
directly to investors through a private placement transaction or 
registered offering, and other times issues an interest to an eligible 
ABCP conduit. The proposed rule would accommodate this practice.
    Fourth, the proposal would clarify and expand (as compared to the 
original proposal) the types of collateral that an eligible ABCP 
conduit could acquire from an originator-seller. Under the proposed 
definition of ``eligible ABCP conduit'', a conduit could acquire any of 
the following types of assets: (1) ABS interests supported by 
securitized assets originated by an originator-seller or one or more 
majority-controlled OS affiliates of the originator seller, and by 
servicing assets; \71\ (2) special units of beneficial interest or 
similar interests in a trust or special purpose vehicle that retains 
legal title to leased property underlying leases that were transferred 
to an intermediate SPV in connection with a securitization 
collateralized solely by such leases originated by an originator-seller 
or majority-controlled OS affiliate and by servicing assets; and (3) 
interests in a revolving master trust collateralized solely by assets 
originated by an originator-seller or majority-controlled OS affiliate; 
and by servicing assets.\72\
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    \71\ The purpose of this clarification is to allow originator-
sellers certain additional flexibility in structuring their 
participation in eligible ABCP conduits, while retaining the core 
principle that the assets being financed have been originated by the 
originator-seller or a majority-controlled OS affiliate, not 
purchased and aggregated.
    \72\ The definition of ``servicing assets'' is discussed in Part 
II.B of this Supplementary Information. The agencies are allowing an 
ABCP conduit to hold servicing assets, and thus acknowledge the 
kinds of rights and assets that a typical ABCP conduit needs to have 
in order to conduct the activities required in a securitization.
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    Consistent with this principle, the agencies seek to clarify that 
the ABS interests acquired by the conduit could not be collateralized 
by securitized assets otherwise purchased or acquired by the 
intermediate SPV's originator-seller, majority-controlled OS affiliate, 
or by the intermediate SPV from unaffiliated originators or sellers. 
The ABS interests also would have to be acquired by the ABCP conduit in 
an initial issuance by or on behalf of an intermediate SPV, (1) 
directly from the intermediate SPV, (2) from an underwriter of the 
securities issued by the intermediate SPV, or (3) from another person 
who acquired the securities directly from the intermediate SPV. In 
addition, the ABCP conduit would have to be collateralized solely by 
asset-backed securities acquired by the ABCP conduit in an initial 
issuance by or on behalf of an intermediate SPV directly from the 
intermediate SPVs, from an underwriter of the securities issued by the 
intermediate SPV, or from another person who acquired the securities 
directly from the intermediate SPV and servicing assets. Because 
eligible ABCP conduits can only purchase ABS interests in an initial 
issuance, eligible ABCP conduits may not aggregate ABS interests by 
purchasing them in the secondary market.
    Fifth, in response to comments on the original proposal that an 
originator-seller should be able to use a wider variety of risk 
retention options, the proposal would expand the retention options 
available to the originator-seller. Under the proposed rule, an 
eligible ABCP conduit would satisfy its risk retention requirements if, 
with respect to each asset-backed security the ABCP conduit acquires 
from an intermediate SPV, the originator-seller or majority-controlled 
OS affiliate held risk retention in the same form, amount, and manner 
as would be required using the standard risk retention or revolving 
asset master trust options. Thus, in the example above of an 
originator-seller that finances credits through a revolving master 
trust, the originator-seller could retain risk in the form of a 
seller's interest meeting the requirements of the revolving master 
trust provisions of the proposed rule.
    Sixth, consistent with the original proposal, the proposal requires 
that 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) of 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. The proposal clarifies that 100 percent 
liquidity coverage means that, in the event that the ABCP conduit is 
unable for any reason to repay maturing ABCP issued by the issuing 
entity, the total amount for which the liquidity provider may be 
obligated is equal to 100 percent of the amount of ABCP outstanding 
plus

[[Page 57951]]

accrued and unpaid interest. Amounts due pursuant to the required 
liquidity coverage may not be subject to credit performance of the ABS 
held by the ABCP conduit or reduced by the amount of credit support 
provided to the ABCP conduit. Liquidity coverage that only funds 
performing receivables or performing ABS interests will not meet the 
requirements of the ABCP option.
d. Duty To Monitor and Disclosure Requirements
    Consistent with the original proposal, the agencies are proposing 
that the sponsor of an eligible ABCP conduit would continue to be 
responsible for compliance. Some commenters on the original proposal 
requested that the agencies replace the monitoring obligation with a 
contractual obligation of an originator-seller to maintain compliance. 
However, the agencies believe that the sponsor of an ABCP conduit is in 
the best position to monitor compliance by originator-sellers. 
Accordingly, the proposal would continue to require the sponsor of an 
ABCP conduit to monitor compliance by an originator-seller.
e. Disclosure Requirements
    The agencies also are proposing disclosure requirements that are 
similar to those in the original proposal, with two changes. First, the 
agencies are proposing to remove the requirement that the sponsor of 
the ABCP conduit disclose the names of the originator-sellers. The 
proposal would continue to require the sponsor of an ABCP conduit to 
provide to each purchaser of ABCP the name and form of organization of 
the regulated liquidity provider that provides liquidity coverage to 
the eligible ABCP conduit, including a description of the form, amount, 
and nature of such liquidity coverage, and notice of any failure to 
fund. In addition, with respect to each ABS interest held by the ABCP 
conduit, the sponsor of the ABCP conduit would be required to provide 
the asset class or brief description of the underlying receivables for 
each ABS interest, the standard industrial category code (SIC Code) for 
the originator-seller or majority-controlled OS affiliate that will 
retain (or has retained) pursuant to this section an interest in the 
securitization transaction, and a description of the form, amount 
(expressed as a percentage and as a dollar amount (or corresponding 
amount in the foreign currency in which the ABS are issued, as 
applicable) of the fair value of all ABS interests issued in the 
securitization transaction. Finally, an ABCP conduit sponsor relying on 
the ABCP option would be required to provide, or cause to be provided, 
upon request, to the Commission and its appropriate Federal banking 
agency, if any, in writing, all of the information required to be 
provided to investors and the name and form of organization of each 
originator-seller or majority-controlled OS affiliate that will retain 
(or has retained) an interest in the underlying securitization 
transactions.
    Second, a sponsor of an ABCP conduit would be required to promptly 
notify investors, the Commission, and its appropriate Federal banking 
agency, if any, in writing of (1) the name and form of organization of 
any originator-seller that fails to maintain its risk retention as 
required by the proposed rule and the amount of asset-backed securities 
issued by an intermediate SPV of such originator-seller and held by the 
ABCP conduit; (2) the name and form of organization of any originator-
seller that hedges, directly or indirectly through an intermediate SPV, 
its risk retention in violation of its risk retention requirements and 
the amount of asset-backed securities issued by an intermediate SPV of 
such originator-seller and held by the ABCP conduit; and (3) and any 
remedial actions taken by the ABCP conduit sponsor or other party with 
respect to such asset-backed securities. In addition, the sponsor of an 
ABCP conduit would be required to take other appropriate steps upon 
learning of a violation by an originator-seller of its risk retention 
obligations including, as appropriate, curing any breach of the 
requirements, or removing from the eligible ABCP conduit any asset-
backed security that does not comply with the applicable requirements. 
To cure the non-compliance of the non-conforming asset, the sponsor 
could, among other things, purchase the non-conforming asset from the 
ABCP conduit, purchase 5 percent of the outstanding ABCP and comply 
with the vertical risk retention requirements, or declare an event of 
default under the underlying transaction documents (assuming the 
sponsor negotiated such a term) and accelerate the repayment of the 
underlying assets.
f. Other Items
    In most cases, the sponsor of the ABCP issued by the conduit will 
be the bank or an affiliate of the bank that organizes the conduit. The 
agencies note that the use of the ABCP option by the sponsor of an 
eligible ABCP conduit would not relieve the originator-seller from its 
independent obligation to comply with its own risk retention 
obligations under the revised proposal, if any. In most, if not all, 
cases, the originator-seller will be the sponsor of the asset-backed 
securities issued by an intermediate SPV and will therefore be required 
to hold an economic interest in the credit risk of the assets 
collateralizing the asset-backed securities issued by the intermediate 
SPV. The agencies also note that a sponsor of an ABCP conduit would not 
be limited to using the ABCP option to satisfy its risk retention 
requirements. An ABCP conduit sponsor could rely on any of the risk 
retention options described in section 4 of the proposed rule.
    The agencies are proposing definitions of ``ABCP'' and ``eligible 
liquidity provider'' that are the same as the definitions in the 
original proposal. The agencies believe it would be inappropriate to 
expand the ABCP option to commercial paper that has a term of over nine 
months, because a duration of nine months accommodates almost all 
outstanding issuances and the bulk of those issuances have a 
significantly shorter term of 90 days or less. In addition, the 
agencies have not expanded the definition of eligible liquidity 
provider to include sovereign entities. The agencies do not believe 
that prudential requirements could be easily designed to accommodate a 
sovereign entity that functions as a liquidity provider to an ABCP 
conduit.
Request for Comments
    32(a). To the extent that the proposed ABCP risk retention option 
does not reflect market practice, how would modifying the proposal help 
ensure high quality underwriting of ABCP? 32(b). What structural or 
definitional changes to the proposal would be appropriate, including 
but not limited to any changes to the proposed definitions of 100 
percent liquidity coverage, eligible ABCP conduit, intermediate SPV, 
majority-owned OS affiliate, originator-seller, and regulated liquidity 
provider? 32(c). Do ABCP conduits typically have 100 percent liquidity 
coverage as defined in the proposal? 32(d). What percentage of ABCP 
conduits and what percentage of ABCP currently outstanding was issued 
by such conduits?
    33(a). Do ABCP conduits typically only purchase assets directly 
from intermediate SPVs (i.e., that meet the requirements of the 
proposal? 33(b). What percentage of ABCP currently outstanding was 
issued by such conduits?
    34(a). Do ABCP conduits typically purchase receivables directly 
from customers, rather than purchasing ABS interests from SPVs 
sponsored by customers? 34(b). What percentage of ABCP currently 
outstanding was issued

[[Page 57952]]

by such conduits? 34(c). Is the requirement that an ABCP conduit 
relying on this option may not purchase receivables directly from the 
originator appropriate? 34(d). Why or why not?
    35(a). Is the requirement that an ABCP conduit relying on this 
option may not purchase ABS interests in the secondary market 
appropriate? 35(b). Why or why not? 35(c). Does the proposed ABCP 
option appropriately capture assets that are acquired through business 
combinations?
    36(a). Do ABCP conduits typically purchase corporate debt 
securities on a regular or occasional basis? 36(b). What percentage of 
ABCP currently outstanding was issued by such conduits?
    37(a). Do ABCP conduits typically purchase ABS in the secondary 
market on a regular or occasional basis? 37(b). What percentage of ABCP 
currently outstanding was issued by such conduits?
    38. With respect to ABCP conduits that purchase assets that do not 
meet the requirements of the proposal, what percentage of those ABCP 
conduits' assets do not meet the requirements?
    39(a). Should the agencies allow multiple eligible liquidity 
providers for purposes of the ABCP risk retention options? 39(b). If 
so, should this be limited to special circumstances? 39(c). Should the 
agencies allow a liquidity provider to provide liquidity coverage with 
respect to a specific ABS interest?
    40(a). Does the definition of majority-owned OS affiliate 
appropriately capture companies that are affiliated with an originator-
seller? 40(b). Why or why not?
    41. Should the rule require disclosure of the originator seller in 
the case of noncompliance by the originator seller?
    42(a). Should the rule also require disclosure to investors in ABCP 
in all cases of violation of this section? 42(b). Why or why not? 
42(c). If so, should the rule prescribe how such disclosure be made 
available to investors?
    43. Are there other changes that should be made to disclosure 
provisions?
    44. Should the rule provide further clarity as to who will be 
deemed a sponsor of ABCP issued by an ABCP conduit?
    45(a). Should there be a supplemental phase-in period (beyond the 
delayed effective dates in 15 U.S.C. 78o-11(i)) for existing ABCP 
conduits that do not meet the proposed definition of eligible ABCP 
conduit? 45(b). Why or why not? 45(c). If so, what would be the 
appropriate limit (e.g., up to 10 percent of the assets in the ABCP 
conduit could be nonconforming), and what would be the appropriate time 
period(s) for conformance (e.g., up to two years)?
5. Commercial Mortgage-Backed Securities
a. Overview of the Original Proposal and Public Comments
    Section 15G(c)(1)(E) of the Exchange Act (15 U.S.C. 78o-
11(c)(1)(E)) provides that, with respect to CMBS, the regulations 
prescribed by the agencies may provide for retention of the first-loss 
position by a third-party purchaser that specifically negotiates for 
the purchase of such first-loss position, holds adequate financial 
resources to back losses, provides due diligence on all individual 
assets in the pool before the issuance of the asset-backed securities, 
and meets the same standards for risk retention as the Federal banking 
agencies and the Commission require of the securitizer. In light of 
this provision and the historical market practice of third-party 
purchasers acquiring first-loss positions in CMBS transactions, the 
agencies originally proposed 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 acquired an eligible 
horizontal residual interest in the issuing entity.\73\ The acquired 
interest would have had to take the same form, amount, and manner as 
the sponsor would have been required to retain under the horizontal 
risk retention option. The CMBS risk retention option would have been 
available only for securitization transactions where commercial real 
estate loans constituted at least 95 percent of the unpaid principal 
balance of the assets being securitized and where six proposed 
requirements were met:
---------------------------------------------------------------------------

    \73\ Such third-party purchasers are commonly referred to in the 
CMBS market as ``B-piece buyers'' and the eligible horizontal 
residual interest is commonly referred to as the ``B-piece.''
---------------------------------------------------------------------------

    (1) The third-party purchaser retained an eligible 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;
    (2) The third-party purchaser paid 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;
    (3) The third-party purchaser performed a review of the credit risk 
of each asset in the pool prior to the sale of the asset-backed 
securities;
    (4) The third-party purchaser could not be affiliated with any 
other party to the securitization transaction (other than investors) or 
have control rights in the securitization (including, but not limited 
to acting as servicer or special servicer) that were not collectively 
shared by all other investors in the securitization;
    (5) The sponsor provided, or caused to be provided, to potential 
purchasers certain information concerning the third-party purchaser and 
other information concerning the transaction; and
    (6) Any third-party purchaser acquiring an eligible horizontal 
residual interest under the CMBS option complied with the hedging, 
transfer and other restrictions applicable to such interest under the 
proposed rules as if the third-party purchaser was a sponsor who had 
acquired the interest under the horizontal risk retention option.
    As stated in the original proposal, these requirements were 
designed to help ensure that the form, amount and manner of the third-
party purchaser's risk retention would be consistent with the purposes 
of section 15G of the Exchange Act.
    Generally, commenters supported the ability of sponsors to transfer 
credit risk to third-party purchasers. One commenter stated that the 
CMBS option acknowledged the mandate of section 941 of the Dodd-Frank 
Act and the recommendations of the Federal Reserve Board by providing 
much need flexibility to the risk retention rules and recognized the 
impact and importance of the third-party purchaser in the CMBS market. 
Some commenters, however, believed the proposed criteria for the option 
would discourage the use of the option or render the option unworkable. 
In particular, one commenter raised concerns with the restrictions on 
financing and hedging of the B-piece, the restrictions on the transfer 
of such interest for the life of the transaction, restrictions on 
servicing and control rights including the introduction of an operating 
advisor, and requirements related to the disclosure of the B-piece 
purchase price would likely discourage the use of the CMBS option.
    In response to the agencies' question in the original proposal as 
to whether a third-party risk retention option should be available to 
other asset classes, commenters' views were mixed. Some commenters 
expressed support for allowing third parties to retain the risk in 
other asset classes, with other commenters supporting a third-party

[[Page 57953]]

option for RMBS and another commenter suggesting the option be made 
available to any transaction in which individual assets may be 
significant enough in size to merit the individual review required of a 
third-party purchaser.
    The agencies believe that a third-party purchaser that specifically 
negotiates for the purchase of a first-loss position is a common 
feature of commercial mortgage securitizations that is generally not 
found in other asset classes. For this reason, section 15G(c)(1)(E)(ii) 
of the Exchange Act specifically permits the agencies to create third-
party risk retention for commercial mortgage securitizations. However, 
the agencies believe there is insufficient benefit to market liquidity 
to justify an expansion of third-party risk retention to other asset 
classes, and propose to maintain the more direct alignment of 
incentives achieved by requiring the sponsor to retain risk for the 
other asset classes not covered by section 15G(c)(1)(E)(ii).
    The agencies also received many comments with respect to the 
specific conditions of the CMBS option in the original proposal. In 
this proposed rule, the CMBS option is similar to that of the original 
proposal, but incorporates a number of key changes the agencies believe 
are appropriate in response to concerns raised by commenters. These are 
discussed below.
b. Proposed CMBS Option
i. Number of Third-Party Purchasers and Retention of Eligible Interest
    Under the original proposal, only one third-party purchaser could 
retain the required risk retention interest. Additionally, the third-
party purchaser would have been required to retain an eligible 
horizontal residual interest in the securitization in the same form, 
amount and manner as would be required of the sponsor under the 
horizontal retention option. The proposed CMBS option was not designed 
to permit a third-party purchaser to share the required risk retention 
with the sponsor.
    Many commenters on the original proposal requested flexibility in 
satisfying the CMBS option through the sharing of risk retention 
between sponsors and third-party purchasers, as well as among multiple 
third-party purchasers. In particular, some commenters noted that 
allowing such flexibility would be consistent with how the proposed 
rule would allow a sponsor to choose to retain a vertical and 
horizontal retention piece to share the risk retention obligation with 
an originator.
    The agencies considered the comments on the original proposal 
carefully and believe that some additional flexibility for the CMBS 
risk retention option would be appropriate. Accordingly, under the 
proposed rule, the agencies would allow two (but no more than two) 
third-party purchasers to satisfy the risk retention requirement 
through the purchase of an eligible horizontal residual interest (as 
defined under the proposed rule). Each third-party purchaser's interest 
would be required to be pari passu with the other third-party 
purchaser's interest, so that neither third-party purchaser's losses 
are subordinate to the other's losses. The agencies do not believe it 
would be appropriate to allow more than two third-party purchasers to 
satisfy the risk retention requirement for a single transaction, 
because it could dilute too much the incentives generated by the risk 
retention requirement to monitor the credit quality of the commercial 
mortgages in the pool.
    The agencies are also revising the CMBS option to clarify that, 
when read together with the revisions that have been made to the 
standard risk retention requirements, the eligible horizontal residual 
interest held by the third-party purchasers can be used to satisfy the 
standard risk retention requirements, either by itself as the sole 
credit risk retained or in combination with a vertical interest held by 
the sponsor. The agencies believe this flexibility increases the 
likelihood that third-party purchasers will assume risk retention 
obligations. The agencies further believe that the interests of the 
third-party purchaser and other investors are aligned through other 
provisions of the proposed CMBS option, namely the Operating Advisor 
provisions and disclosure provisions discussed below.
ii. Third-Party Purchaser Qualifying Criteria
    In the original proposal, the agencies did not propose qualifying 
criteria for third-party purchasers related to the third-party 
purchaser's experience or financial capabilities.
    One commenter proposed that only ``qualified'' third-party 
purchasers be permitted to retain the risk under the CMBS option, with 
such qualifications based on certain pre-determined criteria of 
experience, financial analysis capability, capability to direct the 
special servicer and certain financial capabilities to sustain losses. 
Another commenter requested that the final rule require third-party 
purchasers to be independent from special servicers.
    Consistent with the original proposal, the agencies are not 
proposing to add specific qualifying criteria for third-party 
purchasers. The agencies believe that investors in the business of 
purchasing B-piece interests in CMBS transactions, who are typically 
interested in acquiring special servicing rights in such transactions, 
likely have the requisite experience and capabilities to make an 
informed decision regarding their purchases. Furthermore, the agencies 
continue to propose disclosure requirements with respect to the 
identity and experience of third-party purchasers in the transaction, 
which will alert investors in a CMBS transaction as to the experience 
of third-party purchasers and other material information necessary to 
make an informed investment decision. Additionally, based generally on 
comments the agencies have received, the agencies have not added a 
requirement that third-party purchasers be independent from special 
servicers since the acquisition of special servicing rights is a 
primary reason why third-party purchasers are willing to purchase the 
B-piece in the CMBS transactions. Such an independence requirement 
would adversely affect the willingness of third-party purchasers to 
assume the risk retention obligations in CMBS transactions.
iii. Composition of Collateral
    Consistent with the original proposal, the agencies are restricting 
the third-party purchaser option to securitization transactions 
collateralized by commercial real estate loans. However, the original 
proposal allowed up to 5 percent of the collateral to be other types of 
assets, in order to accommodate assets other than loans that are 
typically needed to administer a securitization. Since then, the 
agencies have added the servicing assets definition to the proposed 
rule, to accommodate these kinds of assets.\74\ Accordingly, the 
agencies are eliminating the 95 percent test and revising the 
collateral restriction to cover securitization transactions 
collateralized by commercial real estate loans and servicing assets.
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    \74\ The definition of ``servicing assets'' is discussed in Part 
II.B of this Supplementary Information.
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iv. Source of Funds
    The original proposal would have required that the third-party 
purchaser pay for its eligible horizontal residual interest in cash, 
and would have prohibited the third-party purchaser from obtaining 
financing, directly or

[[Page 57954]]

indirectly, for the purchase of such interest from any party to the 
securitization transaction other than an investor.
    A few commenters supported the proposed limitation on financing, 
while another commenter recommended that no distinction be made between 
the sponsor's ability to finance its risk retention interest compared 
to third-party purchasers. Several commenters requested clarification 
on what ``indirect'' financing means under the proposal and requested 
that the final rule not prohibit the third-party purchaser from 
obtaining financing from a party for an unrelated transaction.
    The agencies are re-proposing this condition consistent with the 
original proposal. The limitation on obtaining financing would apply 
only to financings for the purchase of the B-piece in a specific CMBS 
transaction and only where the financing provider is another party to 
that same CMBS transaction. The agencies are clarifying that the 
financing provider restriction would include affiliates of the other 
parties to the CMBS transaction. This limitation would not restrict 
third-party purchasers from obtaining financing from a transaction 
party for a purpose other than purchasing the B-piece in the 
transaction; provided that none of such financing is later used to 
purchase the B-piece, which would be an indirect financing of the B-
piece. Nor would third-party purchasers be restricted from obtaining 
financing from a person that is not a party to the specific 
transaction, unless that person had some indirect relationship with a 
party to the transaction, such as a parent-subsidiary relationship or a 
subsidiary-subsidiary relationship under a parent company (subject to 
the required holding period and applicable hedging restrictions). The 
use of the term indirect financing is meant to ensure that these types 
of indirect relationships are prohibited under the financing 
limitations of the rule.
v. Review of Assets by Third-Party Purchaser
    Under the original proposal, a third-party purchaser would have 
been required to conduct a review of the credit risk of each 
securitized asset prior to the sale of the ABS that includes, at a 
minimum, a review of the underwriting standards, collateral, and 
expected cash flows of each loan in the pool. Most commenters 
addressing this issue generally supported the proposed condition that a 
third-party purchaser must separately examine each asset in the pool. 
Specifically, one commenter noted that this level of review is 
currently the industry standard and is a clear indication of the 
strength of the credit review process for CMBS transactions.
    The agencies are proposing this condition again with only minor 
changes to indicate, in the event there is more than one third-party 
purchaser in a transaction, that each third-party purchaser would be 
required to conduct an independent review of the credit risk of each 
CMBS asset.
vi. Operating Advisor
(1) Affiliation and Control Rights
    The original proposal included a condition of the CMBS option 
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 have prohibited a third-party 
purchaser from (1) being affiliated with any other party to the 
securitization transaction (other than investors); or (2) 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 have been 
subject to an exception from this condition, however, only if the 
underlying securitization transaction documents provided for the 
appointment of an independent operating advisor (``Operating Advisor'') 
with certain powers and responsibilities that met certain criteria. The 
proposed criteria were: (1) The Operating Advisor is not affiliated 
with any other party to the securitization, (2) the Operating Advisor 
does not directly or indirectly have any financial interest in the 
securitization other than in fees from its role as Operating Advisor, 
and (3) the Operating Advisor is required to act in the best interest 
of, and for the benefit of, investors as a collective whole. The 
original proposal would have required that an independent Operating 
Advisor be appointed if the third-party purchaser was acting as, or was 
affiliated with, a servicer for any of the securitized assets and had 
control rights related to such servicing.
(2) Operating Advisor Criteria and Responsibilities
    The agencies received many comments with respect to the criteria in 
the original proposal for the Operating Advisor, as well as with 
respect to the Operating Advisor's required responsibilities.
    Commenters had mixed views concerning when the rule should require 
an Operating Advisor and whether the Operating Advisor should play an 
active role while the third-party purchaser is the ``controlling 
class.'' There was a comment supporting the proposed requirement that 
an Operating Advisor be included when the third-party purchaser is 
affiliated with and controls the special servicing function of the 
transaction. Some commenters supported the inclusion of an Operating 
Advisor in all CMBS transactions. Other commenters supported a dormant 
role for the Operating Advisor while the third-party purchaser was the 
``controlling class,'' and the Operating Advisor's power would be 
triggered when such purchaser was no longer the controlling class 
(typically when the third-party purchaser's interest is reduced to less 
than 25 percent of its original principal balance after taking into 
account appraisal reductions). Some of these commenters asserted that 
the introduction of an Operating Advisor may support the interests of 
the senior investors at the expense of the third-party purchaser, 
thereby adversely affecting the willingness of third-party purchasers 
to assume the risk retention obligations. Further, commenters stated 
that the Operating Advisor would add layers of administrative burden on 
an already highly structured CMBS framework and make servicing and 
workouts for the underlying loans more difficult and expensive, thereby 
reducing returns. Finally, some commenters stated that oversight is 
unnecessary while the third-party purchaser continues to have an 
economic stake in the transaction because third-party purchasers are 
highly incentivized to discharge their servicing duties in a manner 
that maximizes recoveries. One of these commenters noted that this is 
its current approach and is working to the satisfaction of both 
investment grade investors and third-party purchasers. Some commenters 
recommended a framework whereby the Operating Advisor would be involved 
immediately but its role would depend on whether the third-party 
purchaser was the controlling class.
    Additionally, some commenters specifically requested that the 
Operating Advisor's authority apply only to the special servicer 
(instead of all servicers as originally proposed) for three reasons. 
First, the special servicer has authority or consent rights with 
respect to all material servicing actions and defaulted loans, whereas 
the master servicer has very little discretion because its servicing 
duties are typically set forth in detail in the pooling and

[[Page 57955]]

servicing agreement and its authority to modify loans is limited. 
Moreover, any control right held by a third-party purchaser with 
respect to servicing is typically exercised through the special 
servicer and the third-party purchaser does not generally provide any 
direct input into master servicer decisions.
    Second, the B-piece termination right is another structural feature 
of CMBS transactions that applies to special servicers but not to 
master servicers. The third-party purchaser's right to terminate and 
replace the special servicer without cause is one method of control by 
the third-party purchaser over special servicing. The master servicer, 
however, is not subject to this termination without cause. The master 
servicer typically can be terminated by the trustee only upon the 
occurrence of one of the negotiated events of default with respect to 
the master servicer. In the event of such a default, holders of ABS 
evidencing a specified percentage of voting rights (25 percent in many 
deals) of all certificates can direct the trustee to take such 
termination action.
    Third, an Operating Advisor's right to remove the master servicer 
may be problematic for the master servicer's servicing rights assets. 
Master servicers usually purchase their servicing rights from the 
sponsors in the securitization and these rights retain an ongoing 
value. Therefore, any termination rights beyond those based on 
negotiated events of default jeopardize the value of the master 
servicer's servicing asset.
    Based on comments received, the agencies acknowledge that third-
party purchasers often are, or are affiliated with, the special 
servicers in CMBS transactions. Because of this strong connection 
between third-party purchasers and the special servicing rights in CMBS 
transactions, the agencies are proposing to limit application of the 
Operating Advisor provisions to special servicers, rather than any 
affiliated servicers as originally proposed in the original proposal. 
Consequently, the agencies are also proposing a revised CMBS option to 
require as a separate condition the appointment of an Operating Advisor 
in all CMBS transactions that rely on the CMBS risk retention option.
    As stated in the original proposal, the agencies believe that the 
introduction of an independent Operating Advisor provides a check on 
third-party purchasers by limiting the ability of third-party 
purchasers to manipulate cash flows through special servicing. In 
approving loans for inclusion in the securitization, third-party 
purchasers ideally will be mindful of the limits on their ability to 
offset the consequences of poor underwriting through servicing tactics 
if loans become troubled, thereby providing a stronger incentive for 
third-party purchasers to be diligent in assessing the credit quality 
of pool assets at the time of securitization. Because the agencies are 
proposing that an Operating Advisor be required for all CMBS 
transactions relying on the CMBS option, the prohibition on third-party 
purchasers having control rights related to servicing is no longer 
necessary and has been removed.
(3) Operating Advisor Independence
    The original proposal would have prohibited the Operating Advisor 
from being affiliated with any party to the transaction and from 
having, directly or indirectly, any financial interest in the 
transaction other than its fees from its role as Operating Advisor.
    An investor commenter supported complete independence for the 
Operating Advisor, reasoning that the Operating Advisor should not in 
any way be conflicted when representing all holders of ABS. Other 
commenters did not support the independence criteria, instead proposing 
to rectify any conflicts of interest through disclosure. One of these 
commenters commented that it would be counter-productive to preclude 
current Operating Advisors from serving in that capacity in the future, 
as such a framework would leave only smaller firms with little or no 
experience as the only eligible candidates and could result in 
diminution of available investment capital. Independence concerns 
should instead be addressed by the Operating Advisor's disclosure at 
the time it initiates proceedings to replace a special servicer, of 
whether the Operating Advisor has any conflicts of interest.
    Consistent with the original proposal, the CMBS option in the 
proposed rule would require that the Operating Advisor not be 
affiliated with other parties to the securitization transaction. Also 
consistent with the original proposal, the Operating Advisor would be 
prohibited from having, directly or indirectly, any financial interest 
in the securitization transaction other than fees from its role as 
Operating Advisor and would be required to act in the best interest of, 
and for the benefit of, investors as a collective whole. As stated 
above, the agencies believe that an independent Operating Advisor is a 
key factor in providing a check on third-party purchasers and special 
servicers, thereby protecting investors' interests.
(4) Qualifications of the Operating Advisor
    In the original proposal, the agencies did not propose 
qualifications for the Operating Advisor other than independence from 
other parties to the securitization transaction.
    One commenter recommended that the final rule include eligibility 
requirements for Operating Advisors, such as requiring an Operating 
Advisor to have an existing servicing platform (not necessarily rated); 
have at least 25 full time employees; have at least $25 million in 
capital; and have some metric for assuring that the Operating Advisor 
will have an ongoing real estate market presence and the in-house 
expertise necessary to effectively carry out their responsibilities. 
Another commenter requested clarification regarding the qualifications 
of an Operating Advisor but did not expressly advocate for or against 
particular qualifications.
    Based in part on comments received, the agencies are proposing 
certain general qualifications for the Operating Advisor. Under the 
proposed rule, the underlying transaction documents must provide for 
standards with respect to the Operating Advisor's experience, expertise 
and financial strength to fulfill its duties and responsibilities under 
the applicable transaction documents over the life of the 
securitization transaction. Additionally, the transaction documents 
must describe the terms of the Operating Advisor's compensation with 
respect to the securitization transaction.
    The agencies do not believe it is necessary to mandate specific 
minimum levels of experience, expertise and financial strength for 
Operating Advisors in CMBS transactions relying on the CMBS option. 
Rather, the agencies believe that CMBS transaction parties should be 
permitted to establish Operating Advisor qualification standards and 
compensation in each transaction. By requiring disclosure to investors 
of such qualification standards, how an Operating Advisor satisfies 
such standards, and the Operating Advisor's related compensation, the 
proposed rule provides investors with an opportunity to evaluate the 
Operating Advisor's qualifications and compensation in the relevant 
transaction.
(5) Role of the Operating Advisor
    Under the original proposal, the duties of the Operating Advisor 
were generally to (1) act in the best interest of investors as a 
collective whole, (2) require the servicer for the securitized assets 
to consult with the Operating Advisor in connection with, and prior

[[Page 57956]]

to, any major decision in connection with servicing, which would 
include any material loan modification and foreclosures and 
acquisitions of properties, and (3) review the actions of the 
affiliated servicer and report to investors and the issuing entity on a 
periodic basis.
    With respect to the role of the Operating Advisor in the original 
proposal, comments were mixed. Investor commenters generally supported 
the consultative role given to Operating Advisors under the original 
proposal. Issuers and industry association commenters did not support 
such role and believed that the powers granted to the Operating Advisor 
under the original proposal were too broad. In particular, these 
commenters generally did not support the proposed requirement that the 
servicer consult with the Operating Advisor prior to any major 
servicing decision.
    Another commenter recommended a framework such that after the 
change-in-control event (that is, when the B-piece position is reduced 
to less than 25 percent of its original principle balance), the 
Operating Advisor's role would be that of a monitoring role and 
investigate claims of special servicer noncompliance when initiated by 
a specified percentage of investors, and provide its findings on a 
regular basis to CMBS investors, the sponsor and the servicers.
    A trade association commenter, supported by two other commenters, 
preferred an approach in which the Operating Advisor's role would be 
reactive while the third-party purchaser is the controlling class, and 
become proactive when the third-party purchaser is no longer the 
controlling class. Under this commenter's approach, the rule would 
provide that the third-party purchaser is no longer in control if the 
sum of principal payments, appraisal reductions and realized losses 
have reduced the third-party purchaser's initial positions to less than 
25 percent of its original face amount.
    Consistent with the original proposal, the proposed rule would 
require consultation with the Operating Advisor in connection with, and 
prior to, any major investing decision in connection with the servicing 
of the securitized assets. However, based on comments received, the 
consultation requirement only applies to special servicers and only 
takes effect once the eligible horizontal residual interest held by 
third-party purchasers in the transaction has a principal balance of 25 
percent or less of its initial principal balance.
(6) Operating Advisor's Evaluation of Servicing Standards
    The original proposal would have included a requirement that the 
Operating Advisor be responsible for reviewing the actions of any 
affiliated servicer and issue a report evaluating whether the servicer 
is operating in compliance with any standard required of the servicer, 
as provided in the applicable transaction documents.
    One trade association commenter recommended that the rule establish 
the standard by which the Operating Advisor evaluates the special 
servicer. It stated that one such standard would be to include language 
in the pooling and servicing agreement or similar transaction document 
that would require the special servicer to maximize the net present 
value of the loan without consideration of the impact of such action on 
any specific class of ABS. However, as this trade association was 
unsupportive of requiring the servicer to consult with the Operating 
Advisor prior to any material workout, it also stated that an 
alternative to actually including the servicing standard would be for 
the Operating Advisor to monitor all loan workouts and, if the special 
servicer is not meeting the stated standard, the Operating Advisor 
could then take the appropriate action.
    The agencies are proposing that the CMBS option require the 
Operating Advisor to have adequate and timely access to information and 
reports necessary to fulfill its duties under the transaction 
documents. Further, the proposed rule would require the Operating 
Advisor to be responsible for reviewing the actions of the special 
servicer, reviewing all reports made by the special servicer to the 
issuing entity, reviewing for accuracy and consistency calculations 
made by the special servicer within the transaction documents, and 
issuing a report to investors and the issuing entity on special 
servicer's performance.
(7) Servicer Removal Provisions
    Under the original proposal, the Operating Advisor would have had 
the authority to recommend that a servicer be replaced if it determined 
that the servicer was not in compliance with the servicing standards 
outlined in the transaction documents. This recommendation would be 
submitted to investors and would be approved unless a majority of each 
class of investors voted to retain the servicer.
    Many commenters were of the view that the rule granted too much 
authority to the Operating Advisor in regards to the removal of a 
servicer. As discussed above, many commenters believed that the 
Operating Advisor's authority should only apply to special servicers. 
Following on this point, many commenters commented that the special 
servicer should be removed only upon the affirmative vote of ABS 
holders (instead of a negative vote as originally proposed).
    One commenter suggested that the special servicer removal process 
should be negotiated among the CMBS transaction parties and specified 
in the pooling and servicing agreement or similar transaction document. 
In this scenario, the special servicer would have the opportunity to 
explain its conduct, the Operating Advisor would be required to 
publicly explain its rationale for recommending special servicer 
removal, and investors in non-controlling classes would vote in the 
affirmative for special servicer removal. Another commenter proposed 
that an Operating Advisor's recommendation to remove a special servicer 
would have to be approved by two-thirds of all ABS holders voting as a 
whole, or through an arbitration mechanism. Another commenter proposed 
that a minimum of 5 percent of all ABS holders based on par dollar 
value of holdings be required for quorum, and decisions would be 
adopted with the support of a simple majority of the dollar value of 
par of quorum. Another commenter advocated removal only after the 
third-party purchaser is no longer the controlling class.
    After considering comments that the servicer removal provision 
should only apply to special servicers, the agencies are proposing that 
the Operating Advisor's authority to recommend removal and replacement 
would be limited to special servicers. Additionally, based on comments 
received, the agencies are proposing that the actual removal of the 
special servicer would require the affirmative vote of a majority of 
the outstanding principal balance of all ABS interests voting on the 
matter, and require a quorum of 5 percent of the outstanding principal 
balance of all ABS interests.
    Because of the agencies' belief that the introduction of an 
independent Operating Advisor provides a check on third-party 
purchasers by limiting the ability of third-party purchasers to 
manipulate cash flows through special servicing, the agencies believe 
that the removal of the special servicer should be independent of 
whether the third-party purchaser is the controlling class in the 
securitization transaction or similar considerations. The proposed 
affirmative majority vote and quorum requirements are designed to 
provide

[[Page 57957]]

additional protections to investors in this regard.
c. Disclosures
    Under the original proposal, the sponsor would have been required 
to provide, or cause to be provided, to potential purchasers and 
federal supervisors certain information concerning the third-party 
purchaser and other information concerning the CMBS transaction, such 
as the third-party purchaser's name, the purchaser's experience 
investing in CMBS, and any other material information about the third-
party purchaser deemed material to investors in light of the particular 
securitization transaction.
    Additionally, a sponsor would have been required to disclose to 
investors 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 the fair value of all ABS 
interests issued in the securitization transaction and the dollar 
amount of the fair value of such ABS interests); the purchase price 
paid for such interest; the material terms of such interest; the amount 
of the interest that the sponsor would have been required to retain if 
the sponsor had retained an interest in the transaction; the material 
assumptions and methodology used in determining the aggregate amount of 
ABS interests of the issuing entity; and certain information about the 
representations and warranties concerning the securitized assets.
    While commenters generally supported the proposed disclosure 
requirements, many commenters raised concerns about specific portions 
of these requirements.
    Under the original proposal, the sponsor would have been required 
to disclose to investors the name and form of organization of the 
third-party purchaser as well as a description of the third-party 
purchaser's experience in investing in CMBS. The original proposal also 
solicited comment as to whether disclosure concerning the financial 
resources of the third-party purchaser would be 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. Some commenters 
supported these proposed requirements, while others did not.
    Under the original proposal, a third-party purchaser would have 
been required to disclose the actual purchase price paid for the 
retained residual interest. Several commenters did not support 
requiring purchase price disclosure. These commenters noted that price 
disclosure raises confidentiality concerns and could reveal the 
purchaser's price parameters to its competitors. These commenters 
provided suggestions for maintaining the confidentiality of such 
information or alternatives to actual disclosure of prices paid.
    Under the original proposal, sponsors would have been required to 
disclose to investors the material assumptions and methodology used in 
determining the aggregate amount of ABS interests issued by the issuing 
entity, including those pertaining to any estimated cash flows and the 
discount rate used. One commenter did not support requiring this 
disclosure and believed that such disclosure would be irrelevant in 
CMBS transactions in that the principal balance of the certificates 
sold to investors would equal the aggregate initial principal balance 
of the mortgage loans, and CMBS transactions did not utilize 
overcollateralization (as is the case with covered bonds and other 
structures).
    Under the original proposal, the sponsor would have been required 
to disclose the representations and warranties concerning the assets, a 
schedule of exceptions to these representations and warranties, and 
what factors were used to make the determination that such exceptions 
should be included in the pool even though they did not meet the 
representations and warranties.
    One commenter agreed that loan-by-loan exceptions should be 
disclosed but did not comment on whether the disclosure of subjective 
factors disclosure should be required. This commenter also advocated 
for a standardized format of disclosure of representations and 
warranties. Another commenter noted that in recent CMBS transactions, 
all representations and warranties and all exceptions thereto are fully 
disclosed. Two commenters were unsupportive of requiring disclosure of 
why exceptions were allowed into the pool because they stated that such 
determinations are often qualitative and the benefit of such disclosure 
would be outweighed by the burden imposed on the issuer. The original 
proposal also requested comment on whether the rule should 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. One commenter noted that it was 
unnecessary to require that investors be provided with a blackline so 
long as the representations and warranties are themselves disclosed.
    The original proposal requested comment on whether the rule should 
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. One investor commenter generally supported 
requiring disclosure of any other information regarding the purchaser 
that is material to investors in light of the circumstances. A few 
commenters were unsupportive of this disclosure requirement. One 
commenter stated that there should be a safe harbor for the types of 
information about the third-party purchaser and that requiring this 
material information disclosure is too broad. Another commenter stated 
that disclosure of ``material information'' is already required under 
existing disclosure rules.
    The agencies are proposing disclosure requirements for the CMBS 
option substantially consistent with the original proposal. The 
agencies have carefully considered the concerns raised by commenters, 
but believe that the importance of the proposed disclosures to 
investors with respect to third-party purchasers, the retained residual 
interest (including the purchase price), the material terms of the 
eligible horizontal residual interest retained by each third-party 
purchaser (including the key inputs and assumptions used in measuring 
the total fair value of all classes of ABS interests, and the fair 
value of the eligible horizontal residual interest), and the 
representations and warranties concerning the securitized assets, 
outweigh any issues associated with the sponsor or third-party 
purchaser to making such information available.
    The agencies are also proposing again to require disclosure of the 
material terms of the applicable transaction documents with respect to 
the Operating Advisor, including without limitation, the name and form 
of organization of the Operating Advisor, the qualification standards 
applicable to the Operating Advisor and how the Operating Advisor 
satisfies these standards, and the terms of the Operating Advisor's 
compensation.
d. Transfer of B-Piece
    As discussed above, consistent with the original proposal, the 
proposed rule would allow a sponsor of a CMBS transaction to meet its 
risk retention requirement where a third-party

[[Page 57958]]

purchaser acquires the B-piece, and all other criteria and conditions 
of the proposed requirements for this option as described are met.
    Under the original proposal, the sponsor or, if an eligible third-
party purchaser purchased the B-piece, the third-party purchaser, would 
have been required to retain the required eligible horizontal residual 
interest for the full duration of the securitization transaction. 
Numerous commenters urged that this proposal be changed to allow 
transfer of the B-piece prior to the end of the securitization 
transaction. Some of the commenters making this recommendation 
requested a specified termination point (or ``sunset'') for the CMBS 
risk retention requirement. Other commenters recommended that third-
party purchasers be permitted to transfer the retained interest to 
other third-party purchasers, either immediately or after a maximum 
waiting period of one year. Some commenters proposed that there be both 
an overall sunset period for any risk retention requirement and that, 
prior to the end of that period, transfers between qualified third-
party purchasers be permitted.
    Several commenters asserted that permitting transfers by third-
party purchasers was critical to the continuation of the third-party 
purchaser structure for CMBS transactions. Another commenter, a 
securitization sponsor, stated that the transfer restrictions included 
in the original proposal would undermine the effectiveness of the CMBS 
option because some investors could not (due to fiduciary or 
contractual obligations) or did not desire to invest where such 
restrictions would be imposed. A broker-dealer commenter stated that it 
was crucial for the rules to give third-party purchasers some ability 
to sell the B-piece to qualified transferees because third-party 
purchasers or their investors would not be able to agree to a 
prohibition on the sale of the B-piece investment for the entire life 
of the transaction.
    Commenters that advocated a sunset for CMBS risk retention 
generally requested that it occur after two-to-five years. Commenters 
that requested permitted transfers to a qualified third-party purchaser 
by the original B-piece holder prior to the end of the risk retention 
requirement advocated that there be no minimum retention period by the 
original B-piece holder, while one commenter suggested a one-year 
initial retention period.
    Certain commenters contended that the restrictions of the original 
proposal were not necessary to promote good underwriting and that 
permitting transfer of the B-piece prior to the end of the 
securitization transaction would be warranted because after a certain 
amount of time, performance of the underlying commercial mortgages is 
dependent more on economic conditions rather than an underwriting 
requirement. One industry group stated that three years would be 
sufficient to provide all securitization participants the opportunity 
to determine the quality of underwriting, arguing that after a three-
year period, deficient underwriting or other performance factors would 
be reflected in the sale price of the retained interest.
    Some of the commenters that recommended permitting transfers to 
qualified third-party purchasers suggested additional conditions, such 
as that the third-party purchaser also be a qualified institutional 
buyer or accredited investor for purposes of the Securities Act of 
1933, or that the transferee certify that it had performed the same due 
diligence and had the same access to information as the original third-
party purchaser. One commenter suggested that qualified institutional 
buyer or accredited investor status alone should cause an entity to 
qualify as a qualified transferee of a third-party purchaser.
    The agencies have considered the points raised by commenters on the 
original proposal with respect to transferability of the B-piece and 
believe, for the reasons discussed further below, that limited 
transfers prior to the end of the securitization transaction are 
warranted. The agencies are therefore proposing, as an exception to the 
transfer and hedging restrictions of the proposed rule and section 15G 
of the Exchange Act, to permit the transfer of the retained interest by 
any initial third-party purchaser to another third-party purchaser at 
any time after five years after the date of the closing of the 
securitization transaction, provided that the transferee satisfies each 
of the conditions applicable to the initial third-party purchaser under 
the CMBS option (as described above) in connection with such purchase. 
The proposed rule also would permit transfers by any such subsequent 
third-party purchaser to any other purchaser satisfying the criteria 
applicable to initial third-party purchasers. In addition, in the event 
that the sponsor retained the B-piece at closing, the proposed rule 
would permit the sponsor to transfer such interest to a purchaser 
satisfying the criteria applicable to third-party purchasers after a 
five-year period following the closing of the securitization 
transaction has expired. The proposed rule would require that any 
transferring third-party purchaser provide the sponsor with complete 
identifying information as to the transferee third-party purchaser.
    In considering the comments and formulating the revised proposed 
rule, the agencies attempted to balance two overriding goals: (1) Not 
disrupting the existing CMBS third-party purchaser structure, and (2) 
ensuring that risk retention promotes good underwriting. The agencies 
followed the analysis of the commenters who asserted that, after a five 
year period, the quality of the underwriting would be sufficiently 
evident that the initial third-party purchaser or, if there was no 
initial third-party purchaser, the sponsor would suffer the 
consequences of poor underwriting in the form of a reduced sales price 
for such interest. The agencies also believe that the initial holder of 
the B-piece, whether a third-party purchaser or the sponsor, would need 
to assume that retention for a five-year period would result in such 
holder bearing the consequences of poor underwriting and, thus, that by 
permitting transfer after the five year period the agencies would not 
be creating a structure which resulted in the initial holder being less 
demanding of the underwriting than if it was required to retain the B-
piece until the full sunset period applicable to CMBS securitizations 
had expired. In connection with this, the requirement (among other 
conditions) that a subsequent purchaser, like the initial third-party 
purchaser, conduct an independent review of the credit risk of each 
securitized asset was important to the agencies, as this requirement 
would emphasize to the initial B-piece holder that the performance of 
the securitized assets would be scrutinized by any potential purchaser, 
thus exposing the initial purchaser to the full risks of poor 
underwriting.
    The standards for the Federal banking agencies to provide 
exemptions to the risk requirements and prohibition on hedging are 
outlined in section 941(e) of the Dodd-Frank Act. The exemption 
described above would allow third-party purchasers and sponsors to 
transfer a horizontal risk retention interest after a five year period 
to sponsors or third-party purchasers that meet the same standards. The 
agencies believe that under 15 U.S.C. 78o-11(e)(2), a five-year 
retention duration helps ensure high underwriting standards for the 
securitizers and originators of assets that are securitized or 
available for securitization by forcing sponsors or initial third-party 
purchasers to absorb a significant

[[Page 57959]]

portion of losses related to underwriting deficiencies. Furthermore, 
the agencies believe that this exemption would meet the statute's 
requirement that the exemption encourage appropriate risk management 
practices by the securitizers and originators of assets, improve the 
access of consumers and businesses to credit on reasonable terms, or 
otherwise is in the public interest and for the protection of 
investors. By limiting the risk retention requirement for CMBS to five 
years rather than the entire duration of the underlying assets, the 
agencies are responding to commenters' concerns that lifetime retention 
requirements would eliminate B-piece buyers' ability to participate in 
the CMBS market, and without their participation, market liquidity for 
commercial mortgages would be severely impacted. The proposed approach 
of requiring the third-party purchaser to hold for at least five years 
accommodates continuing participation of B-piece buyers in the market, 
in a way that still requires meaningful risk retention as an incentive 
to good risk management practices by securitizers in selecting assets, 
and addressing specific concerns about maintaining consumers' and 
businesses' access to commercial mortgage credit.
    The agencies have not adopted the recommendations made by several 
commenters that transfers to qualified third-party purchasers be 
permitted with no minimum holding period or after a one year holding 
period. The agencies decided that unless there was a holding period 
that was sufficiently long to enable underwriting defects to manifest 
themselves, the original third-party purchaser might not be 
incentivized to insist on effective underwriting of the securitized 
assets. This, in turn, would be in violation of section 941(e)'s 
requirement that any exemption continue to help ensure high quality 
underwriting standards. The agencies are therefore proposing a period 
of five years based on the more conservative comments received as to 
duration of the CMBS retention period. The agencies believe that 
permitting transfers to qualifying third-party purchasers after five 
years should not diminish in any respect the pressure on the sponsor to 
use proper underwriting methods.
Request for Comment
    46. Should the period for B-piece transfer be any longer or shorter 
than five years? Please provide any relevant data analysis to support 
your conclusion.
    47(a). Should the agencies only allow one third-party purchaser to 
satisfy the risk retention requirement? 47(b). Should the agencies 
consider allowing for more than two third-party purchasers to satisfy 
the risk retention requirement?
    48(a). Are the third-party qualifying criteria the agencies are 
proposing appropriate? 48(b). Why or why not? 48(c). Would a sponsor be 
able to track the source of funding for other purposes to determine if 
funds are used for the purchase of the B-piece?
    49(a). Are the Operating Advisor criteria and responsibilities the 
agencies are proposing appropriate? 49(b). Why or why not?
e. Duty To Comply
    The original proposal would have required the sponsor of a CMBS 
transaction to maintain and adhere to policies and procedures to 
monitor the third-party purchaser's compliance with the CMBS option and 
to notify investors if the sponsor learns that the third-party 
purchaser no longer complies with such requirements.
    Several commenters criticized the proposed monitoring obligations 
because they believed that such monitoring would not be feasible for a 
sponsor, especially the restriction on hedging. Some commenters 
proposed alternatives, such as making the Operating Advisor responsible 
for compliance by the third-party purchaser or using contractual 
representations and warranties and covenants to ensure compliance.
    Another commenter suggested that the pooling and servicing 
agreement or similar transaction document set forth a dispute 
resolution mechanism for investors, including the ability of investors 
to demand an investigation of possible noncompliance by the special 
servicer upon request from a specified percentage of ABS and how the 
costs of resulting investigations would be borne and that independent 
parties would perform such investigations.
    The agencies have considered these comments but continue to believe 
that it is important for the sponsor to monitor third-party purchasers. 
A transfer of risk to a third-party purchaser is not, under the 
agencies' view of the risk retention requirement, a transfer of the 
sponsor's general obligation to satisfy the requirement. Although the 
proposal allows third-party purchasers to retain the required eligible 
horizontal residual interest, the agencies believe that the sponsor of 
the CMBS transaction should ultimately be responsible for compliance 
with the requirements of the CMBS option, rather than shifting the 
obligation to the third-party purchaser or Operating Advisor, as some 
commenters on the original proposal suggested, by requiring 
certifications or representations and warranties. Additionally, the 
agencies are not proposing a specific requirement that the pooling and 
servicing agreement or similar transaction document include dispute 
resolution provisions because the agencies believe that most investor 
disputes, particularly disputes related to possible noncompliance by 
the special servicer, will be resolved through the proposed Operating 
Advisor process. However, this is not intended to limit investors and 
other transaction parties from continuing to include negotiated rights 
and remedies in CMBS transaction documents, including dispute 
resolution provisions in addition to the proposed Operating Advisor 
provisions.
    Accordingly, the agencies are proposing the same monitoring and 
notification requirements as under the original proposal with no 
modifications. The sponsor would be required to maintain policies and 
procedures to actively monitor the third-party purchaser's compliance 
with the requirements of the rule and to notify (or cause to be 
notified) ABS holders in the event of any noncompliance with the rule.
6. Government-Sponsored Enterprises
a. Overview of Original Proposal and Public Comment
    In the original proposal, the agencies proposed that the guarantee 
(for timely payment of principal and interest) by the Enterprises while 
they operate under the conservatorship or receivership of FHFA with 
capital support from the United States would satisfy the risk retention 
requirements of section 15G of the Exchange Act with respect to the 
mortgage-backed securities issued by the Enterprises. Similarly, an 
equivalent guarantee provided by a limited-life regulated entity that 
has succeeded to the charter of an Enterprise, and that is operating 
under the authority and oversight of FHFA under section 1367(i) of the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 
would satisfy the risk retention requirements, provided that the entity 
is operating with capital support from the United States. The original 
proposal also provided that the hedging and finance provisions would 
not apply to an Enterprise while operating under conservatorship or 
receivership with capital support from the United States, or to a 
limited-life regulated entity that

[[Page 57960]]

has succeeded to the charter of an Enterprise and is operating under 
the authority and oversight of FHFA with capital support from the 
United States. Under the original proposal, a sponsor (that is, the 
Enterprises) utilizing this option would have been required to provide 
to investors, in written form under the caption ``Credit Risk 
Retention'' and, upon request, to FHFA and the Commission, a 
description of the manner in which it met the credit risk retention 
requirements.
    As the agencies explained in the original proposal, if either an 
Enterprise or a successor limited-life regulated entity began to 
operate other than as described, the Enterprise or successor entity 
would no longer be able to avail itself of the credit risk retention 
option provided to the Enterprises and would have become subject to the 
related requirements and prohibitions set forth elsewhere in the 
proposal.
    In the original proposal, the agencies explained what factors they 
took into account regarding the treatment of the Enterprises while they 
were in conservatorship or receivership with capital support from the 
United States.\75\ First, the agencies observed that because the 
Enterprise fully guaranteed the timely payment of principal and 
interest on the mortgage-backed securities they issued, the Enterprises 
were exposed to the entire credit risk of the mortgages that 
collateralize those securities. The agencies also highlighted that the 
Enterprises had been operating under the conservatorship of FHFA since 
September 6, 2008, and that as conservator, FHFA had assumed all powers 
formerly held by each Enterprise's officers, directors, and 
shareholders and was directing its efforts as conservator toward 
minimizing losses, limiting risk exposure, and ensuring that the 
Enterprises priced their services to adequately address their costs and 
risk. Finally, the agencies described how each Enterprise, concurrent 
with being placed in conservatorship, entered into a Senior Preferred 
Stock Purchase Agreement (PSPA) with the United States Department of 
the Treasury (Treasury) and that the PSPAs provided capital support to 
the relevant Enterprise if the Enterprise's liabilities had exceeded 
its assets under GAAP.\76\
---------------------------------------------------------------------------

    \75\ See Original Proposal, 76 FR at 24111-24112.
    \76\ Under each PSPA as amended, Treasury purchased senior 
preferred stock of each Enterprise. In exchange for this cash 
contribution, the liquidation preference of the senior preferred 
stock that Treasury purchased from the Enterprise under the 
respective PSPA increases in an equivalent amount. The senior 
preferred stock of each Enterprise purchased by Treasury is senior 
to all other preferred stock, common stock or other capital stock 
issued by the Enterprise.
    Treasury's commitment to each Enterprise is the greater of: (1) 
$200 billion; or (2) $200 billion plus the cumulative amount of the 
Enterprise's net worth deficit as of the end of any calendar quarter 
in 2010, 2011 and 2012, less any positive net worth as of December 
31, 2012. Under amendments to each PSPA signed in August 2012, the 
fixed-rate quarterly dividend that each Enterprise had been required 
to pay to Treasury was replaced, beginning on January 1, 2013, with 
a variable dividend based on each Enterprise's net worth, helping to 
ensure the continued adequacy of the financial commitment made under 
the PSPA and eliminating the need for an Enterprise to borrow 
additional amounts to pay quarterly dividends to Treasury. The PSPAs 
also require the Enterprises to reduce their retained mortgage 
portfolios over time.
---------------------------------------------------------------------------

    The agencies received a number of comments on the original proposal 
with respect to the Enterprises, including comments from banks and 
other financial businesses, trade organizations, public interest and 
public policy groups, members of Congress and individuals. A majority 
of the commenters supported allowing the Enterprises' guarantee to be 
an acceptable form of risk retention in accordance with the original 
proposal.
    Many of the comments that supported the original proposal noted 
that the capital support by the United States government, coupled with 
the Enterprises' guarantee, equated to 100 percent risk retention by 
the Enterprises. Others believed the treatment of the Enterprises in 
the original proposal was important to support the mortgage market and 
to ensure adequate credit in the mortgage markets, especially for low 
down payment loans. One commenter representing community banks stated 
that, without the provision for the Enterprises in the original 
proposal, many community banks would have difficulty allocating capital 
to support risk retention and, by extension, continued mortgage 
activity. A few commenters specifically supported the original 
proposal's exception for the Enterprises from the prohibitions on 
hedging. These commenters asserted that preventing the Enterprise from 
hedging would be unduly burdensome, taking into consideration the 100 
percent guarantee of the Enterprises, while other sponsors would only 
be required to meet a 5 percent risk retention requirement. At least 
one commenter noted that applying the hedging prohibition to the 
Enterprises could have negative consequences for taxpayers, given the 
capital support from the United States.
    A number of the commenters said that, even though they supported 
the original proposal, they believed that it could create an advantage 
for the Enterprises over private lenders. These commenters recommended 
that the agencies adopt a broader definition for QRM to address any 
potential disadvantages for private lenders, rather than change the 
risk retention option proposed for the Enterprises.\77\
---------------------------------------------------------------------------

    \77\ The comments that relate to the QRM definition are 
addressed in Part VI of this Supplementary Information, which 
discusses the proposed QRM definition.
---------------------------------------------------------------------------

    Those commenters that opposed the treatment of the Enterprises in 
the original proposal generally believed that it would provide the 
Enterprises with an unfair advantage over private capital, and asserted 
that it would be inconsistent with the intent of section 15G of the 
Exchange Act. Many of these commenters stated that this aspect of the 
original proposal, if adopted, would prevent private capital from 
returning to the mortgage markets and would otherwise make it difficult 
to institute reform of the Enterprises. One commenter believed the 
original proposal interfered with free market competition and placed 
U.S. government proprietary interests ahead of the broader economic 
interests of the American people. Other comments suggested that the 
original proposal's treatment of the Enterprises could have negative 
consequences for taxpayers.
b. Proposed Treatment
    The agencies have carefully considered the comments received with 
respect to the original proposal's provision for the Enterprises. While 
the agencies understand the issues involved with the Enterprises' 
participation in the mortgage market, the agencies continue to believe 
that it is appropriate, from a public policy perspective, to recognize 
the guarantee of the Enterprises as fulfilling their risk retention 
requirement under section 15G of the Exchange Act, while in 
conservatorship or receivership with the capital support of the United 
States. The authority and oversight of the FHFA over the operations of 
the Enterprises or any successor limited-life regulated entity during a 
conservatorship or receivership,\78\ the full guarantee provided by 
these entities on the timely payment of principal and interest on the 
mortgage-backed securities that they issue, and the capital support 
provided

[[Page 57961]]

by Treasury under the PSPAs \79\ provide a reasonable basis consistent 
with the goals and intent of section 15G for recognizing the Enterprise 
guarantee as meeting the Enterprises' risk retention requirement.
---------------------------------------------------------------------------

    \78\ In this regard, FHFA is engaged in several initiatives to 
contract the Enterprises presence in the mortgage markets, including 
increasing and changing the structure of the guarantee fees charged 
by the Enterprises and requiring the Enterprises to develop risk-
sharing transactions to transfer credit risk to the private sector. 
See, e.g., FHFA 2012 Annual Report to Congress, at 7-11 (June 2013), 
available at http://www.FHFA.gov (FHFA 2012 Report).
    \79\ By its terms, a PSPA with an Enterprise may not be 
assigned, transferred, inure to the benefit of, any limited-life, 
regulated entity established with respect to the Enterprise without 
the prior written consistent of Treasury.
---------------------------------------------------------------------------

    Accordingly, the agencies are now proposing the same treatment for 
the Enterprises as under the original proposal, without modification. 
Consistent with the original proposal, if any of the conditions in the 
proposed rule cease to apply, the Enterprises or any successor 
organization would no longer be able to rely on its guarantee to meet 
the risk retention requirement under section 15G of the Exchange Act 
and would need to retain risk in accordance with one of the other 
applicable sections of this risk retention proposal.
    For similar reasons, the restrictions and prohibitions on hedging 
and transfers of retained interests in the proposal (like the original 
proposal) would not apply to the Enterprises or any successor limited-
life regulated entities, as long as the Enterprise (or, as applicable, 
successor entity) is operating consistent with the conditions set out 
in the rule. In the past, the Enterprises have sometimes acquired pool 
insurance to cover a percentage of losses on the mortgage loans 
comprising the pool.\80\ FHFA also has made risk-sharing through a 
variety of alternative mechanisms to be a major goal of its Strategic 
Plan for the Enterprise Conservatorships.\81\ Because the proposed rule 
would require each Enterprise, while in conservatorship or 
receivership, to hold 100 percent of the credit risk on mortgage-backed 
securities that it issues, the prohibition on hedging in the proposal 
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 or take other reasonable actions to limit 
losses that would otherwise arise from the Enterprises' 100 percent 
exposure to the credit risk of the securities that they issue. Because 
the proposal would apply only so long as the relevant Enterprise 
operates under the authority and control of FHFA and with capital 
support from the United States, the agencies continue to believe that 
the proposed treatment of the Enterprises as meeting the risk retention 
requirement of section 15G of the Exchange Act should be consistent 
with the maintenance of quality underwriting standards, in the public 
interest, and consistent with the protection of investors.\82\
---------------------------------------------------------------------------

    \80\ Typically, insurers would pay the first losses on a pool of 
loans, up to 1 or 2 percent of the aggregate unpaid principal 
balance of the pool.
    \81\ See, e.g., FHFA 2012 Report at 7-11.
    \82\ See Original Proposal, 76 FR at 24112.
---------------------------------------------------------------------------

    As explained in the original proposal and noted above, the agencies 
recognize both the need for, and importance of, reform of the 
Enterprises, and expect to revisit and, if appropriate, modify the 
proposed rule after the future of the Enterprises and of the statutory 
and regulatory framework for the Enterprises becomes clearer.
7. Open Market Collateralized Loan Obligations
a. Overview of Original Proposal and Public Comment
    In the original proposal, the agencies observed that, in the 
context of CLOs, the CLO manager generally acts as the sponsor by 
selecting the commercial loans to be purchased by the CLO issuing 
entity (the special purpose vehicle that holds the CLO's collateral 
assets and issues the CLO's securities) and then manages the 
securitized assets once deposited in the CLO structure.\83\ 
Accordingly, the original proposal required the CLO manager to satisfy 
the minimum risk retention requirement for each CLO securitization 
transaction that it manages. The original proposal did not include a 
form of risk retention designed specifically for CLO securitizations. 
Accordingly, CLO managers generally would have been required to satisfy 
the minimum risk retention requirement by holding a sufficient amount 
of standard risk retention in horizontal, vertical, or L-shaped form.
---------------------------------------------------------------------------

    \83\ See id. at 24098 n. 42.
---------------------------------------------------------------------------

    Many commenters, including several participants in CLOs, raised 
concerns regarding the impact of the proposal on certain types of CLO 
securitizations, particularly CLOs that are securitizations of 
commercial loans originated and syndicated by third parties and 
selected for purchase on the open market by asset managers unaffiliated 
with the originators of the loans (open market CLOs). Some commenters 
asserted that most asset management firms currently serving as open 
market CLO managers do not have the balance sheet capacity to fund 5 
percent horizontal or vertical slices of the CLO. Thus, they argued, 
imposing standard risk retention requirements on these managers could 
cause independent CLO managers to exit the market or be acquired by 
larger firms, thereby limiting the number of participants in the market 
and raising barriers to entry. According to these commenters, the 
resulting erosion in market competition could increase the cost of 
credit for large, non-investment grade companies represented in CLO 
portfolios above the level that would be consistent with the credit 
quality of these companies.
    Certain commenters also asserted that open market CLO managers are 
not ``securitizers'' under section 15G of the Exchange Act. These 
commenters argued that because the CLO managers themselves would never 
legally own, sell, or transfer the loans that comprised the CLO's 
collateral pool, but only direct which assets would be purchased by the 
CLO issuing entity, they should not be ``securitizers'' as defined in 
section 15G. Thus, these commenters argued that the agencies' proposal 
to impose a sponsor's risk retention requirement on open market CLO 
managers is contrary to the statute.\84\
---------------------------------------------------------------------------

    \84\ See Part II.A.2 of this Supplementary Information for a 
discussion of the definition of ``securitizer'' under section 15G of 
the Exchange Act.
---------------------------------------------------------------------------

    One commenter argued that CLO underwriters (typically investment 
banks) are ``securitizers'' for risk retention purposes and agent banks 
of the underlying loans are ``originators.'' This commenter noted that 
the CLO underwriter typically finances the accumulation of most of the 
initial loan assets until the CLO securities are issued. According to 
this commenter, the CLO manager selects the loans, but the CLO 
underwriter legally transfers them and takes the market value risk of 
the accumulating loan portfolio should the CLO transaction fail to 
close. However, other commenters argued that no party within the open 
market CLO structure constitutes a ``securitizer'' under section 15G. 
These commenters stated that they did not view the underwriter as a 
``securitizer'' because it does not select or manage the loans 
securitized in a CLO transaction or transfer them to the issuer. These 
commenters requested that the agencies establish an exemption from the 
risk retention requirement for certain open market CLOs.
    In addition to the above comments, a commenter proposed that 
subordinated collateral management fees and incentive fees tied to the 
internal rate of return received by investors in the CLO's equity 
tranche be counted towards the CLO manager's risk retention 
requirement, as receipt of these fees is contingent upon the 
satisfactory performance of the CLO and

[[Page 57962]]

timely payment of interest to CLO bondholders, thereby aligning the 
interest of CLO managers and investors.
b. Proposed Requirement
    The agencies have considered the concerns raised by commenters with 
respect to the original proposal and CLOs. As explained in the original 
proposal, the agencies believe that the CLO manager is a 
``securitizer'' under section 15G of the Exchange Act because it 
selects the commercial loans to be purchased by the CLO issuing entity 
for inclusion in the CLO collateral pool, and then manages the 
securitized assets once deposited in the CLO structure. The agencies 
believe this is consistent with part (B) of the definition of 
securitizer which includes ``a person who organizes and initiates an 
asset-backed securities transaction by selling or transferring assets, 
either directly or indirectly, including through an affiliate, to the 
issuer.'' \85\ The CLO manager typically organizes and initiates the 
transaction as it has control over the formation of the CLO collateral 
pool, the essential aspect of the securitization transaction. It also 
indirectly transfers the underlying assets to the CLO issuing entity 
typically by selecting the assets and directing the CLO issuing entity 
to purchase and sell those assets.
---------------------------------------------------------------------------

    \85\ See 15 U.S.C. 78o-11(a)(3)(B).
---------------------------------------------------------------------------

    The agencies believe that reading the definition of ``securitizer'' 
to include a typical CLO manager or other collateral asset manager that 
performs such functions is consistent with the purposes of the statute 
and principles of statutory interpretation. The agencies believe that 
the text itself supports the interpretation that a CLO manager is a 
securitizer because, as explained above, the agencies believe that the 
CLO manager organizes and initiates a securitization transaction by 
indirectly transferring assets to the issuing entity. However, in the 
case that any ambiguity exists regarding the statutory meaning of 
``transfer'' and whether or not it means a legal sale or purchase, the 
agencies may look to the rest of the statute, including the context, 
when interpreting its meaning. Furthermore, as stated by the Supreme 
Court, ``a statute should be construed so that effect is given to all 
its provisions, so that no part will be inoperative or superfluous, 
void or insignificant.'' \86\
---------------------------------------------------------------------------

    \86\ See, e.g. Corley v. United States, 556 U.S. 303, 129 S.Ct 
1558, 1566, 173 L.Ed.2d 443 (2009).
---------------------------------------------------------------------------

    It is clear from the statutory text and legislative history of 
section 15G of the Exchange Act that Congress intended for risk 
retention to be held by collateral asset managers (such as CLO or CDO 
managers), who are the parties who determine the credit risk profile of 
securitized assets in many types of securitization transactions and 
therefore should be subject to a regulatory incentive to monitor the 
quality of the assets they cause to be transferred to an issuing 
entity.\87\ Additionally, the agencies believe a narrow reading could 
enable market participants to evade the operation of the statute by 
employing an agent to select assets to be purchased and securitized. 
This could potentially render section 15G of the Exchange Act 
practically inoperative for any transaction where this structuring 
could be achieved, and would have an adverse impact on competition and 
efficiency by permitting market participants to do indirectly what they 
are prohibited from doing directly.
---------------------------------------------------------------------------

    \87\ S. Rep. No. 111-176 (April 30, 2010).
---------------------------------------------------------------------------

    The agencies also recognize that the standard forms of risk 
retention in the original proposal could, if applied to open market CLO 
managers, result in fewer CLO issuances and less competition in this 
sector. The agencies therefore have developed a revised proposal that 
is designed to allow meaningful risk retention to be held by a party 
that has significant control over the underwriting of assets that are 
typically securitized in CLOs, without causing significant disruption 
to the CLO market. The agencies' goal in proposing this alternative 
risk retention option is to avoid having the general risk retention 
requirements create unnecessary barriers to potential open market CLO 
managers sponsoring CLO securitizations. The agencies believe that this 
alternate risk retention option could benefit commercial borrowers by 
making additional credit available in the syndicated loan market.
    Under the proposal, an open market CLO would be defined as a CLO 
whose assets consist of senior, secured syndicated loans acquired by 
such CLO directly from sellers in open market transactions and 
servicing assets, and that holds less than 50 percent of its assets by 
aggregate outstanding principal amount in loans syndicated by lead 
arrangers that are affiliates of the CLO or originated by originators 
that are affiliates of the CLO. Accordingly, this definition would not 
include CLOs (often referred to as ``balance sheet'' CLOs) where the 
CLO obtains a majority of its assets from entities that control or 
influence its portfolio selection. Sponsors of balance sheet CLOs, 
would be subject to the standard risk retention options in the proposed 
rule because the particular considerations for risk retention relevant 
to an open market CLO (as discussed above) should not affect sponsors 
of balance sheet CLOs in the same manner. Furthermore, as commenters on 
the original proposal indicated, sponsors of balance sheet CLOs should 
be able to obtain sufficient support to meet any risk retention 
requirement from the affiliate that is the originator of the 
securitized loans in a balance sheet CLO.
    Under the proposal, in addition to the standard options for 
vertical or horizontal risk retention, an open market CLO could satisfy 
the risk retention requirement if the firm serving as lead arranger for 
each loan purchased by the CLO were to retain at the origination of the 
syndicated loan at least 5 percent of the face amount of the term loan 
tranche purchased by the CLO. The lead arranger would be required to 
retain this portion of the loan tranche until the repayment, maturity, 
involuntary and unscheduled acceleration, payment default, or 
bankruptcy default of the loan. This requirement would apply regardless 
of whether the loan tranche was purchased on the primary or secondary 
market, or was held at any particular time by an open market CLO 
issuing entity.
    The sponsor of an open market CLO could presumably negotiate that 
the lead arranger of each loan tranche purchased for the CLO portfolio 
retain a portion of the relevant loan tranche at origination. However, 
the sponsors of open market CLOs have frequently arranged for the 
purchase of loans in the secondary market as well as from originators. 
For purchases on the secondary market, negotiation of risk retention in 
connection with such purchases would likely be impractical. 
Accordingly, the proposal contemplates that specific senior, secured 
term loan tranches within a broader syndicated credit facility would be 
designated as ``CLO-eligible'' at the time of origination if the lead 
arranger committed to retain 5 percent of each such CLO-eligible 
tranche, beginning on the closing date of the syndicated credit 
facility.
    A CLO-eligible tranche could be identical in its terms to a tranche 
not so designated, and could be sized based on anticipated demand by 
open market CLOs. For the life of the facility, loans that are part of 
the CLO-eligible tranche could then trade in the secondary market among 
both open market CLOs and other investors. The agencies acknowledge 
that this approach may result in the retention by loan originators of 
risk associated with assets that are no longer held in securitizations, 
but have narrowly

[[Page 57963]]

tailored this option to eliminate that result as much as possible.
    In order to ensure that a lead arranger retaining risk had a 
meaningful level of influence on loan underwriting terms, the lead 
arranger would be required to have taken an initial allocation of at 
least 20 percent of the face amount of the broader syndicated credit 
facility, with no other member of the syndicate assuming a larger 
allocation or commitment. Additionally, a retaining lead arranger would 
be required to comply with the same sales and hedging restrictions as 
sponsors of other securitizations until the repayment, maturity, 
involuntary and unscheduled acceleration, payment default, or 
bankruptcy default of the loan tranche.
    Under the proposal, a lead arranger retaining a ``CLO-eligible'' 
loan tranche must be identified at the time of the syndication of the 
broader credit facility, and legal documents governing the origination 
of the syndicated credit facility must include covenants by the lead 
arranger with respect to satisfaction of requirements described above.
    Voting rights within the broader syndicated credit facility must 
also be defined in such a way that holders of the ``CLO-eligible'' loan 
tranche had, at a minimum, consent rights with respect to any waivers 
and amendments of the legal documents governing the underlying CLO-
eligible loan tranche that can adversely affect the fundamental terms 
of that tranche. This is intended to prevent the possible erosion of 
the economic terms, maturity, priority of payment, security, voting 
provisions or other terms affecting the desirability of the CLO-
eligible loan tranche by subsequent modifications to loan documents. 
Additionally, the pro rata provisions, voting provisions and security 
associated with the CLO-eligible loan tranche could not be materially 
less advantageous to the holders of that tranche than the terms of 
other tranches of comparable seniority in the broader syndicated credit 
facility.
    Under the proposal, the sponsor of an open market CLO could avail 
itself of the option for open market CLOs only if: (1) The CLO does not 
hold or acquire any assets other than CLO-eligible loan tranches 
(discussed above) and servicing assets (as defined in the proposed 
rule); (2) the CLO does not invest in ABS interests or credit 
derivatives (other than permitted hedges of interest rate or currency 
risk); and (3) all purchases of assets by the CLO issuing entity 
(directly or through a warehouse facility used to accumulate the loans 
prior to the issuance of the CLO's liabilities) are made in open market 
transactions. The governing documents of the open market CLO would 
require, at all times, that the assets of the open market CLO consist 
only of CLO-eligible loan tranches and servicing assets.
    The proposed option for open market CLOs is intended to allocate 
risk retention to the parties that originate the underlying loans and 
that likely exert the greatest influence on how the loans are 
underwritten, which is an integral component of ensuring the quality of 
assets that are securitized. In developing the proposed risk retention 
option for open market CLOs, the agencies have considered the factors 
set forth in section 15G(d)(2) of the Exchange Act.\88\ Section 15G 
permits the agencies to allow an originator (rather than a sponsor) to 
retain the required amount of credit risk and to reduce the amount of 
credit risk required of the sponsor by the amount retained by the 
originator.\89\
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78o-11(d)(2). These factors are whether the 
assets sold to the securitizer have terms, conditions, and 
characteristics that reflect low credit risk; whether the form or 
volume of transactions in securitization markets creates incentives 
for imprudent origination of the type of loan or asset to be sold to 
the securitizer; and the potential impact of risk retention 
obligations on the access of consumers and business to credit on 
reasonable terms, which may not include the transfer of credit risk 
to a third party.
    \89\ See id. at Section 78o-11(c)(G)(iv) and (d) (permitting the 
Commission and Federal banking agencies to allow the allocation of 
risk retention from a sponsor to an originator).
---------------------------------------------------------------------------

    The terms of the proposed option for eligible open market CLOs 
include conditions designed to provide incentive to lead arrangers to 
monitor the underwriting of loans they syndicate that may be sold to an 
eligible open market CLO by requiring that lead arrangers retain risk 
on these leveraged loans that could be securitized through CLOs. The 
agencies believe that this proposed risk retention option for open 
market CLOs would meaningfully align the incentives of the party most 
involved with the credit quality of these loans--the lead arranger--
with the interests of investors. Alternatively, incentive would be 
placed on the CLO manager to monitor the credit quality of loans it 
securitizes if it retains risk under the standard risk retention 
option.
    In response to commenter requests that the agencies recognize 
incentive fees as risk retention, the agencies recognize that 
management fees incorporate credit risk sensitivity and contribute to 
aligning the interests of the CLO manager and investors with respect to 
the quality of the securitized loans. However, these fees do not appear 
to provide an adequate substitute for risk retention because they 
typically have small expected value (estimated as equivalent to a 
horizontal tranche of less than 1 percent), especially given that CLOs 
securitize leveraged loans, which carry higher risk than many other 
securitized assets. Additionally, these fees are not funded in cash at 
closing and therefore may not be available to absorb losses as 
expected. Generally, the agencies have declined to recognize unfunded 
forms of risk retention for purposes of the proposal (such as fees or 
guarantees), except in the case of the Enterprises under the conditions 
specified with regard to their guarantees.
    Under the option for open market CLOs, the sponsor relying on the 
option would be required to provide, or cause to be provided, certain 
disclosures to potential investors. The sponsor would be required to 
disclose this information a reasonable period of time prior to the sale 
of the asset-backed securities in the securitization transaction (and 
at least annually with respect to information regarding the assets held 
by the CLO) and, upon request, to the Commission and its appropriate 
Federal banking agency, if any. First, a sponsor relying on the CLO 
option would need to disclose a complete list of every asset held by an 
open market CLO (or before the CLO's closing, in a warehouse facility 
in anticipation of transfer into the CLO at closing). This list would 
need to include the following information (i) the full legal name and 
Standard Industrial Classification category code of the obligor of the 
loan or asset; (ii) the full name of the specific loan tranche held by 
the CLO; (iii) the face amount of the loan tranche held by the CLO; 
(iv) the price at which the loan tranche was acquired by the CLO; and 
(v) for each loan tranche, the full legal name of the lead arranger 
subject to the sales and hedging restrictions of Sec.  ----.12 of the 
proposed rule. Second, the sponsor would need to disclose the full 
legal name and form of organization of the CLO manager.
Request for Comment
    50(a). Does the proposed CLO risk retention option present a 
reasonable allocation of risk retention among the parties that 
originate, purchase, and sell assets in a CLO securitization? 50(b). 
Are there any changes that should be made in order to better align the 
interests of CLO sponsors and CLO investors?
    51. Are there technical changes to the proposed CLO option that 
would be needed or desirable in order for lead arrangers to be able to 
retain the risk as proposed, and for CLO sponsors to be able to rely on 
this option?

[[Page 57964]]

    52(a). Who should assume responsibility for ensuring that lead 
arrangers comply with requirement to retain an interest in CLO-eligible 
tranches? 52(b). Would some sort of ongoing reporting or periodic 
certification by the lead arranger to holders of the CLO-eligible 
tranche be feasible? 52(c). Why or why not?
    53(a). The agencies would welcome suggestions for alternate or 
additional criteria for identifying lead arrangers. 53(b). Do loan 
syndications typically have more than one lead arranger who has 
significant influence over the underwriting and documentation of the 
loan? 53(c). If so, should the risk retention requirement be permitted 
to be shared among more than one lead arranger? 53(d). What practical 
difficulties would this present, including for the monitoring of 
compliance with the retention requirement? 53(e). How could the rule 
assure that each lead arranger's retained interest is significant 
enough to influence its underwriting of the loan?
    54(a). Is the requirement for the lead arranger to take an initial 
allocation of 20 percent of the broader syndicated credit facility 
sufficiently large to ensure that the lead arranger can exert a 
meaningful level of influence on loan underwriting terms? 54(b). Could 
a smaller required allocation accomplish the same purpose?
    55(a). The proposal permits lead arrangers to sell or hedge their 
retained interest in a CLO-eligible loan tranche if those loans 
experience a payment or bankruptcy default or are accelerated. Would 
the knowledge that it could sell or hedge a defaulted loan in those 
circumstances unduly diminish the lead arranger's incentive to 
underwrite and structure the loan prudently at origination? 55(b). 
Should the agencies restrict the ability of lead arrangers to sell or 
hedge their retained interest under these circumstances? 55(c). Why or 
why not?
    56(a). Should the lead arranger role for ``CLO-eligible'' loan 
tranches be limited to federally supervised lending institutions, which 
are subject to regulatory guidance on leveraged lending? 56(b). Why or 
why not?
    57(a). Should additional qualitative criteria be placed on CLO-
eligible loan tranches to ensure that they have lower credit risk 
relative to the broader leveraged loan market? 57(b). What such 
criteria would be appropriate?
    58(a). Should managers of open market CLOs be required to invest 
principal in some minimal percentage of the CLO's first loss piece in 
addition to meeting other requirements for open market CLOs proposed 
herein? 58(b). Why or why not?
    59(a). Is the requirement that all assets (other than servicing 
assets) consist of CLO-eligible loan tranches appropriate? 59(b). To 
what extent could this requirement impede the ability of a CLO sponsor 
to diversify its assets or its ability to rely on this option? 59(c). 
Does this requirement present any practical difficulties with reliance 
on this option, particularly the ability of CLO sponsors to accumulate 
a sufficient number of assets from CLO-eligible loan tranches to meet 
this requirement? 59(d). If so, what are they? 59(e). Would it be 
appropriate for the agencies to provide a transition period (for 
example, two years) after the effective date of the rule to allow some 
investment in corporate or other obligations other than CLO-eligible 
loan tranches or servicing assets while the market adjusts to the new 
standards? 59(f). What transition would be appropriate? 59(g). Would 
allowing a relatively high percentage of investment in such other 
assets in the early years following the effective date (such as 10 
percent), followed by a gradual reduction, facilitate the ability of 
the market to utilize the proposed option? 59(h). Why or why not? 
59(i). What other transition arrangements might be appropriate?
    60(a). Should an open market CLO be allowed permanently to hold 
some de minimis percentage of its collateral assets in corporate 
obligations other than CLO-eligible loan tranches under the option? 
60(b). If so, how much?
    61(a). Is the requirement that permitted hedging transactions be 
limited to interest rate and currency risks appropriate? 61(b). Are 
there other derivative transactions that CLO issuing entities engage in 
to hedge particular risks arising from the loans they hold and not as 
means of gaining synthetic exposures?
    62(a). Is the requirement that the holders of a CLO-eligible loan 
tranche have consent rights with respect to any material waivers and 
amendments of the underlying legal documents affecting their tranche 
appropriate? 62(b). How should waivers and amendments that affect all 
tranches (such as waivers of defaults or amendments to covenants) be 
treated for this purpose? 62(c). Should holders of CLO-eligible loan 
tranches be required to receive special rights with respect those 
matters, or are their interests sufficiently aligned with other 
lenders?
    63. How would the proposed option facilitate (or not facilitate) 
the continuance of open market CLO issuances?
    64(a). What percentage of currently outstanding CLOs, if any, have 
securitized assets that consist entirely of syndicated loans? 64(b). 
What percentage of securitized assets of currently outstanding CLOs 
consist of syndicated loans?
    65(a). Should unfunded portions of revolving credit facilities be 
allowed in open market CLO collateral portfolios, subject to some 
limit, as is current market practice? 65(b). If yes, what form should 
risk retention take? 65(c). Would the retention of 5 percent of an 
unfunded revolving commitment to lend (plus 5 percent of any 
outstanding funded amounts) provide the originator with incentives 
similar to those provided by retention of 5 percent of a funded term 
loan? 65(d). Why or why not?
    66(a). Would a requirement for the CLO manager to retain risk in 
the form of unfunded notes and equity securities, as proposed by an 
industry commenter, be a reasonable alternative for the above proposal? 
66(b). How would this meet the requirements and purposes of section 15G 
of the Exchange Act?
8. Municipal Bond ``Repackaging'' Securitizations
    Several commenters on the original proposal requested that the 
agencies exempt municipal bond repackagings securitizations from risk 
retention requirements, the most common form of which are often 
referred to as ``tender option bonds'' (TOBs).\90\ These commenters 
argued that these transactions should be exempt from risk retention for 
the following reasons:
---------------------------------------------------------------------------

    \90\ As described by one commenter, a typical TOBs transaction 
consists of the deposit of a single issue of highly rated, long-term 
municipal bonds in a trust and the issuance by the trust of two 
classes of securities: A floating rate, puttable security (the 
``floaters''), and an inverse floating rate security (the 
``residual''). No tranching is involved. The holders of floaters 
have the right, generally on a daily or weekly basis, to put the 
floaters for purchase at par, which put right is supported by a 
liquidity facility delivered by a highly rated provider and causes 
the floaters to be a short-term security. The floaters are in large 
part purchased and held by money market mutual funds. The residual 
is held by a longer term investor (bank, insurance company, mutual 
fund, hedge fund, etc.). The residual investors take all of the 
market and structural risk related to the TOBs structure, with the 
floaters investors only taking limited, well-defined insolvency and 
default risks associated with the underlying municipal bonds, which 
risks are equivalent to those associated with investing in such 
municipal bonds directly.
---------------------------------------------------------------------------

     Securities issued by municipal entities are exempt, so 
securitizations involving these securities should also be exempt;
     Municipal bond repackagings are not the type of 
securitizations that prompted Congress to enact section 15G of the 
Exchange Act, but rather are

[[Page 57965]]

securitizations caught in the net cast by the broad definition of ABS. 
In fact, the underlying collateral of TOBs has very lower credit risk 
and is structured to meet the credit quality requirements of Rule 2a-7 
under the Investment Company Act of 1940; \91\
---------------------------------------------------------------------------

    \91\ 17 CFR 270.2a-7.
---------------------------------------------------------------------------

     Imposing risk retention in the TOBs market would reduce 
the liquidity of municipal bonds, which would lead to an increase in 
borrowing costs for municipalities and other issuers of municipal 
bonds, as well a decrease the short-term investments available for tax-
exempt money market funds; and
     TOB programs are financing vehicles that are used because 
more traditional forms of securities financing are inefficient in the 
municipal securities market; TOB programs are not intended to, and do 
not, transfer material investment risk from the securitizer to 
investors. The securitizer in a TOB program (whether the TOB program 
sponsor or a third-party investor) has ``skin in the game'' by virtue 
of (i) the nature of the TOB inverse floater interest it owns, which 
represents ownership of the underlying municipal securities and is not 
analogous to other types of ABS programs, or (ii) its provision of 
liquidity coverage or credit enhancement, or its obligation to 
reimburse the provider of liquidity coverage or credit enhancement for 
any losses.

Another commenter asserted that TOBs and other types of municipal 
repackaging transactions continue to offer an important financing 
option for municipal issuers by providing access to a more diverse 
investor base, a more liquid market and the potential for lower 
interest rates. According to this commenter, if TOBs were subject to 
the risk retention requirements of the proposal, the cost of such 
financing would increase significantly, sponsor banks would likely 
scale back the issuance of TOBs, and as a result the availability of 
tax-exempt investments in the market would decrease.
    In order to reflect and incorporate the risk retention mechanisms 
currently implemented by the market, the agencies are proposing to 
provide two additional risk retention options for certain municipal 
bond repackagings. The proposed rule closely tracks certain 
requirements for these repackagings, outlined in IRS Revenue Procedure 
2003-84, that are relevant to risk retention.\92\ Specifically, the re-
proposed rule proposes additional risk retention options for certain 
municipal bond repackagings in which:
---------------------------------------------------------------------------

    \92\ Revenue Procedure 2003-84, 2003-48 I.R.B. 1159.
---------------------------------------------------------------------------

     Only two classes of securities are issued: A tender option 
bond and a residual interest;
     The tender option bond qualifies for purchase by money 
market funds under Rule 2a-7 under the Investment Company Act of 1940;
     The holder of a tender option bond must have the right to 
tender such bonds to the issuing entity for purchase at any time upon 
no more than 30 days' notice;
     The collateral consists solely of servicing assets and 
municipal securities as defined in Section 3(a)(29) of the Securities 
Exchange Act of 1934 and all of those securities have the same 
municipal issuer and the same underlying obligor or source of payment;
     Each of the tender option bond, the residual interest and 
the underlying municipal security are issued in compliance with the 
Internal Revenue Code of 1986, as amended (the ``IRS Code''), such that 
the interest payments made on those securities are excludable from the 
gross income of the owners;
     The issuing entity has a legally binding commitment from a 
regulated liquidity provider to provide 100 percent guarantee or 
liquidity coverage with respect to all of the issuing entity's 
outstanding tender option bonds; \93\ and
---------------------------------------------------------------------------

    \93\ The agencies received very few comments with respect to the 
definition of regulated liquidity provider included in the original 
proposal with respect to the proposed ABCP option. The proposed rule 
includes the same definition and 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.
---------------------------------------------------------------------------

     The issuing entity qualifies for monthly closing elections 
pursuant to IRS Revenue Procedure 2003-84, as amended or supplemented 
from time to time.

An issuing entity that meets these qualifications would be a Qualified 
Tender Option Bond Entity.
    The sponsor of a Qualified Tender Option Bond Entity may satisfy 
its risk retention requirements under section 10 of the proposed rule 
if it retains an interest that upon issuance meets the requirements of 
an eligible horizontal residual interest but that upon the occurrence 
of a ``tender option termination event'' as defined in section 4.01(5) 
of IRS Revenue Procedure 2003-84, as amended or supplemented from time 
to time, will meet requirements of an eligible vertical interest.\94\ 
The agencies believe that the proposed requirements for both an 
eligible horizontal residual interest and an eligible vertical interest 
adequately align the incentives of sponsors and investors.
---------------------------------------------------------------------------

    \94\ Section 4.01(5) of IRS Revenue Procedure 2003-84 defines a 
tender option termination event as: (1) A bankruptcy filing by or 
against a tax-exempt bond issuer; (2) a downgrade in the credit-
rating of a tax-exempt bond and a downgrade in the credit rating of 
any guarantor of the tax-exempt bond, if applicable, below 
investment grade; (3) a payment default on a tax-exempt bond; (4) a 
final judicial determination or a final IRS administrative 
determination of taxability of a tax-exempt bond for Federal default 
on the underlying municipal securities and credit enhancement, where 
applicable; (5) a credit rating downgrade below investment grade; 
(6) the bankruptcy of the issuer and, when applicable, the credit 
enhancer; or (7) the determination that the municipal securities are 
taxable.
---------------------------------------------------------------------------

    The sponsor of a Qualified Tender Option Bond Entity may also 
satisfy its risk retention requirements under this Section if it holds 
municipal securities from the same issuance of municipal securities 
deposited in the Qualified Tender Option Bond Entity, the face value of 
which retained municipal securities is equal to 5 percent of the face 
value of the municipal securities deposited in the Qualified Tender 
Option Bond Entity. The prohibitions on transfer and hedging set forth 
in section 12 of the proposed rule would apply to any municipal 
securities retained by the sponsor of a Qualified Tender Option Bond 
Entity in satisfactions of its risk retention requirements under this 
section.
    The sponsor of a Qualified Tender Option Bond Entity could also 
satisfy its risk retention requirements under subpart B of the proposed 
rule using any of the other risk retention options in this proposal, 
provided the sponsor meets the requirements of that option.
Request for Comment
    67(a). Do each of the additional options proposed with respect to 
repackagings of municipal securities accommodate existing market 
practice for issuers and sponsors of tender option bonds? 67(b). If 
not, are there any technical adjustments that need to be made in order 
to accommodate existing market practice?
    68(a). Do each of the additional options proposed with respect to 
repackagings of municipal securities adequately align the incentives of 
sponsors and investors? 68(b). If not, are

[[Page 57966]]

there any additional requirements that should be added in order to 
better align those incentives?
9. Premium Capture Cash Reserve Account
a. Overview of Original Proposal and Public Comment
    In the original proposal, the agencies were concerned with two 
different forms of evasive behavior by sponsors to reduce the 
effectiveness of risk retention. First, in the context of horizontal 
risk retention, it could have been difficult to measure how much risk a 
sponsor was retaining where the risk retention requirement was measured 
using the ``par value'' of the transaction. In particular, a first loss 
piece could be structured with a face value of 5 percent, but might 
have a market value of only cents on the dollar. As the sponsor might 
not have to put significant amounts of its own funds at risk to acquire 
the horizontal interest, there was concern that the sponsor could 
structure around its risk retention requirements and thereby evade a 
purpose of section 15G.
    Second, 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 and diminish the value, relative to 
par value, of the most subordinated credit tranche. 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 unsound underwriting practices.
    In order to achieve the goals of risk retention, the original 
proposal would have increased the required amount of risk retention by 
the amount of proceeds in excess of 95 percent of the par value of ABS 
interests, or otherwise required the sponsor to deposit the difference 
into a first-loss premium capture cash reserve account. The amount 
placed into the premium capture cash reserve account would have been 
separate from and in addition to the sponsor's base risk retention 
requirement, and would have been used to cover losses on the underlying 
assets before such losses were allocated to any other interest or 
account. As a likely consequence to those proposed requirements, the 
agencies expected that few, if any, securitizations would require the 
establishment of a premium capture cash reserve account, as sponsors 
would simply adjust by holding more risk retention.
    The agencies requested comment on the effectiveness and 
appropriateness of the premium capture cash reserve account and sought 
input on any alternative methods. Several commenters were supportive of 
the concept behind the premium capture cash reserve account to prevent 
sponsors from structuring around the risk retention requirement. 
However, most commenters generally objected to the premium capture cash 
reserve account. Many commenters expressed concern that the premium 
capture cash reserve account would prevent sponsors and originators 
from recouping the costs of origination and hedging activities, give 
sponsors an incentive to earn compensation in the form of fees from the 
borrower instead of cash from deal proceeds, and potentially cause the 
sponsor to consolidate the entire securitization vehicle for accounting 
purposes.
    Commenters stated that these potential negative effects would 
ultimately make securitizations uneconomical for many sponsors, and 
therefore would have a significant adverse impact on the cost and 
availability of credit. Some commenters also argued that the premium 
capture cash reserve account exceeded the statutory mandate and 
legislative intent of the Dodd-Frank Act.
b. Proposed Treatment
    After careful consideration of all the comments regarding the 
premium capture cash reserve account, and in consideration of the use 
of fair value in the measurement of the standard risk retention amount 
in the proposed rule (as opposed to the par value measurement in the 
original proposal), the agencies have decided not to include a premium 
capture cash reserve account provision in the proposed rule. The 
agencies still consider it important to ensure that there is meaningful 
risk retention and that sponsors cannot effectively negate or reduce 
the economic exposure they are required to retain under the proposed 
rule. However, the proposal to use fair value to measure the amount of 
risk retention should meaningfully mitigate the ability of a sponsor to 
evade the risk retention requirement through the use of deal 
structures. The agencies also took into consideration the potential 
negative unintended consequences the premium capture cash reserve 
account might cause for securitizations and lending markets. The 
elimination of the premium capture cash reserve account should reduce 
the potential for the proposed rule to negatively affect the 
availability and cost of credit to consumers and businesses.
Request for Comment
    69(a). Should the proposed rule require a sponsor to fund all or 
part of its risk retention requirement with own funds, instead of using 
proceeds from the sale of ABS interests to investors? 69(b). Would risk 
retention be more effective if sponsors had to fund it entirely with 
their own funds? 69(c). Why or why not?
    70(a). Should the agencies require a higher amount of risk 
retention specifically for transaction structures which rely on premium 
proceeds, or for assets classes like RMBS and CMBS which have relied 
historically on the use of premium proceeds? 70(b). If so, how should 
this additional risk requirement be sized in order to ensure risk 
retention achieves the right balance of cost versus effectiveness?

C. Allocation to the Originator

1. Overview of Original Proposal and Public Comment
    As a general matter, the original proposal was structured so that 
the sponsor of a securitization transaction would be solely responsible 
for complying with the risk retention requirements established under 
section 15G of the Exchange Act and the proposed implementing 
regulations, consistent with that statutory provision. However, subject 
to a number of considerations, section 15G authorizes the agencies to 
allow a sponsor to allocate at least a portion of the credit risk it is 
required to retain to the originator(s) of securitized assets.\95\ 
Accordingly, subject to conditions and restrictions discussed below, 
the original proposal would have permitted a sponsor to reduce its 
required risk retention obligations in a securitization transaction by 
the portion of risk

[[Page 57967]]

retention obligations assumed by the originators of the securitized 
assets.
---------------------------------------------------------------------------

    \95\ 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).
---------------------------------------------------------------------------

    When determining how to allocate the risk retention requirements, 
the agencies are directed to consider whether the assets sold to the 
sponsor have terms, conditions, and characteristics that reflect low 
credit risk; whether the form or volume of the transactions in 
securitization markets creates incentives for imprudent origination of 
the type of loan or asset to be sold to the sponsor; and the potential 
impact of the risk retention obligations on the access of consumers and 
businesses to credit on reasonable terms, which may not include the 
transfer of credit risk to a third party.\96\
---------------------------------------------------------------------------

    \96\ 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.
---------------------------------------------------------------------------

    In the original proposal, the agencies proposed a framework that 
would have permitted a sponsor of a securitization to allocate a 
portion of its risk retention obligation to an originator that 
contributed a significant amount of assets to the underlying asset 
pool. The agencies endeavored to create appropriate incentives for both 
the securitization sponsor and the originator(s) to maintain and 
monitor appropriate underwriting standards without creating undue 
complexity, which potentially could mislead investors and confound 
supervisory efforts to monitor compliance. Importantly, the original 
proposal did not require allocation to an originator. Therefore, it did 
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 fulfill a sponsor's risk 
retention requirement.
    The allocation to originator option in the original proposal was 
designed to work in tandem with the base vertical or horizontal risk 
retention options that were set forth in that proposal. The provision 
would have made the allocation to originator option available to a 
sponsor that held all of the retained interest under the vertical 
option or all of the retained interest under the horizontal option, but 
would not have made the option available to a sponsor that satisfied 
the risk retention requirement by retaining a combination of vertical 
and horizontal interests.
    Additionally, the original proposal would have permitted a 
securitization sponsor to allocate a portion of its risk retention 
obligation 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 was allocated 
credit risk in accordance with the proposal was required to be at least 
20 percent, but not in excess of the percentage of the securitized 
assets it originated. The originator would have been required to hold 
its allocated share of the risk retention obligation in the same manner 
as would have been required of the sponsor, and subject to the same 
restrictions on transferring, hedging, and financing the retained 
interest. Thus, for example, if the sponsor satisfied its risk 
retention requirements by acquiring an eligible horizontal residual 
interest, an originator allocated risk would have been required to 
acquire a portion of that 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 have been reduced by 
the amount allocated to the originator. Finally, the original proposal 
would have made the sponsor responsible for any failure of an 
originator to abide by the transfer and hedging restrictions included 
in the proposed rule.
    Several commenters opposed the original proposal on allocation to 
originators in its entirety for a variety of reasons. A common reason 
stated was that originators would be placed in an unequal bargaining 
position with sponsors. Other commenters supported the proposed 
provision, but many urged that it be revised. Several commenters stated 
that requiring that the originator use the same form of risk retention 
as the sponsor should be removed, while one commenter proposed that if 
a sponsor desired to allocate a portion of risk retention to an 
originator, only the horizontal retention option should be used. Many 
commenters stated that the proposed 20 percent origination threshold 
required in order for the option to be used was too high. One commenter 
urged that an originator that originated more than 50 percent of the 
securitized assets be required to retain at least 50 percent of the 
required retention. Another commenter suggested that an originator 
retaining a portion of the required interest be allocated only a 
percentage of the loans it originated, rather than an allocation of the 
entire pool, as proposed. The agencies also received comments that the 
definition of ``originator'' ought to include parties that purchase 
assets from entities that create the assets and that allocation to 
originators should be permitted where the L-shaped option or horizontal 
cash reserve account option was used as a form of risk retention.
2. Proposed Treatment
    The agencies have carefully considered the concerns raised by 
commenters with respect to the original proposal on allocation to 
originators. The agencies do not believe, however, that a significant 
expansion of the allocation to originator option would be appropriate 
and that allocation limits on originators are necessary to realize the 
agencies' goal of better aligning securitizers' and investors' 
interests.
    Therefore, the agencies are proposing an allocation to originator 
provision that is substantially similar to the provision in the 
original proposal. The only modifications to this option would be 
technical changes that reflect the proposed flexible standard risk 
retention (discussed above in Part III.B.1 of this SUPPLEMENTARY 
INFORMATION). The rule, like the original proposal, would require that 
an originator to which a portion of the sponsor's risk retention 
obligation is allocated acquire and retain ABS interests or eligible 
horizontal residual interests in the same manner as would have been 
retained by the sponsor. Under the proposed rule, this condition would 
require an originator to acquire horizontal and vertical interests in 
the securitization transaction in the same proportion as the interests 
originally established by the sponsor. This requirement helps to align 
the interests of originators and sponsors, as both face the same 
likelihood and degree of losses if the collateralized assets begin to 
default.
    In addition, the proposed rule would permit a sponsor that uses a 
horizontal cash reserve account to use this option. Finally, consistent 
with the change in the general risk retention from par value to fair 
value (discussed above in Part III.B.1 of this Supplementary 
Information) in determining the maximum amount of risk retention that 
could be allocated to an originator, the current NPR refers to the fair 
value, rather than the dollar amount (or corresponding amount in the 
foreign currency in which the ABS are issued, as applicable), of the 
retained interests.
    As explained in the original proposal, by limiting this option to 
originators that originate at least 20 percent of the asset pool, the 
agencies seek to ensure that the originator retains risk in an amount 
significant enough to function as an actual incentive for the 
originator

[[Page 57968]]

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 have been seeking to acquire a speculative 
investment. These requirements are also intended to reduce the 
proposal's potential complexity and facilitate investor and regulatory 
monitoring.
    The re-proposal again requires that an originator hold retained 
interests in the same manner as the sponsor. As noted, the proposed 
rule provides the sponsor with significant flexibility in determining 
the mix of vertical and horizontal interests that it would hold to meet 
its risk retention requirement. In addition, unlike the original 
proposal, the proposed rule would permit a sponsor that holds a 
combination of vertical and horizontal interests to utilize the 
allocation to originator option. If originators were permitted to 
retain their share of the sponsor's risk retention obligation in a 
proportion that is different from the sponsor's mix of the vertical and 
horizontal interests, investor and regulatory monitoring could become 
very complex.
    The re-proposal does not incorporate commenters' suggestion that an 
originator be allocated retention in only the loans that it originated. 
The operational burden on both securitization sponsors and federal 
supervisors to ensure that retention is held by originators on the 
correct individual loans would be exceedingly high. Therefore, the 
proposal continues to require that originators allocated a portion of 
the risk retention requirement be allocated a share of the entire 
securitization pool.
    The agencies are not proposing a definition of originator modified 
from the original proposal and are not proposing to include persons 
that acquire loans and transfer them to a sponsor. The agencies 
continue to believe that the definition of the term originator in 
section 15G \97\ does not provide the agencies with flexibility to make 
this change. This definition limits an originator to a person that 
``through the extension of credit or otherwise, creates a financial 
asset.'' A person that acquires an asset created by another person 
would not be the ``creator'' of such asset.
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78o-11(a)(4).
---------------------------------------------------------------------------

    The agencies are not proposing to eliminate the allocation to 
originator provision, as some commenters suggested. Although the 
agencies are sensitive to concerns that smaller originators might be 
forced to accept allocations from sponsors due to unequal bargaining 
power, the 20 percent threshold would make the allocation option 
available only for entities whose assets form a significant portion of 
a pool and who, thus, ordinarily could be expected to have some 
bargaining power with a sponsor.
    Finally, the agencies do not believe that it is necessary, as some 
commenters suggested, to require retention by a non-sponsor originator 
which provides more than half of the securitized asset pool. In most 
circumstances, such an originator would be a sponsor. In any 
circumstance where such an originator was not the sponsor, the agencies 
believe that risk retention goals would be adequately served by 
retention by the sponsor, if allocation to the originator did not 
otherwise occur.
Request for Comment
    71(a). If originators were allocated risk only as to the loans they 
originate, would it be operationally feasible to allocate losses on a 
loan-by-loan basis? 71(b). What would be the degree of burden to 
implement such a system and accurately track and allocate losses?

D. Hedging, Transfer, and Financing Restrictions

1. Overview of the Original Proposal and Public Comment
    Section 15G(c)(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 with respect to an asset. Consistent with this 
statutory directive, the original proposal prohibited a sponsor from 
transferring any interest or assets that it was 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). An issuing entity, however, would not be deemed a 
consolidated affiliate of the sponsor for the securitization even if 
its financial statements were consolidated with those of the sponsor 
under applicable accounting standards.
    In addition to the transfer restrictions, the original proposal 
prohibited a sponsor or any consolidated affiliate from hedging the 
credit risk the sponsor was required to retain under the rule. However, 
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 have been prohibited under the 
original proposal. The original proposal also prohibited a sponsor and 
a consolidated affiliate from pledging as collateral for any obligation 
any interest or asset that the sponsor was required to retain unless 
the obligation was with full recourse to the sponsor or consolidated 
affiliate.
    Commenters generally expressed support for the proposed 
restrictions in the original proposal as they felt that the 
restrictions were appropriately structured. However, several commenters 
recommended that sponsors only be required to maintain a fixed 
percentage of exposure to a securitization over time rather than a 
fixed amount of exposure. Some commenters also recommended that the 
transfer restriction be modified so that not only could sponsors 
transfer retained interests or assets to consolidated affiliates, but 
consolidated affiliates could hold the risk retention initially as 
well.
2. Proposed Treatment
    The agencies have carefully considered the comments received with 
respect to the original proposal's hedging, transfer, and financing 
restrictions, and the agencies do not believe that any significant 
changes to these restrictions would be appropriate (other than the 
exemptions provided for CMBS and duration of the hedging and transfer 
restrictions, as described in Part IV.F of this Supplementary 
Information).
    The agencies are, however, proposing changes in connection with the 
consolidated affiliate treatment. As noted above, the ``consolidated 
affiliate'' definition would be operative in two respects. First, the 
original proposal would have permitted transfers of the risk retention 
interest to a consolidated affiliate. The agencies proposed this 
treatment under the rationale that financial losses are shared equally 
within a group of consolidated entities; therefore, a sponsor would not 
``avoid'' losses by transferring the required risk retention asset to 
an affiliate. Upon further consideration, the agencies are concerned 
that, under current accounting standards, consolidation of an entity 
can occur under circumstances in which a significant portion of the 
economic losses of one entity will not, in economic terms, be suffered 
by its consolidated affiliate.
    To avoid this outcome, the current proposal introduces the concept 
of a

[[Page 57969]]

``majority-owned affiliate,'' which would be defined under the proposal 
as an entity that, directly or indirectly, majority controls, is 
majority controlled by, or is under common majority control with, 
another entity For purposes of this definition, majority control would 
mean ownership of more than 50 percent of the equity of an entity or 
ownership of any other controlling financial interest in the entity (as 
determined under GAAP). The agencies are also, in response to 
commenters, revising the proposal to allow risk retention to be 
retained as an initial matter by a majority-owned affiliate; in other 
words, it would not be necessary for the sponsor to go through the 
steps of holding the required retention interest for a moment in time 
before moving it to the affiliate.
    Second, the original proposal prohibited a consolidated affiliate 
of the sponsor from hedging a risk retention interest required to be 
retained under the rule. Again, the rationale was that the sponsor's 
consolidated affiliate would obtain the benefits of the hedging 
transaction and they would offset any losses sustained by the sponsor. 
In the current proposal, the agencies are eliminating the concept of 
the ``consolidated'' affiliate and instead applying the hedging 
prohibition to any affiliate of the sponsor.
    In all other respects, the agencies are again proposing the same 
hedging, transfer, and financing restrictions as under the original 
proposal, without modification. The proposal would prohibit a sponsor 
or any affiliate from hedging the credit risk the sponsor is required 
to retain under the rule or from purchasing or selling a security or 
other financial instrument, or entering into an agreement (including an 
insurance contract), derivative or other position, with any other 
person if: (i) Payments on the security or other financial instrument 
or under the agreement, derivative, or position are materially related 
to the credit risk of one or more particular ABS interests that the 
retaining sponsor is required to retain, or one or more of the 
particular securitized assets that collateralize the asset-backed 
securities; and (ii) the security, instrument, agreement, derivative, 
or position in any way reduces or limits the financial exposure of the 
sponsor to the credit risk of one or more of the particular ABS 
interests or one or more of the particular securitized assets that 
collateralize the asset-backed securities.
    Similar to the original proposal, under the proposed rule 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: (1) Any class of ABS interests in the issuing 
entity that were issued in connection with the securitization 
transaction and that are included in the index represented no more than 
10 percent of the dollar-weighted average of all instruments included 
in the index, and (2) all classes of ABS interests in all issuing 
entities that were issued in connection with any securitization 
transaction in which the sponsor was required to retain an interest 
pursuant to the 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.
    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).
    Consistent with the original proposal, the proposed rule would 
prohibit a sponsor and any affiliate from pledging as collateral for 
any obligation (including a loan, repurchase agreement, or other 
financing transaction) any ABS interest that the sponsor is required to 
retain unless the obligation is with full recourse to the sponsor or a 
pledging affiliate (as applicable). 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 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.
    Similar to the original proposal, the proposed rule would not 
prohibit an issuing entity from engaging in hedging activities itself 
when such activities would be for the benefit of all investors in the 
asset-backed securities. However, any credit protection by or hedging 
protection obtained by an issuing entity could not cover any ABS 
interest or asset that the sponsor is required to retain under the 
proposed rule. For example, if the sponsor retained a 5 percent 
eligible vertical interest, an issuing entity may purchase (or benefit 
from) a credit insurance wrap that covers up to 95 percent of the 
tranches, but not the 5 percent of such tranches required to be 
retained by the sponsor.
Request for Comment
    72(a). Is the scope of the proposed restriction relating to 
majority-owned affiliates, and affiliates generally, appropriate to 
prevent sponsors from avoiding losses arising from a risk retention 
asset? 72(b). Should the agencies, instead of the majority-owned 
affiliate approach, increase the 50 percent ownership requirement to a 
100 percent ownership threshold under a wholly-owned approach?

IV. 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.\98\ In addition, section 15G(e)(1) permits the agencies 
jointly to adopt or issue additional exemptions, exceptions, or 
adjustments to the risk retention requirements of the 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

[[Page 57970]]

interest and for the protection of investors.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78o-11(c)(1)(G) and (e).
---------------------------------------------------------------------------

    Consistent with these provisions, the original proposal would have 
exempted certain types of ABS or securitization transactions from the 
credit risk retention requirements of the rule, each as discussed 
below, along with the comments and the new or revised proposals of the 
proposed rule.

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

    The original proposal would have implemented section 15G(e)(3)(B) 
of the Exchange Act by exempting from the risk retention requirements 
any securitization transaction that is collateralized solely by 
residential, multifamily, or health care facility mortgage loan assets 
if the assets are insured or guaranteed as to the payment of principal 
and interest by the United States or an agency of the United 
States.\99\ Also, the original proposal would have exempted any 
securitization transaction that involves the issuance of ABS if the ABS 
are insured or guaranteed as to the payment of principal and interest 
by the United States or an agency of the United States and that are 
collateralized solely by residential, multifamily, or health care 
facility mortgage loan assets, or interests in such assets.
---------------------------------------------------------------------------

    \99\ Id. at section 78o-11(e)(3)(B).
---------------------------------------------------------------------------

    Commenters on the original proposal generally believed the agencies 
had appropriately proposed to implement this statutory exemption from 
the risk retention requirement. Some commenters remarked that the broad 
exemptions granted to government institutions and programs, which are 
unrelated to prudent underwriting, are another reason that transactions 
securitizing loans with private mortgage insurance should be exempted 
because, without including private mortgage insurance, the rule may 
encourage excessive reliance on such exemption and undermine the 
effectiveness of risk retention.
    Commenters also generally believed that the agencies were correct 
in believing the federal department or agency issuing, insuring or 
guaranteeing the ABS or collateral would monitor the quality of the 
assets securitized. One commenter noted that, in its experience, 
federal programs are sufficiently monitored to ensure the safety and 
consistency of the securitization and public interest. One commenter 
said that it would seem that any U.S. guarantee or insurance program 
should be exempt if it provides at least the same amount of coverage as 
the risk retention requirement, and another commenter said that the 
exemption should be broad enough to cover all federal insurance and 
guarantee programs. One commenter noted that the exemption seemed to 
prevent the mixing of U.S. direct obligations and U.S. insured or 
guaranteed obligations because the proposed rule would only allow an 
exemption for transactions collateralized either solely by U.S. direct 
obligations or solely by assets that are fully insured or guaranteed as 
to the payment of principal and interest by the U.S. Certain commenters 
urged the agencies to extend the government-backed exemptions to ABS 
backed by foreign governments, similar to the European Union's risk 
retention regime which includes a general exemption for transactions 
backed by ``central government'' claims without restriction.
    Several commenters urged the agencies to revise the government 
institutions and programs exemption to include an exemption for 
securitizations consisting of student loans made under the Federal 
Family Education Loan Program (``FFELP''). In particular, these 
commenters believe an exemption is warranted because FFELP loans have a 
U.S.-backed guarantee on 97 percent to 100 percent of defaulted 
principal and interest under the FFELP guarantee programs administered 
by the Department of Education. These commenters noted that FFELP loans 
benefit from a higher level of federal government support than Veterans 
Administration loans (25 percent to 50 percent) and Department of 
Agriculture Rural Development loans (up to 90 percent). These 
commenters also noted that risk retention would have no effect on the 
underwriting standards since these loans have been funded already and 
the program is no longer underwriting new loans. A securitizer of 
student loans also noted that the Department of Education set the 
standards by which FFELP loans were originated and serviced. Some 
commenters said that, if the agencies do not entirely exclude FFELP 
loan securitizations from the risk retention requirement, at a minimum 
the agencies should only require risk retention on the non-FFELP 
portion of the ABS portfolio.\100\
---------------------------------------------------------------------------

    \100\ One commenter requested an exemption for the sponsor of 
short-term notes issued by Straight-A Funding, LLC. As Straight-A 
Funding, LLC will not have ABS interests outstanding after January 
19, 2014, such an exemption is not necessary.
---------------------------------------------------------------------------

    Two commenters on the original proposal urged the agencies to 
include an exemption for ABS collateralized by any credit instrument 
extended under the federal guarantee program for bonds and notes issued 
for eligible community or economic development purposes established 
under the Community Development Financial Institutions (``CDFI'') bond 
program. Therefore, because credit risk retention was addressed and 
tailored specifically for the CDFI program, it was this commenter's 
view that the CDFI program transactions were designed to be exempt from 
the final credit risk retention requirements of section 15G of the 
Exchange Act in accordance with section 94l(b) of the Dodd-Frank Act.
    The agencies are again proposing, without changes from the original 
proposal, the exemption from the risk retention requirements for any 
securitization transaction that is collateralized solely by 
residential, multifamily, or health care facility mortgage loan assets 
if the assets are insured or guaranteed in whole or in part as to the 
payment of principal and interest by the United States or an agency of 
the United States. The agencies are also proposing, without changes 
from the original proposal, the exemption from the risk retention 
requirements for any securitization transaction that involves the 
issuance of ABS if the ABS are insured or guaranteed as to the payment 
of principal and interest by the United States or an agency of the 
United States and that are collateralized solely by residential, 
multifamily, or health care facility mortgage loan assets, or interests 
in such assets.
    In addition, taking into consideration comments received on the 
original proposal, the agencies are proposing a separate provision for 
securitization transactions that are collateralized by FFELP loans. 
Under the proposed rule, a securitization transaction that is 
collateralized (excluding servicing assets) solely by FFELP loans that 
are guaranteed as to 100 percent of defaulted principal and accrued 
interest (i.e., FFELP loans with first disbursement prior to October 
1993 or pursuant to certain limited circumstances where a full 
guarantee was required) would be exempt from the risk retention 
requirements. A securitization transaction that is collateralized 
solely (excluding servicing assets) by FFELP loans that are guaranteed 
as to at least 98 percent of defaulted principal and accrued interest 
would have its risk retention requirement reduced to 2 percent.\101\ 
This means that if the lowest guaranteed

[[Page 57971]]

amount for any FFELP loan in the pool is 98 percent (i.e., a FFELP loan 
with first disbursement between October 1993 and June 2006), the risk 
retention requirement for the entire transaction would be 2 percent. 
Similarly, under the proposed rule, a securitization transaction that 
is collateralized solely (excluding servicing assets) by FFELP loans 
that are guaranteed as to at least 97 percent of defaulted principal 
and accrued interest (in other words, all other securitizations 
collateralized solely by FFELP loans) would have its risk retention 
requirement reduced to 3 percent. Accordingly, if the lowest guaranteed 
amount for any FFELP loan in the pool is 97 percent (i.e., a FFELP loan 
with first disbursement of July 2006 or later), the risk retention 
requirement for the entire transaction would be 3 percent.
---------------------------------------------------------------------------

    \101\ The definition of ``servicing assets'' is discussed in 
Part II.B of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

    The agencies believe this reduction in the risk retention 
requirement is appropriate because FFELP loans have a guarantee on 97 
percent to 100 percent of defaulted principal and interest under the 
FFELP guarantee programs backed by the U.S. Department of Education. 
Further, fairly extensive post-default servicing must be properly 
performed under FFELP rules as a prerequisite to guarantee payment. 
Sponsors would therefore be encouraged to select assets for 
securitization with high quality underwriting standards. Furthermore, 
appropriate risk management practices would be encouraged as such 
proper post-default servicing will be required to restore the loan to 
payment status or successfully collect upon the guarantee.
    The agencies generally are not proposing to expand general 
exemptions from risk retention for other types of assets, as described 
in commenters' requests above. The agencies are not creating an 
exemption for short-term promissory notes issued by the Straight-A 
Funding program. The agencies do not believe such an exemption is 
appropriate because of the termination of the FFELP program and the 
presence in the market of other sources of funding for student lending. 
Additionally, the agencies are not proposing to exempt securitization 
transactions that employ a mix of government-guaranteed and direct 
government obligations from risk retention requirements, because the 
agencies have not found evidence that such securitization transactions 
currently exist in the market and the agencies have concerns about the 
development of such transactions for regulatory arbitrage purposes.
    The agencies are not proposing an exemption from risk retention for 
securitizations of assets issued, guaranteed or insured by foreign 
government entities. The agencies do not believe it would be 
appropriate to exempt such transactions from risk retention if they 
were offered in the United States to U.S. investors.
    Finally, the agencies are not proposing an exemption for the CDFI 
program, because the agencies do not believe such an exemption is 
necessary. It does not appear that CDFI program bonds are ABS. Although 
the proceeds of the bonds flow to CDFIs for use in funding community 
development lending, and the community development loans are ultimately 
the source of repayment on the bond, they do not collateralize the 
bonds. Furthermore, even if the bonds were ABS, the bonds are fully 
guaranteed by the U.S. government and therefore would qualify for other 
exemptions from risk retention contemplated by section 15G of the 
Exchange Act, discussed below.

B. Exemption for Securitizations of Assets Issued, Insured, or 
Guaranteed by the United States or Any Agency of the United States and 
Other Exemptions

    Section 15G(c)(1)(G)(ii) of the Exchange Act requires that the 
agencies, in implementing risk retention regulations, provide for a 
total or partial exemption from risk retention for securitizations of 
assets that are issued or guaranteed by the United States or an agency 
of the United States, as the agencies jointly determine appropriate in 
the public interest and the protection of investors.\102\ The original 
proposal would have contained full exemptions from risk retention for 
any securitization transaction if the ABS issued in the transaction 
were (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 residential, multifamily, or health care facility 
mortgage loan securitizations discussed above); or (3) fully guaranteed 
as to the timely payment of principal and interest by the United States 
or any agency of the United States.
---------------------------------------------------------------------------

    \102\ Id. at 78o-11(c)(1)(G).
---------------------------------------------------------------------------

    Consistent with section 15G(e)(3)(A) of the Exchange Act, the 
original proposal also would have provided an exemption from risk 
retention 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.\103\ Additionally, the 
original proposal provided an exemption from risk retention, consistent 
with section 15G(c)(1)(G)(iii) of the Exchange Act,\104\ for securities 
(1) 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 or (2) defined as a qualified scholarship 
funding bond in section 150(d)(2) of the Internal Revenue Code of 1986.
---------------------------------------------------------------------------

    \103\ Id. at 78o-11(e)(3)(A).
    \104\ Id. at 78o-11(c)(1)(G)(iii).
---------------------------------------------------------------------------

    Commenters on the original proposal generally believed that the 
proposed exemptions would appropriately implement the relevant 
provisions of the Exchange Act. Two commenters requested that the final 
rule clarify that this exemption extends to securities issued on a 
federally taxable as well as on a federal tax-exempt basis. Similarly, 
another commenter requested that the agencies make it clear that, in 
order to satisfy the qualified scholarship funding bond exemption, it 
is sufficient that the issuer be the type of entity described in the 
definition of qualified scholarship funding bond. One commenter did not 
support the broad exemption for municipal and government entities 
because it believed the exemption would provide an unfair advantage to 
public mortgage insurance that is not otherwise available to private 
mortgage insurance. Three commenters requested that the municipal 
exemption be broadened to include special purpose entities created by 
municipal entities because such special purpose entities are fully 
accountable to the public and are generally created to accomplish 
purposes consistent with the mission of the municipal entity.
    Another commenter said that the exemption should be broadened to 
cover securities issued by entities on behalf of municipal sponsors 
because the Commission has historically, through no-action letters, 
deemed such securities to be exempt under section 3(a)(2) of the 
Securities Act. This commenter also asked that the final rule or 
adopting release clarify that any ``separate security'' under Rule 131 
under the Securities Act would also be exempt under the risk retention 
rule.

[[Page 57972]]

One commenter stated that an exemption was appropriate in this 
circumstance because state and municipal issuers are required by state 
constitutions to carry out a ``public purpose,'' which excludes a 
profit motive.
    Several commenters recommended the agencies broaden the exemption 
so that all state agency and nonprofit student lenders (regardless of 
section 150(d) qualification) would be exempt from the rule. In 
general, these commenters stated that an exemption would be appropriate 
because requiring risk retention by these entities would be unnecessary 
and will cause them financial distress, thus impairing their ability to 
carry out their public-interest mission. One commenter said that the 
original proposal would make an erroneous distinction between nonprofit 
lenders that use section 150(d) and those who do not because both types 
of nonprofit student lenders offer the same level of retained risk. 
Also, the group noted that nonprofit and state agency student lenders 
are chartered to perform a specific public purpose--to provide 
financing to prospective students who want to enroll in higher 
education institutions. However, one commenter did not support a broad 
exemption for nonprofit student lenders because there did not appear to 
be anything inherent in a nonprofit structure that would protect 
investors in securitizations. Further, this commenter noted that there 
have been nonprofit private education lenders whose business model 
differs little from for-profit lenders.
    After considering the comments received, the agencies are again 
proposing the exemptions under section 15G(c)(1)(G)(ii) of the Exchange 
Act without substantive modifications from the original proposal. The 
agencies believe that broadening the scope of the exemption to cover 
private entities that are affiliated with municipal entities, but that 
are not themselves municipal entities, would go beyond the statutory 
scope of section 15G(c)(1)(G)(iii) of the Exchange Act. Similarly, the 
agencies are not expanding the originally proposed exemptions to cover 
nonprofit student loan lenders. The agencies believe that nonprofit 
student loan lending differs little from for-profit student loan 
lending and that there does not appear to be anything inherent in the 
underwriting practices of nonprofit student loan lending to suggest 
that these securitizations align interests of securitizers with 
interests of investors so that an exemption would be appropriate under 
section 15G(c)(1)(G) or section 15G(e) of the Exchange Act.

C. Exemption for Certain Resecuritization Transactions

    Under the original proposal, certain ABS issued in resecuritization 
transactions \105\ (resecuritization ABS) would have been exempted from 
the credit risk retention requirements if they met two conditions. 
First, the transaction had to be collateralized solely by existing ABS 
issued in a securitization transaction for which credit risk was 
retained as required under the original proposal, or which was 
otherwise exempted from credit risk retention requirements (compliant 
ABS). Second, the transaction had to be structured so that it involved 
the issuance of only a single class of ABS interests and provided for a 
pass through of all principal and interest payments received on the 
underlying ABS (net of expenses of the issuing entity) to the holders 
of such class of ABS. Because the holder of a resecuritization ABS 
structured as a single-class pass-through security would have a 
fractional undivided interest in the pool of underlying ABS and in the 
distributions of principal and interest (including prepayments) from 
these underlying ABS, the agencies reasoned that a resecuritization ABS 
meeting these requirements would not alter the level or allocation of 
credit and interest rate risk on the underlying ABS.
---------------------------------------------------------------------------

    \105\ In a resecuritization transaction, the asset pool 
underlying the ABS issued in the transaction comprises one or more 
asset-backed securities.
---------------------------------------------------------------------------

    In the original proposal, the agencies proposed to adopt this 
exemption under the general exemption provisions of section 15G(e)(1) 
of the Exchange Act.\106\ The agencies noted that a resecuritization 
transaction that created a single-class pass-through would neither 
increase nor reallocate the credit risk inherent in that underlying 
compliant ABS, and that the transaction could allow for the combination 
of ABS backed by smaller pools, and 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 a result, the 
exemption for this type of resecuritization could improve the access of 
consumers and businesses to credit on reasonable terms.\107\
---------------------------------------------------------------------------

    \106\ As discussed above in Part IV of this SUPPLEMENTARY 
INFORMATION, 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. 15 
U.S.C. 78o-11(e)(1).
    \107\ See Original Proposal, 76 FR at 24138.
---------------------------------------------------------------------------

    Under the original proposal, sponsors of resecuritizations that 
were not structured purely as single-class pass-through transactions 
would have been required to meet the credit risk retention requirements 
with respect to such resecuritizations unless another exemption for the 
resecuritization was available. Thus, the originally proposed rule 
would subject resecuritizations to separate risk retention requirements 
that separate the credit or pre-payment risk of the underlying ABS into 
new tranches.\108\
---------------------------------------------------------------------------

    \108\ For example, under the proposed rules, the sponsor of a 
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 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.
    Similarly, with regard to ABS structured to protect against pre-
payment risk or that are structured to achieve sequential paydown of 
tranches, the agencies reasoned that 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 exposed to a higher level of credit risk 
than holders of shorter duration classes. See Original Proposal, 76 
FR at 24138 n.193.
---------------------------------------------------------------------------

    The agencies received a number of comments on the resecuritization 
exemption in the original proposal, principally but not exclusively 
from financial entities and financial trade organizations. The 
commenters, including investor members of one trade organization, 
generally favored expanding the resecuritization exemption and allowing 
greater flexibility in these transactions, although individual 
commenters differed in how broad a new exemption should be. Further, 
while many commenters generally supported the first criterion for the 
proposed exemption that the ABS used in the resecuritization must be 
compliant with, or exempt from, the risk retention rules, they did not 
support the second criterion that only a single class pass-through be 
issued in the resecuritization transaction for the proposed exemption 
to apply. In particular, they did not believe that this condition would

[[Page 57973]]

further the goal of improving underwriting of the underlying assets, 
although they believed that it would unnecessarily restrict a source of 
liquidity in the market place.
    A few commenters asserted that applying risk retention to 
resecuritization of ABS that are already in the market place, whether 
or not the interests are compliant ABS, cannot alter the incentives for 
the original ABS sponsor to create high-quality assets. Some commenters 
also stated that resecuritizations allowed the creation of specific 
tranches of ABS interests, such as planned asset class securities, or 
principal or interest only strips, that are structured to meet specific 
demands of investors, so that subjecting such transactions to 
additional risk retention (possibly discouraging the issuance of such 
securities) could prevent markets from efficiently fulfilling investor 
needs. Commenters also noted that resecuritization transactions allow 
investors to sell ABS interests that they may no longer want by 
creating assets that are more highly valued by other investors, thereby 
improving the liquidity of these assets. Another commenter advised that 
the rule should encourage resecuritizations that provided additional 
collateral or enhancements such as insurance policies for the 
resecuritization ABS. Another commenter noted that resecuritizations of 
mortgage backed securities were an important technical factor in the 
recent run up in prices and that requiring additional risk retention 
would chill the market unnecessarily.
    Some comments suggested that the agencies should expand the 
exemption to some common types of resecuritizations, but not apply it 
to CDOs. To distinguish which should be subject to the exemption, 
commenters suggested not extending the exemption to transactions with 
managed pools of collateral, or limiting the types or classes of ABS 
that could be resecuritized, and the derivatives an issuing entity 
could use. A few commenters specifically stated that the 
resecuritization exemption should be extended to include sequential pay 
resecuritizations or resecuritizations structured to address prepayment 
risk, if they were collateralized by compliant ABS. Another commenter 
recommended that the exemption include any tranched resecuritizations 
(such as typical collateralized mortgage obligations) of ABS issued or 
guaranteed by the U.S. government, the Government National Mortgage 
Associations or the Enterprises, as these instruments were an important 
source of liquidity for the underlying assets.
    Finally, one commenter requested clarification as to whether the 
resecuritizations of Enterprise ABS, guaranteed by the Enterprises, 
would be covered by the provision for Enterprises in the original 
proposal. The agencies are clarifying that to the extent the 
Enterprises act as sponsor for a resecuritization of their ABS, fully 
guarantee the resulting securities as to principal and interest, and 
meet the other conditions the agencies are again proposing, that 
provision would apply to the Enterprise securitization 
transaction.\109\
---------------------------------------------------------------------------

    \109\ See proposed rule at Sec.  ----.8. The wording of the 
provision as proposed is not limited to just initial Enterprise-
sponsored securitization transactions but would also apply to ABS 
created by Enterprise-sponsored resecuritizations, as long as all 
the proposed conditions are met.
---------------------------------------------------------------------------

    The agencies continue to believe that the resecuritization 
exemption from the original proposal is appropriate for the reasons 
discussed in that proposal, and above. Accordingly, the agencies are 
again proposing this provision without substantive change. 
Additionally, the agencies have carefully considered comments asking 
for expansion of the resecuritization exemption. In this respect, the 
agencies have considered that sponsors of resecuritization transactions 
would have considerable flexibility in choosing what ABS interests to 
include in an underlying pool as well as in creating the specific 
structures. This choice of securities is essentially the underwriting 
of those securities for selection in the underlying pool. The agencies 
consider it appropriate, therefore, to propose rules that would provide 
sponsors with sufficient incentive to choose ABS that have lower levels 
of credit risk and to not use a resecuritization to obscure what might 
have been sub-par credit performance of certain ABS. It is also 
appropriate to apply the risk retention requirements in 
resecuritization transactions because resecuritization transactions can 
result in re-allocating the credit risk of the underlying ABS interest. 
Taking into account these considerations, the agencies believe that 
requiring additional risk retention as the standard for most 
resecuritization transactions is consistent with the intent of section 
15G of the Exchange Act, both in light of recent history and the 
specific statutory requirement that the agencies adopt risk retention 
standards for CDOs, and similar instruments collateralized by ABS.\110\
---------------------------------------------------------------------------

    \110\ See 15 U.S.C. 78o-11(c)(1)(F).
---------------------------------------------------------------------------

    The agencies note that to qualify for the proposed resecuritization 
exemptions, the ABS that are resecuritized would have to be compliant 
ABS. As the agencies noted in the original proposal, section 15G of the 
Exchange Act would not apply to ABS issued before the effective date of 
the agencies' final rules,\111\ and that as a practical matter, 
private-label ABS issued before the effective date of the final rules 
would typically not be compliant ABS. ABS issued before the effective 
date that meet the terms of an exemption from the proposed rule or that 
are guaranteed by the Enterprises, however, could qualify as compliant 
ABS.
---------------------------------------------------------------------------

    \111\ See id. at section 78o-11(i) (regulations become effective 
with respect to residential mortgage-backed ABS one year after 
publication of the final rules in the Federal Register, and two 
years for all other ABS).
---------------------------------------------------------------------------

    The agencies also do not believe that many of the commenters' 
suggestions for distinguishing ``typical'' resecuritizations from CDOs 
or other higher risk transactions could be applied consistently across 
transactions. The agencies, however, are proposing a modification to 
the original proposal in an effort to address comments about liquidity 
provision to the underlying markets and access to credit on reasonable 
terms while remaining consistent with the purpose of the statute. 
Certain RMBS resecuritizations are designed to address pre-payment risk 
for RMBS, because RMBS tend to have longer maturities than other types 
of ABS and high pre-payment risk. In this market, investors often seek 
securities structured to protect against pre-payment risk and have 
greater certainty as to expected life. At the same time, these 
resecuritizations do not divide again the credit risk of the underlying 
ABS with new tranches of differing subordination and therefore do not 
give rise to the same concerns as CDOs and similar resecuritizations 
that involve a subsequent tranching of credit risk.
    Accordingly, the agencies are proposing a limited expansion of the 
resecuritization exemption to include certain resecuritizations of RMBS 
that are structured to address pre-payment risk, but that do not re-
allocate credit risk by tranching and subordination structures. To 
qualify for this exemption, the transaction would be required to meet 
all of the conditions set out in the proposed rule. First, the 
transaction must be a resecuritization of first-pay classes of ABS, 
which are themselves collateralized by first-lien residential mortgage 
located in a state of the United States or its territories.\112\

[[Page 57974]]

The proposal would define ``first-pay class'' as a class of ABS 
interests for which all interests in the class are entitled to the same 
priority of principal payment and that, at the time of closing of the 
transaction, are entitled to repayments of principal and payments of 
interest prior to or pro-rata, except for principal-only and interest 
only tranches that are prior in payment, with all other classes of 
securities collateralized by the same pool of first-lien residential 
mortgages until such class has no principal or notional balance 
remaining.\113\ The proposed rule also would allow a pool 
collateralizing an exempted resecuritization to contain servicing 
assets.\114\
---------------------------------------------------------------------------

    \112\ Section 2 of the proposed rule defines ``state'' as having 
the same meaning as in section 3(a)(16) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78c(a)(16)). Thus, the mortgages underlying 
the ABS interest that would be re-securitized in a transaction 
exempted under this provision must be on property located in a state 
of the United States, the District of Columbia, Puerto Rico, the 
Virgin Islands, or any other possession of the United States.
    \113\ A single class pass-through ABS under which an investor 
would have a fractional, undivided interest in the pool of mortgages 
collateralizing the ABS would qualify as a ``first pay class'' under 
this definition.
    \114\ The proposed definition of ``servicing assets'' is 
discussed in Part II of this Supplementary Information.
---------------------------------------------------------------------------

    In addition, the proposed rule would require that the first-pay 
classes of ABS used in the resecuritization transaction consist of 
compliant ABS. Further, to qualify for the exemption any ABS interest 
issued in the resecuritization would be required to share pro rata in 
any realized principal losses with all other ABS holders of ABS 
interests issued in the resecuritization based on the unpaid principal 
balance of such interest at the time the loss is realized.
    The proposed rule would also require the transaction to be 
structured to reallocate pre-payment risk and specifically would 
prohibit any structure which re-allocates credit risk (other than 
credit risk reallocated only as a collateral consequence of 
reallocating pre-payment risk). It would also prohibit the issuance of 
an inverse floater or any similarly structured class of ABS as part of 
the exempt resecuritization transaction. The proposal would define 
``inverse floater'' as an ABS interest issued as part of a 
securitization transaction for which interest or other income is 
payable to the holder based on a rate or formula that varies inversely 
to a reference rate of interest.
    The exclusion from the proposed exemption of transactions involving 
the issuance of an inverse floater class would address the high risk of 
loss that has been associated with these instruments.
    The agencies are proposing the expanded exemptions from risk 
retention for resecuritizations of first-pay classes of RMBS under the 
general exemption provisions of section 15G(e)(1) of the Exchange Act, 
and believe that the provision is consistent with the requirements of 
this section. The provisions that would limit the exemption to 
resecuritizations of first-pay classes of RMBS, and the specific 
prohibitions on structures that re-allocate credit risk, would also 
help minimize credit risk associated with the resecuritization ABS and 
prevent the transaction from reallocating existing credit risk.
Request for Comment
    73(a). Would the issuance of an inverse floater class of ABS be 
necessary to properly structure other classes of ABS to provide 
adequate pre-payment protection for investors as part of the 
resecuritization transaction? 73(b). Would this prohibition frustrate 
the goals of the proposed exemption?

D. Other Exemptions From Risk Retention Requirements

    In the original proposal, the agencies' requested comment about 
whether there were other securitization transactions not covered by the 
exemptions in the original proposal that should be exempted from risk 
retention. The agencies received requests from commenters for 
exemptions from risk retention for some types of assets, as discussed 
below. After carefully considering the comments, the agencies are 
proposing some additional exemptions from risk retention that were not 
included in the original proposal.
1. Utility Legislative Securitizations
    Some commenters on the original proposal requested that the 
agencies exempt ABS issued by regulated electric utilities that are 
backed by stranded costs, transition property, system restoration 
property and other types of property specifically created or defined 
for regulated utility-related securitizations by state legislatures 
(utility legislative securitizations). These commenters asserted that 
risk retention for these transactions would not encourage better 
underwriting or otherwise promote the purposes of the risk retention 
requirement, because a utility legislative securitization can generally 
only occur after findings by a state legislature and a public service 
commission that it is desirable in the interest of utility consumers 
and after utility executives representing the utility's investors seek 
such financing. According to commenters, the structure is used to 
minimize the costs of financing significant utility-related costs, and 
the increase in the cost of such financing that would result from risk 
retention would not be warranted, because it would not affect credit 
quality of the underlying assets. Further, commenters asserted that 
this type of financing avoids the risk of poor underwriting standards, 
adverse selection and minimizes credit risk, because the utility 
sponsor does not choose among its customers for inclusion or exclusion 
from the transaction and because the financing order mechanism, or 
choose order of repayment.
    The agencies have considered these comments and are proposing to 
provide an exemption from risk retention for utility legislative 
securitizations. Specifically, the re-proposed rule would exempt any 
securitization transaction where the ABS are issued by an entity that 
is wholly owned, directly or indirectly, by an investor-owned utility 
company that is subject to the regulatory authority of a state public 
utility commission or other appropriate state agency. Additionally, ABS 
issued in an exempted transaction would be required to be secured by 
the intangible property right to collect charges for the recovery of 
specified costs and such other assets of the issuing entity. The 
proposed rule would define ``specified cost'' to mean any cost 
identified by a state legislature as appropriate for recovery through 
securitization pursuant to ``specified cost recovery legislation,'' 
which is legislation enacted by a state that:
     Authorizes the investor-owned utility company to apply 
for, and authorized the public utility commission or other appropriate 
state agency to issue, a financing order determining the amount of 
specified costs the utility will be allowed to recover;
     Provides that pursuant to a financing order, the utility 
acquires an intangible property right to charge, collect, and receive 
amounts necessary to provide for the full recovery of the specified 
costs determined to be recoverable, and assures that the charges are 
non-bypassable and will be paid by customers within the utility's 
historic service territory who receive utility goods or services 
through the utility's transmission and distribution system, even if 
those customers elect to purchase these goods or services from a third 
party; and
     Guarantees that neither the state nor any of its agencies 
has the authority to

[[Page 57975]]

rescind or amend the financing order, to revise the amount of specified 
costs, or in any way to reduce or impair the value of the intangible 
property right, except as may be contemplated by periodic adjustments 
authorized by the specified cost recovery legislation.\115\
---------------------------------------------------------------------------

    \115\ The eligibility standards for the exemption are similar to 
certain requirements for these securitizations outlined in IRS 
Revenue Procedure 2005-62, 2005-2 C.B. 507, that are relevant to 
risk retention. This Revenue Procedure outlines the Internal Revenue 
Service's requirements in order to treat the securities issued in 
these securitizations as debt for tax purposes, which is the primary 
motivation for states and public utilities to engage in such 
securitizations.
---------------------------------------------------------------------------

    As a general matter, the agencies believe that, although it falls 
somewhat short of being an explicit state guarantee, the financing 
order mechanism typical in utility legislative securitizations (by 
which, under state law, the state periodically adjusts the amount the 
utility is authorized to collect from users of its distribution 
network) would ensure to a sufficient degree that adequate funds are 
available to repay investors.
2. Seasoned Loans
    Some commenters on the original proposal urged the agencies to 
create an exemption for securitizations of loans that were originated a 
significant period of time prior to securitization (seasoned loans) and 
that had remained current, because underwriting quality would no longer 
be as relevant to the credit performance of such loans. Commenters 
representing different groups provided different suggestions on the 
length of time required for a loan to be seasoned: sponsors 
representing issuers suggested a two-year seasoning period for all 
loans, whereas commenters representing investors suggested fully 
amortizing fixed-rate loans should be outstanding and performing for 
three years and for adjustable-rate loans the time period should depend 
on the reset date of the loan.
    The agencies believe that risk retention as a regulatory tool to 
promote sound underwriting is less relevant after loans have been 
performing for an extended period of time. Accordingly, for reasons 
similar to the sunset provisions in section 12(f) of the proposed rule 
(as discussed in Part IV.F of this Supplementary Information), the 
agencies are proposing an exemption from risk retention for 
securitizations of seasoned loans that is similar to the sunset 
provisions. The proposed rule would exempt any securitization 
transaction that is collateralized solely (excluding servicing assets) 
by seasoned loans that (1) have not been modified since origination and 
(2) have never been delinquent for 30 days or more.\116\ With respect 
to residential mortgages, the proposed rule would define ``seasoned 
loan'' to mean a residential mortgage loan that either (1) has been 
outstanding and performing for the longer of (i) five years or (ii) the 
period until the outstanding principal balance of the loan has been 
reduced to 25 percent of the original principal balance; or (2) has 
been outstanding and performing for at least seven years. For all other 
asset classes, the proposed rule would define ``seasoned loan'' to mean 
a loan that has been outstanding and performing for the longer of (1) 
two years, or (2) the period until the outstanding principal balance of 
the loan has been reduced to 33 percent of the original principal 
balance.
---------------------------------------------------------------------------

    \116\ The definition of ``servicing assets'' is discussed in 
Part II.B of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

3. Legacy Loan Securitizations
    Some commenters on the original proposal recommended an exemption 
from risk retention for securitizations and resecuritizations of loans 
made before the effectiveness of the final rule, or legacy loans, 
arguing that risk retention would not affect the underwriting standards 
used to create those loans.
    The agencies are not proposing to provide an exemption from risk 
retention for securitizations of loans originated before the effective 
date of the rule (legacy loans). The agencies do not believe that such 
securitizations should be exempt from risk retention because 
underwriting occurred before the effective date of the rule. The 
agencies believe that requiring risk retention does affect the quality 
of the loans that are selected for a securitization transaction, as the 
risk retention requirements are designed to incentivize securitizers to 
select well-underwritten loans, regardless of when those loans were 
underwritten. Furthermore, the agencies do not believe that exempting 
securitizations of legacy loans from risk retention would satisfy the 
statutory criteria for an exemption under 15G(e) of the Exchange 
Act.\117\
---------------------------------------------------------------------------

    \117\ See 15 U.S.C. 78o-11(e).
---------------------------------------------------------------------------

4. Corporate Debt Repackagings
    Several commenters urged the agencies to adopt an exemption from 
risk retention for ``corporate debt repackaging'' \118\ securitization 
transactions. One commenter asserted that currently in corporate debt 
repackaging transactions, depositors and sponsors do not hold any 
interest in the repackaging vehicle. These commenters asserted that 
sponsors would not pursue corporate debt repackagings if they were 
required to retain risk, because it would fundamentally change the 
dynamics of these transactions and could raise accounting and other 
issues. Another commenter observed that corporate debt obligations are, 
generally, full recourse obligations of the issuing company and the 
issuer of the corporate bonds bears 100 percent of the credit risk. The 
commenters stated that adding an additional layer of risk retention to 
a repackaging of obligations that are themselves the subject of 100 
percent risk retention by requiring the sponsor of the repackaging 
transaction to retain an additional 5 percent of the credit risk would 
serve no regulatory purpose. Another commenter asserted that not 
granting an exemption for corporate debt repackagings would reduce the 
ability of investors to invest in tailored repackaged securities and 
likewise reduce funding and liquidity to the detriment of access of 
businesses to credit on reasonable terms.
---------------------------------------------------------------------------

    \118\ According to commenters, corporate debt repackagings are 
created by the deposit of corporate debt securities purchased by the 
sponsoring institution in the secondary market into a trust which 
issues certificates backed by cash flows on the underlying corporate 
bonds.
---------------------------------------------------------------------------

    The agencies are not proposing an exemption from risk retention for 
corporate debt repackagings. The agencies do not believe an exemption 
is warranted because the underlying assets (the corporate bonds) are 
not ABS. Regardless of the level of credit risk a corporate debt issuer 
believes it holds on its underlying corporate bonds, the risk retention 
requirement would apply at the securitization level, and the sponsor of 
the securitization should be required to hold 5 percent of the credit 
risk of the securitization transaction. Risk retention at the 
securitization level for corporate debt repackagings aligns the 
sponsor's interests in selecting the bonds in the pool with investors 
in the securitization, who are often retail investors.
5. ``Non-Conduit'' CMBS Transactions
    Some commenters on the original proposal requested that the 
agencies include an exemption or special treatment for ``non-conduit'' 
CMBS transactions. Examples of ``non-conduit'' CMBS transactions 
include single-asset transactions; single-borrower transactions; large 
loan transactions (fixed and floating) with pools of one to 10 loans; 
and large loan transactions having only an investment-grade component. 
Commenters asserted that, because such transactions involve very small 
pools of loans (or a single loan), a prospective investor is able to

[[Page 57976]]

scrutinize each loan and risk retention would be unnecessary for 
investor protection. In particular, commenters noted that the CMBS menu 
option would work only for ``conduit'' CMBS securitizations in which 
originators of commercial mortgage loans aggregate loan pools of 10 to 
100 loans. Suggestions for the treatment of ``non-conduit'' CMBS 
transactions included:
     Providing a complete exemption for single-asset 
transactions; single-borrower transactions; large loan transactions 
(fixed and floating) with pools of one to 10 loans; and large loan 
transactions having only an investment-grade component;
     Allowing mezzanine loans in single borrower and floating 
rate CMBS transactions to satisfy the risk retention requirement and 
any PCCRA requirements; and
     Exempting single borrower and large loan transactions with 
less than a certain number of loans.
    The agencies are not proposing an exemption from risk retention for 
``non-conduit'' CMBS securitizations. While the agencies do not dispute 
that the smaller pools of loans in these transaction allow for fuller 
asset-level disclosure in offering documents and could allow 
prospective investors the opportunity to review each loan in the pool, 
the agencies do not believe that this fact alone is sufficient grounds 
to satisfy the exemption standards of section 15G of the Exchange Act. 
Furthermore, the agencies do not believe that there are significant 
differences between ``conduit'' and ``non-conduit'' CMBS to warrant a 
special exemption for ``non-conduit'' CMBS.
6. Tax Lien-Backed Securities Sponsored by a Municipal Entity
    One commenter on the original proposal asserted that tax lien-
backed securitizations are not ABS under the Exchange Act and should 
not be subject to risk retention requirement. According to this 
commenter, under state and municipal law, all property taxes, 
assessment and sewer and water charges become liens on the day they 
become due and payable if unpaid. These taxes, assessments and charges, 
and any related tax liens, arise by operation of law and do not involve 
an extension of credit by any party or any underwriting decision on the 
party of the city. If the agencies disagreed with the position that tax 
lien securitizations are not ABS, this commenter requested that the 
agencies provide a narrowly tailored exemption for any tax lien-backed 
securitization transactions sponsored by a municipality. In this 
regard, the commenter argued that such securitizations do not involve 
any of the public policy concerns underlying the risk retention 
requirement because the tax liens arise by operation of law and do not 
involve an extension of credit or underwriting decisions on the part of 
the city. As a result, this commenter stated that applying the credit 
risk retention rules would not further the agencies' stated goals of 
encouraging prudent underwriting standards and ensuring the quality of 
the assets underlying a securitization transaction.
    The agencies are not proposing an exemption from risk retention for 
securitizations of tax lien-backed securities sponsored by municipal 
entities. The agencies believe that there is insufficient data to 
justify granting a specific exemption. Furthermore, the agencies are 
concerned that this type of exemption could end up being overly broad 
in its application and be used to exempt sponsors of securitizations of 
securities from programs, such as Property Assessed Clean Energy 
programs, that use a securitized ``tax lien'' structure to fund and 
collect consensual financing for property improvements desired by 
private property owners.
7. Rental Car Securitizations
    One commenter on the original proposal requested that the agencies 
exempt rental car securitizations because of the extensive 
overcollateralization required to support a rental car securitization, 
the on-going structural protections with respect to collateral 
valuation, and the importance of the vehicles to the business 
operations of the car rental operating company.
    The agencies are not proposing an exemption from risk retention for 
rental car securitizations. Risk retention is required of other 
sponsors that similarly rely on securitization for funding and that 
sponsor securitizations with similar overcollateralization protections 
and structural features. The agencies do not believe that there are 
particular features of this type of securitization that would warrant 
an exemption under the factors that the agencies must consider in 
section 15G(e) of the Exchange Act.

E. Safe Harbor for Foreign Securitization Transactions

    The original proposal included a ``safe harbor'' provision for 
certain securitization transactions based on the limited nature of the 
transactions' connections with the United States and U.S. investors 
(foreign securitization transactions). The safe harbor was 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 limited 
involvement by persons in the United States with respect to both assets 
being securitized and the ABS sold in connection with the transaction. 
Finally, as originally proposed, the safe harbor would not have been 
available for any transaction or series of transactions that, although 
in technical compliance with the conditions of the safe harbor, was 
part of a plan or scheme to evade the requirements of section 15G 
Exchange Act and the proposed rules.
    As set forth in the original proposal, the risk retention 
requirement would not apply to a securitization transaction if: (1) The 
securitization transaction is not required to be and is not registered 
under the Securities Act; (2) no more than 10 percent of the dollar 
value 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, or a U.S. state or territory or (ii) the 
unincorporated branch or office located in the United States of an 
entity not chartered, incorporated, or organized under the laws of the 
United States, or a U.S. state or territory (collectively, a U.S.-
located entity); (4) 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.\119\
---------------------------------------------------------------------------

    \119\ See infra note 112 for the definition of ``state.''
---------------------------------------------------------------------------

    Commenters on the original proposal generally favored the creation 
of a safe harbor for certain foreign securitizations. Several 
commenters, however, requested that the exemption be broadened. 
Specifically, several commenters noted that the U.S. risk retention 
rules may be incompatible with foreign risk retention requirements, 
such as the European Union risk retention requirements, and requested 
that the safe harbor be modified to more readily facilitate cross-
border compliance with varied foreign risk retention requirements.

[[Page 57977]]

    Several commenters supported a mutual recognition system for some 
cross-border offerings. For example, commenters recommended various 
methodologies for establishing a mutual recognition framework that 
would permit non-U.S. securitizers to either satisfy or be exempt from 
U.S. risk retention requirements if a sufficient minimum amount of a 
foreign securitization complies with foreign risk retention 
requirements that would be recognized under such a framework. A few 
commenters recommended that in the absence of a mutual recognition 
framework, a higher proceeds limit threshold of 30 percent, or as much 
as 33 percent, would be more appropriate to preserve cross-border 
market liquidity, in at least some circumstances. A few commenters also 
requested clarification of how the percentage value of ABS sold to U.S. 
investors under the 10 percent proceeds limit should be calculated.
    The agencies are proposing a foreign safe harbor that is similar to 
the original proposal but modified to address some commenter concerns. 
The proposal makes a revision to the safe harbor eligibility 
calculation to clarify that interests retained by the sponsor may be 
included in calculating the percentage of ABS interests sold in the 
securitization transaction that are sold to U.S. persons or for the 
account or benefit of U.S. persons. The proposed safe harbor 
eligibility calculation also would clarify that any ABS transferred to 
U.S. persons or for the account or benefit of U.S. persons, including 
U.S. affiliates of non-U.S. sponsors, must be included in calculating 
eligibility for the safe harbor.
    The agencies are again proposing a 10 percent limit on the value of 
classes of ABS sold to U.S. persons for safe harbor eligibility, 
similar to the original proposal. The agencies continue to believe that 
the proposed 10 percent limit appropriately aligns the safe harbor with 
the objective of the rule, which is to exclude only those transactions 
with limited effect on U.S. interests, underwriting standards, risk 
management practices, or U.S. investors.
    In addition, the agencies are concerned that expansion of the 10 
percent limit would not effectively address the concerns of foreign 
securitization sponsors, some of whom rely extensively on U.S. 
investors for liquidity. However, the agencies also believe that the 
proposed rule incorporates sufficient flexibility for sponsors with 
respect to forms of eligible risk retention to permit foreign sponsors 
seeking a significant U.S. investor base to retain risk in a format 
that satisfies home country and U.S. regulatory requirements. For 
example, in response to comments from mortgage securitizers in the 
United Kingdom who use revolving trust structures, the agencies are 
proposing to permit seller's interest to qualify as risk retention for 
revolving master trusts securitized by non-revolving assets. The 
agencies' revisions to the original proposal that are designed to 
provide flexibility to foreign securitization sponsors that use the 
revolving master trust structure are discussed in detail in Part 
III.B.2 of this SUPPLEMENTARY INFORMATION.
    The agencies considered the comments requesting a mutual 
recognition framework and observe that such a framework has not been 
generally adopted in non-U.S. jurisdictions with risk retention 
requirements. The agencies believe that given the many differences 
between jurisdictions, finding comparability among securitization 
frameworks that place the obligation to comply with risk retention 
requirements upon different parties in the securitization transaction, 
have different requirements for hedging, risk transfer, or unfunded 
risk retention, or otherwise vary materially, it likely would not be 
practicable to construct such a ``mutual recognition'' system that 
would meet all the requirements of section 15G of the Exchange Act. 
Moreover, in several such jurisdictions, the risk retention framework 
recognizes unfunded forms of risk retention, such as standby letters of 
credit, which the agencies do not believe provide sufficient alignment 
of incentives and have rejected as eligible forms of risk retention 
under the U.S. framework.
Request for Comment
    74. Are there any extra or special considerations relating to these 
circumstances that the agencies should take into account?
    75(a). Should the more than 10 percent proceeds trigger be higher 
or lower (e.g., 0 percent, 5 percent, 15 percent, or 20 percent)? 
75(b). If so, what should the trigger be and why? 75(c). Are the 
eligibility calculations appropriate? 75(d). If not, how should they be 
modified?

F. Sunset on Hedging and Transfer Restrictions

    As discussed in Part III.D of this SUPPLEMENTARY INFORMATION, 
Section 15G(c)(1)(A) of the Exchange Act provides that sponsors may not 
hedge or transfer the risk retention interest they are required to 
hold.\120\
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 78o-11(c)(1)(A). As with other provisions of 
risk retention, the agencies could provide an exemption under 
section 15G(e) of the Exchange Act if certain findings were met. See 
id. at section 78o-11(e).
---------------------------------------------------------------------------

    The agencies originally proposed that sponsors generally would have 
to hold risk retention for the duration of a securitization 
transaction. The proposal did not provide any sunset provisions after 
which the prohibitions on sale and hedging of retained interests would 
expire, though the proposal did specifically include a question related 
to including a sunset provision in the final rule and requested 
commenter feedback.
    While a few commenters representing the investor community 
expressed support for risk retention for the life of the security, the 
majority of commenters who discussed this topic in their letters 
opposed risk retention lasting for the duration of the transaction. 
Generally, these commenters argued that credit losses on underlying 
assets due to poor underwriting tend to occur in the first few years of 
the securitization and that defaults occur less frequently as the 
assets are seasoned. Additionally, they asserted that the risk 
retention requirement as proposed would reduce liquidity in the 
financial system and increase the amount of capital banks would be 
required to hold, thereby reducing credit availability and raising 
borrowing costs for consumers and businesses. Thus, they argued, a 
sunset provision should be included in the final rule to help offset 
the costs and burden created by the retention requirement. After the 
mandated risk retention period, sponsors or their consolidated 
affiliates would be allowed to hedge or transfer to an unaffiliated 
third party the retained interest or assets.
    Commenters proposed a variety of suggestions for incorporating a 
sunset provision in the final rule. Some favored a blanket risk 
retention provision, whereby retention of the interest would no longer 
be required after a certain period of time, regardless of the asset 
class. They stated that a blanket sunset requirement would be the 
easiest to implement and dovetails with the agencies' stated goal of 
reducing regulatory complexity. Among those commenters advocating for a 
blanket sunset, most stated that a three year sunset provision would be 
ideal. A subset of these commenters acknowledged that three years could 
be too long for some asset classes (such as automobile ABS), however 
they maintained that historical loss rates show that this duration 
would be appropriate for some of the largest asset classes, in 
particular CMBS and RMBS. They stated that, after three years, losses

[[Page 57978]]

related to underwriting defects have already occurred and any future 
credit losses are typically attributed to financial events or, in the 
case of RMBS, life events such as illness or unemployment, unrelated to 
the underwriting quality. One commenter estimated that a three-year 
sunset would reduce the costs associated with risk retention by 50 
percent.
    Other commenters suggested that the sunset provision should vary by 
asset class. While this might be more operationally complex to 
implement than a blanket sunset provision, they stated it would be more 
risk sensitive as it would take into account the fact that different 
asset classes have varying default rates and underlying exposure 
durations (for example, 30 years for a standard residential mortgage 
versus five years for a typical automobile loan). For example, 
commenters suggested a range of risk retention durations for RMBS, 
stating that anywhere from two to five years would be appropriate. 
Another commenter advocated that the risk retention requirement for 
RMBS should end at the later of five years or when the pool is reduced 
to 25 percent of its original balance. Similarly for CMBS, some 
commenters suggested requiring risk retention for only two or three 
years in the final rule. A few commenters stated that a sunset 
provision should be based upon the duration of the asset in question. 
For instance, one commenter stated that automobile ABS should have a 
sunset provision of less than five years since automobile loans are of 
such a short duration, while another commenter advocated using the 
average pool duration to determine the length of required risk 
retention.
    The agencies have carefully considered the comments, as well as 
other information on credit defaults for various asset classes in 
contemplating whether a limit on the duration of the risk retention 
requirement would be appropriate. The agencies have concluded that the 
primary purpose of risk retention--sound underwriting--is less likely 
to be effectively promoted by risk retention requirements after a 
certain period of time has passed and a peak number of delinquencies 
for an asset class has occurred.
    Accordingly, the agencies are proposing two categories of duration 
for the transfer and hedging restrictions under the proposed rule--one 
for RMBS and one for other types of ABS. For all ABS other than RMBS, 
the transfer and hedging restrictions under the rule would expire on or 
after the date that is the latest of (1) the date on which the total 
unpaid principal balance of the securitized assets that collateralize 
the securitization is reduced to 33 percent of the original unpaid 
principal balance as of the date of the closing of the securitization, 
(2) the date on which the total unpaid principal obligations under the 
ABS interests issued in the securitization is reduced to 33 percent of 
the original unpaid principal obligations at the closing of the 
securitization transaction, or (3) two years after the date of the 
closing of the securitization transaction.
    Similarly, the agencies are proposing, as an exception to the 
transfer and hedging restrictions of the proposed rule and section 15G 
of the Exchange Act, to permit the transfer of the retained B-piece 
interest from a CMBS transaction by the sponsor or initial third-party 
purchaser to another third-party purchaser five years after the date of 
the closing of the securitization transaction, provided that the 
transferee satisfies each of the conditions applicable to the initial 
third-party purchaser under the CMBS option (as described above in Part 
III.B.5 of this SUPPLEMENTARY INFORMATION).
    The agencies believe the exemptions to the prohibitions on transfer 
and hedging for both non-residential mortgage ABS and CMBS would help 
ensure high quality underwriting standards for the securitizers and 
originators of non-residential mortgage ABS and CMBS, would improve the 
access of consumers and businesses to credit on reasonable terms, and 
are in the public interest and for the protection of investors--and 
thus satisfy the conditions for exceptions to the rule.\121\ After 
losses due to underwriting quality occur in the initial years following 
a securitization transaction, risk retention does little to improve the 
underwriting quality of ABS as most subsequent losses are related to 
financial events or, in the case of RMBS, life events not captured in 
the underwriting process. In addition, these exemptions would improve 
access to credit for consumer and business borrowers by increasing 
potential liquidity in the non-residential mortgage ABS and CMBS 
markets.
---------------------------------------------------------------------------

    \121\ 15 U.S.C. 78o-11(e)(2).
---------------------------------------------------------------------------

    Because residential mortgages typically have a longer duration than 
other assets, weaknesses in underwriting may show up later than in 
other asset classes and can be masked by strong housing markets. 
Moreover, residential mortgage pools are uniquely sensitive to adverse 
selection through prepayments: If market interest rates fall, borrowers 
refinance their mortgages and prepay their existing mortgages, but 
refinancing is not available to borrowers whose credit has 
deteriorated, so the weaker credits become concentrated in the RMBS 
pool in later years. Accordingly, the agencies are proposing a 
different sunset provision for RMBS backed by residential mortgages 
that are subject to risk retention. Under the rule, risk retention 
requirements with respect to RMBS would end on or after the date that 
is the later of (1) five years after the date of the closing of the 
securitization transaction or (2) the date on which the total unpaid 
principal balance of the residential mortgages that collateralize the 
securitization is reduced to 25 percent of the original unpaid 
principal balance as of the date of the closing of the securitization. 
In any event, risk retention requirements for RMBS would expire no 
later than seven years after the date of the closing of the 
securitizations transaction.
    The proposal also makes clear that the proposed rule's restrictions 
on transfer and hedging end if a conservator or receiver of a sponsor 
or other holder of risk retention is appointed pursuant to federal or 
state law.
Request for Comment
    76(a). Are the sunset provisions appropriately calibrated for RMBS 
(i.e., later of five years or 25 percent, but no later than seven 
years) and all other asset classes (i.e., later of two years or 33 
percent)? 76(b). If not, please provide alternative sunset provision 
calibrations and any relevant analysis to support your assertions.
    77(a). Is it appropriate to provide a sunset provision for all 
RMBS, as opposed to only amortizing RMBS? 77(b). Why or why not? 77(c). 
What effects might this have on securitization market practices?

G. Federal Deposit Insurance Corporation Securitizations

    The agencies are proposing an additional exemption from risk 
retention for securitization transactions that are sponsored by the 
FDIC acting as conservator or receiver under any provision of the 
Federal Deposit Insurance Act or Title II of the Dodd-Frank Act. This 
new exemption is being proposed because such exemption would help 
ensure high quality underwriting and is in the public interest and for 
the protection of investors.\122\ These receivers and conservators 
perform a function that benefits creditors in liquidating and 
maximizing the value of assets of failed financial institutions for the 
benefit of creditors and, accordingly, their actions are guided by 
sound underwriting

[[Page 57979]]

practices. Such receivers and conservators do not originate loans or 
other assets and thus are not engaged in ``originate to distribute'' 
activities that led to poorly underwritten loans and that were a 
significant reason for the passage of section 941 of the Dodd-Frank 
Act. The quality of the assets securitized by these receivers and 
conservators and the ABS collateralized by those assets will be 
carefully monitored and structured so as to be consistent with the 
relevant statutory authority. Moreover, this exemption is in the public 
interest because it would, for example, allow the FDIC to maximize the 
value of assets of a conservatorship or receivership and thereby reduce 
the potential costs of financial institution failures to creditors.
---------------------------------------------------------------------------

    \122\ See 15 U.S.C. 78o-11(e).
---------------------------------------------------------------------------

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

    As contemplated by section 15G of the Exchange Act, the original 
proposal included a zero risk retention requirement, or exemption, for 
securitizations of commercial loans, commercial real estate loans, and 
automobile loans that met specific proposed underwriting 
standards.\123\ All three categories of proposed underwriting standards 
contained two identical requirements. First, a securitization exempt 
from risk retention under these proposed provisions could be backed 
only by a pool consisting entirely of assets that met the underwriting 
standards. Second, sponsors would be required to repurchase any assets 
that were found not to have met the underwriting criteria at 
origination.
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    \123\ Pursuant to section 15G, only the Federal banking agencies 
are proposing the underwriting definitions in Sec.  ----.14 (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 exemption and 
underwriting standards in Sec. Sec.  ----.15 through ----.18 of the 
proposed rules.
---------------------------------------------------------------------------

    The agencies note the concern expressed by some commenters with 
respect to all three of these asset classes that, for the residential 
mortgage asset class and QRM, a significant portion of the existing 
market would qualify for an exemption from risk retention, whereas in 
proposing the underwriting standards for qualifying commercial loans, 
commercial real estate loans, and automobile loans, the agencies have 
proposed conservative underwriting criteria that will not capture an 
equivalent portion of the respective markets. The agencies believe this 
is appropriate because the homogeneity in the securitized residential 
mortgage loan market is dissimilar to the securitization market for 
commercial loan or commercial real estate loan asset classes. 
Commercial loans and commercial real estate loans typically focus on a 
common set of borrower and collateral metrics, but they are 
individually underwritten and tailored to a specific borrower or 
property, and often certain terms developed in view not only of the 
borrower's financial position but also the general business cycle, 
industry business cycle, and standards for appropriate leverage in that 
industry sub-sector. The agencies believe the additional complexity 
needed to create underwriting standards for every major type of 
business in every economic cycle would be so great that originators 
would almost certainly be dissuaded from attempting to implement them 
or attempting to stay abreast of the numerous regulatory revisions the 
agencies would be required to issue from time to time.
    Moreover, the proposed underwriting standards establish clear 
requirements, which are necessary to enable originators, sponsors, and 
investors to be certain as to whether any particular loan meets the 
rule's requirements for an exemption. For the agencies to expand the 
underwriting criteria in the fashion suggested by some commenters, the 
rules would need to accommodate numerous relative standards. The 
resulting uncertainty on behalf of market participants whether any 
particular loan was actually correctly designated on a particular point 
of those relative standards to qualify for an exemption would be 
expected to eliminate the market's willingness to rely on the 
exemption.
    While there may be more homogeneity in the securitized automobile 
loan class, the agencies are concerned that attempting to accommodate a 
significantly large share of the current automobile loan securitization 
market would require weakening the underwriting standards to the point 
where the agencies are skeptical that they would consistently reflect 
loans of a low credit risk. For example, the agencies note that current 
automobile lending often involves no or small down payments, financing 
in excess of the value of the automobile (which is itself a quickly 
depreciating asset) to accommodate taxes and fees, and a credit score 
in lieu of an analysis of the borrower's ability to repay. These 
concerns as to credit quality are evidenced by the high levels of 
credit support automobile securitization sponsors build into their ABS, 
even for so-called ``prime'' automobile loans. Moreover, securitizers 
from the automobile sector explicitly disavowed any interest in using 
any underwriting-based exemptive approach unless the agencies 
incorporated the industry's current model, which relies almost 
exclusively on matrices of credit scores (like FICO) and LTV. As is 
discussed in the agencies' original proposal, the agencies are not 
persuaded that it would be appropriate for the underwriting-based 
exemptions under the rule to incorporate a credit score metric.
Request for Comment
    78(a). In light of the significant expansion of the proposed 
definition of QRM, should the agencies similarly significantly expand 
the type of loans that would meet the qualifying commercial, commercial 
real estate and automobile loan exemptions? 78(b). If so, please 
provide sufficient detailed data regarding loan underwriting criteria 
for each type of loan.

A. Qualifying Commercial Loans

    The original proposal included definitions and underwriting 
standards for qualifying commercial loans (QCL), that, when securitized 
in a pool of solely QCLs, would have been exempt from the risk 
retention requirements. The proposed definition of commercial loan 
generally would have included any business loan that did not fit the 
definition of a commercial real estate loan or 1-4 family residential 
real estate loan.
    The proposed criteria for a QCL included reviewing two years of 
past data; forecasting two years of future data; a total liabilities 
ratio less than or equal to 50 percent; a leverage ratio of less than 
or equal to 3.0 percent; a debt service coverage ratio of greater than 
or equal to 1.5 percent; a straight-line amortizing payment; fixed 
interest rates; a maximum five-year, fully amortizing loan term; and 
representations and warranties against the borrower taking on 
additional debt. Additional standards were proposed for QCLs that are 
backed by collateral, including lien perfection and collateral 
inspection.
    Commenters generally asserted the proposed criteria were too strict 
in one or more areas. These commenters proposed a general loosening of 
the QCL standards to incorporate more loans, and suggested the agencies 
develop underwriting standards that would encompass 20 to 30 percent of 
loans currently issued. One commenter asserted that if the criteria 
were not loosened, the small chance a loan might qualify as a QCL would 
not incentivize

[[Page 57980]]

lenders to go through all the initial tests and perform burdensome 
monitoring after origination.
    Comments on the specific underwriting criteria included an 
observation that some commercial loans are offered with 15- or 20-year 
terms, with adjustable interest rates that reset every five years, and 
that such loans should qualify for the exemption. Another commenter 
suggested allowing second lien loans to qualify if they met all other 
underwriting criteria. A third commenter suggested requiring qualifying 
appraisals for all tangible or intangible assets collateralizing a 
qualified commercial loan.
    In developing the underwriting standards for the original proposal, 
the agencies intended for the standards to be reflective of very high-
quality loans because the loans would be completely exempt from risk 
retention. The agencies have carefully considered the comments on the 
original proposal, and generally believe that the high standards 
proposed are appropriate for an exemption from risk retention for 
commercial loans. In addition, while commercial loans do exist with 
longer terms, the agencies do not believe such long-term commercial 
loans are necessarily as safe as shorter-term commercial loans, as 
longer loans involve more uncertainty about continued repayment 
ability. Accordingly, the agencies are proposing underwriting standards 
for QCLs similar to those in the original proposal. However, as 
discussed below, the agencies are proposing to allow blended pools to 
facilitate the origination and securitization of QCLs.
    The agencies are proposing some modifications to the standards in 
the original proposal for QCLs. Under the proposal, junior liens may 
collateralize a QCL. However, if the purpose of the commercial loan is 
to finance the acquisition of tangible or intangible property, or to 
refinance such a loan, the lender would be required to obtain a first 
lien on the property for the loan to qualify as a QCL. While a 
commercial lender should consider the appropriate value of the 
collateral to the extent it is a factor in the repayment of the 
obligation, the agencies are declining to propose a requirement of a 
qualifying appraisal, so as not to increase the burden associated with 
underwriting a QCL.
Request for Comment
    79(a). Are the revisions to the qualifying commercial loan 
exemption appropriate? 79(b). Should other revisions be made?
    80(a). In evaluating the amortization term for qualifying 
commercial loans, is full amortization appropriate? 80(b). If not, what 
would be an appropriate amortization period or amount for high-quality 
commercial loans?

B. Qualifying Commercial Real Estate Loans

    The original proposal included underwriting standards for CRE loans 
that would have been exempt from risk retention (qualifying CRE loans, 
or QCRE loans). The proposed standards focused predominately on the 
following criteria: The borrower's capacity to repay the loan; the 
value of, and the originator's security interest in, the collateral; 
the loan-to-value (LTV) ratio; and, whether the loan documentation 
includes the appropriate covenants to protect the value of the 
collateral.
    Commenters generally supported the exemption from risk retention in 
the original proposal for QCRE loans. However, many questioned whether 
the QCRE loan exemption would be practicable, due to the stringency of 
the qualifying criteria proposed by the agencies. Some commenters 
asserted that less than 0.4 percent of conduit loans that have been 
securitized since the beginning of the CMBS market would meet the 
criteria. Most commenters requested that the agencies loosen the QCRE 
loan criteria to allow more loans to qualify for the exemption.
    In the original proposal, a commercial real estate (CRE) loan would 
have been defined as any loan secured by a property of five or more 
residential units or by non-residential real property, where the 
primary source of repayment would come from the proceeds of sale or 
refinancing of the property or rental income from entities not 
affiliated with the borrower. In addition, the definition would have 
specifically excluded land loans and loans to real estate investment 
trusts (REITs).
    Three main concerns were expressed by commenters with respect to 
the definition of CRE loans in the original proposal. First, some 
commenters questioned why CRE loans must be repaid from funds that do 
not include rental income from an affiliate of the borrower. These 
commenters said that in numerous commercial settings, particularly 
hotels and hospitals, entities often rent commercial properties from 
affiliated borrowers, and those rental proceeds are used to repay the 
underlying loans. These commenters strongly encouraged the agencies to 
remove the affiliate rent prohibition.
    Second, some commenters questioned the exclusion of certain land 
loans from the definition of CRE in the original proposal. 
Specifically, these commenters stated that numerous CMBS 
securitizations include loans to owners of a fee interest in land that 
is ground leased to a third party who owns the improvements and whose 
ground lease payments are a source of income for debt service payments 
on the loan. These commenters suggested that the agencies clarify that 
the exclusion did not apply to such loans.
    Third, many commenters criticized the agencies for excluding loans 
to REITs from the definition of CRE loans in the original proposal. 
These commenters asserted that mortgage loans on commercial properties 
where the borrower was a REIT are no riskier than similar loans where 
the borrower was a non-REIT partnership or corporation and that a 
significant portion of the CMBS market involves underlying loans to 
finance buildings owned by REITs. These commenters requested that the 
agencies delete the restriction against REITs, or in the alternative 
clarify that the prohibition only applies to loans to REITs that are 
not secured by mortgages on specific commercial real estate.
    The agencies are proposing the CRE definition from the original 
proposal again, with some modifications to address the commenter 
concerns discussed above. Regarding affiliate rental income, the 
agencies were concerned when developing the original proposal that a 
parent company might lease a building to an affiliate and manipulate 
the rental income so that the loan on the building would meet the 
requirements for a qualifying CRE loan. However, the agencies did not 
intend to exclude the types of hotel loans mentioned by commenters from 
the CRE loan definition, because the agencies do not consider income 
from hotel guests to be derived from an affiliate. The agencies are 
therefore proposing to specify that ``rental income'' in the CRE loan 
definition would be any income derived from a party who is not an 
affiliate of the borrower, or who is an affiliate but the ultimate 
income stream for repayment comes from unaffiliated parties (for 
example, in a hotel, dormitory, nursing home, or similar property).
    Regarding land loans, the agencies are concerned that weakening any 
restriction on land loans would allow for riskier QCRE loans, as 
separate parties could own the land and the building on the land and 
could make servicing and foreclosure on the loan more difficult. 
Therefore, the agencies are continuing to propose to exclude all land 
loans from the CRE loan definition.

[[Page 57981]]

    Finally, in developing the original proposal, the agencies intended 
to not allow unsecured loans to REITs, or loans secured by general 
pools of REIT assets rather than by specific properties, to be 
qualifying CRE loans. However, the agencies did not intend to exclude 
otherwise valid CRE loans from the definition solely because the 
borrower was organized as a REIT structure. After reviewing the 
comments and the definition of CRE loan, the agencies have decided to 
remove the language excluding REITs in the proposed definition.
    The agencies divided the underwriting criteria in the original 
proposal into four categories: Ability to repay, loan-to-value 
requirement, valuation of the collateral, and risk management and 
monitoring.
1. Ability To Repay
    The agencies proposed in the original proposal a number of criteria 
relating to the borrower's ability to repay in order for a loan to 
qualify as QCRE. The borrower would have been required to have a debt 
service coverage (DSC) ratio of at least 1.7, or at least 1.5 for 
certain residential properties or certain commercial properties with at 
least 80 percent triple-net leases.\124\ The proposed standards also 
would have required reviewing two years of historical financial data 
and two years of prospective financial data of the borrower. The loan 
would have been required to have either a fixed interest rate or a 
floating rate that was effectively fixed under a related swap 
agreement. The loan document also would have had to prohibit any 
deferral of principal or interest payments and any interest reserve 
fund. The loan payment amount had to be based on straight-line 
amortization over the term of the loan not to exceed 20 years, with 
payments made at least monthly for at least 10 years of the loan's 
term.
---------------------------------------------------------------------------

    \124\ The original proposal defined a triple-net lease as one in 
which the lessee, not the lessor, is obligated to pay for taxes, 
insurance, and maintenance on the leased property.
---------------------------------------------------------------------------

    Numerous commenters objected to the agencies' proposed DSC ratios 
as too conservative, and proposed eliminating the DSC ratio, lowering 
qualifying DSC ratios to a range between 1.15 and 1.40, or establishing 
criteria similar to those used by Fannie Mae or Freddie Mac to fund 
multifamily real estate loans.
    Many commenters stated that, if the agencies retained the DSC 
ratios, they should remove the triple-net-lease requirement. Many of 
these commenters stated that full service gross leases, rather than 
triple-net leases, are used more often in the industry.\125\
---------------------------------------------------------------------------

    \125\ In a full-service gross lease, the lessor pays for taxes, 
maintenance, and insurance (presumably covering the additional costs 
by charging a higher rental amount to the lessee than under a 
triple-net lease).
---------------------------------------------------------------------------

    Some commenters supported replacing the proposed requirement to 
examine two years of past and future borrower data with one to gather 
two or three years of historical financial data on the property, not 
attempt to forecast two years of future data and to allow new 
properties with no operating history to qualify. Many commenters 
supported the requirement for fixed interest rate loans for QCRE. 
However, some commenters suggested expanding the types of derivatives 
allowed to convert a floating rate into a fixed rate. Many commenters 
also supported the restrictions on deferrals of principal and interest 
and on interest reserve funds. However, a few commenters supported 
allowing some interest-only loans or interest-only periods, in 
connection with a lower LTV ratio (such at 50 percent).
    Many commenters objected to the minimum length and amortization of 
QCRE loans. These commenters said that 3, 5, and 7-year CRE loans have 
become common in the industry, and so a minimum 10-year term would 
disqualify numerous loans. In addition, most commenters supported a 
longer amortization period for QCRE loans, such as 25 or 30 years. Some 
commenters also proposed replacing the amortization requirement with a 
maximum LTV at maturity (based on value at origination) that is lower 
than LTV at origination, which would require some amortization of the 
loan principal.
    After considering the comments on the underwriting criteria for 
QCREs, the agencies are proposing criteria similar to that of the 
original proposal, with some modifications. Based on a review of 
underwriting standards and performance data for multifamily loans 
purchased by the Enterprises, the agencies are proposing to require a 
1.25 DSCR for multifamily properties to be QCRE.\126\ After review of 
the comments and the Federal banking agencies' historical standards for 
conservative CRE lending,\127\ for loans other than qualifying 
multifamily property loans, the agencies are proposing to retain the 
1.5 DSCR for leased QCRE loans and 1.7 for all other QCREs. As 
discussed below, removing the criterion on triple-net leases should 
allow more loans to qualify for an exemption with the 1.5 DSCR 
requirement, rather than the 1.7 DSCR requirement that would have 
applied under the original proposal.
---------------------------------------------------------------------------

    \126\ The agencies reviewed origination volume and performance 
history, as tracked by the TREPP CMBS database, for multifamily 
loans securitized from 2000 through 2011.
    \127\ These standards include the ``Interagency Guidelines for 
Real Estate Lending.'' 12 CFR part 34, subpart D, Appendix A (OCC); 
12 CFR part 208, subpart C, Appendix A (FRB); 12 CFR part 365, 
Appendix A (FDIC).
---------------------------------------------------------------------------

    The agencies considered the comments requesting a debt yield 
requirement, but have decided not to include that in the proposed rule. 
Historically, DSCR has been, and continues to be, widely used in CRE 
lending. Debt yield is a relatively recent concept that was not tracked 
in many historic CMBS deals, which makes it difficult for the agencies 
to calculate historical performance and determine what the appropriate 
level should be for a CRE loan exempt from risk retention. The agencies 
recognize that the DSCR is not a perfect measure, particularly in low 
interest rate environments. However, the agencies also do not want to 
introduce a relatively new methodology into the CRE market without 
long-term data to support the appropriateness of that measure.
    Based on the agencies' further review of applicable data, it 
appears that a significant number of leases are written as full-service 
gross leases, not triple-net leases, and that difference should not 
preclude treatment as a QCRE loan. Since the proposed underwriting 
requirements are based on net operating income (NOI), whether a tenant 
has a triple-net lease or full-service gross lease should not 
significantly affect the borrower's NOI.
    The agencies propose to continue to require that the analysis of 
whether a loan is a QCRE be made with respect to the borrower and not 
be limited to the property only. While the agencies observe that some 
CRE loans are non-recourse, others include guarantees by the borrowers. 
The agencies are concerned that focusing solely on the property could 
be problematic in cases where the borrower may have other outstanding 
commitments that may lead the borrower to siphon cash flow from the 
underwritten property to service the other commitments. By analyzing 
the borrower's position, and not solely the property's income, the 
underwriting should better address this risk. The agencies believe that 
two years of historical data collection and two years of forecasted 
data are appropriate, and that properties with less than two years of 
operating history should not qualify as QCRE loans. The longer a 
property has been operating, particularly after the first few years of 
operation, the better the originator can assess the stability of cash 
flows from the property going

[[Page 57982]]

forward. New properties present significant additional risks and loans 
on those properties generally should not be exempt from risk retention.
    The proposal would continue to require that the interest rate on a 
QCRE loan be fixed or fully convertible into a fixed rate using a 
derivative product. The agencies are not proposing to allow other types 
of derivatives because of concerns about transparency with other types 
of derivative products, including mixed derivative products. For 
example, if the agencies allowed a derivative that established an 
interest rate cap, it may not be clear to investors whether a loan was 
underwritten using the current market rate or the maximum rate allowed 
under the interest rate cap. The agencies are also proposing to retain 
from the original proposal the requirement not to include interest-only 
loans or interest-only periods in QCRE loans. The agencies believe that 
interest-only loans or interest-only periods are associated with higher 
credit risk. If a borrower is not required to make any form of 
principal payment, even with a 25-year amortization period, it raises 
questions as to the riskiness of the loan, and would be inappropriate 
for qualifying CRE loan treatment.
    The agencies are proposing some modifications from the original 
proposal to the standards for QCRE loan terms. The agencies recognize 
that there are CRE loans with amortization periods in excess of 20 
years. Allowing a longer amortization period reduces the amount of 
principal paid on the CRE loan before maturity, which can increase 
risks related to having to refinance a larger principal amount than 
would be the case for a CRE loan with a shorter amortization period. 
Because the agencies believe exemptions from risk retention should be 
available only for the most prudently underwritten CRE loans, the 
agencies believe it is appropriate to consider the risks of an overly 
long amortization period for a QCRE. In balancing those risks with 
commenters' concerns, the agencies are proposing to increase the 
amortization period to 30 years for multifamily residential QCRE loans 
and to 25 years for all other QCRE loans.
    The agencies are continuing to propose to set a 10-year minimum 
maturity for QCRE loans. The agencies are concerned that introducing 
terms shorter than 10 years, such as three or five years, may create 
improper underwriting incentives and not create the low-risk CRE loans 
intended to qualify for the exemption. When making a short-term CRE 
loan, an originator may focus only on a short timeframe in evaluating 
the stability of the CRE underlying the loan in an industry that might 
be at or near the peak of its business cycle. In contrast, a 10-year 
maturity CRE loan allows for underwriting through a longer business 
cycle, including downturns that may not be appropriately captured when 
underwriting to a three-year time horizon.
2. Loan-to-Value Requirement
    The agencies proposed in the original proposal that the combined 
loan-to-value ratio (CLTV) for QCRE loans be less than or equal to 65 
percent (or 60 percent for certain valuation assumptions).
    Many commenters recognized the value in setting LTV ratio 
requirements in CRE underwriting. While some commenters supported the 
agencies' proposed ratios, others did not. Some commenters suggested 
that higher LTV ratios should be allowed in the QCRE standards, 
generally between 65 percent and 80 percent, particularly for 
properties in stable locations with strong historical financial 
performance. One commenter suggested lower LTVs for properties that may 
be riskier. Numerous commenters suggested taking a different approach 
by setting maximum LTVs at origination and maturity, with a maturity 
LTV aimed at controlling the risk that the borrower would not be able 
to refinance. A number of commenters also objected to setting the CLTV 
ratio at 65 percent. These commenters said that many commercial 
properties involve some form of subordinate financing. Some commenters 
proposed eliminating the CLTV ratio entirely and thus allow borrowers 
to use non-collateralized debt to finance the properties. Other 
commenters proposed establishing a higher CLTV ratio (such as 80 
percent) and allow for non-QCRE second liens on the properties.
    The agencies have considered the comments on LTV for QCRE loans and 
are proposing to modify this aspect of QCRE underwriting standards from 
the standard in the original proposal by proposing to establish a 
maximum LTV ratio of 65 percent for QCRE loans. The agencies also are 
proposing to allow up to a 70 percent CLTV for QCRE loans. The more 
equity a borrower has in a CRE project, generally the lower the lender 
or investor's exposure to credit risk. Overreliance on excessive 
mezzanine financing instead of equity financing for a CRE property can 
significantly reduce the cash flow available to the property, as 
investors in mezzanine finance often require high rates of return to 
offset the increased risk of their subordinate position. In proposing 
underwriting criteria for the safest CRE loans that would be exempt 
from risk retention requirements, the agencies believe a 70 percent 
CLTV cap is appropriate, which would require the borrower to have at 
least 30 percent equity in the project to help protect securitization 
investors against losses from declining property values and potential 
defaults on the CRE loans.
    The agencies are also proposing to retain the requirement that the 
maximum CLTV ratio be lowered by 5 percent if the CRE property was 
appraised with a low capitalization (cap) rate. Generally, assuming a 
low cap rate will inflate the appraised value of the CRE property and 
thus increase the amount that can be borrowed given a fixed LTV or 
CLTV. Therefore, such a loan would have a maximum 60 percent LTV and 65 
percent CLTV. In addition, to address the commenters' concerns about 
high cap rates, the agencies are proposing that the cap rates used in 
CRE appraisals be disclosed to investors in securitizations that own 
CRE loans on those properties.
    The agencies are declining to propose requirements for LTVs or 
CLTVs at both origination and maturity. The agencies are concerned that 
introducing the concept of front-end and back-end LTV ratios, rather 
than using straight-line amortization, would allow borrowers to make 
nominal principal payments in early years and back-load a large 
principal payment toward maturity. The effect would be to significantly 
increase the riskiness of the CRE loan at maturity, rather than if the 
loan had been underwritten to provide straight-line amortization 
throughout its life. Therefore, the agencies have decided not to 
propose to include this amortization approach in the revised proposal 
and instead continue to propose the straight-line amortization 
requirement.
3. Collateral Valuation
    In the original proposal, the agencies proposed to require an 
appraisal and environmental risk assessment for every property serving 
as collateral for a QCRE. Commenters strongly supported both the 
valuation appraisal and environmental risk assessment for all QCRE 
properties. Many commenters indicated this is already standard industry 
practice. The agencies are continuing to include this requirement in 
the proposed rule.
4. Risk Management and Monitoring
    The original proposal would have required that a QCRE loan 
agreement require borrowers to supply certain financial information to 
the sponsor and

[[Page 57983]]

servicer. In addition, the agreement would have had to require lenders 
to take a first lien in the property and restrict the ability to pledge 
the property as collateral for other loans.
    Many commenters supported the risk management provisions for 
supplying financial information. Some commenters requested 
clarification that such information should relate to the property 
securing the QCRE loan rather than financial information on the 
borrower. These commenters said that most CRE loans are non-recourse, 
making the property the sole source of repayment and thus its financial 
condition as far more important than the borrower's condition.
    Commenters supported the first-lien requirement. In addition, some 
commenters requested removing the restriction on granting second liens 
on the property to allow borrowers access to subordinate financing. 
These commenters suggested establishing a CLTV to restrict the total 
debt on the property. Finally, some commenters supported the 
requirement that a borrower retain insurance on the property up to the 
property value, while other commenters supported a requirement to have 
insurance only for the replacement cost of the property.
    The agencies are proposing to modify the requirement in the 
original proposal that the borrower provide information to the 
originator (or any subsequent holder) and the servicer, including 
financial statements of the borrower, on an ongoing basis. The agencies 
believe that the servicer would be in the best position to collect, 
store, and disseminate the required information, and could make that 
information available to holders of the CRE loans. Therefore, to reduce 
burden on the borrowers, the agencies are not proposing a requirement 
to provide this information directly to the originator or any 
subsequent holder.
    The agencies are retaining the proposed requirement from the 
original proposal that the lender obtain a first lien on the financed 
property. The agencies note that most CRE loan agreements allow the 
lender to receive additional security by taking an assignment of leases 
or other occupancy agreements on the CRE property, and the right to 
enforce those leases in case of a breach by the borrower. In addition, 
the agencies observe that standard CRE loan agreements also often 
include a first lien on all interests the borrower has in or arising 
out of the property used to operate the building (for example, 
furniture in a hotel). The agencies believe these practices enhance 
prudent lending and therefore would be appropriate to include this 
blanket lien requirement on most types of borrower property to support 
a QCRE loan. There would be an exception for purchase-money security 
interests in machinery, equipment, or other borrower personal property.
    The agencies continue to believe that as long as the machinery and 
equipment or other personal property subject to a purchase-money 
security interest is also pledged as additional collateral for the QCRE 
loan, it would be appropriate to allow such other liens. In addition, 
the proposal would restrict junior liens on the underlying real 
property and leases, rents, occupancy, franchise and license agreements 
unless a total CLTV ratio was satisfied.
    The agencies are continuing to propose a requirement that the 
borrower maintain insurance against loss on the CRE property at least 
up to the amount of the CRE loan. The agencies believe that the 
insurance requirement should serve to protect the interests of 
investors and the qualifying CRE loan in the event of damage to the 
property. Insuring only the replacement cost would not sufficiently 
protect investors, who may be exposed to loss on the CRE loan from 
significantly diminished cash flows during the period when a damaged 
CRE property is being repaired or rebuilt.
    Although commenters were concerned that few CMBS issuers will be 
able to use this exemption due to the conservative QCRE criteria, the 
agencies are keeping many of the same underwriting characteristics for 
the reasons discussed at the beginning of Part V of this Supplementary 
Information.
Request for Comment
    81(a). Is including these requirements in the QCRE exemption 
appropriate? 81(b). Why or why not?
    82. The agencies request comment on the proposed underwriting 
standards, including the proposed definitions and the documentation 
requirements

C. Qualifying Automobile Loans

    The original proposal included underwriting standards for 
automobile loans that would be exempt from risk retention (qualifying 
automobile loans, or QALs). Some commenters proposed including an 
additional QAL-lite option, which would incorporate less stringent 
underwriting standards but be subject to a 2.5 percent risk retention 
amount based on a matrix of borrower FICO scores, loan terms and LTVs 
of up to 135 percent. The agencies are declining to propose a QAL-lite 
standard to avoid imposing a regulatory burden of monitoring multiple 
underwriting standards for this asset class. However, as discussed 
below, the agencies are proposing to allow blended pools of QALs and 
non-QALs, which should help address commenters' concerns. The 
definition of automobile loan in the original proposal generally would 
have included only first-lien loans on light passenger vehicles 
employed for personal use. It specifically would have excluded loans 
for vehicles for business use, medium or heavy vehicles (such as 
commercial trucks and vans), lease financing, fleet sales, and 
recreational vehicles such as motorcycles. The underwriting standards 
from the original proposal focused predominately on the borrower's 
credit history and a down payment of 20 percent.
    While some commenters supported the definition of automobile loan, 
others stated it was too narrow. These commenters suggested expanding 
the definition to include motorcycles because they may not be used 
solely as recreational vehicles. In addition, commenters suggested 
allowing vehicles purchased by individuals for business use, as it may 
be impossible to monitor the use of a vehicle after sale. Commenters 
representing sponsors also supported allowing automobile leases to 
qualify as QALs, with corresponding technical changes. In addition, a 
few commenters supported expanding the definition to include fleet 
purchases or fleet leasing, on the basis that these leases or sales are 
generally with corporations or government entities with strong 
repayment histories.
    The agencies have considered these comments and are proposing a 
definition of automobile loans for QAL underwriting standards that is 
substantially similar to the definition in the original proposal. The 
agencies believe it continues to be appropriate to restrict the 
definition of automobile loan to not include loans on vehicles that are 
more frequently used for recreational purposes, such as motorcycles or 
other recreational vehicles. The agencies also do not believe it would 
be appropriate to expand the exemption to include vehicles used for 
business purposes, as the risks and underwriting of such loans differ 
from those of vehicles used for personal transportation. For example, a 
car or truck used in a business may endure significantly more wear and 
depreciate much faster than a vehicle used only for normal household 
use.
    The agencies are not proposing to expand the definition to include 
automobile leases. While the difference between an automobile purchase 
and a lease may not be significant to a customer, leases represent a 
different set of risks to securitization investors. As

[[Page 57984]]

one example, at the end of a lease, a customer has the right to return 
the automobile, and the securitization may suffer a loss if the resale 
price of that automobile is less than expected. In an automobile loan 
securitization, the customer owns the vehicle at the end of the loan 
term, and cannot return it to the dealer or the securitization trust.
    In the original proposal, the agencies proposed conservative 
underwriting standards, including a 36 percent DTI requirement, a 20 
percent down payment requirement, and credit history standards. 
Generally, commenters opposed the QAL criteria as too conservative, and 
asserted that less than 1 percent of automobile loans would qualify. 
Even those commenters who otherwise supported the conservative QAL 
underwriting suggested some revisions would be necessary to bring them 
in line with current market standards. Automobile sponsor commenters 
acknowledged that the agencies' proposed terms would be consistent with 
very low credit risk, or ``super-prime'' automobile loans, but believed 
that the standard should be set at the ``prime'' level, consistent with 
low credit risk. In addition, commenters criticized the agencies for 
applying to QALs underwriting criteria similar to those they applied to 
QRMs and unsecured lending. Automobile sponsor commenters stated that 
automobile loans are significantly different from mortgage loans, as 
they are smaller and shorter in duration and have readily-salable 
collateral. Investor commenters supported a standard that was above 
``prime,'' but indicated that they could support a standard that 
included loans that did not meet the very conservative ``super-prime'' 
QAL criteria proposed by the agencies.
    Although the agencies have taken into consideration the comments 
that these standards do not reflect current underwriting practices, the 
agencies generally do not believe it would be appropriate to include a 
standard based on FICO scores in the QAL underwriting standards. 
Further, as discussed in Part III.B.1 of this SUPPLEMENTARY 
INFORMATION, the agencies have revised the risk retention requirements 
to address some of the concerns about risk retention for automobile 
securitizations to better enable sponsors of automobile securitizations 
to comply with the risk retention requirements in a manner consistent 
with their existing and current practices.
1. Ability To Repay
    The agencies proposed in the original proposal for QALs a debt-to-
income (DTI) ratio not in excess of 36 percent of a borrower's monthly 
gross income. Originators would have been required to verify a 
borrower's income and debt payments using standard methods. Many 
commenters opposed including a DTI ratio as part of the underwriting 
criteria for QALs. These commenters believed that the significant 
additional burden of collecting documents to verify debts and income 
would far outweigh any benefit, and could have the unanticipated result 
of only applying the burden to the most creditworthy borrowers whose 
loans could potentially qualify for QAL status. A few commenters 
asserted that it was nearly impossible to check information such as 
required alimony or child support. In addition, these commenters were 
concerned about potentially changing DTIs between origination and 
securitization. Commenters also asserted that in practice, only the 
most marginal of automobile lending used income or employment 
verification. Some automobile sponsor commenters said the industry does 
not use DTIs in prime automobile origination because they do not 
believe it is predictive of default, and that the agencies should 
instead adopt the established industry practice of setting FICO score 
thresholds as an indicator of ability to repay.
    The agencies have considered these comments, but continue to 
believe that assessing a borrower's ability to repay is important in 
setting underwriting criteria to identify automobile loans that would 
not be subject to risk retention. DTI is a meaningful figure in 
calculating a customer's ability to repay a loan, and therefore the 
agencies continue to propose the same DTI requirement as in the 
original proposal. As discussed in more detail, the agencies also 
observe that they generally do not believe it would be appropriate to 
include a standard based on FICO scores in the QAL underwriting 
standards, because it would tie a regulatory requirement to third 
party, private industry models.
2. Loan Terms
    Under the original proposal, QAL interest rates and payments would 
have had to be fixed over the term of the loan. In addition, the loan 
would have had to be amortized on a straight-line basis over the term. 
Loans could not have exceeded five years (60 months); for used car 
loans, the maximum term would have been one year shorter for every year 
difference between the current year and the used car's model year. 
Furthermore, the terms would have required that the originator, or 
agent, to retain physical possession of the title until full repayment.
    While commenters supported the proposed requirements for fixed 
interest rates and fixed monthly payments, most commenters opposed one 
or more of the additional proposed QAL loan terms. The straight-line 
amortization requirement was the most problematic issue for commenters. 
Commenters asserted that automobile loans are generally amortized using 
the simple interest method with fixed, level payments and that the 
simple interest method provides that earlier payments would amortize 
less principal, and later payments would amortize more principal, 
rather than a straight-line amortization as proposed by the agencies.
    In addition, many commenters were concerned that numerous states 
require the vehicle's owner (borrower) to retain the physical title, 
and that some states are moving to issue electronic titles that cannot 
have a physical holder. These commenters suggested revising the 
proposed rule to either remove the requirement, or condition it on 
compliance with applicable state law.
    Many commenters also opposed the 60-month maximum loan term, 
stating that current industry standards allow for 72-month loans. Some 
commenters believed that the used-car restrictions were too harsh, 
citing the ``certified pre-owned'' programs available for most used 
cars and longer car lives in general. These commenters suggested either 
removing the used car term restriction, or else loosening the standard 
to exclude from QALs used cars over six years old, rather than over 
five years old, as proposed by the agencies. Commenters also suggested 
a technical change to require the first payment within 45 days of the 
contract date rather than on the closing date.
    The agencies have considered these comments and are proposing the 
QAL standards with some modifications to the original proposal's 
standards. Instead of a straight-line amortization requirement, the 
agencies are proposing a requirement that borrowers make level monthly 
payments that fully amortize the automobile loan over its term. Second, 
the agencies are replacing the requirement in the original proposal 
that the originator retain physical title with a proposed requirement 
that the lender comply with appropriate state law for recording a lien 
on the title. Third, the agencies are proposing to expand the maximum 
allowable loan term for QALs to the lesser of six years (72 months) or 
10 years less the vehicle's age (current model year less vehicle's 
model year). Due to this modification, there would no longer be a 
distinction between new vehicles and

[[Page 57985]]

used vehicles for the QAL definition. Finally, the agencies are 
proposing that payment timing be based on the contract date.
3. Reviewing Credit History
    In the original proposal, an originator would have been required to 
verify, within 30 days of originating a QAL, that the borrower was not 
30 days or more past due; was not more than 60 days past due over the 
past two years; and was not a judgment debtor or in bankruptcy in the 
past three years. The agencies also proposed a safe harbor requiring 
the originator to review the borrower's credit reports from two 
separate agencies, both showing the borrower complies with the past-due 
standards. Also, the agencies proposed a requirement that all QALs be 
current at the closing of the securitization.
    Commenters were concerned that these criteria in the original 
proposal were so strict as to require them to follow the safe harbor. 
They indicated substantial risk that they may make a QAL, but then 
within 30 days after the loan, review the credit history and note a 
single 30-day late payment, thus disqualifying the loan for QAL status. 
To avoid this outcome, commenters (including some investors) suggested 
removing the 30-day past due criteria, also citing their belief that 
many otherwise creditworthy borrowers could have inadvertently missed a 
single payment within that timeframe. Some sponsor commenters favored 
elimination of the credit disqualification standards entirely in favor 
of a FICO cutoff; some investor commenters acknowledged the established 
role of FICO but favored maintaining most of the disqualification 
standards in addition to FICO.
    On the assumption that all originators would rely on the credit 
report safe harbor, commenters asserted that the requirement to obtain 
reports from two separate credit reporting agencies unnecessarily 
increased costs. These commenters stated that so much information is 
shared among the credit reporting agencies, that two credit reports are 
no more predictive than one report of the creditworthiness of a 
borrower. The commenters also stated that this report should be 
obtained within 30 days of the contract date, rather than within 90 
days as proposed.
    Some commenters also opposed the requirement in the original 
proposal that borrowers remain current when the securitization closes. 
These commenters stated that securitizations have a ``cutoff'' date 
before the closing date, when all the QALs would be pooled and 
information verified. It would be possible for a loan to become late 
between the cutoff and closing date without the sponsor knowing until 
after closing. Instead, sponsors suggested replacing the proposed rule 
requirement with a representation made by the sponsor that no loan in 
the securitized pool is more than 30 days past due at cutoff, with the 
securitizer being required to verify that representation for each loan 
no more than 62 days from the securitization's closing date.
    The agencies believe that a QAL should meet conservative 
underwriting criteria, including that the borrower not be more than 30 
days late. However, to reduce the burden associated with reviewing 
credit reports for those delinquencies, the agencies are proposing to 
require only one credit report rather than two, and that the report be 
reviewed within 30 days of the contract date, as requested by 
commenters. The agencies are proposing the same requirements as in the 
original proposal for verification that the automobile loan is current 
when it is securitized. The agencies believe a securitization exempt 
from risk retention should contain only current automobile loans.
    Finally, the agencies are not proposing requirements that would 
rely on proprietary credit scoring systems or underwriting systems. The 
agencies recognize that much of the current automobile lending industry 
relies heavily or solely on a FICO score to approve automobile loans. 
However, the agencies do not believe that a credit score alone is 
sufficient underwriting for a conservative automobile loan with a low 
risk of default. Furthermore, the agencies do not believe it is 
appropriate to establish regulatory requirements that use a specific 
credit scoring product from a private company, especially one not 
subject to any government oversight or investor review of its scoring 
model. The agencies believe that the risks to investors of trusting in 
such proprietary systems and models weighs against this alternative, 
and does not provide the transparency of the bright line underwriting 
standards proposed by the agencies.
4. Loan-to-Value
    In the original proposal, the agencies proposed to require 
automobile loan borrowers to pay 100 percent of the taxes, title costs, 
and fees, in addition to 20 percent of the net purchase price (gross 
price less manufacturer and dealer discounts) of the car. For used 
cars, the purchase price would have been the lesser of the actual 
purchase price or a value from a national pricing service.
    Most commenters opposed the down payment and loan-to-value 
requirements. These commenters cited current automobile industry 
practices where up to 100 percent of the purchase price of the car is 
financed, along with taxes, title costs, dealer fees, accessories, and 
warranties. Some commenters proposed eliminating the LTV entirely, or 
replacing it with a less conservative standard.
    The agencies have considered the comments and the underwriting 
standards and have concluded that a lower down payment could be 
required without a significant decline in the credit quality of a QAL. 
Therefore, the agencies are proposing a down payment of at least 10 
percent of the purchase price of the vehicle, plus 100 percent of all 
taxes, fees, and extended warranties. The agencies do not believe that 
a collateralized loan with an LTV over 90 percent would be low-risk, 
and that a customer should put some of the customer's own cash into the 
deal to reduce risks for strategic default and incent repayment of the 
loan. The agencies would also define purchase price consistently across 
new and used vehicles to equal the price negotiated with the dealer 
less any manufacturer rebates.
Request for Comment
    83(a). Are the revisions to the qualifying automobile loan 
exemption appropriate? 83(b). If not, how can they be modified to more 
appropriately reflect industry standards?
    84. Are all the proposed underwriting criteria appropriate?

D. Qualifying Asset Exemption

    As discussed above, numerous industry and sponsor commenters on the 
original proposal for reduced risk retention requirements for 
commercial, CRE, and automobile loans asserted that the requirement 
that all assets in a collateral pool must meet the proposed 
underwriting standards (qualifying assets) to exempt the securitization 
transaction from risk retention was too stringent. These commenters 
stated that requiring every asset in a collateral pool to meet the 
proposed conservative underwriting requirements would make it difficult 
to obtain a large enough pool of qualifying assets to issue a 
securitization in a timely manner, and therefore some originators would 
not underwrite to the qualifying asset standards. These commenters 
suggested that the agencies allow a proportional reduction in required 
risk retention for those assets in a collateral pool that met the 
proposed underwriting standards. For example, if a pool contained 20

[[Page 57986]]

percent automobile loans that are qualifying assets and 80 percent of 
other automobile loans, only 80 percent of the pool would be subject a 
risk retention requirement.
    Commenters representing investors in securitization transactions 
generally opposed blended pools of qualifying assets and other assets. 
These investors stated that blending could allow sponsors too much 
latitude to mix high-quality qualifying assets, which may pay down 
first, with low-quality non-qualifying assets, which would create 
significant risk of credit loss for investors over the course of the 
transaction.
    The agencies have carefully considered the comments and are 
proposing to apply a 0 percent risk retention requirement to qualifying 
assets, where both qualifying assets and non-qualifying assets secure 
an asset-backed security.\128\ Any non-qualifying assets that secure an 
asset-backed security would be subject to the full risk retention 
requirements in the proposed rule, including hedging and transfer 
restrictions.
---------------------------------------------------------------------------

    \128\ Under 15 U.S.C. 78o-11(c)(1)(B)(ii), the agencies may 
require a sponsor to retain less than 5 percent of the credit risk 
for an asset that securitizes an asset-backed security, if the asset 
meets the underwriting standards established by the agencies under 
15 U.S.C. 78o-11(c)(2)(B). Accordingly, the agencies are proposing 
to require 0 percent risk retention with respect to any asset 
securitizing an asset-backed security that meet the proposed 
underwriting standards for automobile loans, commercial loans, or 
commercial real estate loans. See 15 U.S.C. 78o-11(c)(1)(B)(ii). The 
agencies also believe that exempting qualifying assets from risk 
retention would be consistent with 15 U.S.C. 78o-11(e) and the 
purposes of the statute. The agencies believe the exemption could, 
in a direct manner, help ensure high-quality underwriting standards 
for assets that are available for securitization, and create 
additional incentives under the risk retention rules for these high-
quality assets to be originated in the market. The agencies further 
believe such an exemption would encourage appropriate risk 
management practices by securitization sponsors and asset 
originators, by establishing rigorous underwriting standards for the 
exempt assets and providing additional incentives for these 
standards to take hold in the marketplace.
---------------------------------------------------------------------------

    The agencies believe that applying a 0 percent risk retention 
requirement to assets that meet the proposed underwriting standards 
would be appropriate given the very high credit quality of such assets. 
In addition, allowing both qualifying and non-qualifying assets to 
secure an asset-backed security should promote liquidity in the 
relevant securitization markets without harming the goals of risk 
retention requirement. The agencies understand that a lender may not be 
able to originate, or a sponsor aggregate, an entire pool of qualifying 
assets within a reasonable amount of time to promote efficient 
securitization. The agencies believe that the proposal to apply a 0 
percent risk retention requirement to qualifying assets would likely 
enhance the liquidity of loans underwritten to the qualifying asset 
underwriting standards, thereby encouraging originators to underwrite 
more qualifying assets of high credit quality.
    The agencies recognize that section 15G is generally structured in 
contemplation of pool-level exemptions, and that investors, whom the 
statute is designed to protect, expressed some preference during the 
agencies' initial proposal for a pool-level approach. The agencies 
believe the structure of the proposal could offset these concerns. The 
agencies are proposing to reduce the sponsor's 5 percent risk retention 
requirement by the ratio of the combined unpaid principal balance (UPB) 
of qualified loans bears to the total UPB of the loans in the 
pool.\129\ The agencies believe this method is more appropriate than a 
system based on the absolute number of qualifying loans in the pool, as 
a sponsor could create a pool with a large number of small value 
qualifying loans combined with a few low-quality loans with large 
principal balances. The agencies have also considered an ``average 
balance'' approach as an alternative, but are concerned that it could 
be used to reduce overall risk retention on pools of loans with 
disparate principal balances skewed towards a few large non-qualified 
loans.
---------------------------------------------------------------------------

    \129\ If a $100 million pool of commercial mortgages included a 
sum total of $20 million of qualified commercial mortgages (by UPB), 
the ratio would be 1/5, and the sponsor could reduce its 5 percent 
risk retention requirement by one-fifth, for a retention holding 
requirement of 4 percent.
---------------------------------------------------------------------------

    To address transparency concerns, the agencies are proposing that 
sponsors of asset-backed securities that are secured by both qualifying 
and non-qualifying assets disclose to investors, their primary Federal 
regulator (as appropriate), and the Commission the manner in which the 
sponsor determined the aggregate risk retention requirement for the 
pool after including qualifying assets with 0 percent risk retention, a 
description of the qualified and nonqualified assets groups, and any 
material differences between them with respect to the composition of 
each group's loan balances, loan terms, interest rates, borrower credit 
information, and characteristics of any loan collateral.
    The agencies would not make blended pool treatment available for 
securitizations of loans from different asset classes (i.e., automobile 
and commercial) that secure the same asset-backed security. The 
agencies believe that blending across asset classes would significantly 
reduce transparency to investors. In addition, the agencies are also 
considering imposing a limit on the amount of qualifying assets a 
sponsor could include in any one securitization involving blended pools 
through a 2.5 percent risk retention minimum for any securitization 
transaction, but the agencies are also considering the possibility of 
raising or lowering that limit by 1 or more percent. The agencies 
recognize that it might be useful for sponsors acting on a transparent 
basis to attempt to allay moderate investor reservations about some 
assets in a pool by including other high-quality assets. However, one 
consistent theme in the agencies consideration of risk retention has 
been to require sponsors to hold a meaningful exposure to all assets 
they securitize that are subject to the full risk retention 
requirement. The agencies are concerned that providing sponsors 
unlimited flexibility with respect to mixing qualifying and non-
qualifying collateral pools could create opportunities for practices 
that would be inconsistent with this over-arching principle.
    The agencies also acknowledge investor concerns about mixing 
qualifying and non-qualifying assets, as noted above. For example, some 
investors commenting on the original proposal expressed concern that 
sponsors might be able to manipulate such combinations to achieve 
advantages that are not easily discernible to investors, such as mixing 
high-quality shorter-term assets with lower-quality longer-term assets. 
In this regard, the agencies observe the Commission's current proposal 
on loan level disclosures to investors in asset-backed securities 
represents a mechanism by which investors would obtain a more detailed 
view of loans in the pool than they sometimes did in prior 
markets.\130\ However the agencies remain concerned about potential 
abuses of this aspect of the proposed rule and seek comment on how to 
address this issue beyond the disclosure requirements already included 
in the proposed rule. For example, an additional requirement that 
qualifying assets and non-qualifying assets in the same collateral pool 
do not have greater than a one year difference in maturity might 
alleviate some investor concerns.

[[Page 57987]]

Additional disclosure requirements might also alleviate this concern.
---------------------------------------------------------------------------

    \130\ See Asset-Backed Securities, Release Nos. 33-9117, 34-
61858, 75 FR 23328 (May 3, 2010), and Re-proposal of Shelf 
Eligibility Conditions for Asset-Backed Securities and Other 
Additional Requests for Comment, Release Nos. 33-9244, 34-64968, 76 
FR 47948 (August 5, 2011).
---------------------------------------------------------------------------

    In addition, the agencies are proposing (consistent with the 
original proposal) that securitization transactions that are 
collateralized solely by qualifying assets (of the same asset class) 
and servicing assets would be exempt from the risk retention 
requirements of the proposed rule.
Request for Comment
    85. Commenters on the QRM approach contained in the agencies' 
original proposal requested that the agencies permit blended pools for 
RMBS. The agencies invite comment on whether and, if so how, such an 
approach may be constructed where the underlying assets are residential 
mortgages, given the provisions of paragraph (c)(1)(B)(i)(II) and the 
exemption authority in paragraph (c)(2)(B), (e)(1) and (e)(2) of 
Section 15G.
    86(a). How should the proportional reduction in risk retention be 
calculated? 86(b). What additional disclosures should the agencies 
require for collateral pools that include both qualifying and non-
qualifying assets? 86(c). How would these additional disclosures 
enhance transparency and reduce the risk of sponsors taking advantage 
of information asymmetries? 86(d). Should a collateral pool that 
secures asset-backed securities be subject to a minimum total risk 
retention requirement of 2.5 percent? 86(e). If not, what would be an 
appropriate limit on the amount of qualifying assets that may be 
included in a collateral pool subject to 0 percent risk retention? 
86(f). What other limiting mechanisms would be appropriate for mixed 
collateral pools?
    87(a). Would a maturity mismatch limit such as the one discussed 
above (such that qualifying and non-qualifying assets do not have a 
difference in maturity of more than one year) be an appropriate 
requirement for collateral pools containing qualifying and non-
qualifying assets? 87(b). How should such a limit be structured? 87(c). 
What other limits would be appropriate to address the investor and 
agency concerns discussed above?

E. Buyback Requirement

    The original proposal provided that, if after issuance of a 
qualifying asset securitization, it was discovered that a loan did not 
meet the underwriting criteria, the sponsor would have to repurchase 
the loan. Industry commenters asserted that if the agencies retained 
this requirement, it should include a materiality standard. 
Alternately, these groups suggested that the agencies allow curing 
deficiencies in the underwriting or loans instead of requiring buyback. 
Finally, industry commenters stated that they should not be responsible 
for post-origination problems with qualifying loans, and expressed 
concern that investors may seek to use the buyback requirement to make 
the sponsor repurchase poorly performing assets that met all the 
requirements at origination. Investor commenters, on the other hand, 
supported the buyback requirement as the sole remedy, and they opposed 
relying solely on representations and warranties.
    The agencies have observed that during the recent financial crisis, 
investors who sought a remedy through representations and warranties 
often struggled through litigation with the sponsor or originator. 
Requiring the prompt repurchase of non-qualifying loans affords 
investors a clear path to remedy problems in the original underwriting. 
Therefore, the agencies are again proposing a buyback requirement for 
commercial, CRE, and automobile loans subsequently found not to meet 
the underwriting requirements for an exemption to the risk retention 
requirements. However, the agencies also agree with the sponsor 
commenters that buyback should not be the sole remedy, and therefore 
are proposing to allow a sponsor the option to cure a defect that 
existed at the time of origination to bring the loan into conformity 
with the proposed underwriting standards. Curing a loan should put the 
investor in no better or worse of a position than if the loan had been 
originated correctly. Some origination deficiencies may not be able to 
be cured after origination, and so for those deficiencies, buyback 
would remain the sole remedy.
    The agencies also agree that buyback or cure should occur only when 
there are material problems with the qualifying loan that caused it not 
to meet the qualifying standards at origination. The agencies are not 
proposing any specific materiality standards in the rule, but believe 
that sponsors and investors could be guided by standards of 
materiality.\131\
---------------------------------------------------------------------------

    \131\ See, e.g., TSC Industries, Inc. v. Northway, Inc., 426 
U.S. 438 (1976).
---------------------------------------------------------------------------

    Finally, as the agencies explained in the original proposal, the 
underwriting requirements need to be met only at the origination of the 
loan. Subsequent performance of the loan, absent any failure to meet 
the underwriting requirements at origination or failure of the loan to 
be current at the time of origination, would not be grounds for a loan 
buyback or cure. The borrower's failure to meet its continuing 
obligations under the loan document covenants required for qualifying 
loan treatment, such as the requirement for periodic financial 
statements for CRE loans, would also not be grounds for a buyback or 
cure if the loan terms at origination appropriately imposed the 
obligation on the borrower.
Request for Comment
    88. The agencies request comment on the buyback provision for 
qualifying loans, including on the proposed changes discussed above to 
allow cure and to incorporate a materiality standard.

VI. Qualified Residential Mortgages

A. Overview of Original Proposal and Public Comments

    Section 15G of the Exchange Act exempts sponsors of securitizations 
from the risk retention requirements if all of the assets that 
collateralize the securities issued in the transaction are QRMs.\132\ 
Section 15G directs the agencies to define QRM jointly, taking into 
consideration underwriting and product features that historical loan 
performance data indicate result in a lower risk of default. In 
addition, section 15G requires that the definition of a QRM be ``no 
broader than'' the definition of a QM.\133\
---------------------------------------------------------------------------

    \132\ See 15 U.S.C. 78o-11(c)(1)(C)(iii).
    \133\ See id. at section 78o-11(e)(4).
---------------------------------------------------------------------------

    In developing the definition of a QRM in the original 
proposal,\134\ the agencies articulated several goals and principles. 
First, the agencies stated that QRMs should be of very high credit 
quality, given that Congress exempted QRMs completely from the credit 
risk retention requirements. Second, the agencies recognized that 
setting fixed underwriting rules to define a QRM could exclude many 
mortgages to creditworthy borrowers. In this regard, the agencies 
recognized that a trade-off exists between the lower implementation and 
regulatory costs of providing fixed and simple eligibility requirements 
and the lower probability of default attendant to requirements that 
incorporate detailed and compensating underwriting factors. Third, the 
agencies sought to preserve a sufficiently large population of non-QRMs 
to help enable the market for securities backed by non-QRM mortgages to 
be relatively liquid. Fourth, the agencies sought to implement 
standards that would be

[[Page 57988]]

transparent and verifiable to participants in the market.
---------------------------------------------------------------------------

    \134\ See Original Proposal, 76 FR at 24117.
---------------------------------------------------------------------------

    The agencies also sought to implement the statutory requirement 
that the definition of QRM be no broader than the definition of a QM, 
as mandated by the Dodd-Frank Act.\135\ Under the original proposal, 
the agencies proposed to incorporate the statutory QM standards, in 
addition to other requirements, into the definition of a QRM and apply 
those standards strictly in setting the QRM requirements to ensure that 
the definition of QRM would be no broader than the definition of a QM. 
The agencies noted in the original proposal that they expected to 
monitor the rules adopted under TILA to define a QM and review those 
rules to determine whether changes to the definition of a QRM would be 
necessary or appropriate.
---------------------------------------------------------------------------

    \135\ See 15 U.S.C. 78o-11(e)(4)(C). At the time of issuance of 
the original proposal on April 29, 2011, the Board had sole 
rulemaking authority for defining QM, which authority transferred to 
CFPB on July 21, 2011, the designated transfer date under the Dodd-
Frank Act.
---------------------------------------------------------------------------

    In considering how to determine if a mortgage is of sufficient 
credit quality, the agencies examined data from several sources.\136\ 
Based on these and other data, the agencies originally proposed 
underwriting and product features that were robust standards designed 
to ensure that QRMs would be of very high credit quality.\137\ A 
discussion of the full range of factors that the agencies considered in 
developing a definition of a QRM can be found in the original 
proposal.\138\
---------------------------------------------------------------------------

    \136\ As provided in the original proposal, the agencies 
reviewed data supplied by McDash Analytics, LLC, a wholly owned 
subsidiary of Lender Processing Services, Inc. (LPS), on prime 
fixed-rate loans originated from 2005 to 2008, which included 
underwriting and performance information on approximately 8.9 
million mortgages; data from the 1992 to 2007 waves of the triennial 
Survey of Consumer Finances (SCF), which focused on respondents who 
had purchased their homes either in the survey year or the previous 
year, and included information on approximately 1,500 families; and 
data regarding loans purchased or securitized by the Enterprises 
from 1997 to 2009, which consisted of more than 78 million 
mortgages, and included data on loan products and terms, borrower 
characteristics (e.g., income and credit score), and performance 
data through the third quarter of 2010. See 76 FR at 24152.
    \137\ The agencies acknowledged in the original proposal that 
any set of fixed underwriting rules likely would 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. See Original Proposal, 76 FR at 24118.
    \138\ See Original Proposal, 76 FR at 24117-29.
---------------------------------------------------------------------------

    The agencies originally proposed to define QRM to mean 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 was 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 12 months or less, such as a loan to purchase a new 
dwelling where the borrower plans to sell a current dwelling within 12 
months; or (iv) a timeshare plan described in 11 U.S.C. 101(53D).\139\ 
In addition, under the original proposal, a QRM (i) must be a first 
lien transaction with no subordinate liens; (ii) have a mortgage term 
that does not exceed 30 years; (iii) have maximum front-end and back-
end DTI ratios of 28 percent and 36 percent, respectively; \140\ (iv) 
have a maximum LTV ratio of 80 percent in the case of a purchase 
transaction, 75 percent in the case of rate and term refinance 
transactions, and 70 percent in the case of cash out refinancings; (v) 
include a 20 percent down payment from borrower funds in the case of a 
purchase transaction; and (vi) meet certain credit history 
restrictions.\141\
---------------------------------------------------------------------------

    \139\ See id. at 24166.
    \140\ A front-end DTI 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.
    \141\ In order to facilitate the use of these standards for QRM 
purposes, the original proposal included as an appendix to the 
proposed rule (Additional QRM Standards Appendix) all of the 
standards in the HUD Handbook 4155-1 that are used for QRM purposes. 
(See HUD Handbook, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh/4155.1.) 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). See discussion in the Original Proposal, 76 FR at 
24119.
---------------------------------------------------------------------------

    The agencies sought comment on the overall approach to defining QRM 
as well as on the impact of the QRM definition on the securitization 
market, mortgage pricing, and credit availability, including to low-to-
moderate income borrowers. The agencies further requested comment on 
the proposed eligibility criteria of QRMs, such as the LTV, DTI, and 
borrower credit history standards.
    The scope of the QRM definition generated a significant number of 
comments. Some commenters expressed support for the overall proposed 
approach to QRM, including the 20 percent down payment requirement of 
the QRM definition. These commenters asserted that an LTV requirement 
would be clear, objective, and relatively easy to implement, and 
represent an important determinant of a loan's default probability.
    However, the overwhelming majority of commenters, including 
individuals, industry participants (e.g., real estate brokers, mortgage 
bankers, securitization sponsors), insurance companies, public interest 
groups, state agencies, financial institutions and trade organizations, 
opposed various aspects of the originally proposed approach to defining 
QRM. In addition, many members of Congress commented that the proposed 
20 percent down payment requirement was inconsistent with legislative 
intent, and strongly urged the agencies to eliminate or modify the down 
payment requirement.
    Many commenters argued that the proposed QRM definition was too 
narrow, especially with respect to the LTV and DTI requirements. Many 
of these commenters asserted that the proposed QRM definition would 
prevent recovery of the housing market by restricting available credit, 
and as a result, the number of potential homebuyers. These commenters 
also argued that the proposed definition of QRM, especially when 
combined with the complexities of the proposed risk retention 
requirement that would have applied to non-QRMs, would make it 
difficult for private capital to compete with the Enterprises and thus, 
impede the return of private capital to the mortgage market. Many also 
asserted that the proposed LTV and DTI requirements favored wealthier 
persons and disfavored creditworthy low- and moderate-income persons 
and first-time homebuyers. A number of commenters believed that LTV and 
DTI elements of the proposed QRM definition would not only affect 
mortgages originated for securitization, but would likely also be 
adopted by portfolio lenders, magnifying the adverse effects described 
above. Other commenters claimed that the proposed QRM definition and 
proposed risk retention requirements would harm community banks and 
credit unions by increasing costs to those who purchase loans 
originated by these smaller institutions.
    Some commenters urged the agencies to implement a more qualitative 
QRM standard with fewer numerical thresholds. Others argued for a 
matrix

[[Page 57989]]

system that would weigh compensating factors, instead of using an all-
or-nothing approach to meeting the threshold standards. Commenters 
stated that requiring borrowers to put down more cash for a rate-and-
term refinancing may prevent them from refinancing with safer and more 
economically desirable terms. Commenters were also critical of the 
proposed credit history requirements (in particular, the 30-day past 
due restriction), and the points and fees component of the proposed QRM 
definition.
    Although a few commenters supported the inclusion of servicing 
standards in the QRM definition under the original proposal, the 
majority of those who submitted comment on this subject opposed the 
proposed servicing standards for a variety of reasons. For example, 
commenters asserted that servicing standards were not an underwriting 
standard or product feature, and were not demonstrated to reduce the 
risk of default. In addition, commenters stated that the proposed 
standards were too vague for effective compliance, and that the 
proposed rule's approach of requiring them to be terms of the mortgage 
loan would prevent future improvements in servicing from being 
implemented with respect to QRMs.
    Many commenters urged the agencies to postpone finalizing the QRM 
definition until after the QM definition was finalized. Many commenters 
also advocated for the agencies to align the QRM definition to the QM 
definition.

B. Approach to Defining QRM

    In determining the appropriate scope of the proposed QRM 
definition, the agencies carefully weighed a number of factors, 
including commenters' concerns, the cost of risk retention, current and 
historical data on mortgage lending and performance, and the recently 
finalized QM definition and other rules addressing mortgages. For the 
reasons discussed more fully below, the agencies are proposing to 
broaden and simplify the scope of the QRM exemption from the original 
proposal and define ``qualified residential mortgage'' to mean 
``qualified mortgage'' as defined in section 129C of TILA \142\ and 
implementing regulations, as may be amended from time to time.\143\ The 
agencies propose to cross-reference the definition of QM, as defined by 
the CFPB in its regulations, to minimize potential for future conflicts 
between the QRM standards in the proposed rule and the QM standards 
adopted under TILA.
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 1639c.
    \143\ See Final QM Rule.
---------------------------------------------------------------------------

    The risk retention requirements are intended to address problems in 
the securitization markets by requiring securitizers to generally 
retain some economic interest in the credit risk of the assets they 
securitize (i.e., have ``skin in the game''). Section 15G of the 
Exchange Act requires the agencies to define a QRM exception from the 
credit risk retention requirement, taking into consideration 
underwriting and product features that historical loan performance data 
indicate result in a lower expected risk of default. The requirements 
of the QM definition are designed to help ensure that borrowers are 
offered and receive residential mortgage loans on terms that reasonably 
reflect their financial capacity to meet the payment obligations 
associated with such loans. The QM definition excludes many loans with 
riskier product features, such as negative amortization and interest-
only payments, and requires consideration and verification of a 
borrower's income or assets and debt. This approach both protects the 
consumer and should lead to lower risk of default on loans that qualify 
as QM.
    As discussed more fully below, the agencies believe a QRM 
definition that aligns with the definition of a QM meets the statutory 
goals and directive of section 15G of the Exchange Act to limit credit 
risk, preserves access to affordable credit, and facilitates 
compliance.
1. Limiting Credit Risk
    Section 129(C)(a) of TILA, as implemented by 12 CFR 1026.43(c), 
requires lenders to make a ``reasonable and good faith determination'' 
that a borrower has the ability to repay a residential mortgage loan. 
The QM rules provide lenders with a presumption of compliance with the 
ability-to-repay requirement. Together, the QM rules and the broader 
ability-to-repay rules restrict certain product features and lax 
underwriting practices that contributed significantly to the 
extraordinary surge in mortgage defaults that began in 2007.\144\
---------------------------------------------------------------------------

    \144\ See Christopher Mayer, Karen Pence, and Shane M. Sherlund, 
``The Rise in Mortgage Defaults, Journal of Economic Perspectives, 
23(1), 27-50 (Winter 2009).
---------------------------------------------------------------------------

    The QM rule does this, in part, by requiring documentation and 
verification of consumers' debt and income.\145\ To obtain the 
presumption of compliance with the ability-to-repay requirement as a 
QM, the loan must have a loan term not exceeding 30 years; points and 
fees that generally do not exceed 3 percent; \146\ and not have risky 
product features, such as negative amortization, interest-only and 
balloon payments (except for those loans that qualify for the 
definition of QM that is only available to eligible small portfolio 
lenders).\147\ Formal statistical models indicate that mortgages that 
do not meet these aspects of the QM definition rule are associated with 
a higher probability of default.\148\
---------------------------------------------------------------------------

    \145\ See generally 12 CFR 1026.43(c).
    \146\ The QM definition provides a tiered-cap for points and 
fees for loan amounts less than $100,000. See id. at 1026.43(e)(3).
    \147\ See 78 FR 35430 (June 12, 2013). In addition, the loan 
must have consumer debt payments that represent 43 percent or less 
of a borrower's income, or the loan must be eligible for purchase, 
guarantee or insurance by an Enterprise, HUD, the U.S. Department of 
Veteran Affairs, the U.S. Department of Agriculture, or the Rural 
Housing Service. See 12 CFR 1026.43(e)(2)(vi).
    \148\ See Shane M. Sherlund, ``The Past, Present, and Future of 
Subprime Mortgages,'' Finance and Economics Discussion Series, Paper 
2008-63 available at http://www.federalreserve.gov/pubs/feds/2008/200863/200863pap.pdf; Ronel Elul, Nicholas S. Souleles, Souphala 
Chomsisengphet, Dennis Glennon, and Robert Hunt. ``What `Triggers' 
Mortgage Default?'' American Economic Review 100(2), 490-494 (May 
2010).
---------------------------------------------------------------------------

    Consistent with these statistical models, historical data indicate 
that mortgages that meet the QM criteria have a lower probability of 
default than mortgages that do not meet the criteria. This pattern is 
most pronounced for loans originated near the peak of the housing 
bubble, when non-traditional mortgage products and lax underwriting 
proliferated. For example, of loans originated from 2005 to 2008, 23 
percent of those that met the QM criteria experienced a spell of 90-day 
or more delinquency or a foreclosure by the end of 2012, compared with 
44 percent of loans that did not meet the QM criteria.\149\
---------------------------------------------------------------------------

    \149\ For purposes of this calculation, mortgages that do not 
meet the QM criteria are those with negative amortization, balloon, 
or interest-only features; those with no documentation; and those 
with DTI ratios in excess of 43 percent that were not subsequently 
purchased or guaranteed by the Enterprises or the FHA. Because of 
data limitations, loans with points and fees in excess of 3 percent 
and low-documentation loans that do not comply with the QM 
documentation criteria may be erroneously classified as QMs. The 
default estimates are based on data collected from mortgage 
servicers by Lender Processing Services and from securitized pools 
by CoreLogic. These data will under-represent mortgages originated 
and held by small depository institutions and adjustable-rate 
mortgages guaranteed by the FHA. The difference between delinquency 
statistics for QM and non-QM mortgages is consistent with a 
comparable tabulation estimated on loans securitized or purchased by 
the Enterprises. In the Enterprise analysis for loans originated 
from 2005 to 2008, 14 percent of those that met the QM criteria, 
compared with 33 percent of loans that did not meet the QM criteria, 
experienced a 90-day or more delinquency or a foreclosure by the end 
of 2012.
---------------------------------------------------------------------------

    In citing these statistics, the agencies are not implying that they 
consider a 23

[[Page 57990]]

percent default rate to be an acceptable level of risk. The expansion 
in non-traditional mortgages and the lax underwriting during this 
period facilitated the steep rise in house prices and the subsequent 
sharp drop in house prices and surge in unemployment, and the default 
rates reflect this extraordinary macroeconomic environment. This point 
is underscored by the superior performance of more recent mortgage 
vintages. For example, of prime fixed-rate mortgages that comply with 
the QM definition, an estimated 1.4 percent of those originated from 
2009 to 2010, compared with 16 percent of those originated from 2005 to 
2008, experienced a 90-day or more delinquency or a foreclosure by the 
end of 2012.\150\
---------------------------------------------------------------------------

    \150\ The higher default rate for the loans originated from 2005 
to 2008 may reflect the looser underwriting standards in place at 
that time and the greater seasoning of these loans in addition to 
the changes in the macroeconomic environment. The estimates are 
shown only for prime fixed-rate mortgages because these mortgages 
have made up almost all originations since 2008.
---------------------------------------------------------------------------

    In the original proposal, the criteria for a QRM included an LTV 
ratio of 80 percent or less for purchase mortgages and measures of 
solid credit history that evidence low credit risk. Academic research 
and the agencies' own analyses indicate that credit history and the LTV 
ratio are significant factors in determining the probability of 
mortgage default.\151\ However, these additional credit overlays may 
have ramifications for the availability of credit that many commenters 
argued were not outweighed by the corresponding reductions in 
likelihood of default from including these determinants in the QRM 
definition.
---------------------------------------------------------------------------

    \151\ See Original Proposal, 76 FR at 24120-24124.
---------------------------------------------------------------------------

    Moreover, the QM definition provides protections against mortgage 
default that are consistent with the statutory requirements. As noted 
above, risk retention is intended to align the interests of 
securitization sponsors and investors. Misalignment of these interests 
is more likely to occur where there is information asymmetry, and is 
particularly pronounced for mortgages with limited documentation and 
verification of income and debt. Academic studies suggest that 
securities collateralized by loans without full documentation of income 
and debt performed significantly worse than expected in the aftermath 
of the housing boom.\152\
---------------------------------------------------------------------------

    \152\ See Benjamin J. Keys, Amit Seru, and Vikrant Vig, ``Lender 
Screening and the Role of Securitization: Evidence from Prime and 
Subprime Mortgage Markets,'' Review of Financial Studies, 25(7) 
(July 2012); Adam Ashcraft, Paul Goldsmith-Pinkham, and James 
Vickery, ``MBS Ratings and the Mortgage Credit Boom,'' Federal 
Reserve Bank of New York Staff Report 449 (2010), available at 
http://www.newyorkfed.org/research/staff_reports/sr449.html.
---------------------------------------------------------------------------

    The QM definition limits the scope of this information asymmetry 
and misalignment of interests by requiring improved verification of 
income and debt. An originator that does not follow these verification 
requirements, in addition to other QM criteria, may be subject under 
TILA to potential liability and a defense to foreclosure if the 
consumer successfully claims he or she did not have the ability to 
repay the loan.\153\ The potential risk arising from the consumer's 
ability to raise a defense to foreclosure extends to the creditor, 
assignee, or other holder of the loan for the life of the loan, and 
thereby may provide originators and their assignees with an incentive 
to follow verification and other QM requirements scrupulously.\154\
---------------------------------------------------------------------------

    \153\ See sections 130(a) and 130(k) of TILA, 15 U.S.C. 1640.
    \154\ There are limits on the exposure to avoid unduly 
restricting market liquidity.
---------------------------------------------------------------------------

    Other proposed and finalized regulatory changes are also intended 
to improve the quality and amount of information available to investors 
in QRM and non-QRM residential mortgage securitizations and incentivize 
originators and servicers to better manage mortgage delinquencies and 
potential foreclosures. These improvements may help to lessen the 
importance of broad ``skin in the game'' requirements on sponsors as an 
additional measure of protection to investors and the financial 
markets. For example, the Commission has proposed rules that, if 
finalized, would require in registered RMBS transactions disclosure of 
detailed loan-level information at the time of issuance and on an 
ongoing basis. The proposal also would require that securitizers 
provide investors with this information in sufficient time prior to the 
first sale of securities so that they can analyze this information when 
making their investment decision.\155\ In addition, the CFPB has 
finalized loan originator compensation rules that help to reduce the 
incentives for loan originators to steer borrowers to unaffordable 
mortgages \156\ as well as mortgage servicing rules that provide 
procedures and standards that servicers must follow when working with 
troubled borrowers in an effort to avoid unnecessary foreclosures.\157\ 
The Enterprises and the mortgage industry also have improved standards 
for due diligence, representations and warrants, appraisals, and loan 
delivery data quality and consistency.
---------------------------------------------------------------------------

    \155\ See Asset-Backed Securities, Release Nos. 33-9117, 34-
61858 75 FR 23328 at 23335, 23355 (May 3, 2010).
    \156\ See Loan Originator Compensation Requirements Under the 
Truth in Lending Act (Regulation Z); Final Rules, 78 FR 11280 (Feb. 
15, 2013).
    \157\ See Mortgage Servicing Rules Under the Truth in Lending 
Act (Regulation Z); Final Rule, 78 FR 10902 (Feb. 14, 2013); 
Mortgage Servicing Rules Under the Truth in Lending Act (Regulation 
Z); Final Rule, 78 FR 10696 (Feb. 14, 2013).
---------------------------------------------------------------------------

2. Preserving Credit Access
    Mortgage lending conditions have been tight since 2008, and to date 
have shown little sign of easing. Lending conditions have been 
particularly restrictive for borrowers with lower credit scores, 
limited equity in their homes, or with limited cash reserves. For 
example, between 2007 and 2012, originations of prime purchase 
mortgages fell about 30 percent for borrowers with credit scores 
greater than 780, compared with a drop of about 90 percent for 
borrowers with credit scores between 620 and 680.\158\ Originations are 
virtually nonexistent for borrowers with credit scores below 620. These 
findings are also evident in the results from the Senior Loan Officer 
Opinion Survey. In the April 2012 Survey, a large share of lenders 
indicated that they were less likely than in 2006 to originate loans to 
borrowers with weaker credit profiles. In the April 2013 survey, 
lenders indicated that their appetite for making such loans had not 
changed materially over the previous year.\159\
---------------------------------------------------------------------------

    \158\ These calculations are based on data provided by McDash 
Analytics, LLC, a wholly owned subsidiary of Lender Processing 
Services, Inc. The underlying data are provided by mortgage 
servicers. These servicers classify loans as ``prime,'' 
``subprime,'' or ``FHA.'' Prime loans include those eligible for 
sale to the Enterprises as well as those with favorable credit 
characteristics but loan sizes that exceed the Enterprises' 
guidelines (``jumbo loans'').
    \159\ Data are from the Federal Reserve Board's Senior Loan 
Officer Opinion Survey on Bank Lending Practices. The April 2012 
report is available at http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201205/default.htm and the April 2013 report is 
available at http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201305/default.htm.
---------------------------------------------------------------------------

    Market conditions reflect a variety of factors, including various 
supervisory, regulatory, and legislative efforts such as the 
Enterprises' representations and warrants policies; mortgage servicing 
settlements reached with federal regulators and the state attorney 
generals; revised capital requirements; and new rules addressing all 
aspects of the mortgage lending process. These efforts are far-reaching 
and complex, and the interactions and aggregate effect of them on the 
market and participants are difficult to predict. Lenders may

[[Page 57991]]

continue to be cautious in their lending decisions until they have 
incorporated these regulatory and supervisory changes into their 
underwriting and servicing systems and gained experience with the 
rules.
    The agencies are therefore concerned about the prospect of imposing 
further constraints on mortgage credit availability at this time, 
especially as such constraints might disproportionately affect groups 
that have historically been disadvantaged in the mortgage market, such 
as lower-income, minority, or first-time homebuyers.
    The effects of the QRM definition on credit pricing and access can 
be separated into the direct costs incurred in funding the retained 
risk portion and the indirect costs stemming from the interaction of 
the QRM rule with existing regulations and current market conditions. 
The agencies' estimates suggest that the direct costs incurred by a 
sponsor for funding the retained portion should be small. Plausible 
estimates by the agencies range from zero to 30 basis points, depending 
on the amount and form of incremental sponsor risk retention, and the 
amount and form of debt in sponsor funding of incremental risk 
retention. The funding costs may be smaller if investors value the 
protections associated with risk retention and are thereby willing to 
accept tighter spreads on the securities.
    However, the indirect costs stemming from the interaction of the 
QRM definition with existing regulations and market conditions are more 
difficult to quantify and have the potential to be large. The agencies 
judge that these costs are most likely to be minimized by aligning the 
QM and QRM definitions. The QM definition could result in some 
segmentation in the mortgage securitization market, as sponsors may be 
reluctant to pool QMs and non-QMs because of the lack of presumption of 
compliance available to assignees of non-QMs. As QRMs cannot be 
securitized with non-QRMs under the proposed rule,\160\ the QRM 
definition has the potential to compound this segmentation if the QM 
and QRM definitions are not aligned. Such segmentation could also lead 
to an increase in complexity, regulatory burden, and compliance costs, 
as lenders might need to set up separate underwriting and 
securitization platforms beyond what is already necessitated by the QM 
definition. These costs could be passed on to borrowers in the form of 
higher interest rates or tighter credit standards. Finally, in addition 
to the costs associated with further segmentation of the market, 
setting a QRM definition that is distinct from the QM definition may 
interact with the raft of other regulatory changes in ways that are 
near-impossible to predict. Cross-referencing to the QM definition 
should facilitate compliance with QM and reduce these indirect costs.
---------------------------------------------------------------------------

    \160\ See 15 U.S.C. 78o-11(c)(1)(B).
---------------------------------------------------------------------------

    The agencies recognize that aligning the QRM and QM definitions has 
the potential to intensify any existing bifurcation in the mortgage 
market between QM and non-QM loans, as securitizations collateralized 
by non-QMs could have higher funding costs due to risk retention 
requirements in addition to potential risk of legal liability under the 
ability-to-repay rule. The agencies acknowledge this risk but judge it 
to be smaller than the risk associated with further segmentation of the 
market.
    If adopted, the agencies intend to review the advantages and 
disadvantages of aligning the QRM and QM definitions as the market 
evolves to ensure the rule best meets the statutory objectives of 
section 15G of the Exchange Act.
Request for Comment
    89(a). Is the agencies' approach to considering the QRM definition, 
as described above, appropriate? 89(b). Why or why not? 89(c). What 
other factors or circumstances should the agencies take into 
consideration in defining QRM?

C. Proposed Definition of QRM

    As noted above, Section 15G of the Exchange Act requires, among 
other things, that the definition of QRM be no broader than the 
definition of QM. The Final QM Rule is effective January 10, 2014.\161\ 
The external parameters of what may constitute a QRM may continue to 
evolve as the CFPB clarifies, modifies or adjusts the QM rules.\162\
---------------------------------------------------------------------------

    \161\ See Final QM Rule.
    \162\ For example, the CFPB recently finalized rules to further 
clarify when a loan is eligible for purchase, insurance or guarantee 
by an Enterprise or applicable federal agency for purposes of 
determining whether a loan is a QM. See Amendments to the 2013 
Mortgage Rules under the Real Estate Settlement Procedures Act 
(Regulation X) and the Truth in Lending Act (Regulation Z), 78 FR 
44686 (July 24, 2013). The CFPB also recently proposed rules that 
further address what amounts should be included as loan originator 
compensation in certain cases (i.e., manufactured home loans) for 
purposes of calculating the 3 percent points and fees threshold 
under the QM rules. See Amendments to the 2013 Mortgage Rules under 
the Equal Credit Opportunity Act (Regulation B), Real Estate 
Settlement Procedures Act (Regulation X), and the Truth in Lending 
Act (Regulation Z), 78 FR 39902 (July 2, 2013).
---------------------------------------------------------------------------

    Because the definition of QRM incorporates QM by reference, the 
proposed QRM definition would expressly exclude home-equity lines of 
credit (HELOCs), reverse mortgages, timeshares, and temporary loans or 
``bridge'' loans of 12 months or less, consistent with the original 
proposal of QRM.\163\ It would also expand the types of loans eligible 
as QRMs.\164\ Under the original proposal, a QRM was limited to closed-
end, first-lien mortgages used to purchase or refinance a one-to-four 
family property, at least one unit of which is the principal dwelling 
of the borrower. By proposing to align the QRM definition to the QM 
definition, the scope of loans eligible to qualify as a QRM would be 
expanded to include any closed-end loan secured by any dwelling (e.g., 
home purchase, refinances, home equity lines, and second or vacation 
homes).\165\ Accordingly, the proposed scope of the QRM definition 
would differ from the original proposal because it would include loans 
secured by any dwelling (consistent with the definition of QM), not 
only loans secured by principal dwellings. In addition, if a 
subordinate lien meets the definition of a QM, then it would also be 
eligible to qualify as a QRM, whereas under the original proposal QRM-
eligibility was limited to first-liens. The agencies believe the 
expansion to permit loans secured by any dwelling, as well as 
subordinate liens, is appropriate to preserve credit access and 
simplicity in incorporating the QM definition into QRM.
---------------------------------------------------------------------------

    \163\ Also excluded would be most loan modifications, unless the 
transaction meets the definition of refinancing set forth in section 
1026.20(a) of the Final QM rule, and credit extended by certain 
community based lending programs, down payment assistance providers, 
certain non-profits, and Housing Finance Agencies, as defined under 
24 CFR 266.5. For a complete list, see 12 CFR 1026.43(a).
    \164\ See 12 CFR 1026.43(e)(2), which provides that QM is a 
covered transaction that meets the criteria set forth in Sec. Sec.  
1026.43(e)(2), (4), (5), (6) or (f). A ``covered transaction'' is 
defined to mean ``a consumer credit transaction that is secured by a 
dwelling, as defined in Sec.  1026.2(a)(19), including any real 
property attached to a dwelling, other than a transaction exempt 
from coverage under [Sec.  1026.43(a)].''
    \165\ See 12 CFR 1026.43(a).
---------------------------------------------------------------------------

    The CFPB regulations implementing the rules for a QM provide 
several definitions of a QM. The agencies propose that a QRM would be a 
loan that meets any of the QM definitions.\166\
---------------------------------------------------------------------------

    \166\ See 12 CFR 1026.43(e)(2), (e)(4), (e)(5), or (e)(6) or 
(f).
---------------------------------------------------------------------------

    These include the general QM definition, which provide that a loan 
must have:
     Regular periodic payments that are substantially equal;

[[Page 57992]]

     No negative amortization, interest only, or balloon 
features;
     A maximum loan term of 30 years;
     Total points and fees that do not exceed 3 percent of the 
total loan amount, or the applicable amounts specified in the Final QM 
Rule, for small loans up to $100,000;
     Payments underwritten using the maximum interest rate that 
may apply during the first five years after the date on which the first 
regular periodic payment is due;
     Consideration and verification of the consumer's income 
and assets, including employment status if relied upon, and current 
debt obligations, mortgage-related obligations, alimony and child 
support; and
     Total debt-to-income ratio that does not exceed 43 
percent.
    In recognition of the current mortgage market conditions and 
expressed concerns over credit availability, the CFPB also finalized a 
second temporary QM definition.\167\ The agencies propose that a QRM 
would also include a residential mortgage loan that meets this second 
temporary QM definition. This temporary QM definition provides that a 
loan must have:
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    \167\ 12 CFR 1026.43(e)(4).
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     Regular periodic payments that are substantially equal;
     No negative amortization, interest only, or balloon 
features;
     A maximum loan term of 30 years;
     Total points and fees, that do not exceed 3 percent of the 
total loan amount, or the applicable amounts specified for small loans 
up to $100,000; and
     Be eligible for purchase, guarantee or insurance by an 
Enterprise, HUD, the Veterans Administration, U.S. Department of 
Agriculture, or Rural Housing Service.\168\
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    \168\ See 12 CFR 1206.43(e)(4)(ii).
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    Lenders that make a QM have a presumption of compliance with the 
ability-to-repay requirement under 129C(a) of TILA, as implemented by 
Sec.  1026.43(c) of Regulation Z, and therefore obtain some protection 
from such potential liability.\169\ However, there are different levels 
of protection from TILA liability \170\ depending on whether a QM is 
higher-priced or not.\171\ QMs that are not higher-priced loans 
received a legal safe harbor for compliance with the ability-to-repay 
requirement, whereas QMs that are higher-priced covered transactions 
received a rebuttable presumption of compliance.\172\ Both non-higher 
priced and higher-priced QMs would be eligible as QRMs without 
distinction, and could be pooled together in the same securitization.
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    \169\ See section 129C(b)(1) of TILA, 15 U.S.C. 1639c(b)(1).
    \170\ Lenders that violate the ability-to-repay requirement may 
be liable for actual and statutory damages, plus court and attorney 
fees. Consumers can bring a claim for damages within three years 
against a creditor. Consumers can also raise a claim for these 
damages at any time in a foreclosure action taken by the creditor or 
an assignee. The damages are capped to limit the lender's liability. 
See sections 130(a), (e), and (k) of TILA, 15 U.S.C. 1640. However, 
the level of protection afforded differs depending on the loan's 
price. For a detailed discussion of the safe harbor and presumption 
of compliance, see 78 FR at 6510-6514.
    \171\ For the definition of higher-priced covered transaction, 
see 12 CFR 1026.43(b)(4) and accompanying commentary.
    \172\ For a detailed discussion of the safe harbor and 
presumption of compliance, see 78 FR at 6510-6514.
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    The temporary QM definition for loans eligible for purchase or 
guarantee by an Enterprise expires once the Enterprise exits 
conservatorship.\173\ In addition, the FHA, the U.S. Department of 
Veteran Affairs, the U.S. Department of Agriculture, and the Rural 
Housing Service each have authority under the Dodd-Frank Act to define 
QM for their own loans.\174\ The temporary QM definition for loans 
eligible to be insured or guaranteed by one of these federal agencies 
expires once the relevant federal agency issues its own QM rules.\175\
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    \173\ See 12 CFR 1026.43(e)(4)(iii).
    \174\ See section 129C(b)(3)(B)(ii) of TILA; 15 U.S.C. 1639c.
    \175\ See 12 CFR 1026.43(e)(4)(iii).
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    Finally, the CFPB provided several additional QM definitions to 
facilitate credit offered by certain small creditors. The agencies 
propose that a QRM would be a QM that meets any of these three special 
QM definitions.\176\ The Final QM Rule allows small creditors to 
originate loans as QMs with greater underwriting flexibility (e.g., no 
quantitative DTI threshold applies) than under the general QM 
definition.\177\ However, this third QM definition is available only to 
small creditors that meet certain asset and threshold criteria \178\ 
and hold the QM loans in portfolio for at least three years, with 
certain exceptions (e.g., transfer of a loan to another qualifying 
small creditor, supervisory sales, and merger and acquisitions).\179\ 
Accordingly, loans meeting this third ``small creditor'' QM definition 
would generally be ineligible as QRMs for three years following 
consummation because they could not be sold.
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    \176\ See 12 CFR 1026.43(e)(5), 12 CFR 1026.43(e)(6), and 12 CFR 
1026.43(f).
    \177\ See 12 CFR 1026.43(e)(5).
    \178\ An entity qualifies as a ``small creditor'' if it does not 
exceed $2 billion in total assets; originates 500 or fewer first-
lien covered transactions in the prior calendar year (including all 
affiliates); and holds the QMs in portfolio for at least three 
years, with certain exceptions. See 12 CFR 1026.43(e)(5)(i)(D), 
discussed in detail in 78 FR at 35480-88 (June 12, 2013).
    \179\ See 12 CFR 1026.43(e)(5)(ii).
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    The Final QM Rule also provides these eligible small creditors with 
a two-year transition period during which they can originate balloon 
loans that are generally held in portfolio, and meet certain criteria, 
as QMs.\180\ This two-year transition period expires January 10, 2016. 
Again, loans meeting this fourth QM definition would generally be 
ineligible as QRMs for three years following consummation. Last, the 
Final QM Rule allows eligible small creditors that operate 
predominantly in rural or underserved areas to originate balloon-
payment loans as QMs if they are generally held in portfolio, and meet 
certain other QM criteria.\181\ Loans meeting this third QM definition 
would also generally be ineligible for securitization for three years 
following consummation because they cannot be sold.
---------------------------------------------------------------------------

    \180\ See 12 CFR 1026.43(e)(6), discussed in detail at 78 FR at 
35488.
    \181\ See 12 CFR 1026.43(f).
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    For the reasons discussed above, the agencies are not proposing to 
incorporate either an LTV ratio requirement or standards related to a 
borrower's credit history into the definition of QRM.\182\ Furthermore, 
the agencies are not proposing any written appraisal requirement or 
assumability requirement as part of QRM. In response to comments, and 
as part of the simplification of the QRM exemption from the original 
proposal, the agencies are not proposing any servicing standards as 
part of QRM.
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    \182\ The agencies continue to believe that both LTV and 
borrower credit history are important aspects of prudent 
underwriting and safe and sound banking.
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Request for Comment
    The agencies invite comment on all aspects of the proposal to 
equate QRM with QM. In particular,
    90. Does the proposal reasonably balance the goals of helping 
ensure high quality underwriting and appropriate risk management, on 
the one hand, and the public interest in continuing access to credit by 
creditworthy borrowers, on the other?
    91. Will the proposal, if adopted, likely have a significant effect 
on the availability of credit? Please provide data supporting the 
proffered view.
    92(a). Is the proposed scope of the definition of QRM, which would 
include loans secured by subordinate liens, appropriate? 92(b). Why or 
why not? 92(c). To what extent do concerns

[[Page 57993]]

about the availability and cost of credit affect your answer?
    93(a). Should the definition of QRM be limited to loans that 
qualify for certain QM standards in the final QM Rule? 93(b). For 
example, should the agencies limit QRMs to those QMs that could qualify 
for a safe harbor under 12 CFR 1026.43(e)(1)? Provide justification for 
your answer.

D. Exemption for QRMs

    In order for a QRM to be exempted from the risk retention 
requirement, the proposal includes evaluation and certification 
conditions related to QRM status, consistent with statutory 
requirements. For a securitization transaction to qualify for the QRM 
exemption, each QRM collateralizing the ABS would be required to be 
currently performing (i.e., the borrower is not 30 days or more past 
due, in whole or in part, on the mortgage) at the closing of the 
securitization transaction. Also, the depositor for the securitization 
would be required to certify that it evaluated the effectiveness of its 
internal supervisory controls to ensure that all of the assets that 
collateralize the securities issued out of the transaction are QRMs, 
and that it has determined that its internal supervisory controls are 
effective. This evaluation would 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 would be required 
to provide, or cause to be provided, a copy of this certification to 
potential investors a reasonable period of time prior to the sale of 
the securities and, upon request, to the Commission and its appropriate 
Federal banking agency, if any.
Request for Comment
    94(a). Are the proposed certification requirements appropriate? 
94(b). Why or why not?

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

    The original proposal provided that, if after the closing of a QRM 
securitization transaction, it was discovered that a mortgage did not 
meet all of the criteria to be a QRM due to inadvertent error, the 
sponsor would have to repurchase the mortgage. The agencies received a 
few comments regarding this requirement. Some commenters were 
supportive of the proposed requirement, while other commenters 
suggested that the agencies allow substitution of mortgages failing to 
meet the QRM definition.
    The agencies are again proposing a buyback requirement for 
mortgages that are determined to not meet the QRM definition by 
inadvertent error after the closing of the securitization transaction, 
provided that the conditions set forth in section 12 of the proposed 
rules are met.\183\ These conditions are intended to provide a sponsor 
with the opportunity to correct inadvertent errors by promptly 
repurchasing any non-qualifying mortgage loans from the pool. In 
addition, this proposed requirement would help ensure that sponsors 
have a strong economic incentive to ensure that all mortgages backing a 
QRM securitization satisfy all of the conditions applicable to QRMs 
prior to closing of the transactions. Subsequent performance of the 
loan, absent any failure to meet the QRM requirements at the closing of 
the securitization transaction, however, would not trigger the proposed 
buyback requirement.
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    \183\ Sponsors may choose to repurchase a loan from securitized 
pools even if there is no determination that the loan is not a QRM. 
The agencies would not view such repurchases as determinative of 
whether or not a loan meets the QRM standard.
---------------------------------------------------------------------------

Request for Comment
    95(a). What difficulties may occur with the proposed repurchase 
requirement under the QRM exemption? 95(b). Are there alternative 
approaches that would be more effective? 95(c). Provide details and 
supporting justification.

E. Request for Comment on Alternative QRM Approach

    Although the agencies believe that the proposed approach of 
aligning QRM with QM is soundly based, from both a policy and a legal 
standpoint, the agencies are seeking public input on its merits. The 
agencies are also seeking input on an alternative approach, described 
below, that was considered by the agencies, but ultimately not selected 
as the preferred approach. The alternative approach would take the QM 
criteria as a starting point for the QRM definition, and then 
incorporate additional standards that were selected to reduce the risk 
of default. Under this approach, significantly fewer loans likely would 
qualify as a QRM and, therefore, be exempt from risk retention.
1. Description of Alternative Approach
    The alternative approach, referred to as ``QM-plus'' would begin 
with the core QM criteria adopted by the CFPB, and then add four 
additional factors. Under this ``QM-plus'' approach:
     Core QM criteria. A QRM would be required to meet the 
CFPB's core criteria for QM, including the requirements for product 
type,\184\ loan term,\185\ points and fees,\186\ underwriting,\187\ 
income and debt verification,\188\ and DTI.\189\ For loans meeting 
these requirements, the QM-plus approach would draw no distinction 
between those mortgages that fall within the CFPB's ``safe harbor'' 
versus those that fall within the CFPB's ``presumption of compliance 
for higher-priced'' mortgages.\190\ Under QM-plus, either type of 
mortgage that meets the CFPB's core criteria for QM would pass this 
element of the QM-plus test. Loans that are QM because they meet the 
CFPB's provisions for GSE-eligible covered transactions, small creditor 
exceptions, or balloon loan provisions would, however, not be 
considered QRMs under the QM-plus approach.
---------------------------------------------------------------------------

    \184\ 12 CFR 1026.43(e)(2)(i).
    \185\ 12 CFR 1026.43(e)(2)(ii).
    \186\ 12 CFR 1026.43(e)(2)(iii); 12 CFR 1026.43(e)(3).
    \187\ 12 CFR 1026.43(e)(2)(iv).
    \188\ 12 CFR 1026.43(e)(2)(v).
    \189\ 12 CFR 1026.43(e)(2)(vi).
    \190\ Cf. 12 CFR 1026.43(e)(1)(i) with 12 CFR 1026.43(e)(1)(ii).
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     One-to-four family principal dwelling. In addition, QRM 
treatment would only be available for loans secured by one-to-four 
family real properties that constitute the principal dwelling of the 
borrower.\191\ Other types of loans eligible for QM status, such as 
loans secured by a boat used as a residence, or loans secured by a 
consumer's vacation home, would not be eligible under the QM-plus 
approach.
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    \191\ The scope of properties that fall within the meaning of 
``one-to-four family property'' and ``principal dwelling'' would be 
consistent with the definitions used in the agencies' original QRM 
proposal in Sec.  --.15(a), including consistent application of the 
meaning of the term ``principal dwelling'' as it is used in TILA 
(see 12 CFR 1026.2(a)(24) and Official Staff Interpretations to the 
Bureau's Regulation Z, comment 2(a)(24)-3).
---------------------------------------------------------------------------

     Lien requirements. All QRMs would be required to be first-
lien mortgages. For purchase QRMs, the QM-plus approach excludes so-
called ``piggyback'' loans; no other recorded or perfected liens on the 
property could exist at closing to the knowledge of the originator. For 
refinance QRMs, junior liens would not be prohibited, but would be 
included in the LTV calculations described below.\192\
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    \192\ These requirements are similar to those in the agencies' 
original QRM proposal in Sec.  --.15. See Sec.  --.15(a) 
(definitions of ``combined loan to value ratio'' and ``loan to value 
ratio'') and Sec.  --.15(d)(2) (subordinate liens).
---------------------------------------------------------------------------

     Credit history. To be eligible for QRM status, the 
originator would be required to determine the borrower was not 
currently 30 or more days past due on any debt obligation, and the 
borrower had not been 60 or more days

[[Page 57994]]

past due on any debt obligations within the preceding 24 months. 
Further, the borrower must not have, within the preceding 36 months, 
been a debtor in a bankruptcy proceeding or been subject to a judgment 
for collection of an unpaid debt; had personal property repossessed; 
had any one-to-four family property foreclosed upon; or engaged in a 
short sale or deed in lieu of foreclosure.\193\
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    \193\ These credit history criteria would be the same as the one 
used in the agencies' original QRM proposal in Sec.  --.15(d)(5), 
including the safe harbor allowing the originator to make the 
required determination by reference to two credit reports.
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     Loan to value ratio. To be eligible for QRM status, the 
LTV at closing could not exceed 70 percent. Junior liens, which would 
only be permitted for non-purchase QRMs as noted above, must be 
included in the LTV calculation if known to the originator at the time 
of closing, and if the lien secures a HELOC or similar credit plan, 
must be included as if fully drawn.\194\ Property value would be 
determined by an appraisal, but for purchase QRMs, if the contract 
price at closing for the property was lower than the appraised value, 
the contract price would be used as the value.\195\
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    \194\ These requirements would be consistent with the approach 
used in the agencies' original QRM proposal in Sec. Sec.  --.15(a) 
and ----.15(d)(9), except the same LTV would be used for purchases, 
refinancings, and cash-out refinancings. As the agencies discussed 
in the original proposal, there is data to suggest that refinance 
loans are more sensitive to LTV level. See Original Proposal at 
section IV.B.4. This single LTV approach in the QM-plus is 
equivalent to the most conservative LTV level (for cash-out 
refinancings) included in the original proposal.
    \195\ As in the agencies' original proposal, the appraisal would 
be required to be a written estimate of the property's market value, 
and be 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 promulgated by the Appraisal Standards Board of 
the Appraisal Foundation, the appraisal requirements of the Federal 
banking agencies, and applicable laws.
---------------------------------------------------------------------------

    As discussed elsewhere in this Supplementary Information, the 
agencies' analysis of mortgage market data led the agencies to conclude 
that an approach that aligns QRM with QM covers most of the present 
mortgage market, and a significant portion of the historical market, 
putting aside non-traditional mortgages related primarily to subprime 
lending and lending with little documentation. This QM-plus approach 
would cover a significantly smaller portion of the mortgage market. 
Securitizers would be required to retain risk for QMs that do not meet 
the four factors above.
Request for Comment
    96(a). As documented in the initial proposal, academic research and 
the agencies' own analyses show that credit history and loan-to-value 
ratio are key determinants of mortgage default, along with the product 
type factors that are included in the QM definition.\196\ If QRM 
criteria do not address credit history and loan-to-value, would 
securitizers packaging QRM-eligible mortgages into RMBS have any 
financial incentive to be concerned with these factors in selecting 
mortgages for inclusion in the RMBS pool? 96(b). Is the incentive that 
would be provided by risk retention unnecessary in light of the 
securitizer incentives and investor disclosures under an approach that 
aligns QRM with QM as described in the previous section of this 
Supplementary Information?
---------------------------------------------------------------------------

    \196\ Original Proposal, section IV.B.2; section IV.B.3; section 
IV.B. 4; section IV.B.5; Appendix A to the SUPPLEMENTARY 
INFORMATION.
---------------------------------------------------------------------------

    97(a). Does the QM-plus approach have benefits that exceed the 
benefits of the approach discussed above that aligns QRM with QM? For 
example, would the QM-plus approach favorably alter the balance of 
incentives for extending credit that may not be met by the QM 
definition approach or the QRM approach previously proposed? 97(b). 
Would the QM-plus approach have benefits for financial stability?
    98. Would the QM-plus approach have greater costs, for example in 
decreased access to mortgage credit, higher priced credit, or increased 
regulatory burden?
    99. Other than the different incentives described above, what other 
benefits might be obtained under the QM-plus approach?
2. Mortgage Availability and Cost
    As discussed above, the overwhelming majority of commenters, 
including securitization sponsors, housing industry groups, mortgage 
bankers, lenders, consumer groups, and legislators opposed the 
agencies' original QRM proposal, recommending instead that almost all 
mortgages without features such as negative amortization, balloon 
payments, or teaser rates should qualify for an exemption from risk 
retention.\197\ The basis for these commenters' objections was a 
unified concern that the proposal would result in a decrease in the 
availability of non-QRM mortgages and an increase in their cost. The 
other strong element of concern was that the original proposal's 20 
percent purchase down payment requirement may have become a de facto 
market-wide standard, with harsh consequences for borrowers in economic 
circumstances that make it extremely difficult to save such sums.
---------------------------------------------------------------------------

    \197\ Some commenters expressed support for additional factors, 
such as less stringent LTV restrictions, reliance on private 
mortgage insurance for loans with LTVs in excess of such 
restrictions, and different approaches to the agencies' proposed 
credit quality restrictions.
---------------------------------------------------------------------------

    In developing QRM criteria under section 15G, the agencies have 
balanced the benefits, including the public interest, with the cost and 
the other considerations. To the extent risk retention would impose any 
direct restriction on credit availability and price, the agencies 
proposed an approach that aligns QRM with QM, which directly reflects 
this concern.
    There may be concerns, however, that the effect of aligning QRM 
with QM could ultimately decrease credit availability as lenders, and 
consequently securitizers, would be very reluctant to transact in non-
QM loans. Since the QM criteria have been issued (and even before), 
many lenders have indicated they would not make any non-QM mortgages, 
expressing concern that they are uncertain of their potential liability 
under the TILA ability-to-repay requirements.
Request for Comment
    100(a). Would setting the QRM criteria to be the same as QM 
criteria give originators additional reasons to have reservations about 
lending outside the QM criteria? 100(b). Would the QM-plus approach, 
which confers a distinction on a much smaller share of the market than 
the approach that aligns QRM with QM, have a different effect?
    Numerous commenters on the original QRM proposal asserted that 
lenders may charge significantly higher interest rates on non-QRM 
loans, with estimates ranging from 75 to 300 basis points. A limited 
number of these commenters described or referred to an underlying 
analysis of this cost estimate. The agencies take note that a 
significant portion of the costs were typically ascribed to provisions 
of the risk retention requirements that the agencies have eliminated 
from the proposal. As discussed in the previous section of this 
Supplementary Information, the agencies are considering the factors 
that will drive the incremental cost of risk retention. If the non-QRM 
market is small relative to the QRM market, investors might demand a 
liquidity premium for holding securities collateralized by non-QRMs. 
Investors might also demand a risk premium for holding these securities 
if non-QRMs are perceived to be lower-quality mortgages. If the scope 
of the non-QRM

[[Page 57995]]

market is sufficiently broad to avoid these types of premiums, the 
factors impacting cost will be the amount of additional risk retention 
that would be required under the rule, above current market practice, 
and the cost to the securitizer of funding and carrying that additional 
risk retention asset, reduced by the expected yield on that asset. 
There are a significant number of financial institutions that possess 
securitization expertise and infrastructure, and that also have 
management expertise in carrying the same type of ABS interests they 
would be required to retain under the rule; in fact, they have long 
carried large volumes of them as part of their business model. They 
also compete for securitization business and compete on mortgage 
pricing.
Request for Comment
    101. In light of these factors, the agencies seek comment on 
whether the QM-plus approach would encourage a broader non-QRM market 
and thus mitigate concerns about the types of costs associated with a 
narrow QRM approach described above. Considering the number of 
institutions in the market with securitization capacity and expertise 
that already hold RMBS interests presenting the same types of risks as 
the RMBS interests the proposed rule now establishes as permissible 
forms of risk retention, would the requirement to retain risk in a 
greater number of securitizations under the QM-plus approach act as a 
restraint on the amount and cost of mortgage credit available in the 
market?
3. Private Securitization Activity
    In structuring the risk retention rules, the agencies have sought 
to minimize impediments to private securitization activity as a source 
of market liquidity for lending activity, and this principle has not 
been overlooked in the RMBS asset class. To the extent risk retention 
would impose any impediment to private securitization activity, the 
agencies proposed an approach that aligns QRM with QM to address that 
concern.
    In response to the agencies' original QRM proposal, comments from 
RMBS investors generally supported the kinds of loan-to-value, credit 
history, and debt-to-income factors the agencies proposed.\198\ While 
there were some investors who expressed concern as to the exact 
calibration of the QRM requirements, on balance, these commenters 
expressed support for an approach that made risk retention the rule, 
not the exception.
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    \198\ For example, one such investor stated that the proposed 
QRM criteria were appropriate to maintain the proper balance between 
incentives for securitizers and mortgage credit availability. SIFMA 
Asset Management. Another expressed concern that broadening the QRM 
definition will give securitizers less ``skin in the game'' and 
increase investors' risk exposure, which is contrary to investors' 
long-term interests. Vanguard.
---------------------------------------------------------------------------

    Additionally, commenters recommended that the agencies examine data 
from the private securitization market in addition to the GSE data that 
was considered in the original proposal.
    The agencies conducted two such analyses.\199\ The first analysis 
was based on all securitized subprime and Alt-A loans originated from 
2005 to 2008.\200\ That analysis indicated that of such mortgages that 
did not meet the QM criteria, 52 percent experienced a serious 
delinquency by the end of 2012, where serious delinquency is defined as 
90 or more days delinquent or in foreclosure. In contrast, 42 percent 
of such mortgages that met the QM criteria experienced a serious 
delinquency by the end of 2012.\201\ If the set of QM-eligible 
mortgages were limited to those with a loan-to-value ratio of 70 
percent or less, the serious delinquency rate falls to 27 percent. As 
discussed earlier in this Supplementary Information, these 
extraordinarily high delinquency rates reflect the sharp drop in house 
prices and surge in unemployment that occurred after the loans were 
originated, as well as lax underwriting practices. In addition, Alt-A 
and subprime loans are not reflective of the overall market and had 
many features that would exclude them from the QM definition, but data 
regarding these features were not always captured in the data sets.
---------------------------------------------------------------------------

    \199\ The two analyses are not perfectly comparable. The first 
analysis included some loans with less than full documentation and 
the second analysis excluded no documentation loans. The second 
analysis used data with cumulative loan-to-value data while the 
first did not, and the second analysis used a credit overlay while 
the first did not.
    \200\ These data are a subset of the same data referenced in 
Part VI.B.1 of this Supplementary Information.
    \201\ These data do not include information on points and fees 
or full information on whether the loan met the QM documentation 
requirements. If these factors were taken into account, the 
delinquency rate on QM-eligible loans might be lower.
---------------------------------------------------------------------------

    The second analysis was based on all types of privately securitized 
loans originated from 1997 to 2009.\202\ Although these data cover a 
broader range of loan types and years than the first analysis, subprime 
and Alt-A loans originated towards the end of the housing boom 
represent the bulk of all issuance during this period. That analysis 
indicated that 48 percent of mortgages that did not meet the QM 
criteria experienced a serious delinquency by the end of 2012, compared 
with 34 percent of mortgages that met the QM criteria. Limiting the set 
of QM-eligible mortgages to those with a loan-to-value ratio of 70 
percent or less and a minimum FICO score of 690 resulted in a 12 
percent serious delinquency rate, and when that set was further limited 
to a combined loan-to-value ratio of 70 percent or less, it resulted in 
a 6.4 percent serious delinquency rate.
---------------------------------------------------------------------------

    \202\ See Part VIII.C.7.c, infra (Commission's Economic 
Analysis).
---------------------------------------------------------------------------

    The agencies also analyzed GSE data to compare delinquency rates of 
loans that would have met QM criteria with those of loans that would 
have met criteria approximating the QM-plus criteria--those with loan-
to-value ratios of 70 percent or less, minimum FICO scores of 690, and 
debt-to-income ratios of no more than 43 percent. Those meeting the 
tighter criteria and originated in 2001-2004 had ever 90-day 
delinquency rates of 1.1 percent, compared with 3.9 percent for all QM 
loans. For loans originated in 2005-2008, the rates were 3.8 percent 
and 13.9 percent, respectively.
Request for Comment
    102. How would the QM-plus approach influence investors' decisions 
about whether or not to invest in private RMBS transactions?
    Another factor in investor willingness to invest in private label 
RMBS, as well as the willingness of originators to sell mortgages to 
private securitizers, concerns the presence of the Enterprises in the 
market, operating as they are under the conservatorship of the FHFA and 
with capital support by the U.S. Treasury.\203\ Currently, the vast 
majority of residential mortgage securitization activity is performed 
by the Enterprises, who retain 100 percent of the risk of the mortgages 
they securitize.\204\
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    \203\ Groups representing securitizers and mortgage originators 
have recently expressed the view that restarting the private 
securitization market for conforming mortgages is dependent upon 
sweeping reform to the current role of the Enterprises. See, e.g., 
American Securitization Forum, White Paper: Policy Proposals to 
Increase Private Capital in the U.S. Housing Finance System (April 
23, 2013); Mortgage Bankers Association, Key Steps on the Road to 
GSE Reform (August 8, 2013).
    \204\ Ginnie Mae plays the next largest role.
---------------------------------------------------------------------------

Request for Comment
    103. How would the QM-plus approach affect or not affect investor 
appetite for investing in private label RMBS as opposed to 
securitizations guaranteed by the Enterprises?
    The agencies note that the proposed requirements for risk retention 
have

[[Page 57996]]

been significantly revised in response to commenter concerns about the 
original proposal. With respect to the costs of risk retention for 
sponsors and the possible effect that a QM-plus approach could have on 
their willingness to participate in the securitization market, the 
agencies request comment on whether risk retention could be unduly 
burdensome for sponsors or whether it would provide meaningful 
alignment of incentives between sponsors and investors.
Request for Comment
    104. Since more RMBS transactions would be subject to risk 
retention under the QM-plus approach, how would the proposed forms of 
risk retention affect sponsors' willingness to participate in the 
market?
4. Request for Comment About the Terms of the QM-Plus Approach
    In addition, to the questions posed above, the agencies request 
public comment on a few specific aspects of the QM-plus approach, as 
follows.
a. Core QM Criteria
    The QM-plus approach would only include mortgages that fall within 
the QM safe harbor or presumption of compliance under the core QM 
requirements. If a mortgage achieved QM status only by relying on the 
CFPB's provisions for GSE-eligible covered transactions, small 
creditors, or balloon loans, it would not be eligible for QRM 
status.\205\
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    \205\ Specifically, the QRM would need to be eligible for the 
safe harbor or presumption of compliance for a ``qualified 
mortgage,'' as defined in regulations codified at 12 CFR 1026.43(e) 
and the associated Official Interpretations published in Supplement 
I to Part 1026, without regard to the special rules at 12 CFR 
1026.43(e)(4)-(6) or 12 CFR 1026.43(f).
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Request for Comment
    105. The agencies request comment whether the QM-plus approach 
should also include mortgages that fall within QM status only in 
reliance on the CFPB's provisions for GSE-eligible covered 
transactions, small creditors, or balloon loans. For all but the GSE-
eligible covered transactions, the CFPB's rules make the mortgages 
ineligible for QM status if the originator sells them into the 
secondary market within three years of origination. For GSE-eligible 
loans, it appears sale to the GSEs may remain the best execution 
alternative for small originators (although the agencies are seeking 
comment on this point). The agencies request commenters advocating 
inclusion of these non-core QMs under the QM-plus approach to address 
specifically how inclusion would improve market liquidity for such 
loans.
b. Piggyback Loans
    For purchase QRMs, the QM-plus approach excludes so-called 
``piggyback'' loans; no other recorded or perfected liens on the 
property could exist at closing of the purchase mortgage, to the 
knowledge of the originator at closing. The CFPB's QM requirements do 
not prohibit piggyback loans, but the creditor's evaluation of the 
borrower's ability to repay must include consideration of the 
obligation on the junior lien (similar to the treatment the QM-plus 
approach incorporates for junior liens on refinancing transactions). As 
the agencies discussed in the original proposal, the economic 
literature concludes that, controlling for other factors, including 
combined LTV ratios, the use of junior liens at origination of purchase 
mortgages to reduce down payments significantly increases the risk of 
default.\206\
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    \206\ See Original Proposal at note 132 and accompanying text.
---------------------------------------------------------------------------

Request for Comment
    106. The agencies request comment whether, notwithstanding the 
agencies' concern about this additional risk of default, the agencies 
should remove the outright prohibition on piggyback loans from the QM-
plus approach.
    107(a). Commenters, including one group representing RMBS 
investors, expressed concern that excluding loans to a borrower that is 
30 days past due on any obligation at the time of closing from the 
definition of QRM would be too conservative.\207\ The QM-plus approach 
is based on the view that these 30-day credit derogatories are 
typically errors, or oversights by borrowers, that are identified to 
borrowers and eliminated during the underwriting process. Thus a 30-day 
derogatory that cannot be resolved before closing is an indication of a 
borrower who, as he or she approaches closing, is not meeting his or 
her obligations in a timely way. The agencies request comments from 
originators as to this premise. 107(b). The agencies also request 
comment on whether the QM-plus approach should permit a borrower to 
have a single 60-day plus past-due at the time of closing, but not two. 
107(c). The agencies further request comment on whether this approach 
should be included if the borrower's single 60-day past-due is on a 
mortgage obligation.
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    \207\ ASF Investors.
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    In connection with the agencies' discussion elsewhere in this 
Supplementary Information notice of underwriting criteria for 
commercial loans, commercial mortgages, and auto loans, the agencies 
have requested comment about permitting blended pools of qualifying and 
non-qualifying assets, with proportional reductions in risk 
retention.\208\ Commenters are referred to an invitation to comment on 
blended pools with respect to residential mortgage securitizations that 
appears at the end of that discussion.
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    \208\ See Part V.D of this SUPPLEMENTARY INFORMATION.
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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 the agencies 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 the agencies 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.\209\ 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 $500

[[Page 57997]]

million) and publishes its certification and a short, explanatory 
statement in the Federal Register together with the rule.
---------------------------------------------------------------------------

    \209\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    As discussed in the SUPPLEMENTARY INFORMATION above, section 941 of 
the Dodd-Frank Act \210\ 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 a 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.
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    \210\ Codified at section 15G of the Exchange Act, 17 U.S.C. 
78o-11.
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    Section 15G provides a total exemption from the risk retention 
requirements for securitizers of certain securitization transactions, 
such as an ABS issuance collateralized exclusively by QRMs, and further 
authorizes the agencies to establish a lower risk retention requirement 
for securitizers of ABS issuances collateralized by other asset types, 
such as commercial, commercial real estate (CRE), and automobile loans, 
which satisfy underwriting standards established by the Federal banking 
agencies.
    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. 
Under the proposed rule a sponsor may offset the risk retention 
requirement by the amount of any eligible vertical risk retention 
interest or eligible horizontal residual interest acquired by an 
originator of one or more securitized assets if certain requirements 
are satisfied, including, the originator must originate at least 20 
percent of the securitized assets, 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 
December 31, 2012 Call Report data to evaluate the origination and 
securitization activity of small banking organizations that potentially 
could retain credit risk directly through their own securitization 
activity or indirectly under allocation provisions of the 
proposal.\211\
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    \211\ 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.
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    As of December 31, 2012, there were approximately 1,291 small 
national banks and Federal savings associations that would be subject 
to this rule. The Call Report data indicates that approximately 140 
small national banks and Federal savings associations, originate loans 
to securitize themselves or sell to other entities for securitization, 
predominately through ABS issuances collateralized by one-to-four 
family residential mortgages. This number reflects conservative 
assumptions, as few small entities sponsor securitizations, and few 
originate a sufficient number of loans for securitization to meet the 
minimum 20 percent share for the allocation to originator provisions 
under the proposed rule. As the OCC regulates approximately 1,291 small 
entities, and 140 of those entities could be subject to this proposed 
rule, the proposed rule could impact a substantial number of small 
national banks and Federal savings associations.
    The vast majority of securitization activity by small entities is 
in the residential mortgage sector. 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. For those loans 
not sold to the Enterprises, most would likely meet the QRM exemption. 
The QM rule, on which the QRM proposal is based, also includes 
exceptions for small creditors, which may be utilized by many of these 
small entities to meet the requirements and thus not need to hold risk 
retention on those assets. For these reasons, the OCC believes the 
proposed rule would not have a substantial economic effect on small 
entities.
    Therefore, the OCC concludes that the proposed rule would not have 
a significant impact on a substantial number of small entities. 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 Federal savings associations 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.\212\ Under regulations promulgated by the Small 
Business Administration, a small entity includes a commercial bank or 
bank holding company with assets of $500 million or less (each, a small 
banking organization).\213\ 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.
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    \212\ See 5 U.S.C. 601 et seq.
    \213\ 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

[[Page 57998]]

securitization transaction is generally responsible for complying with 
the risk retention requirements established under section 15G. The 
Board is unaware of any small banking organization under the 
supervision of the Board that has acted as a sponsor of a 
securitization transaction \214\ (based on December 31, 2012 
data).\215\ As of December 31, 2012, there were approximately 5,135 
small banking organizations supervised by the Board, which includes 
4,092 bank holding companies, 297 savings and loan holding companies, 
632 state member banks, 22 Edge and agreement corporations and 92 U.S. 
offices of foreign banking organizations.
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    \214\ For purposes of the proposed rules, this would include a 
small bank holding company; savings and loan holding company; state 
member bank; Edge corporation; agreement corporation; foreign 
banking organization; and any subsidiary of the foregoing.
    \215\ 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.
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    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 eligible vertical risk retention 
interest or eligible horizontal residual interest acquired by an 
originator of one or more securitized assets if certain requirements 
are satisfied, including, the originator must originate at least 20 
percent of the securitized assets, as measured by the aggregate unpaid 
principal balance of the asset pool.\216\ 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.
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    \216\ With respect to an open market CLO transaction, the risk 
retention retained by the originator must be at least 20 percent of 
the aggregate principal balance at origination of a CLO-eligible 
loan tranche.
---------------------------------------------------------------------------

    The December 31, 2012 regulatory report data \217\ indicates that 
approximately 723 small banking organizations, 87 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.\218\ 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 
December 31, 2012, only one small banking organization supervised by 
the Board reported an outstanding principal balance of assets sold and 
securitized of $100 million or more.\219\
---------------------------------------------------------------------------

    \217\ 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) the outstanding principal 
balance of assets sold and securitized by the reporting entity with 
servicing retained or with recourse or other seller-provided credit 
enhancements, and (2) assets sold with recourse or other seller-
provided credit enhancements and not securitized by the reporting 
bank.
    \218\ 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.
    \219\ 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.\220\ 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 $500 million) and publishes its certification and 
a short, explanatory statement in the Federal Register together with 
the rule.
---------------------------------------------------------------------------

    \220\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    As of March 31, 2013, there were approximately 3,711 small FDIC-
supervised institutions, which include 3,398 state nonmember banks and 
313 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 \221\ 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 a 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.
---------------------------------------------------------------------------

    \221\ 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 QRMs, and further 
authorizes the agencies to establish a lower risk retention requirement 
for securitizers of ABS issuances collateralized by other asset types, 
such as commercial, commercial real estate (CRE), and automobile loans, 
which satisfy underwriting standards established by the Federal banking 
agencies.
    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

[[Page 57999]]

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 40 small banking organizations 
that currently sponsor securitizations (two of which are national 
banks, seven are state member banks, 23 are state nonmember banks, and 
eight are savings associations, based on March 31, 2013 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 eligible vertical risk retention 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.\222\ 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 March 31, 2013 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.\223\
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    \222\ With respect to an open market CLO transaction, the risk 
retention retained by the originator must be at least 20 percent of 
the aggregate principal balance at origination of a CLO-eligible 
loan tranche.
    \223\ 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) the outstanding principal 
balance of assets sold and securitized by the reporting entity with 
servicing retained or with recourse or other seller-provided credit 
enhancements, and (2) assets sold with recourse or other seller-
provided credit enhancements and not securitized by the reporting 
bank.
---------------------------------------------------------------------------

    The Call Report data indicates that approximately 703 small banking 
organizations, 456 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.\224\ 
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 March 31, 2013, only 
two small banking organizations reported an outstanding principal 
balance of assets sold and securitized of $100 million or more.\225\
---------------------------------------------------------------------------

    \224\ 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.
    \225\ 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.
    Commission: 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 
asset-backed securities (ABS) to retain not less than 5 percent of the 
credit risk of the assets collateralizing the ABS.\226\ 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.\227\ 
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.
---------------------------------------------------------------------------

    \226\ See 17 U.S.C. 78o-11.
    \227\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    A few commenters on the original proposal indicated that the 
proposed risk retention requirements could indirectly affect the 
availability of credit to small businesses and lead to contractions in 
the secondary mortgage market, with a corresponding reduction in 
mortgage originations. The Regulatory Flexibility Act only requires an 
agency to consider regulatory alternatives for those small entities 
subject to the proposed rules. The Commission has considered the 
broader economic impact of the proposed rules, including their 
potential effect on efficiency, competition and capital formation, in 
the Commission's Economic Analysis below.
    The Commission encourages written comments regarding this 
certification. The Commission requests, in particular, that commenters 
describe the nature of any direct impact on small entities and provide 
empirical data to support the extent of the impact.
    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

[[Page 58000]]

have been submitted by the FDIC, OCC, and the Commission to OMB for 
approval under section 3507(d) of the PRA and section 1320.11 of OMB's 
implementing regulations (5 CFR part 1320). The Board reviewed the 
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, by facsimile to 202-
395-6974, or by email to: [email protected]. Attention, 
Commission and Federal Banking Agency Desk Officer.
2. Proposed Information Collection
    Title of Information Collection: Credit Risk Retention.
    Frequency of response: Event generated; annual, monthly.
    Affected Public: \228\
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    \228\ 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.
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    FDIC: Insured state non-member banks, insured state branches of 
foreign banks, state savings associations, and certain subsidiaries of 
these entities.
    OCC: National banks, Federal savings associations, Federal branches 
or agencies of foreign banks, or any operating subsidiary thereof.
    Board: Insured state member banks, bank holding companies, savings 
and loan holding companies, Edge and agreement corporations, foreign 
banking organizations, nonbank financial companies supervised by the 
Board, and any subsidiary thereof.
    Commission: All entities other than those assigned to the FDIC, 
OCC, or Board.
    Abstract: The notice sets forth permissible forms of risk retention 
for securitizations that involve issuance of asset-backed securities. 
The proposed rule contains requirements subject to the PRA. The 
information requirements in the joint regulations proposed by the three 
Federal banking agencies and the Commission are found in sections --.4, 
-- .5, -- .6, --.7, --.8, --.9, --.10, --.11, --.13, --.15, --.16, 
--.17, and --.18. 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 for the 
recordkeeping requirements set forth in sections -- .4(e) and -- 
.5(g)(2), there would be no mandatory retention period for the proposed 
collections of information.
Section-by-Section Analysis
    Section --.4 sets forth the conditions that must be met by sponsors 
electing to use the standard risk retention option, which may consist 
of an eligible vertical interest or an eligible horizontal residual 
interest, or any combination thereof. Sections -- .4(d)(1) and 
--.4(d)(2) specify the disclosures required with respect to eligible 
horizontal residual interests and eligible vertical interests, 
respectively.
    A sponsor retaining any eligible horizontal residual interest (or 
funding a horizontal cash reserve account) is required to calculate the 
Closing Date Projected Cash Flow Rate and Closing Date Projected 
Principal Repayment Rate for each payment date, and certify to 
investors that it has performed such calculations and that the Closing 
Date Projected Cash Flow Rate on any payment date does not exceed the 
Closing Date Projected Principal Repayment Rate on such payment date 
(Sec.  --.4(b)(2)).
    Additionally, the sponsor is required to disclose: the fair value 
of the eligible horizontal residual interest retained by the sponsor 
and the fair value of the eligible horizontal residual interest 
required to be retained (Sec.  --.4(d)(1)(i)); the material terms of 
the eligible horizontal residual interest (Sec.  --.4(d)(1)(ii)); the 
methodology used to calculate the fair value of all classes of ABS 
interests (Sec.  --.4(d)(1)(iii)); the key inputs and assumptions used 
in measuring the total fair value of all classes of ABS interests, and 
the fair value of the eligible horizontal residual interest retained by 
the sponsor (Sec.  --.4(d)(1)(iv)); the reference data set or other 
historical information used to develop the key inputs and assumptions 
(Sec.  --.4(d)(1)(v)); the number of securitization transactions 
securitized by the sponsor during the previous five-year period in 
which the sponsor retained an eligible horizontal residual interest 
pursuant to this section, and the number (if any) of payment dates in 
each such securitization on which actual payments to the sponsor with 
respect to the eligible horizontal residual interest exceeded the cash 
flow projected to be paid to the sponsor on such payment date in 
determining the Closing Date Projected Cash Flow Rate (Sec.  
--.4(d)(1)(vi)); and the amount placed by the sponsor in the horizontal 
cash reserve account at closing, the fair value of the eligible 
horizontal residual interest that the sponsor is required to fund 
through such account, and a description of such account (Sec.  
--.4(d)(1)(vii)).
    For eligible vertical interests, the sponsor is required to 
disclose: whether the sponsor retains the eligible vertical interest as 
a single vertical security or as a separate proportional interest in 
each class of ABS interests in the issuing entity issued as part of the 
securitization transaction (Sec.  --.4(d)(2)(i)); for eligible vertical 
interests retained as a single vertical security, the fair value amount 
of the single vertical security retained at the closing of the 
securitization transaction and the fair value amount required to be 
retained, and the percentage of each class of ABS interests in the 
issuing entity underlying the single vertical security at the closing 
of the securitization transaction and the percentage of each class of 
ABS interests in the issuing entity that would have been required to be 
retained if the eligible vertical interest was held as a separate 
proportional interest (Sec.  --.4(d)(2)(ii)); for eligible vertical 
interests retained as a separate proportional interest in each class of 
ABS interests in the issuing entity, the percentage of each class of 
ABS interests in the issuing entity retained at the closing of the 
securitization transaction and the percentage of each class of ABS

[[Page 58001]]

interests required to be retained (Sec.  --.4(d)(2)(iii)); and 
information with respect to the measurement of the fair value of the 
ABS interests in the issuing entity (Sec.  --.4(d)(2)(iv)).
    Section --.4(e) requires a sponsor to retain the certifications and 
disclosures required in paragraphs (b) and (d) of this section in 
written form in its records and must provide the disclosure upon 
request to the Commission and its appropriate Federal banking agency, 
if any, until three years after all ABS interests are no longer 
outstanding.
    Section --.5 requires sponsors relying on the revolving master 
trust risk retention option to disclose: The value of the seller's 
interest retained by the sponsor, the fair value of any horizontal risk 
retention retained by the sponsor under Sec.  --.5(f), and the unpaid 
principal balance value or fair value, as applicable, the sponsor is 
required to retain (Sec.  --.5(g)(1)(i)); the material terms of the 
seller's interest and of any horizontal risk retention retained by the 
sponsor under Sec.  --.5(f) (Sec.  --.5(g)(1)(ii)); and if the sponsor 
retains any horizontal risk retention under Sec.  --.5(f), the same 
information as is required to be disclosed by sponsors retaining 
horizontal interests (Sec.  --.5(g)(1)(iii)). Additionally, a sponsor 
must retain the disclosures required in Sec.  --.5(g)(1) in written 
form in its records and must provide the disclosure upon request to the 
Commission and its appropriate Federal banking agency, if any, until 
three years after all ABS interests are no longer outstanding (Sec.  
--.5(g)(2)).
    Section --.6 addresses the requirements for sponsors utilizing the 
eligible ABCP conduit risk retention option. The requirements for the 
eligible ABCP conduit risk retention option include disclosure to each 
purchaser of ABCP and periodically to each holder of commercial paper 
issued by the ABCP conduit of the name and form of organization of the 
regulated liquidity provider that provides liquidity coverage to the 
eligible ABCP conduit, including a description of the form, amount, and 
nature of such liquidity coverage, and notice of any failure to fund; 
and with respect to each ABS interest held by the ABCP conduit, the 
asset class or brief description of the underlying receivables, the 
standard industrial category code for the originator-seller or 
majority-owned OS affiliate that retains an interest in the 
securitization transaction, and a description of the form, fair value, 
and nature of such interest (Sec.  --.6(d)). An ABCP conduit sponsor 
relying upon this section shall provide, upon request, to the 
Commission and its appropriate Federal banking agency, if any, the 
information required under Sec.  --.6(d), in addition to the name and 
form of organization of each originator-seller or majority-owned OS 
affiliate that retains an interest in the securitization transaction 
(Sec.  --.6(e)).
    A sponsor relying on the eligible ABCP conduit risk retention 
option shall maintain and adhere to policies and procedures to monitor 
compliance by each originator-seller or majority-owned OS affiliate 
(Sec.  --.6(f)(2)(i)). If the ABCP conduit sponsor determines that an 
originator-seller or majority-owned OS affiliate is no longer in 
compliance, the sponsor must promptly notify the holders of the ABCP, 
the Commission and its appropriate Federal banking agency, in writing 
of the name and form of organization of any originator-seller or 
majority-owned OS affiliate that fails to retain and the amount of 
asset-backed securities issued by an intermediate SPV of such 
originator-seller and held by the ABCP conduit, the name and form of 
organization of any originator-seller or majority-owned OS affiliate 
that hedges, directly or indirectly through an intermediate SPV, their 
risk retention in violation and the amount of asset-backed securities 
issued by an intermediate SPV of such originator-seller or majority-
owned OS affiliate and held by the ABCP conduit, and any remedial 
actions taken by the ABCP conduit sponsor or other party with respect 
to such asset-backed securities (Sec.  --.6(f)(2)(ii)).
    Section --.7 sets forth the requirements for sponsors relying on 
the commercial mortgage-backed securities risk retention option, and 
includes disclosures of: The name and form of organization of each 
third-party purchaser (Sec.  --.7(a)(7)(i)); each initial third-party 
purchaser's experience in investing in commercial mortgage-backed 
securities (Sec.  --.7(a)(7)(ii)); other material information (Sec.  
--.7(a)(7)(iii)); the fair value of the eligible horizontal residual 
interest retained by each third-party purchaser, the purchase price 
paid, and the fair value of the eligible horizontal residual interest 
that the sponsor would have retained if the sponsor had relied on 
retaining an eligible horizontal residual interest under the standard 
risk retention option (Sec.  --.7(a)(7)(iv) and (v)); a description of 
the material terms of the eligible horizontal residual interest 
retained by each initial third-party purchaser, including the same 
information as is required to be disclosed by sponsors retaining 
horizontal interests pursuant to Sec.  --.4 (Sec.  --.7(a)(7)(vi)); the 
material terms of the applicable transaction documents with respect to 
the Operating Advisor (Sec.  --.7(a)(7)(vii); and representations and 
warranties concerning the securitized assets, a schedule of any 
securitized assets that are determined not to comply with such 
representations and warranties, and the factors used to determine such 
securitized assets should be included in the pool notwithstanding that 
they did not comply with the representations and warranties (Sec.  
--.7(a)(7)(viii)). A sponsor relying on the commercial mortgage-backed 
securities risk retention option shall provide in the underlying 
securitization transaction documents certain provisions related to the 
Operating Advisor (Sec.  --.7(a)(6)), maintain and adhere to policies 
and procedures to monitor compliance by third-party purchasers with 
regulatory requirements (Sec.  --.7(b)(2)(A)), and notify the holders 
of the ABS interests in the event of noncompliance by a third-party 
purchaser with such regulatory requirements (Sec.  --.7(b)(2)(B)).
    Section --.8 requires that a sponsor relying on the Federal 
National Mortgage Association and Federal Home Loan Mortgage 
Corporation ABS risk retention option must disclose a description of 
the manner in which it has met the credit risk retention requirements 
(Sec.  --.8(c)).
    Section --.9 sets forth the requirements for sponsors relying on 
the open market CLO risk retention option, and includes disclosures of 
a complete list of, and certain information related to, every asset 
held by an open market CLO (Sec.  --.9(d)(1)), and the full legal name 
and form of organization of the CLO manager (Sec.  --.9(d)(2).
    Section --.10 sets forth the requirements for sponsors relying on 
the qualified tender option bond risk retention option, and includes 
disclosures of the name and form of organization of the Qualified 
Tender Option Bond Entity, and a description of the form, fair value 
(expressed as a percentage of the fair value of all of the ABS 
interests issued in the securitization transaction and as a dollar 
amount), and nature of such interest in accordance with the disclosure 
obligations in section --.4(d) (Sec.  --.10(e)).
    Section --.11 sets forth the conditions that apply when the sponsor 
of a securitization allocates to originators of securitized assets a 
portion of the credit risk it is required to retain, including 
disclosure of the name and form of organization of any originator that 
acquires and retains an interest in the transaction, a description of 
the form, amount and nature of such interest, and the method of payment 
for such interest (Sec.  --.11(a)(2)). A sponsor relying on this 
section shall maintain and adhere to

[[Page 58002]]

policies and procedures that are reasonably designed to monitor 
originator compliance with retention amount and hedging, transferring 
and pledging requirements (Sec.  --.11(b)(2)(A)) and shall promptly 
notify the holders of the ABS interests in the transaction in the event 
of originator noncompliance with such regulatory requirements (Sec.  
--.11(b)(2)(B)).
    Section --.13 provides an exemption from the risk retention 
requirements for qualified residential mortgages that meet certain 
specified criteria, including that the depositor of the asset-backed 
security certify that it has evaluated the effectiveness of its 
internal supervisory controls and concluded that the controls are 
effective (Sec.  --.13(b)(4)(i)), and that the sponsor provide a copy 
of the certification to potential investors prior to sale of asset-
backed securities (Sec.  --.13(b)(4)(iii)). In addition, Sec.  
--.13(c)(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 provides exemptions from the risk retention 
requirements for qualifying commercial loans that meet the criteria 
specified in Section --.16, qualifying CRE loans that meet the criteria 
specified in Section --.17, and qualifying automobile loans that meet 
the criteria specified in Section --.18. Section --.15 also requires 
the sponsor to disclose a description of the manner in which the 
sponsor determined the aggregate risk retention requirement for the 
securitization transaction after including qualifying commercial loans, 
qualifying CRE loans, or qualifying automobile loans with 0 percent 
risk retention, and descriptions of the qualifying commercial loans, 
qualifying CRE loans, and qualifying automobile loans (``qualifying 
assets'') and descriptions of the assets that are not qualifying 
assets, and the material differences between the group of qualifying 
assets and the group of assets that are not qualifying assets with 
respect to the composition of each group's loan balances, loan terms, 
interest rates, borrower credit information, and characteristics of any 
loan collateral (Sec.  --.15(a)(4)).
    Sections --.16, --.17 and --.18 each require that: The depositor of 
the asset-backed security certify that it has evaluated the 
effectiveness of its internal supervisory controls and concluded that 
its internal supervisory controls are effective (Sec. Sec.  
--.16(b)(8)(i), --.17(b)(10)(i), and --.18(b)(8)(i)); the sponsor 
provide a copy of the certification to potential investors prior to the 
sale of asset-backed securities (Sec. Sec.  --.16(b)(8)(iii), 
--.17(b)(10)(iii), and --.18(b)(8)(iii)); and the sponsor promptly 
notify the holders of the securities of any loan included in the 
transaction that is required to be cured or repurchased by the sponsor, 
including the principal amount of such loan(s) and the cause for such 
cure or repurchase (Sec. Sec.  --.16(c)(3), --.17(c)(3), and 
--.18(c)(3)).

Estimated Paperwork Burden

    Estimated Burden per Response:

Sec.  --.4--Standard risk retention: Horizontal interests: 
Recordkeeping--0.5 hours, disclosures--3.0 hours, payment date 
disclosures--1.0 hour with a monthly frequency; vertical interests: 
Recordkeeping--0.5 hours, disclosures--2.5 hours; combined horizontal 
and vertical interests: Recordkeeping--0.5 hours, disclosures--4.0 
hours, payment date disclosures--1.0 hour with a monthly frequency.
Sec.  --.5--Revolving master trusts: Recordkeeping--0.5 hours; 
disclosures--4.0 hours.
Sec.  --.6--Eligible ABCP conduits: Recordkeeping--20.0 hours; 
disclosures--3.0 hours.
Sec.  --.7--Commercial mortgage-backed securities: Recordkeeping--30.0 
hours; disclosures--20.75 hours.
Sec.  --.8--Federal National Mortgage Association and Federal Home Loan 
Mortgage Corporation ABS: Disclosures--1.5 hours.
Sec.  --.9--Open market CLOs: Disclosures--20.25 hours.
Sec.  --.10--Qualified tender option bonds: Disclosures--4.0 hours.
Sec.  --.11--Allocation of risk retention to an originator: 
Recordkeeping 20.0 hours; disclosures 2.5 hours.
Sec.  --.13--Exemption for qualified residential mortgages: 
Recordkeeping--40.0 hours; disclosures 1.25 hours.
Sec.  --.15--Exemption for qualifying commercial loans, commercial real 
estate loans, and automobile loans: Disclosure--20.0 hours.
Sec.  --.16--Underwriting standards for qualifying commercial loans: 
Recordkeeping--40.0 hours; disclosures--1.25 hours.
Sec.  --.17- Underwriting standards for qualifying CRE loans: 
Recordkeeping--40.0 hours; disclosures--1.25 hours.
Sec.  --.18--Underwriting standards for qualifying automobile loans: 
Recordkeeping--40.0 hours; disclosures--1.25 hours.
FDIC
    Estimated Number of Respondents: 92 sponsors; 494 annual offerings 
per year.
    Total Estimated Annual Burden: 10,726 hours.
OCC
    Estimated Number of Respondents: 30 sponsors; 160 annual offerings 
per year.
    Total Estimated Annual Burden: 3,549 hours.
Board
    Estimated Number of Respondents: 20 sponsors; 107 annual offerings 
per year.
    Total Estimated Annual Burden: 2,361 hours.
Commission
    Estimated Number of Respondents: 107 sponsors; 574 annual offerings 
per year.
    Total Estimated Annual Burden: 12,355 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 249 unique sponsors conduct ABS offerings per year. This 
estimate was based on the average number of ABS offerings from 2004 
through 2012 reported by the ABS database AB Alert for all non-CMBS 
transactions and by Securities Data Corporation for all CMBS 
transactions. Of the 249 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, and then 
estimated how frequently the entities would make the required 
disclosure by estimating the proportionate amount of offerings per year 
for each agency. In making this determination, the estimate was based 
on the average number of ABS offerings from 2004 through 2012, and 
therefore, we estimate the total number of annual offerings per year to 
be 1,334.\229\ We also made the following additional estimates:
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    \229\ 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, offerings made under Securities Act 
Rule 144A, and traditional private placements. We also note that 
this estimate is for offerings that are not exempted under 
Sec. Sec.  --.19 and --.20 of the proposed rule.

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[[Page 58003]]

     12 offerings per year will be subject to disclosure and 
recordkeeping requirements under section Sec.  --.11, which are divided 
equally among the four agencies (i.e., 3 offerings per year per 
agency);
     100 offerings per year will be subject to disclosure and 
recordkeeping requirements under section Sec.  ----.13, which are 
divided proportionately among the agencies based on the entity 
percentages described above (i.e., 8 offerings per year subject to 
Sec.  --.13 for the Board; 12 offerings per year subject to Sec.  --.13 
for the OCC; 37 offerings per year subject to Sec.  --.13 for the FDIC; 
and 43 offerings per year subject to Sec.  --.13 for the Commission); 
and
     120 offerings per year will be subject to the disclosure 
requirements under Sec.  --.15, which are divided proportionately among 
the agencies based on the entity percentages described above (i.e., 10 
offerings per year subject to Sec.  --.15 for the Board, 14 offerings 
per year subject to Sec.  --.15 for the OCC; 44 offerings per year 
subject to Sec.  --.15 for the FDIC, and 52 offerings per year subject 
to Sec.  --.15 for the Commission. Of these 120 offerings per year, 40 
offerings per year will be subject to disclosure and recordkeeping 
requirements under Sec. Sec.  --.16, --.17, and --.18, respectively, 
which are divided proportionately among the agencies based on the 
entity percentages described above (i.e., 3 offerings per year subject 
to each section for the Board, 5 offerings per year subject to each 
section for the 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 subpart B of the proposed rule, the 
agencies multiplied the number of offerings estimated to be subject to 
the base risk retention requirements (i.e., 1,114) \230\ 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 1,114 offerings per year by 43 percent, which 
equals 479 offerings per year. This number was then divided by the 
number of base risk retention options under subpart B of the proposed 
rule (i.e., nine) \231\ 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 479 offerings per year by 
nine options, resulting in 53 offerings per year per base risk 
retention option.
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    \230\ Estimate of 1,334 offerings per year minus the estimate of 
the number of offerings qualifying for an exemption under Sec. Sec.  
--.13 and --.15 (220 total).
    \231\ For purposes of this calculation, the horizontal, 
vertical, and combined horizontal and vertical risk retention 
methods under the standard risk retention option are each counted as 
a separate option under subpart B of the proposed rule.
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    The total estimated annual burden for each agency was then 
calculated by multiplying the number of offerings per year per section 
for such agency by the number of burden hours estimated for the 
respective section, then adding these subtotals together. For example, 
under Sec.  --.10, the Commission multiplied the estimated number of 
offerings per year for Sec.  --.10 (i.e., 53 offerings per year) by the 
estimated annual frequency of the response for Sec.  --.10 of one 
response, and then by the disclosure burden hour estimate for Sec.  
--.10 of 4.0 hours. Thus, the estimated annual burden hours for 
respondents to which the Commission accounts for the burden hours under 
Sec.  --.10 is 212 hours (53 * 1 * 4.0 hours = 212 hours). 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.
    For disclosures made at the time of the securitization 
transaction,\232\ the Commission allocates 25 percent of these hours 
(1,070 hours) to internal burden for all sponsors. For the remaining 75 
percent of these hours, (3,211 hours), the Commission uses an estimate 
of $400 per hour for external costs for retaining outside professionals 
totaling $1,284,400. For disclosures made after the time of sale in a 
securitization transaction,\233\ the Commission allocated 75 percent of 
the total estimated burden hours (1,911 hours) to internal burden for 
all sponsors. For the remaining 25 percent of these hours (637 hours), 
the Commission uses an estimate of $400 per hour for external costs for 
retaining outside professionals totaling $254,800.
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    \232\ These are the disclosures required by Sec.  --.4(d)(1) and 
(2) (as applicable to horizontal interests, vertical interests, or 
any combination of horizontal and vertical interests); Sec. Sec.  
--.5(g)(1) through (3); --.6(d) and (e); --.7(a)(7)(i) through 
(viii); --.8(c); --.9(d); --10(e); --.11(a)(2); --.13(b)(4)(iii); 
--.15(a)(4); --.16(b)(8)(iii); --.17(b)(10)(iii); and 
--.18(b)(8)(iii).
    \233\ These are the disclosures required by Sec. Sec.  
--.4(b)(2); --.6(f)(2)(ii); --.7(b)(2)(B); --.9(d); --.11(b)(2)(B); 
--13(c)(3); --.16(c)(3); --17(c)(3); and --.18(c)(3).
---------------------------------------------------------------------------

    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 5 percent of the credit risk of any asset that the 
sponsor, through the issuance of an asset-backed security (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.\234\
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    \234\ 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 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.\235\ In addition, Section 15G states that the agencies must 
permit a sponsor to retain less than 5 percent of the credit risk of 
commercial mortgages, commercial loans, and automobile loans that are 
transferred, sold, or conveyed through the issuance of ABS by the 
sponsor if the loans meet underwriting standards established by the 
Federal banking agencies.\236\
---------------------------------------------------------------------------

    \235\ See id. at section 78o-11(c)(1)(C)(iii), (4)(A) and (B).
    \236\ See id. at section 78o-11(c)(1)(B)(ii) and (2).
---------------------------------------------------------------------------

    Section 15G requires the agencies to prescribe risk retention 
requirements for ``securitizers,'' which the agencies interpret as 
depositors or sponsors of ABS. The proposal would 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 is appropriate in light of the active and 
direct role that a sponsor typically has

[[Page 58004]]

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. Moreover, 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 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 QRM on the housing and housing finance 
markets.
    The Commission is sensitive to the economic impacts, including the 
costs and benefits, of its rules. The discussion below addresses the 
economic effects of the proposed rules, including the likely benefits 
and costs of the rules as well as their effects on efficiency, 
competition and capital formation. Some of the economic effects stem 
from the statutory mandate of Section 15G, whereas others are affected 
by the discretion the agencies have exercised in implementing this 
mandate. These two types of costs and benefits may not be entirely 
separable to the extent that the agencies' discretion is exercised to 
realize the benefits that they believe were intended by Section 15G.
    Section 23(a)(2) of the Exchange Act requires the Commission, when 
making rules under the Exchange Act, to consider the impact on 
competition that the rules would have, and prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.\237\ 
Further, Section 3(f) of the Exchange Act requires the Commission,\238\ 
when engaging in rulemaking where it is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition and capital 
formation.
---------------------------------------------------------------------------

    \237\ 15 U.S.C. 78w(a).
    \238\ 17 U.S.C. 78c(f).
---------------------------------------------------------------------------

2. Background
a. Historical Background
    Asset-backed securitizations, or the pooling of consumer and 
business loans into financial instruments that trade in the financial 
markets, play an important role in the creation of credit for the U.S. 
economy. Benefits of securitization may include reduced cost of credit 
for borrowers, expanded availability of credit, and increased secondary 
market liquidity for loans.\239\ The securitization process generally 
involves the participation of multiple parties, each of whom has 
varying amounts of information and differing economic incentives. For 
example, the entity establishing and enforcing underwriting standards 
and credit decisions (i.e., the originator) and the entity responsible 
for structuring the securitization (i.e., the securitizer) are not 
required to bear any credit risk. By contrast, the ultimate holders of 
the securitized assets (i.e., the investors) bear considerable credit 
risk and yet typically have minimal influence over underwriting 
standards and decisions and limited information about the 
characteristics of the borrower.
---------------------------------------------------------------------------

    \239\ See, e.g., Board of Governors of the Federal Reserve 
System, ``Report to the Congress on Risk Retention'', (October 2010) 
and Financial Stability Oversight Committee, ``Macroeconomic Effects 
of Risk Retention Requirements'', (January 2011).
---------------------------------------------------------------------------

    A considerable amount of literature has emerged that supports the 
view that, during the early to mid-2000s, residential mortgage-backed 
securitizations (RMBSs) contributed to a significant decline in 
underwriting standards for residential mortgage loans.\240\ Much of the 
initial securitization issuance focused primarily on mortgages, which 
had guarantees from the Government National Mortgage Association 
(Ginnie Mae) or the Government Sponsored Enterprises (Enterprises), 
which included the Federal National Mortgage Association, also known as 
Fannie Mae, and the Federal Home Loan Mortgage Corporation, also known 
as Freddie Mac. Based on the initial success of these pass through 
securitizations \241\ and investor demand and acceptance of these 
instruments, asset-backed securitizations subsequently expanded to 
include other asset classes (e.g., car loans, student loans, credit 
card receivables, corporate loans and commercial mortgages). Over the 
years, securitizers began creating increasingly complex structures, 
including credit tranching and resecuritizations. As a result, 
securitizations increased over time in a variety of asset classes, 
providing investors with relatively attractive risk-return investment 
choices.
---------------------------------------------------------------------------

    \240\ Keys, Mukherjee, Seru and Vig, ``Did Securitization Lead 
to Lax Screening? Evidence From Subprime Loans'' (February 2010) and 
Nadauld and Sherlund, ``The Impact of Securitization on the 
Expansion of Subprime Credit'', (2013).
    \241\ Pass through securitization is considered the simplest and 
least complex way to securitize an asset. In this structure, 
investors receive a direct participation in the cash flows from a 
pool of assets. Payments on the securities are made in essentially 
the same manner as payments on the underlying loans. Principal and 
interest are collected on the underlying assets and `passed through' 
to investors without any tranching or structuring or 
reprioritization of the cash flows.
---------------------------------------------------------------------------

    In the early 2000s, as securitizers sought additional assets to 
securitize, originators turned to a formerly lightly-tapped segment of 
the residential home market, known as the sub-prime market.\242\ This 
segment serves the mortgage needs of individuals that are less credit 
worthy, generally for reasons related to income, assets and/or 
employment. The securitization of subprime loans facilitated the 
extension of credit to this segment of the market, which allowed 
securitizers to generate more collateral for the securitization market 
and led to a significant increase in the availability of low credit 
quality mortgage loans for purposes of meeting the relatively high 
demand for securitized investment products. This high volume of lending 
contributed to higher residential property prices.\243\ A contributing 
factor to the increase in housing prices was the unrealistically high 
ratings provided by credit rating agencies on residential mortgage-
backed securities.\244\ Many investors may not have performed 
independent credit assessments, either due to a lack of transparency 
into the characteristics of the underlying assets or an undue reliance 
on credit rating agencies that provided third-party credit evaluations. 
This situation persisted until a high

[[Page 58005]]

number of defaults and an increase in interest rates led to subsequent 
declines in housing prices. The ``originate-to-distribute'' model was 
blamed by many for these events, as the originators and securitizers 
were compensated on the basis of volume rather than quality of 
underwriting. Because lenders often did not expect to bear the risk of 
borrower default in connection with those loans that were securitized 
and sold to third-party investors, the lenders had little ongoing 
economic interest in the performance of the securitization.\245\
---------------------------------------------------------------------------

    \242\ Dell'Ariccia, Deniz and Laeven, ``Credit Booms and Lending 
Standards: Evidence From the Subprime Mortgage Market'', (2008); 
Mian and Sufi, ``The Consequences of Mortgage Credit Expansion: 
Evidence from the 2007 Mortgage Default Crisis'', (2008); 
Puranandam, ``Originate-to-Distribute Model and the Sub-Prime 
Mortgage Crisis'', (2008).
    \243\ Board of Governors of the Federal Reserve, ``Report to the 
Congress on Risk Retention'', (October 2010).
    \244\ See, e.g., Benmelech and Dlugosz, 2010, The Credit Rating 
Crisis, Chapter 3 of NBER Macroeconomics Annual 2009, Vol. 24, pp. 
161-207, Acemoglu, Rogoff and Woodford, eds., University of Chicago 
Press; Bolton, Freixas and Shapiro, ``The Credit Ratings Game'' 
Journal of Finance (February 2012); Griffin and Tang, ``Did 
Subjectivity Play a Role in CDO Credit Ratings'', Working paper 
(2010).
    \245\ Dell'Ariccia, Deniz and Laeven, ``Credit Booms and Lending 
Standards: Evidence From the Subprime Mortgage Market'', (2008), 
Mian and Sufi, ``The Consequences of Mortgage Credit Expansion: 
Evidence from the 2007 Mortgage Default Crisis'', (2008), 
Puranandam, ``Originate-to-Distribute Model and the Sub-Prime 
Mortgage Crisis'', (2008), Keys, Mukherjee, Seru and Vig, ``Did 
Securitization Lead to Lax Screening? Evidence from Subprime Loans'' 
(February 2010) and Nadauld and Sherlund, ``The Impact of 
Securitization on the Expansion of Subprime Credit'', (2013).
---------------------------------------------------------------------------

b. Broad Economic Considerations
    While securitization can redistribute financial risks in ways that 
provide significant economic benefits, certain market practices related 
to its implementation can potentially undermine the efficiency of the 
market. In particular, securitization removes key features of the 
classic borrower-lender relationship, which relies on borrower and 
lender performance incentives generated from repeated interactions, as 
well as the ongoing communication of proprietary information between 
the borrower and the lender. The separation between the borrower and 
the ultimate provider of credit in securitization markets can introduce 
significant informational asymmetries and misaligned incentives between 
the originators and the ultimate investors. In particular, the 
originator has more information about the credit quality and other 
relevant characteristics of the borrower than the ultimate investors, 
which could introduce a moral hazard problem--the situation where one 
party (e.g., the loan originator) may have a tendency to incur risks 
because another party (e.g., investors) will bear the costs or burdens 
of these risks. Hence, when there are inadequate processes in place to 
encourage (or require) sufficient transparency to overcome concerns 
about informational differences, the securitization process could lead 
certain participants to maximize their own welfare and interests at the 
expense of other participants.
    For example, in the RMBS market, mortgage originators generally 
have more information regarding a borrower's ability to repay a loan 
obligation than the investors that ultimately own the economic 
interest, as the originator collects and evaluates information to 
initiate the mortgage. In a securitization, since ABS investors 
typically do not participate in this process, they likely have less 
information about expected loan performance than the originators. 
Disclosures to investors may not be sufficiently detailed regarding the 
quality of the underlying assets to adequately evaluate the assets 
backing the security. In addition, in a securitization the underlying 
pool is comprised of hundreds or thousands of loans, each requiring 
time to evaluate. Thus, such information asymmetry may have an adverse 
impact on investors, especially in the case when the originator and 
securitizer receive full compensation before the time when investors 
ultimately learn about loan quality. Consequently, the originator may 
have incentive to approve and fund a loan that they would not 
otherwise. In other words, the originator may be less diligent in 
solving the adverse selection problem since the consequences are 
transferred to the investors.
    The securitization process removes (or lessens) the consequences of 
poor loan performance from the loan originators, whose compensation 
depends primarily on the fees generated during the origination process. 
This provides economic incentive to produce as many loans as possible 
because loan origination, structuring, and underwriting fees for 
securitizations reward transaction volume. Without the requirement by 
the market to bear any of the risk associated with subsequent defaults, 
this can result in potentially misaligned incentives between the 
originators and the ultimate investors.\246\ Through the securitization 
process, risk is transferred from the originators to investors, who in 
the absence of transparency into the composition of the underlying 
assets, may rely too readily on credit rating agency assessments of the 
underlying loans and credit enhancement supporting the securitization. 
In the years preceding the financial crisis, these incentives may have 
motivated originators to structure mortgage securitizations with little 
or no credit enhancement and extend credit to less creditworthy 
borrowers, whose subsequent defaults ultimately helped to trigger the 
crisis.
---------------------------------------------------------------------------

    \246\ As an example, Ashcraft and Schuermann (2008) identify at 
least seven different frictions in the residential mortgage 
securitization chain that can cause agency and adverse selection 
problems in a securitization transaction. The main point of their 
analysis is that there are many different parties in a 
securitization transaction, each with differing economic interests 
and incentives. Hence, there are multiple opportunities for 
conflicts of interest to arise in such structures.

                                                                          Table 1--Rating Performance of Prime RMBS (%)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    All                  AAA                Investment grade        Speculative grade        Likely to default
                             Year                                  Issues    -------------------------------------------------------------------------------------------------------------------
                                                                                Up      Down    Share    Up      Down    Share    Up      Down    Share    Up      Down    Share    Up     Down
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2004..........................................................       15,512      3.5     0.0     80.9     0.0     0.0     14.3    23.3     0.0      4.4     4.6     0.1      0.2     0.0     0.0
2005..........................................................       14,474      4.6     0.1     72.1     0.0     0.0     18.6    20.9     0.1      8.9     7.4     0.7      0.2     0.0     0.0
2006..........................................................       16,859      3.1     0.1     71.0     0.0     0.0     18.7    13.8     0.1      9.9     5.8     0.8      0.2     0.0    14.3
2007..........................................................       18,452      1.8     0.2     72.1     0.0     0.0     17.9     8.5     0.3      9.7     2.6     1.1      0.2     0.0    21.4
2008..........................................................       20,924      0.5    12.4     73.7     0.0     9.9     16.8     2.5    13.0      9.3     1.4    31.1      0.2     0.0    45.0
2009..........................................................       20,475      0.0    46.4     65.6     0.0    32.0     21.2     0.0    69.0      9.5     0.0    81.7      3.7     0.0    91.2
2010..........................................................       19,700      0.1    29.0     42.5     0.0    12.8     16.3     0.2    44.8     12.9     0.0    64.4     28.3     0.1    34.3
2011..........................................................       18,338      0.3    36.7     36.9     0.0    14.4     14.2     0.6    62.3     10.8     0.9    81.3     38.1     0.5    49.4
2012..........................................................       16,886      0.2    16.3     27.4     0.0     3.6     10.7     0.0    31.3     10.8     0.6    24.7     51.1     0.4    27.8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: The numbers in the table were calculated by Division of Economic and Risk Analysis (DERA) staff using the Standard & Poor's (S&P) RatingsXpress data. These statistics are for securities
  issued by U.S. entities in U.S. dollars, carrying a local currency rating, and having a rating on the scale of AAA to D. Each security is assigned to an asset class based on the collateral
  type information provided by S&P. Securities backed by collateral that mixes multiple types of assets are not included. ``Issues'' is the total number of RMBS issuances outstanding as of
  January 1 for each year. ``Share'' is the share of each rating category among all rated RMBS. Upgrades and downgrades are expressed as a percentage of all rated securitizations in a
  specified year and in a specified rating class. ``Investment Grade'' (IG) are ratings from AA+ to BBB-, ``Speculative'' are from BB+ to B-, and ``Likely to Default'' are CCC+ and below.


[[Page 58006]]

    Evidence of the credit worthiness of borrowers during this period 
is illustrated in Table 1, which shows that 9.9 percent of presumably 
low-risk securities, such as AAA-rated non-agency RMBS, outstanding in 
2008 were downgraded during 2008. More significantly 32.0 percent of 
these securities outstanding in 2009 were downgraded during the year. 
Thus, almost one third of the outstanding RMBS securities with the 
highest possible credit rating were downgraded during 2009, suggesting 
that the credit quality of the underlying collateral and underlying 
credit enhancement for AAA notes was far poorer than originally rated 
by the credit rating agencies.
    The downgrades serve to illustrate the extent to which misaligned 
incentives between originators/sponsors of ABS and the ultimate 
investors may have manifested in the form of lax lending standards and 
relaxed credit enhancement standards during the period before the 
financial crisis. Risk retention is one possible response to this 
problem. Requiring securitizers to share the same risks as the 
investors that purchase these products seeks to mitigate the problems 
caused by misaligned incentives. By retaining loss exposure to the 
securitized assets, securitizers are considered to have ``skin in the 
game'' and thus are economically motivated to be more judicious in 
their selection of the underlying pool of assets, thereby helping to 
produce higher quality (i.e., lower probability of default) securities.
    Currently, sponsors who do not retain 5 percent of the 
securitization likely deploy those funds to other uses, such as 
repaying lines of credit used to fund securitized loans, holding other 
assets or making new loans, which may earn a different interest rate 
and have a different risk exposure. Therefore, a risk retention 
requirement could impose costs to those sponsors who do not currently 
hold risk, in the form of the opportunity costs of those newly tied-up 
funds, or could limit the volume of securitizations that they can 
perform. These costs will likely be passed onto borrowers, either in 
terms of borrowing costs or access to capital. In particular, borrowers 
whose loans do not meet the eligibility requirements or qualify for an 
exemption (i.e., those that require risk retention when securitized by 
the ABS originator/sponsor) will face increased borrowing costs, or be 
priced out of the loan market, thus restricting their access to 
capital. As a result, there could be a negative impact on capital 
formation.
    Hence, there are significant potential costs to the implementation 
of risk retention requirements in the securitization market. The 
Commission notes that the costs will also be impacted by any returns 
and timing of the returns of any retained interest. If the costs are 
deemed by sponsors to be onerous enough that they would no longer be 
able to earn a sufficiently high expected return by sponsoring 
securitizations, this form of supplying capital to the underlying asset 
markets would decline. Fewer asset securitizations would require other 
forms of funding to emerge in order to serve the needs of borrowers and 
lenders. Given the historically large dollar volumes in the 
securitization markets, this could reduce capital flows into the 
underlying asset markets, thereby reducing the amount of capital 
available for lending and possibly adversely impacting efficiency.
    The net impact of this outcome depends on the availability of 
alternative arrangements for transferring capital to the underlying 
assets markets and the costs of transferring capital to sponsors. For 
example, the impact of the potential decrease in the use of 
securitizations in the residential home mortgage market would depend on 
the cost and availability of alternative mortgage funding sources, and 
the willingness of these originators to retain the full burden of the 
associated risks. To the extent there are alternatives, and these 
alternatives can provide funding on terms similar to those available in 
the securitization markets, the impact of the substitution of these 
alternatives for securitizations would likely be minimal. To the extent 
that securitizers can find sources of capital at costs similar to the 
returns paid on retained interests, the impact of risk retention 
requirements would likely be minimal. Currently, however, there is 
little available empirical evidence to reliably estimate the cost and 
consequence of either such outcome.
    To maintain a commensurate level of funding to underlying asset 
markets with the risk retention requirement, the rates on the 
underlying assets would have to increase so that sponsors could achieve 
their higher target returns by serving the securitization market. Two 
recent studies by the Federal Reserve Bank of New York attempt to 
estimate the impact of the higher risk retention on the underlying 
asset markets.\247\ Their analysis suggests that incremental sponsor 
return requirements for serving markets with the higher levels of risk 
retention are relatively modest, somewhere on the order of 0-30 basis 
points.\248\ If so, the higher levels of risk retention would increase 
residential mortgage rates by approximately 0.25 percent. While this 
would increase the average borrower cost for loans that would not 
otherwise be eligible for securitizations exempt from risk retention, 
the increment may be sufficiently small such that securitizations would 
be expected to remain a significant component of the capital formation 
process.
---------------------------------------------------------------------------

    \247\ See appendix A.
    \248\ This assessment assumes that the underlying loan pool 
characteristics are accurately disclosed, and with sufficient detail 
for investors to properly assess the underlying risk. Such a 
scenario would be reflective of the risk retention requirements 
solving the moral hazard problem that might otherwise result in the 
obfuscation of intrinsic risks to the ultimate investors.
---------------------------------------------------------------------------

3. Economic Baseline
    The baseline the Commission uses to analyze the economic effects of 
the risk retention requirements added by Section 15G of the Exchange 
Act is the current set of rules, regulations, and market practices that 
may determine the amount of credit exposure retained by securitizers. 
To the extent not already followed by current market practices, the 
proposed risk retention requirements will impose new costs. The risk 
retention requirements will affect ABS market participants, including 
loan originators, securitizers and investors in ABS, and consumers and 
businesses that seek access to credit. The costs and benefits of the 
risk retention requirements depend largely on the current market 
practices specific to each securitization market--including current 
risk retention practices--and corresponding asset characteristics. The 
economic significance or the magnitude of the effects of the risk 
retention requirements will also depend on the overall size of the 
securitization market and the extent to which the requirements could 
affect access to, and cost of, capital. Below the Commission describes 
the Commission's current understanding of the securitization markets 
that are affected by this proposed rule.
a. Size of Securitization Markets
    The ABS market is important for the U.S. economy and comprises a 
large fraction of the U.S. debt market. During the four year period 
from 2009 to 2012, 31.1 percent of the $26.8 trillion in public and 
private debt issued in the United States was in the form of mortgage-
backed securities (MBS) or other ABS, and 2.7 percent was in the form 
of non-U.S. agency backed (private label) MBS or ABS. For comparison, 
32.8 percent of all debt issued was U.S.

[[Page 58007]]

Treasury debt, and 5.7 percent was municipal debt at the end of 
2012.\249\ Figure 1 shows the percentage breakdown of total non-Agency 
issuances from 2009 to 2012 for various asset classes excluding asset-
backed commercial paper (ABCP) and collateralized loan obligations 
(CLOs).\250\ Consumer credit categories including automobile and credit 
card backed ABS comprise 39 percent and 15 percent of the total annual 
issuance volume, respectively. Non-agency RMBS and commercial mortgage 
backed securities (CMBS) comprise 4 percent and 18 percent of the 
market, respectively, while student loan backed ABS account for 11 
percent of the market. Below the Commission analyzes the variation in 
issuance among these five largest asset classes. For several categories 
the Commission provides detailed information about issuance volume and 
the number of active securitizers (Table 2).
---------------------------------------------------------------------------

    \249\ Source: SIFMA.
    \250\ To estimate the size and composition of the private-label 
securitization market the Commission uses the data from Securities 
Industry and Financial Markets Association (SIFMA) and AB Alert. In 
the following analysis, the Commission excludes all securities 
guaranteed by U.S. government agencies. ABCP is a short-term 
financing instrument and is frequently rolled over, thus, its 
issuance volume is not directly comparable to the issuance volume of 
long-term ABS of other sectors. The Commission does not have CLO 
issuance data.
[GRAPHIC] [TIFF OMITTED] TP20SE13.000

    Prior to the financial crisis of 2008, the number of non-agency 
RMBS issuances was substantial. For example, new issuances totaled 
$503.9 billion in 2004 and peaked at $724.1 billion in 2005. Non-agency 
RMBS issuances fell dramatically in 2008, to $28.6 billion, as did the 
total number of securitizers, from a high of 78 in 2007 to 31 in 2008. 
In 2012, there was only $15.7 billion in new non-agency RMBS issuances 
by 13 separate securitizers. Of this amount, however, only $3.6 billion 
was issued by 3 separate securitizers backed by prime mortgages and 
were not resecuritizations.

                                                             Table 2--Annual Issuance Volume and Number of Securitizers by Category
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Credit card ABS                   Automobile ABS                   Student loan ABS                  Non-agency RMBS
                           Year                           --------------------------------------------------------------------------------------------------------------------------------------
                                                             SEC    144A   Private   Total     SEC    144A   Private   Total     SEC    144A   Private   Total     SEC    144A   Private   Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Panel A--Annual Issuance Volume by Category ($ bn)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2004.....................................................    46.3     4.9      0.0    51.2     63.4     6.5      0.0    70.0     38.3     7.5      0.2    45.9    490.3    13.6      0.0   503.9
2005.....................................................    61.2     1.8      0.0    62.9     85.1     8.7      0.0    93.9     54.1     8.1      0.4    62.6    707.9    16.2      0.0   724.1
2006.....................................................    60.0    12.5      0.0    72.5     68.0    12.2      0.0    80.2     54.9    10.9      0.5    66.2    702.8    20.4      0.0   723.3
2007.....................................................    88.1     6.4      0.0    94.5     55.8     6.8      0.0    62.6     41.7    16.0      0.6    58.3    598.1    42.2      0.0   640.3
2008.....................................................    56.7     5.0      0.0    61.6     31.9     5.6      0.0    37.6     25.8     2.4      0.0    28.2     12.2    16.4      0.0    28.6
2009.....................................................    34.1    12.5      0.0    46.6     33.9    15.4      0.0    49.2      8.3    12.5      0.0    20.8      0.3    47.8      0.0    48.1
2010.....................................................     5.3     2.1      0.0     7.5     38.0    15.3      0.0    53.3      2.8    16.2      1.2    20.2      0.2    46.1     12.8    59.2
2011.....................................................    10.0     4.8      1.5    16.3     41.9    14.4      0.0    56.3      2.5    13.9      1.1    17.5      0.7    11.1     10.5    22.2
2012.....................................................    28.7    10.5      0.0    39.2     65.6    13.9      0.0    79.5      6.6    23.2      0.0    29.9      1.9    12.6      1.2    15.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Panel B--Annual Number of Securitizers by Category
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2004.....................................................      12       4        0      15       29       9        0      37       10       7        1      16       41      15        0      44

[[Page 58008]]

 
2005.....................................................      13       5        0      17       30       9        0      38       13       7        1      19       46      18        0      51
2006.....................................................      10      11        0      18       23      12        0      30        8      17        1      24       50      27        0      62
2007.....................................................      12       8        0      16       23       9        0      28        7      17        1      22       46      32        0      59
2008.....................................................       9       3        0      11       16       7        0      20        3       6        0       8       12      19        0      24
2009.....................................................       9       6        0      11       13      13        0      22        3       6        0       6        1      16        0      17
2010.....................................................       5       5        0       9       19      15        0      27        2      18        1      19        1      18        1      20
2011.....................................................       5       7        1      12       14      16        0      25        1      19        1      20        1      12        2      14
2012.....................................................       7       9        0      13       18      24        0      36        1      26        0      26        1      11        1      12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: The numbers in the table were calculated by DERA staff using the AB Alert database. The deals are categorized by offering year, underlying asset type, and offering type (SEC registered
  offerings, Rule 144A offerings, or traditional private placement). Non-agency RMBS include residential, Alt-A, and subprime RMBS. Automobile loan ABS include ABS backed by automobile loans,
  both prime and subprime, motorcycle loans, and truck loans). Panel A shows the total issuance amount in billions of dollars. Panel B shows the number of unique sponsors of ABS in each
  category (the number in the column ``Total'' may not be the sum of numbers in the columns ``SEC'', ``144A'' and ``Private'' because some securitizers may sponsor deals in several
  categories). Only ABS deals sold in the U.S. and sponsors of such deals are counted.

    Similar to the market for non-agency RMBS, the market for CMBS also 
experienced a decline following the financial crisis. There were $229.2 
billion in new issuances at the market's peak in 2007.\251\ New 
issuances fell to $4.4 billion in 2008 and to $8.9 billion in 2009. In 
2012, there were $35.7 billion in new CMBS issuances.
---------------------------------------------------------------------------

    \251\ See Table 3. The estimates relating to the CMBS market are 
from SIFMA, and can be found at http://www.sifma.org/research/statistics.aspx. The SIFMA dataset does not include information 
relating to the number of CMBS securitizers and does not distinguish 
issuances by type.

                      Table 3--CMBS Issuance ($bn)
------------------------------------------------------------------------
                          Year                               Issuance
------------------------------------------------------------------------
2004....................................................            93.5
2005....................................................           156.7
2006....................................................           183.8
2007....................................................           229.2
2008....................................................             4.4
2009....................................................             8.9
2010....................................................            22.5
2011....................................................            34.3
2012....................................................            35.7
------------------------------------------------------------------------
Notes: Source--SIFMA.

    While the ABS markets based on credit cards, automobile loans, and 
student loans experienced a similar decline in issuances following the 
financial crisis, the issuance trends in Table 2 indicate that they 
have rebounded substantially more than the non-agency RMBS and CMBS 
markets. The automobile loans sector currently has the largest issuance 
volume and the largest number of active sponsors of ABS among all asset 
classes. There were $79.5 billion in new automobile ABS issuances in 
2012 from 42 securitizers. This amount of new issuances is 
approximately twice the amount of new issuances in 2008 ($37.6 billion) 
and is similar to the amount of new issuances from 2004 to 2007.
    Although the amount of new credit card ABS issuances has not fully 
rebounded from pre-crisis levels, it is currently substantially larger 
than in recent years. There were $39.2 billion in new credit card ABS 
issuances in 2012, a five-fold increase over the amount of new 
issuances in 2010 ($7.5 billion). The number of credit card ABS 
securitizers has remained steady over time, totaling 16 in 2012. The 
amount of new student loan issuances has also not fully rebounded from 
pre-crisis levels. There were $29.9 billion in new student loan ABS 
issuances in 2012, compared to a range from $45.9 billion to $58.3 
billion between 2004 and 2007. However, the number of student loan 
securitizers has returned to pre-crisis levels, totaling 27 in 2012. 
While risk retention requirements will apply to the previous asset 
classes there are other asset classes not listed here to which risk 
retention will also apply.
    Information describing the amount of issuances and the number of 
securitizers in the ABCP and CLO markets is not readily available, 
however, information on the total amount of issuances outstanding 
indicates that the ABCP market has decreased since the end of 2006, 
when the total amount outstanding was $1,081.4 billion, 55 percent of 
the entire commercial paper market.\252\ As of the end of 2012, there 
were $319.0 billion of ABCP outstanding, accounting for 30 percent of 
the commercial paper market.
---------------------------------------------------------------------------

    \252\ Based on information from the Federal Reserve Bank of St. 
Louis FRED Economic Data database.

            Table 4--Commercial Paper (CP) Outstanding ($bn)
------------------------------------------------------------------------
                                                                  ABCP
               Year                    ABCP        All CP        share
                                                 outstanding   (percent)
------------------------------------------------------------------------
2004..............................      688.9         1,401.5      49.2
2005..............................      860.3         1,637.5      52.5
2006..............................    1,081.4         1,974.7      54.8
2007..............................      774.5         1,785.9      43.4
2008..............................      734.0         1,681.5      43.7
2009..............................      487.0         1,170.0      41.6
2010..............................      348.1           971.5      35.8
2011..............................      328.8           959.3      34.3
2012..............................      319.0         1,065.6      29.9
------------------------------------------------------------------------
Notes: Source--Federal Reserve.

b. Current Risk Retention Market Practices
    As noted earlier, the potential economic effects of the proposed 
risk retention requirements will depend on current market practices. 
Currently, risk retention is not mandated in any sector of the U.S. ABS 
market, although some sponsors of different ABS classes do retain risk 
voluntarily--at least at initial issuance. The aggregate levels of 
current risk retention vary across sponsors and ABS asset classes. 
Adopted practices are different for different sectors (to the extent 
that they are applied at all) and there is no uniform reporting of the 
types or amounts of retained ABS pieces. Because aggregated 
quantitative information relating to the current risk retention 
practices of ABS securitizers is currently unavailable, the Commission 
does not have sufficient information to measure the extent to which 
risk is currently retained. Below the Commission describes current risk 
retention practices for various asset classes based upon its 
understanding of these markets and public comment received to date. The 
Commission would benefit from additional public comment and data about 
historical and

[[Page 58009]]

current risk retention practices in all ABS sectors.
i. RMBS Risk Retention Practices
    The Commission understands that securitizers of non-agency RMBS 
historically did not generally retain a portion of credit risk.\253\ 
Consequently, except in the case where exemptions are applicable (e.g., 
the QRM exemption), the proposed risk retention requirements likely 
will impose new constraints on these securitizers.
---------------------------------------------------------------------------

    \253\ However, more recently, one of the largest sponsors of 
SEC-registered RMBS has stated it currently retains some interest in 
the RMBS transactions that it sponsors. For example, see Sequoia 
Mortgage Trust 2013-1, 424b5, File No. 333-179292-06 filed January 
16, 2013; http://www.sec.gov/Archives/edgar/data/1176320/000114420413002646/v332142_424b5.htm.
---------------------------------------------------------------------------

    The Commission also understands that securitizers of other ABS 
market sectors typically retain some portion of credit risk. For these 
securitizers, depending on the amount and form of risk currently 
retained, the proposed risk retention requirements may pose less of a 
constraint. Markets where securitizers typically retain some portion of 
risk include the markets for CMBS, automobile loan ABS, ABS with a 
revolving master trust structure, and CLOs. The markets for CMBS and 
ABCP include structures in which parties involved in the securitization 
other than the securitizer retain risk.
ii. CMBS Risk Retention Practices
    The current risk retention practice in the CMBS market is to retain 
at issuance the ``first loss piece'' (riskiest tranche). This tranche 
is typically sold to a specialized category of CMBS investors, known as 
a ``B-piece buyer''. The B-piece investors in CMBS often hold dual 
roles as bond investors, if the assets remain current on their 
obligations, and as holders of controlling interests to appoint special 
servicers, if the loans default and go into special servicing. As 
holders of the controlling interest, they will typically appoint an 
affiliate as the special servicer. The B-piece CMBS investors are 
typically real estate specialists who use their extensive knowledge 
about the underlying assets and mortgages in the pools to conduct 
extensive due diligence on new deals.\254\ The B-pieces are often 
``buy-and-hold'' investments, and secondary markets for B-pieces are 
virtually non-existent at this time.\255\ Currently, the B-piece (as 
defined by Standard & Poor's) typically makes up the lowest rated 3-4 
percent of the outstanding amount of interests issued in CMBS 
securitization at issuance. During the four year period from 2009 to 
2012, the non-rated and all speculative grade tranches typically bought 
by B-piece buyers made up the lowest 4.4 percent.\256\ Thus, the 
prevailing market practice for risk retention in the CMBS sector is 
less than the proposed 5 percent B-piece risk retention option for CMBS 
sponsors.
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    \254\ CMBS have a much smaller number of underlying loans in a 
pool (based on data from ABS prospectuses filed on EDGAR, a typical 
CMBS has about 150 commercial properties in a pool, whereas RMBS 
have about 3,000 assets in a pool and automobile loan/lease ABS 
typically have 75,000 assets) and these loans are often not 
standardized. Thus, direct management of individual underperforming 
loans is often necessary and is much more viable for CMBS than for 
other asset classes.
    \255\ An industry publication places the number of active B-
piece buyers in 2007 at 12, and the number of active B-piece buyers 
between 2010 and the first part of 2011 at 1. This information was 
taken from S&P Credit Research. ``CMBS: The Big `B' Theory'' Apr 11, 
2011, https://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245302231520.
    \256\ DERA staff calculated these numbers using data from 
Standard & Poor's RatingsXpress.
---------------------------------------------------------------------------

iii. Master Trusts Risk Retention Practices
    Securitizers of revolving master trusts often maintain risk 
exposures through the use of a seller's interest which, as discussed 
above, is intended to be equivalent to the securitizer's interest in 
the receivables underlying the ABS. The Commission does not have 
sufficient aggregated data about revolving master trusts that would 
permit it to estimate the amount of risk currently retained. The 
Commission requests comment for this below.
iv. Other ABS Risk Retention Practices
    The current voluntary market practices for other categories of ABS 
that serve to align the interests of the sponsor and investors vary 
across asset classes. The Commission understands that securitizers of 
automobile loan ABS typically maintain exposure to the quality of their 
underwriting by retaining ABS interests from their securitization 
transactions; however, there is insufficient data available to the 
Commission to estimate the equivalent amount of risk retained through 
this practice. The Commission understands that securitizers of student 
loans do not typically retain credit risk. However, Sallie Mae, the 
largest sponsor of student loan asset-backed securities, does retain a 
residual interest in the securitizations that it sponsors.
vi. ABCP Risk Retention Practices
    Commenting on the original proposal, ABCP conduit operators noted 
that there are structural features in ABCP that align the interests of 
the ABCP conduit sponsor and the ABCP investors. For instance, ABCP 
conduits usually have some mix of credit support and liquidity support 
equal to 100 percent of the ABCP outstanding. This liquidity and credit 
support exposes the ABCP conduit sponsor to the quality of the assets 
in an amount that far exceeds 5 percent.
vi. CLO Risk Retention Practices
    Some commenters noted that securitizers of CLOs often retain a 
small portion of the residual interest and asserted that securitizers 
retain risk through subordinated management and performance fees that 
have performance components that depend on the performance of the 
overall pool or junior tranches. The proposed rule does not allow for 
fees to satisfy risk retention requirements. The Commission is 
requesting comment on any recent developments in the CLO market whereby 
risk is retained as defined by the proposed rule.\257\
---------------------------------------------------------------------------

    \257\ In the Board of Governors of the Federal Reserve System's 
``Report to the Congress on Risk Retention'' (October 2010), pp. 41-
48, mechanisms intended to align incentives and mitigate risk are 
described, including alternatives such as overcollateralization, 
subordination, guarantees, representations and warranties, and 
conditional cash flows as well as the retention of credit risk. The 
Report also contains a description of the most common incentive 
alignment and credit enhancement mechanisms used in the various 
securitization asset classes. The Report does not establish the 
extent to which these alternatives might be substitutes for the 
retention of credit risk.
---------------------------------------------------------------------------

4. Analysis of Risk Retention Requirements
    As discussed above, the agencies are proposing rules to implement 
Section 15G of the Exchange Act requiring sponsors of asset backed 
securitizations to retain risk. Each of the asset classes subject to 
these proposed rules have their own particular structure and, as a 
result, the implementation and impact of risk retention will vary 
across asset classes, although certain attributes of risk retention are 
common to all asset classes. In this section, the Commission discusses 
those aspects of the proposed rules that apply across asset classes: 
The requirement that securitizers hold 5 percent of the credit risk of 
a securitization, the use of fair value (versus par value) of the 
securitization as the method of measuring the amount of risk retained 
by the securitizer, and the length of time that a securitizer would be 
required to hold its risk exposure.

[[Page 58010]]

a. Level and Measurement of Risk Retention
i. Requirement To Hold Five Percent of Risk
    Section 15G requires the agencies to jointly prescribe regulations 
that require a securitizer to retain not less than 5 percent of the 
credit risk of any asset that the securitizer, through the issuance of 
ABS, transfers, sells, or conveys to a third party, unless an exemption 
from the risk retention requirements for the securities or transaction 
is otherwise available. The agencies are proposing to apply a minimum 5 
percent base risk retention requirement to all ABS transactions that 
are within the scope of Section 15G.
    As a threshold matter, the requirement to retain risk is intended 
to align the incentives of the ABS sponsors and their investors. 
Sponsors of securitizations should be motivated to securitize assets 
with probabilities of default that are accurately reflected in the 
pricing of the corresponding tranches, because they will be required to 
hold some of the risk of the assets being securitized. Risk retention 
may increase investor participation rates because investors would have 
assurance that the sponsor is exposed to the same credit risk and will 
suffer similar losses if default rates are higher than anticipated. 
This may increase borrower access to capital, particularly if loan 
originators are otherwise constrained in their ability to underwrite 
mortgages because more investors means more available capital. In 
particular, the act of securitizing the loans allows the lenders to 
replenish their capital and continue to make more loans, over and above 
what could be made based solely on the initial capital of the lender. 
When the underlying risks are disclosed properly, securitization should 
facilitate capital formation as more money will flow to borrowers. 
Higher investment may also lead to improved price efficiency, as the 
increase in securitization transactions will provide additional 
information to the market.
    While risk retention is intended to result in better incentive 
alignment, it is important to consider whether a 5 percent risk 
retention requirement will appropriately align the incentives of the 
sponsors and investors. Establishing an appropriate risk retention 
threshold requires a tradeoff between ensuring that the level of risk 
retained provides adequate incentive alignment, while avoiding costs 
that are associated with restricting capital resources to projects that 
may offer lower risk-adjusted returns. A risk retention requirement 
that is set too high could lead to inefficient deployment of capital as 
it would require the capital to be retained rather than further used in 
the market to facilitate capital formation. On the other hand, a risk 
retention requirement that is too low could provide insufficient 
alignment of incentives.
    In certain cases the agencies have proposed to exempt asset classes 
from the risk retention requirements because there already exists 
sufficient incentive alignment or other features to conclude that 
further constraints are unnecessary. In particular, the securitizations 
of these exempted asset classes have characteristics that ensure that 
the quality of the assets is high. For example, if the pool of assets 
sponsors can securitize is drawn from an asset class with a low 
probability of default, opportunities to exploit potentially misaligned 
incentives are fewer and investors may have a correspondingly lesser 
need for the protection accorded by risk retention requirements.
    Another possibility is that excessive required risk retention 
levels may prevent capital from being used in more valuable 
opportunities, leading to potentially higher borrowing rates as capital 
is diverted to required risk retention. In this scenario the reduction 
in capital formation would have a negative impact on competition due to 
the extra cost of securitizing non-qualified assets, disadvantaging 
them relative to qualified assets. However, the statute prescribes a 5 
percent minimum amount of risk be retained.
ii. Measurement of Risk Retention Using Fair Value
    The agencies have proposed to require sponsors to measure risk 
retention using a fair value framework as described in U.S. GAAP (ASC 
820). The Commission believes that this would align the measurement 
more closely with the economics of a securitization transaction because 
market valuations more precisely reflect the securitizer's underlying 
economic exposure to borrower default. Defining a fair value framework 
also may enhance comparability across different securitizations and 
provide greater clarity and transparency.
    Use of fair value accounting as a method of valuing risk retention 
also will provide a benefit to the extent that investors and sponsors 
can understand how much risk is being held and that the valuation 
methodology accurately reflects intrinsic value. If investors cannot 
understand the proposed measurement methodology, the value of holding 
risk will be reduced as investors will be unable to determine the 
extent to which risk retention aligns incentives. If investors cannot 
determine whether incentives are properly aligned, they may invest less 
in the securitization market because there will be uncertainty over the 
quality of assets being securitized.
    One benefit of fair value is investors and sponsors generally have 
experience with fair value accounting. In addition, the use of fair 
value is intended to prevent sponsors from structuring around risk 
retention.
    Fair value calculations are susceptible to a range of results 
depending on the key variables selected by the sponsor in determining 
fair value. This could result in costs to investors to the extent that 
securitizers use assumptions resulting in fair value estimates at the 
outer edge of the range of potential values, and thereby potentially 
lowering their relative amount of risk retention. In order to help 
mitigate this potential cost, the agencies have proposed to require the 
sponsor to disclose specified information about how it calculates fair 
value. While this requirement should discourage manipulation, sponsors 
will incur additional costs to prepare the necessary disclosures. In 
addition, because the proposed rule specifies that fair value must be 
determined by fair value framework as described in US GAAP, sponsors 
will incur costs to ensure that the reported valuations are compliant 
with the appropriate valuation standards.
    Alternatively, the agencies could have proposed to require risk 
retention be measured using the par value of the securitization, as in 
the original proposal. Par value is easy to measure, transparent, and 
would not require any modeling or disclosure of methodology. However, 
holding 5 percent of par value may cause sponsors to hold significantly 
less than 5 percent of the risk because the risk is not spread evenly 
throughout the securitization. In addition, not all securitizations 
have a par value. Another alternative considered was premium capture 
cash reserve account (PCCRA) plus par value. The agencies took into 
consideration the potential negative unintended consequences the 
premium capture cash reserve account might cause for securitizations 
and lending markets. The elimination of the premium capture cash 
reserve account should reduce the potential for the proposed rule to 
negatively affect the availability and cost of credit to consumers and 
businesses.
b. Duration of the Risk Retention Requirement
    Another consideration is how long the sponsor is required to retain 
risk. For example, most of the effects of poor

[[Page 58011]]

underwriting practices likely would be evident in the earlier stages of 
a loan's life. If the risk is retained for longer than is optimal, 
there may be a decrease in capital formation because capital cannot be 
redeployed to more efficient uses, resulting in higher costs to 
securitizers than necessary. On the other hand, if the risk is not 
retained long enough, risk retention will not mitigate the incentive 
misalignment problem. The optimal duration of the risk retention 
requirement will in large part depend on the amount of time required 
for investors to realize whether the risks of the underlying loan pools 
were accurately captured, which may vary across asset classes. For 
instance, short durations relative to maturity may be appropriate for 
asset classes where a significant fraction of the defaults occur at the 
beginning of the loan life cycle, such as in the case with RMBS, while 
longer durations are more appropriate for asset classes where 
performance takes longer to evaluate, such as with CMBS, where 
performance may not be assessed until the end of the loan.
    To the extent that there exists a window where risk retention is 
needed but dissipates once the securitization is sufficiently mature, 
requiring a sponsor to retain risk beyond this window could be 
economically inefficient. Consequently, the proposal includes a sunset 
provision whereby the sponsor is free to hedge or transfer the retained 
risk after a specified period of time. Allowing the risk retention 
requirement to sunset will eventually free up capital that can be 
redeployed elsewhere in the business, thereby helping to promote 
capital formation.
    In certain instances where the sponsor is the servicer of the loan 
pool, the sunset provision may motivate the sponsor to delay the 
recognition of defaults and foreclosures until after the sunset 
provision has lapsed. The sponsor's incentive to delay arises from its 
credit exposure to the pool and its control over the foreclosure 
process. Thus, the sponsor/servicer may extend the terms of the loans 
until the expiration of the risk retention provision.\258\ To the 
extent that sponsors delay revealing borrowers' non-performance, this 
would decrease economic efficiency and impair pricing transparency.
---------------------------------------------------------------------------

    \258\ Yingjin Hila Gan and Christopher Mayer. Agency Conflicts, 
Asset Substitution, and Securitization. NBER Working Paper No. 
12359, July 2006.
---------------------------------------------------------------------------

    For RMBS, the agencies have proposed to require securitizers to 
retain risk for the later of five years or until the pool balance has 
been reduced to 25 percent (but no longer than seven years). For all 
other asset classes, the agencies have proposed to require securitizers 
to retain risk for the later of two years or until the pool balance has 
been reduced to 33 percent. These methods were chosen to balance the 
tradeoff between retaining risk long enough to align the sponsors and 
investors incentives and allowing the redeployment of retained capital 
for other productive uses. A shorter duration was chosen for non-
mortgage asset classes, because these loans tend to have shorter 
maturities than mortgages. Requiring a two year holding period 
recognizes that it may not be necessary to retain risk for a longer 
period. The alternative component further calibrates the required 
duration of risk retention based on the remaining balances. By the time 
the loan pool balance decreases to 33 percent, the information about 
the loan performance will be largely revealed, at which point the moral 
hazard problem between the sponsor and the investor is likely to be 
significantly reduced. Although, in the case where the loan pool 
balance drops below the prescribed threshold (25 percent for RMBS and 
33 percent for other ABS) before the prescribed number of years (five 
years for RMBS and two years for other ABS), the additional required 
duration might be costly to the sponsor. In other words, requiring the 
securitizer to continue to retain exposure to the securitization, once 
impact of the information asymmetry has been significantly reduced, 
would impose unnecessary costs, potentially impeding allocation 
efficiency. Indeed, as currently proposed, as loan balances are paid 
down the sponsor may hold more risk relative to other investors because 
the size of the credit risk retention piece is based on the initial 
size of the securitization, and does not change with the current market 
value. This heightened level of risk retention may be unnecessary, 
because at that point, there is nothing further the sponsor can do to 
adversely impact investors, so that economic efficiency would be better 
served by allowing securitizers to withdraw their risk retention 
investment to utilize in new securitizations or other credit forming 
activities.\259\
---------------------------------------------------------------------------

    \259\ See Hartman-Glaser, Piskorski and Tchistyi (2012). In 
order to achieve the economic goals of the risk retention 
requirement, it should be the case that the moral hazard and 
information asymmetry between the securitizer and the investors 
would be fully resolved by the time that loan balances are reduced 
to 25 percent (in the case of RMBS) or 33 percent (in all other 
asset classes). The Commission is unaware of any empirical studies 
or evidence that supports such a conclusion.
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5. Blended Pools and Buyback Provision
a. Blended Pools
    Blended pools are pools that consist of assets of the same class, 
some of which qualify for an exemption from the risk retention 
requirement, and some of which do not qualify for an exemption from the 
risk retention requirement. The proposed rule permits proportional 
reduction in required risk retention for blended pools that consist of 
both exempted and non-exempted assets. The proposed rule does not allow 
mixing asset classes in the same pool for the purpose of reduction of 
the risk retention requirement and has several other restrictions to 
reduce potential of structuring deals around the risk retention 
requirement. Allowing blended pools with a reduced risk retention 
requirement will improve efficiency, competition and capital formation 
by allowing sponsors to securitize more loans when it is difficult to 
obtain a large enough pool of qualifying assets to issue an ABS 
consisting entirely of exempted assets.
b. Buyback Requirement
    The proposal requires that, if after issuance of a qualifying asset 
securitization, it was discovered that a loan did not meet the 
qualifying underwriting criteria, the sponsor would have to repurchase 
or cure the loan (the ``buyback requirement''). The buyback provision 
increases investors' willingness to invest because it makes sponsors of 
an ABS responsible for correcting discovered underwriting mistakes and 
ensures that the actual characteristics of the underlying asset pool 
conform to the promised characteristics.
6. Forms of Risk Retention Menu of Options
    Rather than prescribe a single form of risk retention, the proposal 
allows sponsors to choose from a range of permissible options to 
satisfy their risk retention requirements. As a standard form of risk 
retention available to all asset classes, sponsors may choose vertical 
risk retention, horizontal risk retention, or any combination of those 
two forms. All of these forms require the sponsor to share the risk of 
the underlying asset pool. The proposal also includes options tailored 
to specific asset classes and structures such as revolving master 
trusts, CMBS, ABCP and CLOs. Given the special characteristics of 
certain asset classes, some of these options permit the sponsor to 
allocate a portion of the shared risk to originators or specified third 
parties.

[[Page 58012]]

    By proposing to allow sponsors flexibility to choose how they 
retain risk, the agencies' proposal seeks to enable sponsors to select 
the approach that is most effective. Various factors are likely to 
impact the securitizers preferred method of retaining risk, including 
size, funding costs, financial condition, riskiness of the underlying 
assets, potential regulatory capital requirements, income requirements, 
risk tolerances and accounting conventions. All else being equal, 
sponsors may prefer the option that involves the least exposure to 
credit risk. For example, the horizontal form of standard risk 
retention essentially creates a fully subordinated equity tranche and 
represents the option that is most exposed to credit risk. By contrast, 
a vertical form of standard risk retention is comparable to a stand-
alone securitization that is held by the sponsor and, among the 
available options, is the least exposed to credit risk. Some sponsors 
may choose to utilize the horizontal method of risk retention or some 
combination of the horizontal and vertical method in order to meet the 
risk retention requirement, while at the same time signaling the market 
that the sponsor is securitizing better quality assets.
    If investors believe that the sponsor's choice of risk retention 
method results in insufficient risk exposure to properly align 
incentives, the proposed optionality may result in less effective risk 
retention. However, because investors can observe this choice to help 
inform their investment decision, sponsors have incentive to choose the 
level of risk exposure that encourages optimal investor participation. 
That is, investors may be more likely to participate if the sponsor has 
more skin in the game, which may lead sponsors to prefer an option with 
a higher level of risk retention. Alternatively if the sponsor retains 
insufficient risk exposure investors may not perceive this as a 
sufficient alignment of interest and may not invest (i.e., sponsors may 
securitize bad assets if they do not have enough exposure).
    As the Commission discusses below, a number of the options also 
correspond to current market practices. By allowing sponsors to satisfy 
their risk retention requirement while still maintaining current market 
practices the proposed menu of options approach should help to reduce 
costs of the required regime. Moreover, the flexibility sponsors have 
to design how they prefer to be exposed to credit risk will allow them 
to calibrate and adjust their selections according to changing market 
conditions. It also will accommodate evolving market practices as 
securitizers and investors update preferences and beliefs.
a. Standard Risk Retention
    The standard form of risk retention would permit sponsors to choose 
vertical risk retention, horizontal risk retention, or any combination 
of these two forms.
i. Eligible Horizontal Residual Interest
    One way that a sponsor may satisfy the standard risk retention 
option is by retaining an ``eligible horizontal residual interest'' in 
the issuing entity in ``an amount that is equal to at least 5 percent 
of the fair value of all ABS interests in the issuing entity that are 
issued as part of the securitization transaction.'' \260\ 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, 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.
---------------------------------------------------------------------------

    \260\ Stated as an equation: The EHRI amount >= 5% of the fair 
value of all ABS interests.
---------------------------------------------------------------------------

    This option may provide sponsors with an incentive to securitize 
safer assets relative to other risk retention options because they hold 
the first loss piece. If sponsors are restricted to only holding risk 
retention through the horizontal form, they may choose to reduce their 
credit exposure by issuing relatively safe loans. This would possibly 
restrict the amount of capital available for riskier but viable loans. 
Alternatively, investors could require higher loan rates to compensate 
for this risk.
    A number of commenters on the original proposal generally believed 
that the retention of a subordinated interest effectively aligns the 
incentives of ABS sponsors with ABS investors. Another commenter stated 
that in prime RMBS securitizations, where there is no 
overcollateralization, a horizontal slice would be the best approach. 
Horizontal risk retention may improve capital formation to the extent 
it makes investors more willing to invest in the securitization 
markets.
    It is not clear that horizontal risk retention will fully align 
sponsor incentives with investor incentives. Investors who are 
investing in the most senior tranches will have different incentives 
than the sponsor who is holding the equity tranche. This is similar to 
debt/equity issues that exist in the corporate bond market. Several 
commentators expressed concerns regarding the horizontal risk retention 
option. These commentators noted that the retention of a subordinated 
tranche by the sponsor has the potential to create substantial 
conflicts of interest between sponsors and investors. Another 
commentator recommended that the final rules remove horizontal as an 
option in RMBS transactions noting that history has already shown that 
retaining the equity tranche was not enough to align the securitizer's 
incentives with those of investors in the securitization's other 
tranches.
ii. Eligible Vertical Interest
    Another way a sponsor may satisfy the standard risk retention 
option is by retaining at least 5 percent piece of each class of 
interests issued in the transaction or a single vertical security. The 
proposed rules also would require a sponsor that elects to retain risk 
through the vertical form of standard risk retention to disclose to 
potential investors and regulators certain information about the 
retained risks and the assumptions and methodologies used to determine 
the aggregate dollar amount of ABS interests issued. The vertical form 
of standard risk retention aligns incentives of the sponsor with every 
tranche in the securitization by requiring the sponsor to hold a 
percentage of each tranche. Several commentators on the original 
proposal noted that the vertical form of standard risk retention was 
easy to calculate, more transparent and less subject to manipulation. 
Commenters also noted that the vertical form of standard risk retention 
would receive better accounting treatment than the horizontal form of 
standard risk retention. In addition, one of these commenters noted 
that because managed structures, including CDOs, have compensation 
structures that incentivize managers to select riskier, higher yielding 
assets to maximize return and equity cash flows, the vertical form of 
standard risk retention is the only option that incentivizes managers 
to act for the benefit of all investors.
    More generally, by allowing sponsors to choose a vertical form of 
risk retention, there will be increased flexibility to choose higher 
yielding assets and provide greater access to capital to viable but 
higher risk borrowers than what would otherwise be possible through 
only a horizontal form of risk retention. While the single vertical 
security will have similar costs and benefits to holding 5 percent of 
each tranche, there are slight

[[Page 58013]]

differences. The main difference is that the single vertical security 
trading costs may be lower than the costs of buying 5 percent of each 
tranche.
    Alternatively, the agencies considered allowing for loan 
participations as an option that commenters raised that would satisfy 
the risk retention requirements. Ultimately, it was determined that 
there would be little to no economic benefit for allowing this option 
because the option is currently not used by the market and would 
unlikely be used.
iii. L-Shaped Risk Retention
    As discussed above, the horizontal and vertical risk retention 
options each present certain costs to securitizers. It is possible that 
potential sponsors of securitizations would find both of these risk 
retention options costly. The original risk retention proposal included 
an option of combining equal parts (2.5 percent) of vertical and 
horizontal risk retention. While this combination of horizontal and 
vertical risk retention may mitigate some of the costs related to the 
horizontal only or vertical only risk retention options, it is possible 
that combinations other than equal parts would also satisfy the 
objectives of the risk retention requirements. Hence, in an effort to 
provide greater flexibility to sponsors, the agencies are proposing to 
permit sponsors to hold any combination of vertical and horizontal risk 
retention. The benefit of this flexibility is that the approach allows 
sponsors to minimize costs by selecting a customized risk retention 
method that suits their individual situation and circumstance, 
including relative market demand for the various types of interest that 
may be retained under the rule. To the extent that the costs and 
benefits of credit risk retention vary across time, across asset 
classes, or across sponsors, this approach would implement risk 
retention in the broadest possible manner such that sponsors may choose 
the risk retention implementation that they view as optimal. This 
approach may also permit sponsors some flexibility with regard to 
structuring credit risk retention without having to consolidate assets.
    The proposed set of risk retention alternatives would provide 
sponsors with a much greater array of credit risk retention strategies 
to choose from. Because sponsors are given the choice on how to retain 
risk, their chosen shape may not be as effective in aligning interests 
and mitigating risks for investors. That is, it may create fewer 
benefits or more costs for investors than other alternatives might. 
Thus, the standard risk retention option, to the extent that different 
percentages of horizontal and vertical risk retention create disparate 
benefits and costs for sponsors and investors, may perpetuate some of 
the conflicts of interest that characterized prior securitizations. 
This approach, may create flexibility, but may also increase the 
complexity of implementation of risk retention and the measurement of 
compliance due to the wide choices sponsors would enjoy.
    Horizontal risk retention allows sponsors to communicate private 
information about asset quality more efficiently, in some cases, than 
vertical risk retention, but only if both forms of risk retention are 
an option. A sponsor choosing to retain risk in a horizontal form over 
a vertical form may be able to signal to the market that the sponsor's 
incentives are better aligned with investors'. By choosing a costlier 
way of retaining risk, such as the horizontal form, a sponsor can 
signal to the market the high quality of their assets. This provides a 
benefit to sponsors who are able to signal the high quality of their 
assets less costly than retaining risk in the vertical form and using 
another signaling mechanism.
    Alternatively, the agencies considered allowing sponsors to retain 
risk through holding a representative sample of the loans being 
securitized as proposed in the original proposal. The option was not 
included, among other reasons, because of, as noted by commenters, its 
difficulty to implement.
b. Options for Specific Asset Classes and Structures
i. Master Trust
    Securitizations of revolving lines of credit, such as credit card 
accounts or dealer floor plan 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 master trust that is collateralized by loans or 
other extensions of credit to meet its risk retention requirement by 
retaining a seller's interest in an amount not less than 5 percent of 
the unpaid principal balance of the pool assets held by the sponsor.
    The definitions of a seller's interest and a revolving master trust 
are intended to be consistent with current 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. Commenters on the 
original proposal supported permitting a sponsor to satisfy its risk 
retention requirement through retention of the seller's interest. In 
this regard, a trade association commented that the seller's interest, 
in essence, represents a vertical slice of the risks and rewards of all 
the receivables in the master trust, and therefore operates to align 
the economic interests of securitizers with those of investors. In 
contrast, many commenters raised structural (or technical) concerns 
with the proposed master trust option.
    The Commission preliminarily believes that aligning the 
requirements with current market practice will balance implementation 
costs for sponsors utilizing the master trust structure with the 
benefits that investors receive through improved selection of 
underlying assets by the sponsors. Maintaining current practice will be 
transparent and easy for the market to understand and will preserve 
current levels of efficiency and maintain investor's willingness to 
invest in the market. Codification of current practice will also 
provide clarity to market participants and may encourage additional 
participation given the removal of previous uncertainty about potential 
changes to current practices, thereby increasing capital formation.
    Under this option, there would be a cost to sponsors of measuring 
and disclosing the seller's interest amount on an ongoing basis, but 
since this is a current market practice, the additional cost should be 
minimal. The agencies propose requiring the 5 percent seller's interest 
to be measured in relation to the fair value of the outstanding 
investors' interests rather than the principal amount of assets of the 
issuing entity. As discussed above this acts to make sure the sponsors' 
incentives are aligned with the borrower and to make sure the holdings 
of the sponsor are enough to economically incentivize them.
ii. CMBS
    The Commission understands that the current market practice 
regarding risk retention in the CMBS market is largely in line with the 
agencies' proposed rules. The proposed rules allow for the continuation 
of current risk retention market practice for CMBS in the form of the 
B-piece retention with additional modifications to the current 
practice. Under the agencies' proposal, a sponsor could satisfy the 
risk retention requirements by having up to two third-party purchasers 
(provided that each party's interest is pari passu with the other 
party's interest) purchase an eligible horizontal residual interest (B-
piece) in the issuing entity if at least 95 percent of the total unpaid 
principal balance is commercial real estate loans.

[[Page 58014]]

The third-party purchaser(s) would be required to acquire and retain an 
eligible horizontal residual interest in the issuing entity in the same 
form, amount, and manner as the sponsor (with the same hedging, 
transfer and other restrictions) except that after five years the 
third-party purchaser can sell the B-piece to another eligible third-
party purchaser. Giving the third-party purchaser the ability to sell 
the B-piece to another qualified third-party purchaser should not 
affect the costs or benefits as the transference of the B-piece keeps 
the structure of the ABS intact and therefore the alignment of 
incentives will not change. The original third-party purchaser benefits 
by being given more liquidity and making the purchase of the B-piece 
not as costly, encouraging eligible B-piece purchasers to purchase the 
B-piece and increasing competition among B-piece purchasers. The 
sponsor would be responsible for monitoring the B-piece buyer's 
compliance with the preceding restrictions, and an independent 
operating advisor with the authority to call a vote to remove the 
special servicer would be appointed.
    The proposed option would not allow for B-pieces to be further 
packaged into other securitizations such as CDOs. Due to the current 
limited state of the CDO market, to the extent the proposal is 
codifying the current state of the market, there may be costs and 
benefits to market perception that the Commission cannot quantify but 
relative to the current state there are no costs and benefits. However, 
to be consistent with the motivation behind the proposed rule, 
prohibiting repackaging of B-pieces incentivizes sponsors to exercise 
the oversight necessary to align interests.
    Consistent with the current practice that the ``B-piece'' is the 
lowest rated tranche(s) of CMBS (most junior tranche), it accepts the 
first losses in the case of defaults, and, thus, it is equivalent to 
the horizontal (``first-loss'') option of the general risk retention 
rule applied to CMBS. Consequently, the costs and benefits of the ``B-
piece'' are similar to the ones for the horizontal form of standard 
risk retention. To the extent that sponsors would continue the current 
market practice that they voluntarily use, the costs and benefits will 
be marginal (since the rule proposes mandating the size of a B-piece at 
the level similar to, although slightly higher than, the currently 
used) with the exception below.
    Under current market practice, B-piece investors (who are often 
also special servicers) have a conflict of interest with investment 
grade tranche investors. This conflict could persist to the extent that 
CMBS sponsors choose to structure their risk retention consistent with 
current practice. In theory, a (special) servicer must try to maximize 
recovery for all tranche holders; however, if the servicer is also the 
subordinate tranche holder, it may not look after the borrowers' or 
senior tranche investors' positions, but rather may undertake actions 
(modification, foreclosure, etc.) that maximize the position of the 
first-loss investors at the expense of borrowers or senior tranche 
investors.\261\ While this potential conflict of interest may continue 
to exist, depending on how the sponsor structures the risk retention, 
the proposed rules include requirements that may lessen the impact of 
the conflict.
---------------------------------------------------------------------------

    \261\ Yingjin Hila Gan and Christopher Mayer. ``Agency 
Conflicts, Asset Substitution, and Securitization'', NBER Working 
Paper No. 12359, July 2006, and Brent W. Ambrose, Anthony B. 
Sanders, and Abdullah Yavas. ``CMBS Special Servicers and Adverse 
Selection in Commercial Mortgage Markets: Theory and Evidence'', 
2008, Working Paper.
---------------------------------------------------------------------------

    The proposed rule requires appointment of an independent operating 
advisor who, among other obligations, has the authority to recommend 
and call a vote for removal of the special servicer under certain 
conditions. This proposed requirement may serve to limit the adverse 
effects of the potential conflict of interest, thus helping to ensure 
that the benefits of the risk retention requirements are preserved. 
There would be costs, however, related to the appointment of the 
independent operating advisor, including, but not limited to, the 
payments to the advisor.
    In comparison to the current lack of any statutorily mandated risk 
retention, the primary benefit of allowing sponsors is to maintain 
their current market practices, which effectively achieve the intended 
objectives of risk retention. In a manner analogous to the discussion 
of horizontal risk retention, the B-piece sale may incentivize the 
sponsor (through the intended B-piece buyer) to securitize safer assets 
relative to retaining an eligible vertical interest under the standard 
risk retention option. To the extent that safer assets are securitized, 
investors may be more willing to invest in CMBS, thus, increasing the 
pool of available capital for lending on the commercial real estate 
market. If only the safest commercial real estate loans are 
securitized, however, capital formation could potentially be negatively 
impacted due to sponsors not issuing loans they cannot securitize. 
Thus, riskier loans may not be extended to potentially viable 
borrowers. Since sponsors can sell the B-piece to specialized investors 
who are willing to take risk (and able to evaluate and manage it), 
sponsors can free up additional capital. Thus, allowing the B-piece 
option may lead to increased capital formation and allocational 
efficiency because the risk is transferred to those parties that are 
willing and able to bear it. Both effects could lead to a decline in 
costs of borrowing for commercial real estate buyers relative to a 
situation where the B-piece is not permitted.
    To the extent that the proposed rule allows the current market 
practice to continue with minor change in the size of the horizontal 
piece, and most market participants follow it, both costs and benefits 
of the proposed rule are expected to be minimal with the exception of 
the requirement of the appointment of the independent operating advisor 
discussed above.
iii. ABCP
    The original proposal included a risk retention option specifically 
designed for ABCP structures. As explained in the original proposal, 
ABCP is a type of liability that is typically issued by a special 
purpose vehicle (commonly referred to as a ``conduit'') sponsored by a 
financial institution or other sponsor. The commercial paper issued by 
the 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 securitized assets collateralizing the ABS 
interests that support the ABCP may consist of a wide range of assets 
including automobile loans, commercial loans, trade receivables, credit 
card receivables, student loans, and other loans. Some ABCP conduits 
also purchase assets that are not ABS interests, including direct 
purchases of loans and receivables and repurchase agreements. 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. In the current market the sponsors of the ABS 
interests purchased by ABCP conduits often retain credit risk and 
eventually all sponsors of ABS will be required to comply with the 
credit risk retention rules.
    Under the proposal, sponsors of ABCP conduits could either hold 5 
percent of the risk as discussed above using the standard risk 
retention option or could rely on the ABCP option outlined

[[Page 58015]]

below. To the extent that an ABCP conduit sponsor or its majority-owned 
affiliate already holds over 5 percent of the outstanding ABCP and at 
least 5 percent of the residual interest in the ABCP conduit, the costs 
will be minimal. Under the current proposal, ABCP sponsors would be 
provided an ABCP conduit risk retention option. As long as the assets 
held in the ABCP conduit are not purchased in the secondary markets and 
the sponsor of every ABS interest held by the ABCP conduit complies 
with the credit risk retention requirements then the ABCP conduit 
sponsor would not be required to retain risk. Because the sponsor of 
the ABS interest held by the ABCP conduit would need to comply with the 
credit risk retention requirements certain assets such as receivables 
would not be eligible for purchase by an eligible ABCP conduit which 
would incentivize ABCP conduits to hold other assets.
    Another condition of the proposed conduit option is the requirement 
that the ABCP conduit have 100 percent liquidity support and that all 
ABS held in the conduit are not acquired in secondary market 
transactions. Limiting an eligible ABCP conduit to holding ABS 
interests acquired in initial issuances may allow the conduit to 
negotiate the terms of the deal and have an effect on the riskiness of 
the ABS interests. This may incentivize ABCP conduits to hold ABS 
interests acquired in initial issuances over ABS interests acquired in 
secondary markets, possibly resulting in increased costs in the 
secondary markets for ABS interests due to lower liquidity and 
potentially decreasing efficiency in the secondary markets for ABS 
interests. At the same time, encouraging primary market transactions 
may increase capital formation as new ABS interests will be necessary 
for ABCP conduits to issue ABCP. The liquidity support may increase 
costs for ABCP conduits that were previously unguaranteed or lacked 
liquidity support that meets the requirements in the proposal.
iv. CLOs
    Collateralized Loan Obligations (CLO) sponsors are required to 
retain the same 5 percent of risk as other asset classes. 
Collateralized loans have longer maturities, implying that loan 
balances will not decrease much prior to the maturity of the CLO. Under 
the proposed sunset provisions, this will require the manager to 
effectively retain risk for the life of the CLO. Longer risk retention 
periods could help to mitigate concerns that managers may alter the 
composition of the loan portfolio relative to a short sunset provision. 
The agencies consider CLO managers to be the sponsors of CLOs and thus 
they would be required to meet the credit risk retention requirements. 
The amount of capital available to managers to hold risk can vary with 
the size and affiliations of the manager. To the extent that the CLO 
market has different sized managers, the relative capital costs for 
managers with a small balance sheet available to service the 5 percent 
of risk retention will be greater than the capital costs for managers 
with larger balance sheets. This may induce smaller managers to borrow 
capital in order to cover holding 5 percent of the risk, which could 
result in different funding costs between smaller and larger managers. 
As a result, the CLO option may impact competition by creating an 
advantage for managers with lower funding costs, and potentially 
encourage banks to start sponsoring mangers. The Commission lacks 
sufficient information on the distribution of CLO manager 
characteristics, including their size, access to capital, and funding 
costs, to be able to assess such an impact.
    The agencies are proposing to allow certain types of CLO to satisfy 
the risk retention requirement if the lead arranger for the underlying 
loan tranche has taken an allocation of the syndicated credit facility 
under the terms of the transaction that includes a tranche that is 
designated as a CLO-eligible loan tranche and such allocation is at 
least equal to the greater of (a) 20 percent of the aggregate principal 
balance at origination and (b) the largest allocation taken by any 
other member (or members affiliated with each other) of the syndication 
group.
v. Enterprises
    The proposed rules allow the guarantee of the Enterprises under 
conservatorship or receivership to count as risk retention for purposes 
of the risk retention requirements. Because of the capital support 
provided by the U.S. government for the Enterprises, investors in 
Enterprise ABS are not exposed to credit loss, and there is no 
incremental benefit to be gained by requiring the Enterprises to retain 
risk. This along with the Enterprises' capital support creates a 
competitive advantage for the Enterprises over private-sector 
securitizers when purchasing loans.
    Reinforcing this competitive advantage will provide three 
significant consequences. First, recognizing the guarantee of the 
Enterprises as fulfilling their risk retention requirement will allow 
them to facilitate the availability of capital to segments of the 
population that might not otherwise have access through private sector 
channels. In particular, without Enterprise programs, borrowers that 
cannot qualify for loans that are exempt from the risk retention 
requirements, but could otherwise support repayment of a loan, might 
not be able to secure a loan if lenders are unwilling or unable to 
underwrite and retain such loans on their own balance sheet. Second, 
the recognition of the guarantee of the Enterprises as fulfilling their 
risk retention requirement will smooth home financing in periods when 
banks curb their lending due to limited access to capital and private-
sector securitizers are unable or unwilling to meet excess demand. 
Finally, recognizing the guarantee of the Enterprises as fulfilling 
their risk retention requirement will preserve liquidity in the market 
for mortgages that are not QRMs.
    The main cost of recognizing the Enterprises' guarantee as 
fulfilling their risk retention requirement is the increased 
probability that they will purchase riskier loans that do not meet the 
QRM criteria. A riskier loan portfolio may increase the Enterprises' 
likelihood of default, which has the potential of creating additional 
taxpayer burden. Some commenters noted that by allowing the guarantee 
of the Enterprises as fulfilling their risk-retention requirements and 
preserving their competitive advantage vis-[agrave]-vis private 
securitizers, our rules may result in costs to private securitizers, 
including perhaps exiting the market because of their inability to 
favorably compete with the Enterprises. This will have the effect of 
reducing competition and may impede capital formation in segments of 
the market not served by the Enterprises. However, analysis of loans 
originated between 1997 and 2009, a period that spans the onset of the 
financial crisis, shows that private label loans had a much higher 
serious delinquency rate than Enterprise purchased loans, even after 
accounting for different underlying loan characteristics.\262\ Hence, 
this historical performance-based evidence suggest that Enterprise 
underwriting standards offset any incentive to incur excess risk 
because of their capital support relative, at least in relation the 
incentives and behaviors among private label securitizers during the 
same period. Furthermore, as discussed below, the proposed rule 
includes a proposal to define QRM, which would lessen the

[[Page 58016]]

potential competitive harm to private securitizers.
---------------------------------------------------------------------------

    \262\ See Joshua White and Scott Bauguess, Qualified Residential 
Mortgage: Background Data Analysis on Credit Risk Retention, (August 
2013), available at http://www.sec.gov/divisions/riskfin/whitepapers/qrm-analysis-08-2013.pdf.
---------------------------------------------------------------------------

vi. Alternatives
    In developing the proposed rules on the retention of risk required 
under Section 15G of the Exchange Act, as added by Section 941(b) of 
the Dodd-Frank Act, the agencies considered a number of alternative 
approaches. Some of the alternatives were suggested by commenters 
following the previous rule proposals.
    For instance, commenters suggested other forms of risk retention 
such as: 5 percent participation interest in each securitized asset; 
for CLOs, a performance fee-based option; loss-absorbing subordinate 
financing in CMBS (such as ``rake bonds''); ``contractual'' risk 
retention; private mortgage insurance as a permissible form; 
overcollateralization; subordination; third-party credit enhancement; 
and conditional cash flows. The agencies believed that the costs and 
benefits of these options were not an improvement over the now proposed 
standard risk retention option. The Commission invites public comment 
regarding all aspects of the proposed approach and potential 
alternative approaches.
    Alternative amounts of risk retention include: Requiring sponsors 
to retain a fixed amount of more than 5 percent; Establishing the risk 
retention percentage depending on asset class; and establishing the 
risk retention requirement on a sliding scale depending on the (risk) 
characteristics of the underlying loans observable at origination 
(e.g., instead of the two level structure of 0 percent for exempted 
assets and 5 percent for the rest, to use 0 percent for exempted 
assets, 1 percent for assets with low expected credit risk, 2 percent 
with moderate risk, etc.). The Commission believes that these 
alternatives are overly complicated and may create undue compliance and 
compliance monitoring burden on market participants and regulators 
without providing material benefits over the proposed approaches. The 
Commission requests information about costs and benefits of these 
alternative risk retention parameters, in particular, the costs and 
benefits of requiring fixed risk retention amount of more than 5 
percent. Because there is no current risk retention requirement or 
voluntary compliance at levels above 5 percent, the Commission 
currently lacks sufficient data to quantitatively determine the optimal 
amount of risk retention across each asset class. The Commission seeks, 
in particular, data or other comment on the economic effects of the 5 
percent requirement or of other levels that the agencies have the 
discretion to implement. The Commission also requests comment on 
methodologies and data that could be used to quantitatively analyze the 
appropriate level of risk retention, both generally and for each asset 
class.
    Alternative sunset provisions include: requiring sponsors to hold 
retained pieces until maturity of issued ABS; making the sunset period 
depend on average maturity of the underlying loans; and making sunset 
gradual, i.e., to introduce gradual reduction in the retained 
percentage. At this point, the Commission assumes that these 
alternatives create additional costs, impose undue compliance and 
compliance monitoring burden on market participants and regulators 
without adding benefits. The sunset provision could also be implemented 
with cut off horizons different from the proposed five years for RMBS 
and two years for other asset classes and with pool balance cut offs 
different from the proposed 25 percent and 33 percent respectively. The 
agencies request information about costs and benefits of these 
alternative risk retention structures, in particular, about the 
currently proposed numerical parameters of the sunset provision. The 
Commission also requests comment on methodologies and data that could 
be used to quantitatively analyze the appropriate sunset horizons, both 
generally and for each asset class.
7. Exemptions
    As discussed above, there are overarching economic impacts of a 
risk retention requirement. Below the Commission describes the 
particular costs and benefits relevant to each of the asset classes 
included within this rule that the agencies exempt from risk retention.
a. Federally Insured or Guaranteed Residential, Multifamily, and Health 
Care Mortgage Loan Assets
    The agencies are proposing, without changes from the original 
proposal, the exemption from the risk retention requirements for any 
securitization transaction that is collateralized solely by 
residential, multifamily, or health care facility mortgage loan assets 
if the assets are insured or guaranteed in whole or in part as to the 
payment of principal and interest by the United States or an agency of 
the United States. The agencies are also proposing, without changes 
from the original proposal, the exemption from the risk retention 
requirements for any securitization transaction that involves the 
issuance of ABS if the ABS are insured or guaranteed as to the payment 
of principal and interest by the United States or an agency of the 
United States and that are collateralized solely by residential, 
multifamily, or health care facility mortgage loan assets, or interests 
in such assets.
    Relative to the baseline there is no cost or benefit associated 
with this exemption because risk retention is not currently mandated. 
However, by providing this exemption it will incentivize sponsors to 
use federally insured or guaranteed assets, which will have an impact 
on competition with other assets that are not federally insured or 
guaranteed. The agencies believe it is not necessary to require risk 
retention for these type of assets because investors will be 
sufficiently protected from loss because of the government guarantee 
and adding the cost of risk retention would create costs to sponsors 
where they are not necessary as the incentive alignment problem is 
already being addressed.
b. Securitizations of Assets Issued, Insured or Guaranteed by the 
United States or Any Agency of the United States
    The rules the agencies are proposing today contain full exemptions 
from risk retention for any securitization transaction if the ABS 
issued in the transaction were (1) collateralized solely (excluding 
servicing assets) by obligations issued by the United States or an 
agency of the United States; (2) collateralized solely (excluding 
servicing assets) by assets that are fully insured or guaranteed as to 
the payment of principal and interest by the United States or an agency 
of the United States (other than residential, multifamily, or health 
care facility mortgage loan securitizations discussed above); or (3) 
fully guaranteed as to the timely payment of principal and interest by 
the United States or any agency of the United States.
    Relative to the baseline there is no cost or benefit associated 
with this exemption because risk retention is not currently mandated. 
However, by providing this exemption it will incentivize sponsors to 
use federally insured or guaranteed assets, which will have an impact 
on competition with other assets that are not federally insured or 
guaranteed. The agencies believe it is not necessary to require risk 
retention for these type of assets because investors will be 
sufficiently protected from loss because of the government guarantee 
and adding the cost of risk retention would create costs to sponsors 
where they are not necessary as the

[[Page 58017]]

incentive alignment problem is already being addressed.
c. QRM
    As discussed above, the rules the agencies are re-proposing today 
exempt from required risk retention any securitization comprised of 
QRMs. Section 15G requires that ABS that are collateralized solely by 
QRMs be completely exempted from risk retention requirements, and 
allows the agencies to define the terms and conditions under which a 
residential mortgage would qualify as a QRM. Section 15G mandates that 
the definition of a QRM be ``no broader than'' the definition of a 
``qualified mortgage'' (QM), as the term is defined under Section 
129C(b)(2) of the Truth in Lending Act.
    Pursuant to the statutory mandate, the agencies have proposed to 
exempt ABS collateralized by QRMs, and pursuant to the discretion 
permitted, have proposed defining QRMs broadly as QMs. The Commission 
believes that this definition of QRM would achieve a number of 
important benefits. First, since the criteria used to define QMs focus 
on underwriting standards, safer product features, and affordability, 
the Commission preliminarily believes that equating QRMs with QMs is 
likely to promote more prudent lending, protect consumers, and 
contribute to a sustainable, resilient and liquid mortgage 
securitization market. Second, the Commission believes that a single 
mortgage quality standard (as opposed to creating a second mortgage 
quality standard) would benefit market participants by simplifying the 
requirements applicable to this market. Third, a broader definition of 
QRMs avoids the potential effect of squeezing out certain lenders, such 
as community banks and credit unions, which may not have sufficient 
resources to hold the capital associated with non-QRM mortgages, thus 
enhancing competition within this segment of the lending market. The 
Commission believes that this will increase borrower access to capital 
and facilitate capital formation in securitization markets. Finally, a 
broad definition of QRMs may help encourage the re-emergence of private 
capital in securitization markets. Since Enterprises would have a 
competitive securitizing advantage because of the proposed recognition 
of the guarantee of the Enterprises as fulfilling their risk-retention 
requirement and taxpayer backing, less restrictive QRM criteria would 
enhance the competitiveness of private securitizations and reduce the 
need to rely on low down-payment programs offered by Enterprises.
    Aligning QRM to QM would build into the provision certain loan 
product features that data indicates results in a lower risk of 
default. The Commission acknowledges that QM does not fully address the 
loan underwriting features that are most likely to result in a lower 
risk of default. However, the agencies have considered the entire 
regulatory environment, including regulatory consistency and the 
possible effects on the housing finance market. In addition, the 
agencies believe that other steps being considered may provide 
investors with information that allows them to appropriately assess 
this risk. The Commission has proposed rules that would require in 
registered RMBS transactions disclosure of detailed loan-level 
information at the time of issuance and on an ongoing basis. The 
proposal also would require that securitizers provide investors with 
this information in sufficient time prior to the first sale of 
securities so that they can analyze this information when making their 
investment decision.\263\
---------------------------------------------------------------------------

    \263\ See Asset-Backed Securities, SEC Release No. 33-9117, 75 
FR 23328 at 23335, 23355 (May 3, 2010).
---------------------------------------------------------------------------

    The Commission is aware, however, that defining QRMs broadly to 
equate with QMs may result in a number of economic costs. First, to the 
extent that risk retention reduces the risk exposure of ABS investors, 
a broader definition of QRMs will leave a larger number of ABS 
investors bearing more risk. Second, securitizers will not be required 
to retain an economic interest in the credit risk of QRM loans, and 
thus, the incentives between securitizers and those bearing the credit 
risk of a securitization will remain misaligned. An analysis of 
historical performance among loans securitized into private-label RMBS 
that originated between 1997 and 2009 shows that those meeting the QM 
standard sustained exceedingly high serious delinquency rates, greater 
than 30 percent during that period.\264\ Third, the QRM exemption is 
based on the premise that well-underwritten mortgages were not the 
cause of the financial crisis; however, the criteria for QM loans do 
not account for all borrower characteristics that may provide 
additional information about default rates. For instance, borrowers' 
credit history, their down payment and their loan-to-value ratio have 
been shown to be significantly associated with lower borrower default 
rates.\265\ Fourth, allowing securitizers to bear less risk in their 
securitizations avoids moderation of non-observable risk factors that 
could substantially harm ABS investors during contractionary housing 
periods. That is, investors would be better protected by a narrower QRM 
standard. Fifth, commenters argued that not allowing blended pools of 
QRMs and non-QRMs to qualify for a risk-retention exemption may limit 
securitizations, if lenders cannot originate enough QRMs. Although 
broadening the definition of QRMs reduces this concern, since blended 
pools will still require risk retention, mortgage liquidity may still 
be reduced.
---------------------------------------------------------------------------

    \264\ See Joshua White and Scott Bauguess, Qualified Residential 
Mortgage: Background Data Analysis on Credit Risk Retention, (August 
2013), available at http://www.sec.gov/divisions/riskfin/whitepapers/qrm-analysis-08-2013.pdf
    \265\ Id.
---------------------------------------------------------------------------

d. Qualified Automobile Loans, Qualified Commercial Real Estate Loans 
and Qualified Commercial Loans
    Similar to RMBS discussed above, the agencies have proposed to 
exempt securitizations containing certain qualified loans from the risk 
retention requirement. Specifically, the agencies proposed an exemption 
for qualified automobile loans, qualified commercial real estate loans 
and commercial loans. The benefit to exempted qualified loans from risk 
retention is that sponsors will have more capital available to deploy 
more efficiently. The economic consequences of exempting qualified 
loans are analogous to the discussion associated with requiring 
stricter lending standards than QM in the residential lending market. 
Also there will be fewer administrative, monitoring and compliance 
costs to be met due to the lack of risk retention. Lower costs of 
securitizing loans may enhance competition in the market for qualified 
auto, commercial real estate and commercial loans by allowing more 
firms to be profitable by exempting certain type of loans, sponsors 
have an incentive to misrepresent qualifications of loans, similar to 
what was observed in the financial crisis. One qualification 
surrounding whether or not a loan is qualified is that the sponsor is 
required to purchase any loan that fails to meet the underwriting 
criteria. The benefit of the previous qualification is that it helps to 
prevent and disincentivize sponsors from trying to include unqualified 
loans in the securitization.
e. Resecuritizations
    The agencies have identified certain resecuritizations where 
duplicative risk retention requirements would not appear to provide any 
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

[[Page 58018]]

received are evenly distributed to all security holders, are a unique 
category of resecuritizations. For such transactions, the 
resecuritization process would neither increase nor reallocate the 
credit risk of the underlying ABS. Therefore, there would be no 
potential cost to investors from possible 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 resecuritizations, the 
proposed rule seeks to ensure that this misalignment is addressed by 
not granting these resecuritizations with an exemption from risk 
retention. The proposed rules may have an adverse impact on capital 
formation and efficiency if they make certain resecuritization 
transactions costlier or infeasible to conduct.
f. Other Exemptions
    There are a few exemptions from risk retention included in the 
current proposal that were not included in the original proposal. They 
include exemptions for utility legislative securitizations, two options 
for municipal bond ``repackaging'' securitizations, and seasoned loans.
    With respect to utility legislative securitizations, the agencies 
believe the implicit state guarantee in place for these securitizations 
addresses the moral hazard problem discussed above and adding the cost 
of risk retention would create costs to sponsors where they are not 
necessary as the incentive alignment problem is already being 
addressed.
    For municipal bond repackaging securitizations, the agencies 
believe that the risk retention mechanisms already in place for these 
securitizations already serve to address the moral hazard problem 
discussed above and thus have proposed two options that would reflect 
current market practice.
    Seasoned loans have had a sufficient period of time to prove their 
performance and the agencies believe that providing an exemption for 
these assets consistent with the sunset in place for risk retention 
requirements addresses the moral hazard problem discussed above and 
adding the cost of risk retention would create costs to sponsors where 
they are not necessary as the incentive alignment problem is already 
being addressed.
    Relative to the baseline there is no cost or benefit associated 
with these exemptions because risk retention is not currently mandated. 
However, providing these exemptions would incentivize the creation of 
utility legislative securitizations, municipal bond ``repackaging'' 
securitizations, and securitizations with seasoned loans, which will 
have an impact on competition with other securitizations.
g. Alternatives
    Commenters asked for exemptions for specific asset classes such as: 
rental car securitization, tax lien-backed securities sponsored by a 
municipal entity, ``non-conduit'' CMBS transactions, corporate debt 
repackagings, and legacy loan securitizations. The agencies chose not 
to provide exemptions for these asset classes because the cost 
associated with retaining risk provided a benefit for these asset 
classes by aligning the incentive of the sponsor and the investor. 
These asset classes had either unfunded risk retention already in 
practice or had loans created before the new underwriting 
qualifications were in place. In either case there exists a 
misalignment between the sponsor and investors. In order to resolve 
this moral hazard risk retention is required.
8. Hedging, Transfer and Financing Restrictions
    Under the proposal, a sponsor and its consolidated affiliates 
generally would be prohibited from hedging or transferring the risk it 
is required to retain, except for currency and interest rate hedges and 
some index hedging. Additionally, the sponsor would be prohibited from 
financing the retained interest on a non-recourse basis.
    The main purpose of the hedging/transfer restrictions is to enforce 
the economic intent of the risk retention rule. Without the hedging/
transfer restrictions, sponsors could hedge/transfer their (credit) 
risk exposure to the retained ABS pieces, thereby eliminating the 
``skin in the game'' intent of the rule. Thus, the restriction is 
intended to prevent evasion of the rule's intent.
    Costs related to the hedging/transfer restrictions include direct 
administrative costs and compliance monitoring costs. Additionally, 
according to a few commenters, there is uncertainty about the 
interpretation of the proposed rules, namely, what constitutes 
permissible and impermissible hedges. Such uncertainty may induce 
strategic responses that are designed to evade the without violating 
the letter of the rule. For example, derivative or cash instrument 
positions can be used to hedge risk, but it may be difficult to 
determine whether such a hedge is designed to evade the rule.
9. Foreign Safe Harbor
    The proposal includes a safe harbor provision for certain, 
predominantly foreign, transactions based on the limited nature of the 
transactions' connections with the United States and U.S. investors. 
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. The exclusion would create compliance and 
monitoring cost savings compared to universally applying the risk 
retention rules to all ABS issues.
    The costs of foreign safe harbor exemptions would be small. ABS 
deals with a share of U.S. assets slightly above the threshold of 25 
percent and sold primarily to foreign investors may be restructured by 
sponsors to move the share below the threshold to avoid the need to 
satisfy the risk retention requirements. The number of such deals will 
likely be small \266\ and the resulting economic costs will be minimal.
---------------------------------------------------------------------------

    \266\ Since 2009, only 0.26 percent of all ABS in AB Alert 
database had primary location of collateral in the U.S., but were 
distributed outside of the U.S.
---------------------------------------------------------------------------

    There will be negligible effect of the exclusion on efficiency, 
competition and capital formation (compared to the universal 
application of the risk retention rule) because the affected ABS are 
foreign and not related to U.S. markets. In some instances, allowed by 
the foreign safe harbor provision, the effect on capital formation in 
the United

[[Page 58019]]

States would be positive. For example, foreign sponsors which acquire 
less than 25 percent of assets in the pool in the United States and 
sell the ABS to foreign investors to avoid risk retention requirement 
would create capital in the United States. The prevalence of such 
situations would depend on relative strictness of the United States and 
foreign risk retention rules, tax laws, and other relevant security 
regulations. (see also footnote 36). The effect of the same scenario on 
competition may be marginally negative for the United States sponsors 
involved in similar transactions (securitizing U.S.-based assets for 
sale to foreign investors) because the U.S. sponsors have to retain 
risk pieces by the virtue of being organized under the laws of the U.S.
    The proposal may have negative effect on foreign sponsors that seek 
U.S. investors because they may need to satisfy risk retention 
requirements of two countries (their home country and the United 
States) and, thus, the rule may reduce competition and investment 
opportunities for U.S. investors. The proposed rule is designed to 
provide flexibility for sponsors with respect to forms of eligible risk 
retention to permit foreign sponsors seeking a material U.S. investor 
base to retain risk in a format that satisfies both home country and 
U.S. regulatory requirements, without jeopardizing protection to the 
U.S. investors in the form of risk retention.
10. Request for Comment
    The Commission requests comments on the following questions:
    1. Are the descriptions of the current risk retention practices and 
structures or practices that align the interests of investors and 
sponsors correct with respect to all ABS asset classes, but, in 
particular, in the following: ABCP, CLO, RMBS, automobile loan backed 
ABS, and master trusts with seller's interests?
    2. With respect to current risk retention practices: what share of 
ABS interest is currently retained (less/more than 5 percent)? What 
type of ABS interest is currently retained (horizontal, vertical, L-
shaped, seller's interest)? When was this practice or structure 
developed (before or after the crisis, before or after the promulgation 
of Dodd-Frank Act)? Is information about risk retention (size or shape) 
for specific transactions disclosed to investors? To what extent is 
this practice or structure in response to regulatory restrictions 
(e.g., EU risk retention regulations or the FDIC safe harbor)?
    3. Is there a difference in historical delinquency rates/
performance of securitizations in which the sponsor retained ABS 
interests and securitizations in which the sponsor did not retain ABS 
interests? Is there a difference in the timing of defaults of 
securitizations in which the sponsor retained ABS interests and 
securitizations in which the sponsor did not retain ABS interests?
    4. What are the estimates of the potential costs of appointing the 
independent operating advisors for the proposed CMBS B-piece option?
    5. To what extent do the sponsor and/or its affiliates receive 
subordinated performance fees with respect to a securitization 
transaction? Are the subordinated performance fees received by the 
sponsor and its affiliates equal to or greater than the economic 
exposure they would get from the 5 percent risk retention requirements? 
Because subordinated performance fees only align incentives when the 
assets are performing above a certain threshold, should there be any 
additional restrictions on the use of performance fees to satisfy risk 
retention requirements?
    6. To the extent not already provided, what are the estimates of 
the cost (including opportunity cost) of 5 percent risk retention and 
how will 5 percent retention affect the interest rates paid by 
borrowers under securitized loans?
    7. What would be the costs of establishing the risk retention level 
above the statutory 5 percent? What would be the benefits?
    8. Are there any additional costs that the agencies should consider 
with respect to the risk retention?
    9. Are the sunset provision appropriate for RMBS (i.e., the latter 
of (x) 5 years and (y) the reduction of the asset pool to 25% of its 
original balance, but (z) no longer than 7 years) and all other asset 
classes (i.e., the latter of (x) 2 years and (y) the reduction of the 
asset pool balance to 33%)? What data can be used to support these or 
alternative sunset bounds?
    10. To what extent do the requirements and/or restrictions included 
in each of the risk retention options limit the ability of sponsors to 
use the option?
    11. To what extent are the deals funded by ABCP conduits included 
in the deal volumes for other asset classes?
    12. To the extent that a warehouse line is funded by the issuance 
of revolving ABS, is that ABS included in the deal volume?
    13. It would be helpful to receive additional information about the 
fees charged by sponsors for setting up securitizations, sponsors 
interpretation of their opportunity cost of capital, the interaction of 
regulatory capital with cost of capital, and historical returns of 
tranches of different asset classes in particular the residual 
interest.
    14. The Commission requests data about master trusts that would 
permit it to estimate the amount of risk currently retained.
    15. The Commission currently lacks sufficient data to 
quantitatively assess the potential impact of the proposed minimum 5 
percent retention requirement. In connection with the re-proposal, the 
Commission seeks data or other comment on the economic effects of the 
proposed minimum 5 percent requirement.
    The Commission also requests comment on methodologies and data that 
could be used to quantitatively analyze the appropriate level of risk 
retention, both generally and for each asset class.

Appendix: The Impact of Required Risk Retention on the Cost of Credit

    In this section, we outline a framework for evaluating the impact 
of required risk retention on the cost of credit, and apply it to a 
hypothetical securitization of prime mortgages. While the ultimate 
impact of required risk retention depends in part on the assumptions 
about how risk retention is funded by the sponsor, we conclude that 
incremental risk retention by the sponsor is unlikely to have a 
significant impact on the cost of credit. Our range of reasonable 
estimates of the cost of risk retention is between zero and 30 basis 
points. The former estimate is relevant when incremental retention is 
zero. The latter is relevant when the sponsor is currently retaining 
nothing, and incremental retention is funded entirely with sponsor 
equity.
I. Conceptual Framework
    The analysis below focuses on the impact of risk retention on the 
cost of credit through the cost of funding. If capital markets are 
efficient, the cost of funding an ABS interest directly in capital 
markets should be no different than funding the same ABS interest on 
the balance sheet of the sponsor. However, when capital markets are not 
efficient, risk retention can be costly, as the cost of funding credit 
through securitization is lower than funding on the sponsor's balance 
sheet. Here, we focus on measuring how much risk retention can increase 
the cost of credit to borrowers by forcing a sponsor to increase the 
amount of retention it is funding on its balance sheet.\267\
---------------------------------------------------------------------------

    \267\ As this cost is driven by financial market inefficiency, 
it is worth noting that financial innovation which reduces or 
eliminates this inefficiency over time will subsequently reduce or 
eliminate these costs.

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[[Page 58020]]

    The analysis starts by identifying the marginal amount and form of 
retention. In a typical securitization transaction, the sponsor is 
currently holding some risk retention without being prompted by 
regulation, typically in a first-loss position. In some circumstances, 
the proposed rule will increase the overall amount of retention by the 
sponsor, and it is only this increase that will have an impact on the 
cost of credit. If the sponsor's risk retention is already adequate to 
meet the rule, the implication is that the impact of the rule on the 
cost of credit is zero. In the analysis here, we focus first on the 
marginal retention required by the sponsor to meet the rule.\268\
---------------------------------------------------------------------------

    \268\ It is possible that restrictions proposed above on the 
timing of cash flow to an eligible horizontal residual interest 
(EHRI) will also have an impact on the cost of credit. In 
particular, an increase in the duration of first-loss cash flows may 
prompt the sponsor to increase the required yield on the EHRI. As we 
have found reasonable changes in the yield to have insignificant 
impact on the analysis here, it is ignored it for simplicity.
---------------------------------------------------------------------------

(1) Marginal Risk Retention = Required Risk Retention-Current Risk 
Retention
    For the purposes of this example, assume the sponsor currently 
holds a first loss position equal to 3 percent of the fair value of all 
ABS interests (Current Risk Retention), and consequently needs to hold 
eligible interests with fair value of an additional 2 percent (Marginal 
Risk Retention) in order to meet the 5 percent standard (Required Risk 
Retention).
    We assume that the sponsor has three options to fund this Marginal 
Risk Retention of 2 percent. In the first option, the sponsor funds 
entirely with new equity. In the second option, the sponsor funds part 
of the marginal risk retention with maturity-matched debt secured by 
the ABS interest and recourse to the sponsor, and the rest with new 
equity. In the final option, the sponsor funds part of the marginal 
risk retention with short-term bi-lateral repo secured by the ABS 
interest and recourse to the sponsor, and the rest with new equity.
    Regardless of the funding strategy, the framework outlined below is 
focused on calculating the sponsor's return on marginal equity. This 
calculation has three components: The Amount of Incremental Equity by 
the sponsor, the Gross Yield on the Retained ABS Interest, and the Cost 
of Debt Funding. We review each of these in turn. The amount of 
incremental equity is simply the amount of incremental funding in the 
form of sponsor equity, and it varies across sponsor funding strategy.
(2) Amount of Incremental Equity = Percent of Equity in Incremental 
Funding x Marginal Risk Retention (1)
    Assuming the marginal risk retention requirement of 2 percent from 
the example above, when the sponsor funds marginal risk retention only 
with equity, the Percent Equity in Incremental Funding is 100 percent, 
and the Amount of Incremental Equity is 2 percent (= 1 x 0.02). 
However, if the sponsor funds with 80 percent term debt, the Percent of 
Equity in Incremental Funding is 20 percent, and the Amount of 
Incremental Equity is 0.4 percent (= 0.20 x 0.02). Finally, when the 
sponsor funds marginal risk retention with bi-lateral repo of 90 
percent, the Percent of Equity in Incremental Funding would be 10 
percent, and the Amount of Incremental Equity is 0.2 percent (= 0.10 x 
0.02).
    The Gross Yield at Issue on the Marginal Retained ABS interests by 
the sponsor is an important input to the calculation below, as it 
measures the sponsor's return from holding risk retention. As the gross 
yield increases, all else equal, the cost of risk retention will 
decrease, as the sponsor is being compensated more for its position.
(3) Gross Yield = Yield at Issue on Marginal Retained ABS Interest(s)
    In the motivating example here, we assume the gross yield on 
marginal ABS interests retained is 4 percent.
    In order to calculate the return on marginal equity, it is 
necessary to measure the difference between Gross Yield and the Cost of 
Debt Funding, where the latter is simply the product of the cost of 
incremental debt funding times the amount of debt in the capital 
structure.
(4) Cost of Debt Funding = Percent of Debt in Incremental Funding x 
Cost of Incremental Debt
    When the sponsor only uses equity to fund incremental retention, 
the amount of incremental debt is 0 percent and Cost of Debt Funding is 
zero. When the sponsor uses term debt in 80 percent of the capital 
structure at a cost of 5 percent, the Cost of Debt Funding is 4 percent 
(= 0.8 x 0.05). Finally, when the sponsor uses bi-lateral repo in 90 
percent of the capital structure at a cost of 4 percent, the Cost of 
Debt Funding is 3.6 percent (= 0.9 x 0.04).
    The next step in calculating the marginal return on equity is 
measurement of the Net Yield on marginal retention, which is equal to 
the difference between the gross yield and the cost of debt funding.
(5) Net Yield = Gross Yield (3)-Cost of Debt Funding (4)
    In our examples from above, the Net Yield of the all equity funding 
strategy is 4 percent (= 0.04-0), of the term debt funding strategy is 
0 percent (= 0.04-0.04), and of the bi-lateral repo funding strategy is 
0.4 percent (= 0.04-0.036) percent. Finally, the Return on Marginal 
Equity is the ratio of the Net Yield to the Amount of Incremental 
Equity. It is the actual return to marginal sponsor equity, taking the 
current cost of credit as given.
(6) Return on Marginal Equity = Net Yield (5)/Percent of Equity in 
Incremental Funding
    In our examples from above, the Return on Marginal Equity of the 
all equity funding strategy is 4 percent (= 0.04/1), of the term debt 
funding strategy is 0 percent (= 0/0.2), and of the bi-lateral repo 
funding strategy is 4 percent (= 0.004/0.1).
    These Returns on Marginal Equity are likely to be too low to incent 
the sponsor to go forward with the transaction. In order to remediate 
this problem, we measure the ROE shortfall as the difference, if 
positive, between the sponsor's target return on marginal equity and 
the actual return on marginal equity. This number represents how much 
the sponsor's ROE on marginal equity needs to increase to meet the 
target return.
(7) ROE Shortfall = max (0,Target Return on Equity-Return on Marginal 
Equity (6))
    While we will let the target Return on Marginal Equity vary with 
the funding strategy and risk of the ABS interest retained in the 
detailed example below, for simplicity assume now that the Target 
Return on Equity is 10 percent. Following our example, this leads to an 
ROE shortfall of 6 percent (= 0.10-0.04) for the all equity strategy, 
of 10 percent (= 0.10-0.0) for the term debt funding strategy, and of 6 
percent (= 0.10-0.04) for the bi-lateral repo funding strategy.
    In order to eliminate the shortfall, it is necessary to increase 
the Return on Marginal Equity, which is done by generating more cash 
flow for the sponsor. As all cash flow has been exhausted through 
payments to ABS interests, this can only be done by increasing the 
yield on the underlying assets, which is the measured increase in the 
cost of credit. Note that the incremental cash flow from the higher 
mortgage coupon only needs to flow to the sponsor.\269\
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    \269\ In particular, since we have valued all of the other ABS 
interests at market prices, and the rule does not affect investors 
in those interests, it is safe to assume those tranches can continue 
to be sold at the same price. It is possible that risk retention 
could reduce the yield demanded by investors on those interests, but 
for conservatism we ignore that impact here.

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[[Page 58021]]

    While it is unclear how a sponsor might ultimately structure the 
transaction to capture this incremental cash flow, we assume for 
illustrative purposes here that the sponsor creates a senior IO strip 
in the amount of the incremental yield on the assets, and holds that IO 
strip along with incremental retention.\270\ As the sponsor receives 
100 percent of the cash flow from the incremental cost of credit, small 
changes in the cost of credit can have a large impact on the return on 
marginal equity.\271\
---------------------------------------------------------------------------

    \270\ It is possible that the sponsor would structure this cash 
flow to be an eligible form of retention, and reduce the amount of 
incremental retention, but for conservatism we ignore that impact 
here.
    \271\ The impact of the higher coupon on the return on marginal 
equity is driven by two factors. First, a one basis point increase 
in the mortgage coupon only has to be distributed to the sponsor's 
incremental ABS interest, which in this example is only 2 percent. 
Second, when the sponsor uses leverage through debt, the amount of 
marginal equity is a fraction of the incremental ABS interest. These 
two levels of leverage permit small changes in the mortgage coupon 
to have a relatively large impact on the return on marginal equity.
---------------------------------------------------------------------------

    In our example when the sponsor funds incremental risk retention 
entirely with equity, an increase in the yield on assets by 12 basis 
points, when divided by the amount of incremental equity of 2 percent, 
results in an additional return to marginal equity of 6 percent (=0.12/
0.02). It follows that it would only take a 12 basis point increase in 
the cost of credit to compensate the sponsor for the funding cost of 
incremental risk retention entirely with equity when using a Target 
Return on Incremental Equity of 10 percent.
    More generally, the potential impact of risk retention on the cost 
of credit is equal to the product of the ROE shortfall and the amount 
of incremental equity.
    (8) Impact on Cost of Credit = ROE shortfall (7) x Amount of 
Incremental Equity (2) Substituting earlier equations into (8) results 
in the simple following approximation to the impact of risk retention 
on the cost of credit:
    (9) Impact on the Cost of Credit = Max {0,Target Return on Marginal 
Equity-[Yield on Marginal Retained Interest-(Cost of Incremental Debt x 
(1-Amount of Incremental Equity))]/Amount of Incremental Equity{time}  
x Amount of Incremental Risk Retention x Amount of Incremental Equity
    The equation above demonstrates that the impact of the proposed 
rule on the cost of credit is increasing in the following variables: 
(i) Target return on marginal equity, (ii) cost of incremental debt, 
(iii) amount of incremental risk retention, and (iv) yield on marginal 
retained interest. The impact of the amount of incremental equity is 
ambiguous, as it depends on the cost of incremental debt.
II. Application
    In order to illustrate the framework, we will focus on the 
hypothetical securitization of prime mortgage loans illustrated below. 
The first column documents class name, the second column documents 
tranche NRSRO rating, the third column documents tranche type, the 
fourth column face amount, the fifth column documents tranche coupon, 
and the sixth column is the ratio of tranche face amount (4) to total 
face amount (the sum of face amounts for all non-IO tranches). Using 
cash flow assumptions consistent with prime mortgage loans as well as 
the yield assumption from (9), we compute the price in column (7).\272\ 
The value (8) is simply equal to the price (7) multiplied by the 
balance (6) divided by 100.
---------------------------------------------------------------------------

    \272\ The analysis assumes 15 percent CPR (constant prepayment 
rate), 0 percent CDR (constant default rate), 30 percent loss 
severity, 24-month recovery lag, and employs the forward interest 
rate curve as of 22 May 2013.
[GRAPHIC] [TIFF OMITTED] TP20SE13.001

The Amount and Form of Risk Retention

    There are three ways for the sponsor of this mortgage transaction 
to comply with the proposed rule which we will evaluate here: an 
eligible horizontal retained interest, a vertical interest, or an L-
shaped interest. We review each of these in turn.

[[Page 58022]]

[GRAPHIC] [TIFF OMITTED] TP20SE13.002

    Under the horizontal risk retention option, the sponsor must hold 
ABS interests from the bottom of the capital structure up until the 
value of those interests is no less than 5 percent of the fair value of 
ABS interests. As the value of all ABS interests is $102.5 from Figure 
A1, the value of the horizontal form must be 5.13 percent (=$102.5 x 
5%). The table above illustrates that in order for the sponsor to 
comply with the rule, the sponsor must hold 83.92 percent of the B1 
tranche, as well as 100 percent of all junior tranches, in order to 
meet required retention with horizontal. The value-weighted yield on 
this interest is 5.24 percent.
    Under the L-shaped risk retention option, the sponsor can hold any 
combination of horizontal and vertical interests as long as the 
aggregate fair value is 5.13 percent. We focus here on the sponsor 
holding the non-investment grade part of the capital structure as 
horizontal and the rest vertical. The middle columns illustrate that 
the bottom two tranches (B4 and B5), together represent about 0.64 
percent of fair value, implying that the sponsor needs to hold vertical 
interests with fair value of 4.49 percent. The table illustrates that 
holding 4.4 percent of each of the remaining ABS interests accomplishes 
this requirement, resulting in a value-weighted yield of 4.01 percent.
    Finally, under the vertical risk retention option, the sponsor must 
hold 5 percent of each ABS interest, which mechanically ensures that 
the fair value of those interests is equal to 5.13 percent, and has a 
yield of 2.71 percent.

The Cost of All Equity Funding

    In this section we take the conservative approach that eligible 
risk retention is funded entirely with equity. As finance theory 
suggests that the required return on sponsor equity should be 
determined largely by the risk of asset funded by equity, we assume 
that equity has a required risk-adjusted rate of return which is 
increasing in the risk of the marginal retained ABS interest. In 
particular, when equity is funding the safest form of risk retention--
the vertical form--we assume the required yield is only 7 percent. 
However, when equity is funding the L-shaped form, which is more risky 
than the vertical form but not as risky as horizontal form, we assume 
the required yield increases to 9 percent. Finally, when equity is 
funding the horizontal form, the most risky of all eligible forms, we 
assume the required yield is 11 percent.
[GRAPHIC] [TIFF OMITTED] TP20SE13.003

    In the ``ROE from Retained'' row, the table reports the actual 
return on equity from the retained position, which in every 
circumstance is below the target return on equity. This difference, 
measured in the next row as ``ROE shortfall,'' measures the additional 
yield which must be generated in order compensate equity for its 
required return. For example, when horizontal is funded by full equity, 
the ROE is 5.24

[[Page 58023]]

percent, which is 5.76 percent below the target return of 11 percent.
    For conservatism, we assume that the sponsor was not retaining 
anything without the rule, so the ``Marginal Equity'' is 5 percent. The 
last row computes the coupon impact, which is simply equal to the 
product of Marginal Equity and the ROE shortfall, as all additional 
cash flow from a higher mortgage coupon can be directed to equity. 
Overall, the table illustrates that in a conservative funding 
structure, where the sponsor had no retention before the rule, the 
impact of the proposed rule on the mortgage coupon varies between 21 
and 29 basis points.

The Cost of Risk Retention With Term Debt Funding

    In the example below, we focus on sponsor funding of incremental 
risk retention using a capital structure which varies with the risk of 
the underlying incremental ABS interest: 20 percent equity when 
incremental retention is horizontal, 10 percent equity when incremental 
retention is L-shaped interest, and 5 percent equity incremental 
retention is vertical. The cost of term debt is assumed to be 30-day 
LIBOR plus 6 percent, using the average for a BBB-rated sponsor at a 
maturity of 7-10 years. Given the presence of leverage in the capital 
structure, we assume the cost of equity is 2 percentage points higher 
to fund each type of ABS interest than when funded entirely with 
equity. Using the conceptual framework outlined above, the measured 
impact of risk retention on the cost of credit, illustrated in the last 
line, varies between 12 and 18 basis points.\273\
---------------------------------------------------------------------------

    \273\ For simplicity, we do not vary the cost of debt across the 
risk of the asset portfolio, as this has a second-order impact on 
the result.
[GRAPHIC] [TIFF OMITTED] TP20SE13.004

The Cost of Risk Retention With Bi-Lateral Repo Funding

    In the final approach, we permit the sponsor to follow a more 
aggressive strategy where funding eligible risk retention is funded in 
part with bi-lateral repo. In particular, we assume that only the 
investment-grade portion of the retained interest is funded by repo, 
with a haircut of 10 percent and cost of 4.25 percent, and the rest is 
funded with equity. The cost of repo funding includes a cost of 30-day 
LIBOR plus 2 percent to the repo counterparty combined with a cost of 2 
percent for a fixed-for-floating rate interest rate swap, using a 
maturity of seven years. As repo involves maturity transformation and 
creates unique risks to the sponsor beyond those created just by 
leverage, we further increase the cost of equity funding by another 2 
percentage points above and beyond the equity yield used in the term 
leverage example above. Results suggest that the impact of the proposed 
rule on the cost of credit, when a sponsor funds the marginal retained 
interest with bi-lateral repo, is between 6 and 12 basis points.

[[Page 58024]]

[GRAPHIC] [TIFF OMITTED] TP20SE13.005

D. OCC Unfunded Mandates Reform Act of 1995 Determination

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (UMRA) requires that an agency prepare a budgetary impact 
statement before promulgating a rule that includes a Federal mandate 
that may result in an expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million, adjusted for inflation, ($150 million in 2013) or more in any 
one year. If a budgetary impact statement is required, section 205 of 
the UMRA also requires an agency to identify and consider a reasonable 
number of regulatory alternatives before promulgating a rule.
    Based on current and historical supervisory data on national bank 
and Federal savings association securitization activity, the OCC 
estimates that as of December 31, 2012, there were 56 national banks 
and Federal savings associations that engaged in any securitization 
activity during that year. These entities may be affected by the 
proposed rule. Pursuant to the proposed rule, national banks and 
Federal savings associations would be required to retain approximately 
$3.0 billion of credit risk, after taking into consideration the 
proposed exemptions for QRMs and other qualified assets. This amount 
reflects the marginal increase in risk retention required to be held 
based on the proposed rule, that is, the total risk retention required 
by the rule less the amount of ABS interests already held by 
securitizers that would meet the definitions for eligible risk 
retention.
    The cost of retaining these interests 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 $3.0 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 2 
percent of the retained amount, or approximately $60 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 the required 
disclosures. The OCC estimates that the implementation and disclosure 
will require approximately 480 hours per institution, or at $92 per 
hour, approximately $44,000 per institution. The OCC estimates that the 
rule will apply to as many as 56 national banks and Federal savings 
associations. Thus, the estimated total administrative cost of the 
proposed rule is approximately $2.5 million, and the estimated total 
cost of the proposed rule applied to ABS is $62.5 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 $150.0 million or more. Accordingly, the OCC has 
not prepared a budgetary impact statement or specifically addressed the 
regulatory alternatives considered.

E. Commission: Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \274\ 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:
---------------------------------------------------------------------------

    \274\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

     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.

F. 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

[[Page 58025]]

liability.\275\ 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.
---------------------------------------------------------------------------

    \275\ See 12 U.S.C. 4513.
---------------------------------------------------------------------------

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 Standard risk retention.
----.5 Revolving master trusts.
----.6 Eligible ABCP conduits.
----.7 Commercial mortgage-backed securities.
----.8 Federal National Mortgage Association and Federal Home Loan 
Mortgage Corporation ABS.
----.9 Open market CLOs.
----.10 Qualified tender option bonds.
Subpart C--Transfer of Risk Retention
----.11 Allocation of risk retention to an originator.
----.12 Hedging, transfer and financing prohibitions.
Subpart D--Exceptions and Exemptions
----.13 Exemption for qualified residential mortgages.
----.14 Definitions applicable to qualifying commercial loans, 
commercial real estate loans, and automobile loans.
----.15 Exceptions for qualifying commercial loans, commercial real 
estate loans, and automobile loans.
----.16 Underwriting standards for qualifying commercial loans.
----.17 Underwriting standards for qualifying CRE loans.
----.18 Underwriting standards for qualifying automobile loans.
----.19 General exemptions.
----.20 Safe harbor for certain foreign-related transactions.
----.21 Additional exemptions.

Subpart A--Authority, Purpose, Scope and Definitions


Sec.  ----.1  [Reserved]


Sec.  ----.2  Definitions.

    For purposes of this part, the following definitions apply:
    ABS interest means:
    (1) Any type of interest or obligation issued by an issuing entity, 
whether or not in certificated form, including a security, obligation, 
beneficial interest or residual interest, payments on which are 
primarily dependent on the cash flows of the collateral owned or held 
by the issuing entity; and
    (2) Does not include common or preferred stock, limited liability 
interests, partnership interests, trust certificates, or similar 
interests that:
    (i) Are issued primarily to evidence ownership of the issuing 
entity; and
    (ii) The payments, if any, on which are not primarily dependent on 
the cash flows of the collateral held by the issuing entity; and
    (3) Does not include the right to receive payments for services 
provided by the holder of such right, including servicing, trustee 
services and custodial services.
    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.
    Asset means a self-liquidating financial asset (including but not 
limited to a loan, lease, mortgage, or receivable).
    Asset-backed security has the same meaning as in section 3(a)(79) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(79)).
    Appropriate Federal banking agency has the same meaning as in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
    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.
    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.  --
--.14.
    Commission means the Securities and Exchange Commission.
    Control including the terms ``controlling,'' ``controlled by'' and 
``under common control with'':
    (1) Means the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
person, whether through the ownership of voting securities, by 
contract, or otherwise.
    (2) Without limiting the foregoing, a person shall be considered to 
control another person if the first person:
    (i) Owns, controls or holds with power to vote 25 percent or more 
of any class of voting securities of the other person; or
    (ii) Controls in any manner the election of a majority of the 
directors, trustees or persons performing similar functions of the 
other person.
    Credit risk means:
    (1) The risk of loss that could result from the failure of the 
borrower in the case of a securitized asset, or the issuing entity in 
the case of an ABS interest in the issuing entity, to make required 
payments of principal or interest on the asset or ABS interest on a 
timely basis;
    (2) The risk of loss that could result from bankruptcy, insolvency, 
or a similar proceeding with respect to the borrower or issuing entity, 
as appropriate; or
    (3) The effect that significant changes in the underlying credit 
quality of the asset or ABS interest may have on the market value of 
the asset or ABS interest.
    Creditor has the same meaning as in 15 U.S.C. 1602(g).
    Depositor means:
    (1) The person that receives or purchases and transfers or sells 
the securitized assets to the issuing entity;
    (2) The sponsor, in the case of a securitization transaction where 
there is not an intermediate transfer of the assets from the sponsor to 
the issuing entity; or
    (3) The person that receives or purchases and transfers or sells 
the securitized assets to the issuing entity in the case of a 
securitization transaction where the person transferring or selling the 
securitized assets directly to the issuing entity is itself a trust.
    Eligible horizontal residual interest means, with respect to any 
securitization transaction, an ABS interest in the issuing entity:
    (1) That is an interest in a single class or multiple classes in 
the issuing entity, provided that each interest meets, individually or 
in the aggregate, all of the requirements of this definition;
    (2) With respect to which, on any payment date on which the issuing

[[Page 58026]]

entity has insufficient funds to satisfy its obligation to pay all 
contractual interest or principal due, any resulting shortfall will 
reduce amounts paid to the eligible horizontal residual interest prior 
to any reduction in the amounts paid to any other ABS interest, whether 
through loss allocation, operation of the priority of payments, or any 
other governing contractual provision (until the amount of such ABS 
interest is reduced to zero); and
    (3) That has the most subordinated claim to payments of both 
principal and interest by the issuing entity.
    Eligible vertical interest means, with respect to any 
securitization transaction, a single vertical security or an interest 
in each class of ABS interests in the issuing entity issued as part of 
the securitization transaction that constitutes the same portion of the 
fair value of each such class.
    Federal banking agencies means the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, and the 
Federal Deposit Insurance Corporation.
    GAAP means generally accepted accounting principles as used in the 
United States.
    Issuing entity means, with respect to a securitization transaction, 
the trust or other entity:
    (1) That owns or holds the pool of assets to be securitized; and
    (2) In whose name the asset-backed securities are issued.
    Majority-owned affiliate of a sponsor means an entity that, 
directly or indirectly, majority controls, is majority controlled by or 
is under common majority control with, the sponsor. For purposes of 
this definition, majority control means ownership of more than 50 
percent of the equity of an entity, or ownership of any other 
controlling financial interest in the entity, as determined under GAAP.
    Originator means a person who:
    (1) Through an extension of credit or otherwise, creates an asset 
that collateralizes an asset-backed security; and
    (2) Sells the asset directly or indirectly to a securitizer or 
issuing entity.
    Residential mortgage means a transaction that is a covered 
transaction as defined in section 1026.43(b) of Regulation Z (12 CFR 
1026.43(b)(1)) and any transaction that is exempt from the definition 
of ``covered transaction'' under section 1026.43(a) of Regulation Z (12 
CFR 1026.43(a)).
    Retaining sponsor means, with respect to a securitization 
transaction, the sponsor that has retained or caused to be retained an 
economic interest in the credit risk of the securitized assets pursuant 
to subpart B of this part.
    Securitization transaction means a transaction involving the offer 
and sale of asset-backed securities by an issuing entity.
    Securitized asset means an asset that:
    (1) Is transferred, sold, or conveyed to an issuing entity; and
    (2) Collateralizes the ABS interests issued by the issuing entity.
    Securitizer with respect to a securitization transaction shall mean 
either:
    (1) The depositor of the asset-backed securities (if the depositor 
is not the sponsor); or
    (2) The sponsor of the asset-backed securities.
    Servicer means any person responsible for the management or 
collection of the securitized assets or making allocations or 
distributions to holders of the ABS interests, but does not include a 
trustee for the issuing entity or the asset-backed securities that 
makes allocations or distributions to holders of the ABS interests if 
the trustee receives such allocations or distributions from a servicer 
and the trustee does not otherwise perform the functions of a servicer.
    Servicing assets means rights or other assets designed to assure 
the timely distribution of proceeds to ABS interest holders and assets 
that are related or incidental to purchasing or otherwise acquiring and 
holding the issuing entity's securitized assets. Servicing assets 
include amounts received by the issuing entity as proceeds of rights or 
other assets, whether as remittances by obligors or as other 
recoveries.
    Single vertical security means, with respect to any securitization 
transaction, an ABS interest entitling the sponsor to specified 
percentages of the principal and interest paid on each class of ABS 
interests in the issuing entity (other than such single vertical 
security), which specified percentages result in the fair value of each 
interest in each such class being identical.
    Sponsor means a person who organizes and initiates a securitization 
transaction by selling or transferring assets, either directly or 
indirectly, including through an affiliate, to the issuing entity.
    State has the same meaning as in Section 3(a)(16) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(16)).
    United States means the United States of America, its territories 
and possessions, any State of the United States, and the District of 
Columbia.
    Wholly-owned affiliate means an entity (other than the issuing 
entity) that, directly or indirectly, wholly controls, is wholly 
controlled by, or is wholly under common control with, a sponsor. For 
purposes of this definition, ``wholly controls'' means ownership of 100 
percent of the equity of an entity.

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 (or majority-
owned affiliate of the sponsor) shall retain an economic interest in 
the credit risk of the securitized assets in accordance with any one of 
Sec. Sec.  ----.4 through ----.10.
    (b) Multiple sponsors. If there is more than one sponsor of a 
securitization transaction, it shall be the responsibility of each 
sponsor to ensure that at least one of the sponsors of the 
securitization transaction (or at least one of their majority-owned 
affiliates) retains an economic interest in the credit risk of the 
securitized assets in accordance with any one of Sec. Sec.  ----.4 
through ----.10.


Sec.  ----.4  Standard risk retention.

    (a) Definitions. For the purposes of this section, the following 
definitions apply:
    Closing Date Projected Cash Flow Rate for any payment date shall 
mean the percentage obtained by dividing:
    (1) The fair value of all cash flow projected, as of the 
securitization closing date, to be paid to the holder of the eligible 
horizontal residual interest (or, if a horizontal cash reserve account 
is established pursuant to this section, released to the sponsor or 
other holder of such account), through such payment date (including 
cash flow projected to be paid to such holder on such payment date) by
    (2) The fair value of all cash flow projected, as of the 
securitization closing date, to be paid to the holder the eligible 
horizontal residual interest (or, with respect to any horizontal cash 
reserve account, released to the sponsor or other holder of such 
account), through the maturity of the eligible horizontal residual 
interest (or the termination of the horizontal cash reserve account). 
In calculating the fair value of cash flows and the amount of cash flow 
so projected to be paid, the issuing entity shall use the same 
assumptions and discount rates as were used in determining the fair 
value of the eligible horizontal residual interest (or the amount that 
must be placed in an eligible horizontal cash reserve account, equal to 
the fair value of an eligible horizontal residual interest).

[[Page 58027]]

    Closing Date Projected Principal Repayment Rate for any payment 
date shall mean the percentage obtained by dividing:
    (1) The amount of principal projected, as of the securitization 
closing date, to be paid on all ABS interests through such payment date 
(or released from the horizontal cash reserve account to the sponsor or 
other holder of such account), including principal payments projected 
to be paid on such payment date by
    (2) The aggregate principal amount of all ABS interests issued in 
the transaction. In calculating the projected principal repayments, the 
issuing entity shall use the same assumptions as were used in 
determining the fair value of the ABS interests in the transaction (or 
the amount that must be placed in an eligible horizontal cash reserve 
account, equal to the fair value of an eligible horizontal residual 
interest).
    (b) General requirement. (1) Except as provided in Sec. Sec.  --
--.5 through ----.10, the sponsor of a securitization transaction must 
retain an eligible vertical interest or eligible horizontal residual 
interest, or any combination thereof, in accordance with the 
requirements of this section. The fair value of the amount retained by 
the sponsor under this section must equal at least 5 percent of the 
fair value of all ABS interests in the issuing entity issued as part of 
the securitization transaction, determined in accordance with GAAP. The 
fair value of the ABS interests in the issuing entity (including any 
interests required to be retained in accordance with this part) must be 
determined as of the day on which the price of the ABS interests to be 
sold to third parties is determined.
    (2) A sponsor retaining any eligible horizontal residual interest 
(or funding a horizontal cash reserve account) pursuant to this section 
must prior to the issuance of the eligible horizontal residual interest 
(or funding of a horizontal cash reserve account), or at the time of 
any subsequent issuance of ABS interests, as applicable:
    (i) Calculate the Closing Date Projected Cash Flow Rate and Closing 
Date Projected Principal Repayment Rate for each payment date;
    (ii) Certify to investors that it has performed the calculations 
required by paragraph (b)(2)(i) of this section and that the Closing 
Date Projected Cash Flow Rate for each payment date does not exceed the 
Closing Date Projected Principal Repayment Rate for such payment date; 
and
    (iii) Maintain record of the calculations and certification 
required under this paragraph (b)(2) in accordance with paragraph (e) 
of this section.
    (c) Option to hold base amount in horizontal cash reserve account. 
In lieu of retaining all or any part of an eligible horizontal residual 
interest under paragraph (b) 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 equal 
to the fair value of such eligible horizontal residual interest or part 
thereof, provided that the account meets all of the following 
conditions:
    (1) The account is held by the trustee (or person performing 
similar functions) in the name and for the benefit of the issuing 
entity;
    (2) Amounts in the account are invested only in:
    (i) (A) United States Treasury securities with maturities of one 
year or less;
    (B) 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; or
    (ii) With respect to securitization transactions in which the ABS 
interests or the securitized assets are denominated in a currency other 
than U.S. dollars:
    (A) Sovereign bonds denominated in such other currency with 
maturities of one year or less; or
    (B) Fully insured deposit accounts denominated, in such other 
foreign currency and held in 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
    (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 to satisfy an 
amount due on any ABS interest;
    (ii) No other amounts may be withdrawn or distributed from the 
account unless the sponsor has complied with paragraphs (b)(2)(i) and 
(ii) of this section and the amounts released to the sponsor or other 
holder of the horizontal cash reserve account do not exceed, on any 
release date, the Closing Date Principal Repayment Rate as of that 
release date; and
    (iii) Interest on investments made in accordance with paragraph 
(c)(2) of this section may be released once received by the account.
    (d) Disclosures. A sponsor relying on this section shall provide, 
or cause to be provided, to potential investors a reasonable period of 
time prior to the sale of the asset-backed securities in the 
securitization transaction the disclosures in written form set forth in 
this paragraph (d) under the caption ``Credit Risk Retention'':
    (1) Horizontal interest. With respect to any eligible horizontal 
residual interest held under paragraph (a) of this section, a sponsor 
must disclose:
    (i) The fair value (expressed as a percentage of the fair value of 
all of the ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS are issued, as applicable)) of the eligible horizontal residual 
interest the sponsor will retain (or did retain) at the closing of the 
securitization transaction, and the fair value (expressed as a 
percentage of the fair value of all of the ABS interests issued in the 
securitization transaction and dollar amount (or corresponding amount 
in the foreign currency in which the ABS are issued, as applicable)) of 
the eligible horizontal residual interest that the sponsor is required 
to retain under this section;
    (ii) A description of the material terms of the eligible horizontal 
residual interest to be retained by the sponsor;
    (iii) A description of the methodology used to calculate the fair 
value of all classes of ABS interests, including any portion of the 
eligible horizontal residual interest retained by the sponsor;
    (iv) The key inputs and assumptions used in measuring the total 
fair value of all classes of ABS interests, and the fair value of the 
eligible horizontal residual interest retained by the sponsor, 
including but not limited to quantitative information about each of the 
following, as applicable:
    (A) Discount rates;
    (B) Loss given default (recovery);
    (C) Prepayment rates;
    (D) Defaults;
    (E) Lag time between default and recovery; and
    (F) The basis of forward interest rates used.
    (v) The reference data set or other historical information used to 
develop the key inputs and assumptions referenced in paragraph 
(d)(1)(iv) of this section, including loss given default and actual 
defaults.
    (vi) As of a disclosed date which is no more than sixty days prior 
to the closing

[[Page 58028]]

date of the securitization transaction, the number of securitization 
transactions securitized by the sponsor during the previous five-year 
period in which the sponsor retained an eligible horizontal residual 
interest pursuant to this section, and the number (if any) of payment 
dates in each such securitization on which actual payments to the 
sponsor with respect to the eligible horizontal residual interest 
exceeded the cash flow projected to be paid to the sponsor on such 
payment date in determining the Closing Date Projected Cash Flow Rate.
    (vii) If the sponsor retains risk through the funding of a 
horizontal cash reserve account:
    (A) The amount to be placed (or that is placed) by the sponsor in 
the horizontal cash reserve account at closing, and the fair value 
(expressed as a percentage of the fair value of all of the ABS 
interests issued in the securitization transaction and dollar amount 
(or corresponding amount in the foreign currency in which the ABS are 
issued, as applicable)) of the eligible horizontal residual interest 
that the sponsor is required to fund through the cash account under 
this section; and
    (B) A description of the material terms of the horizontal cash 
reserve account; and
    (C) The disclosures required in paragraphs (d)(1)(iii) through (vi) 
of this section.
    (2) Vertical interest. With respect to any eligible vertical 
interest retained under paragraph (a) of this section:
    (i) Whether the sponsor will retain (or did retain) the eligible 
vertical interest as a single vertical security or as a separate 
proportional interest in each class of ABS interests in the issuing 
entity issued as part of the securitization transaction;
    (ii) With respect to an eligible vertical interest retained as a 
single vertical security:
    (A) The fair value amount of the single vertical security that the 
sponsor will retain (or did retain) at the closing of the 
securitization transaction and the fair value amount of the single 
vertical security that the sponsor is required to retain under this 
section; and
    (B) Each class of ABS interests in the issuing entity underlying 
the single vertical security at the closing of the securitization 
transaction and the percentage of each class of ABS interests in the 
issuing entity that the sponsor would have been required to retain 
under this section if the sponsor held the eligible vertical interest 
as a separate proportional interest in each class of ABS interest in 
the issuing entity; and
    (iii) With respect to an eligible vertical interest retained as a 
separate proportional interest in each class of ABS interests in the 
issuing entity, the percentage 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 percentage of each 
class of ABS interests in the issuing entity that the sponsor is 
required to retain under this section; and
    (iv) The information required under paragraphs (d)(1)(iii), (iv) 
and (v) of this section with respect to the measurement of the fair 
value of the ABS interests in the issuing entity, to the extent the 
sponsor is not already required to disclose the information pursuant to 
paragraph (d)(1) of this section.
    (e) Record maintenance. A sponsor must retain the certifications 
and disclosures required in paragraphs (b) and (d) of this section in 
written form in its records and must provide the disclosure upon 
request to the Commission and its appropriate Federal banking agency, 
if any, until three years after all ABS interests are no longer 
outstanding.


Sec.  ----.5  Revolving master trusts.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    Revolving master trust means an issuing entity that is:
    (1) A master trust; and
    (2) Established to issue on multiple issuance dates one or more 
series, classes, subclasses, or tranches of asset-backed securities all 
of which are collateralized by a common pool of securitized assets that 
will change in composition over time.
    Seller's interest means an ABS interest or ABS interests:
    (1) Collateralized by all of the securitized assets and servicing 
assets owned or held by the issuing entity other than assets that have 
been allocated as collateral only for a specific series;
    (2) That is pari passu to each series of investors' ABS interests 
issued by the issuing entity with respect to the allocation of all 
distributions and losses with respect to the securitized assets prior 
to an early amortization event (as defined in the securitization 
transaction documents); and
    (3) That adjusts for fluctuations in the outstanding principal 
balance of the securitized assets in the pool.
    (b) General requirement. A sponsor satisfies the risk retention 
requirements of Sec.  ----.3 with respect to a securitization 
transaction for which the issuing entity is a revolving master trust if 
the sponsor retains a seller's interest of not less than 5 percent of 
the unpaid principal balance of all outstanding investors' ABS 
interests issued by the issuing entity.
    (c) Measuring and retaining the seller's interest. The retention 
interest required pursuant to paragraph (b) of this section:
    (1) Must meet the 5 percent test at the closing of each issuance of 
ABS interests by the issuing entity, and at every seller's interest 
measurement date specified under the securitization transaction 
documents, but no less than monthly, until no ABS interest in the 
issuing entity is held by any person not affiliated with the sponsor;
    (2) May be retained by one or more wholly-owned affiliates of the 
sponsor, including one or more depositors of the revolving master 
trust.
    (d) Multi-level trusts. (1) If one revolving master trust issues 
collateral certificates representing a beneficial interest in all or a 
portion of the securitized assets held by that trust to another 
revolving trust, which in turn issues ABS interests for which the 
collateral certificates are all or a portion of the securitized assets, 
a sponsor may satisfy the requirements of paragraphs (b) and (c) of 
this section by retaining the seller's interest for the assets 
represented by the collateral certificates through either revolving 
master trust, so long as both revolving master trusts are maintained at 
the direction of the same sponsor or its wholly-owned affiliates; and
    (2) If the sponsor retains the seller's interest associated with 
the collateral certificates at the level of the revolving trust that 
issues those collateral certificates, the proportion of the seller's 
interest required by paragraph (b) of this section that shall be 
retained at that level shall equal no less than the proportion that the 
securitized assets represented by the collateral certificates bears to 
the total securitized assets in the revolving master trust that issues 
the ABS interests, as of each measurement date required by paragraph 
(c) of this section.
    (e) Offset for pool-level excess funding account. The 5 percent 
seller's interest required on each measurement date by paragraph (c) of 
this section may be reduced on a dollar-for-dollar basis by the 
balance, as of such date, of an excess funding account in the form of a 
segregated account that:
    (1) Is funded in the event of a failure to meet the minimum 
seller's interest requirements under the securitization transaction 
documents by distributions otherwise payable to the holder of the 
seller's interest;

[[Page 58029]]

    (2) Is pari passu to each series of investors' ABS interests issued 
by the issuing entity with respect to the allocation of losses with 
respect to the securitized assets prior to an early amortization event; 
and
    (3) In the event of an early amortization, makes payments of 
amounts held in the account to holders of investors' ABS interests in 
the same manner as distributions on securitized assets.
    (f) Combined retention at trust and series level. The 5 percent 
seller's interest required on each measurement date by paragraph (c) of 
this section may be reduced to a percentage lower than 5 percent to the 
extent that, for all series of ABS interests issued by the revolving 
master trust, the sponsor or wholly-owned affiliate of the sponsor 
retains, at a minimum, a corresponding percentage of the fair value of 
all ABS interests issued in each series, in the form of an eligible 
horizontal residual interest that meets the requirements of Sec.  --
--.4, or, for so long as the revolving master trust continues to 
operate by issuing, on multiple issuance dates, one or more series, 
classes, subclasses, or tranches of asset-backed securities, all of 
which are collateralized by pooled securitized assets that change in 
composition over time, a horizontal interest meeting the following 
requirements:
    (1) Whether certificated or uncertificated, in a single or multiple 
classes, subclasses, or tranches, the horizontal interest meets, 
individually or in the aggregate, the requirements of this paragraph 
(f);
    (2) Each series of the revolving master trust distinguishes between 
the series' share of the interest and fee cash flows and the series' 
share of the principal repayment cash flows from the securitized assets 
collateralizing the revolving master trust, which may according to the 
terms of the securitization transaction documents, include not only the 
series' ratable share of such cash flows but also excess cash flows 
available from other series;
    (3) The horizontal interest's claim to any part of the series' 
share of the interest and fee cash flows for any interest payment 
period is subordinated to all accrued and payable interest and 
principal due on the payment date to more senior ABS interests in the 
series for that period, and further reduced by the series' share of 
losses, including defaults on principal of the securitized assets 
collateralizing the revolving master trust for that period, to the 
extent that such payments would have been included in amounts payable 
to more senior interests in the series;
    (4) The horizontal interest has the most subordinated claim to any 
part of the series' share of the principal repayment cash flows.
    (g) Disclosure and record maintenance--(1) Disclosure. A sponsor 
relying on this section shall provide, or cause to be provided, to 
potential investors a reasonable period of time prior to the sale of 
the asset-backed securities in the securitization transaction and, upon 
request, to the Commission and its appropriate Federal banking agency, 
if any, the following disclosure in written form under the caption 
``Credit Risk Retention'':
    (i) The value (expressed as a percentage of the unpaid principal 
balance of all of the investors' ABS interests issued in the 
securitization transaction and dollar amount (or corresponding amount 
in the foreign currency in which the ABS are issued, as applicable)) of 
the seller's interest that the sponsor will retain (or did retain) at 
the closing of the securitization transaction, the fair value 
(expressed as a percentage of the fair value of all of the investors' 
ABS interests issued in the securitization transaction and dollar 
amount (or corresponding amount in the foreign currency in which the 
ABS are issued, as applicable)) of any horizontal risk retention 
described in paragraph (f) of this section that the sponsor will retain 
(or did retain) at the closing of the securitization transaction, and 
the unpaid principal balance or fair value, as applicable (expressed as 
percentages of the values of all of the ABS interests issued in the 
securitization transaction and dollar amounts (or corresponding amounts 
in the foreign currency in which the ABS are issued, as applicable)) 
that the sponsor is required to retain pursuant to this section;
    (ii) A description of the material terms of the seller's interest 
and of any horizontal risk retention described in paragraph (f) of this 
section; and
    (iii) If the sponsor will retain (or did retain) any horizontal 
risk retention described in paragraph (f) of this section, the same 
information as is required to be disclosed by sponsors retaining 
horizontal interests pursuant to Sec.  --.4(d)(i).
    (2) Record maintenance. A sponsor must retain the disclosures 
required in paragraph (g)(1) of this section in written form in its 
records and must provide the disclosure upon request to the Commission 
and its appropriate Federal banking agency, if any, until three years 
after all ABS interests are no longer outstanding.
    (h) Early amortization of all outstanding series. A sponsor that 
organizes a revolving master trust for which all securitized assets 
collateralizing the trust are revolving assets, and that relies on this 
Sec.  --.5 to satisfy the risk retention requirements of Sec.  --.3, 
does not violate the requirements of this part if its seller's interest 
falls below the level required by Sec.  ----.5 after an event of 
default triggers early amortization, as specified in the securitization 
transaction documents, of all series of ABS interests issued by the 
trust to persons not affiliated with the sponsor, if:
    (1) The sponsor was in full compliance with the requirements of 
this section on all measurement dates specified in paragraph (c) of 
this section prior to the event of default that triggered early 
amortization;
    (2) The terms of the seller's interest continue to make it pari 
passu or subordinate to each series of investors' ABS interests issued 
by the issuing entity with respect to the allocation of all losses with 
respect to the securitized assets;
    (3) The terms of any horizontal interest relied upon by the sponsor 
pursuant to paragraph (f) to offset the minimum seller's interest 
amount continue to require the interests to absorb losses in accordance 
with the terms of paragraph (f) of this section; and
    (4) The revolving master trust issues no additional ABS interests 
after early amortization is initiated to any person not affiliated with 
the sponsor, either during the amortization period or at any time 
thereafter.


Sec.  ----.6  Eligible ABCP conduits.

    (a) Definitions. For purposes of this section, the following 
additional definitions apply:
    100 percent liquidity coverage means an amount equal to the 
outstanding balance of all ABCP issued by the conduit plus any accrued 
and unpaid interest without regard to the performance of the ABS 
interests held by the ABCP conduit and without regard to any credit 
enhancement.
    ABCP means asset-backed commercial paper that has a maturity at the 
time of issuance not exceeding nine months, exclusive of days of grace, 
or any renewal thereof the maturity of which is likewise limited.
    ABCP conduit means an issuing entity with respect to ABCP.
    Eligible ABCP conduit means an ABCP conduit, provided that:
    (1) The ABCP conduit is bankruptcy remote or otherwise isolated for 
insolvency purposes from the sponsor of the ABCP conduit and from any 
intermediate SPV;

[[Page 58030]]

    (2) The asset-backed securities acquired by the ABCP conduit are:
    (i) Collateralized solely by the following:
    (A) Asset-backed securities collateralized solely by assets 
originated by an originator-seller or one or more majority-owned OS 
affiliates of the originator seller, and by servicing assets;
    (B) Special units of beneficial interest or similar interests in a 
trust or special purpose vehicle that retains legal title to leased 
property underlying leases that were transferred to an intermediate SPV 
in connection with a securitization collateralized solely by such 
leases originated by an originator-seller or majority-owned OS 
affiliate, and by servicing assets; or
    (C) Interests in a revolving master trust collateralized solely by 
assets originated by an originator-seller or majority-owned OS 
affiliate and by servicing assets; and
    (ii) Not collateralized by asset-backed securities (other than 
those described in paragraphs (2)(i)(A) through (C) of this 
definition), otherwise purchased or acquired by the intermediate SPV, 
the intermediate SPV's originator-seller, or a majority-owned OS 
affiliate of the originator seller; and
    (iii) Acquired by the ABCP conduit in an initial issuance by or on 
behalf of an intermediate SPV (A) directly from the intermediate SPV, 
(B) from an underwriter of the securities issued by the intermediate 
SPV, or (C) from another person who acquired the securities directly 
from the intermediate SPV;
    (3) The ABCP conduit is collateralized solely by asset-backed 
securities acquired from intermediate SPVs as described in paragraph 
(2) of this definition and servicing assets; and
    (4) A regulated liquidity provider has entered into a legally 
binding commitment to provide 100 percent liquidity coverage (in the 
form of a lending facility, an asset purchase agreement, a repurchase 
agreement, or other similar arrangement) to all the ABCP issued by the 
ABCP conduit by lending to, purchasing ABCP issued by, or purchasing 
assets from, the ABCP conduit in the event that funds are required to 
repay maturing ABCP issued by the ABCP conduit. With respect to the 100 
percent liquidity coverage, in the event that the ABCP conduit is 
unable for any reason to repay maturing ABCP issued by the issuing 
entity, the liquidity provider shall be obligated to pay an amount 
equal to any shortfall, and the total amount that may be due pursuant 
to the 100 percent liquidity coverage shall be equal to 100 percent of 
the amount of the ABCP outstanding at any time plus accrued and unpaid 
interest (amounts due pursuant to the required liquidity coverage may 
not be subject to credit performance of the ABS held by the ABCP 
conduit or reduced by the amount of credit support provided to the ABCP 
conduit and liquidity support that only funds performing receivables or 
performing ABS interests does not meet the requirements of this 
section).
    Intermediate SPV means a special purpose vehicle that:
    (1) Is a direct or indirect wholly-owned affiliate of the 
originator-seller;
    (2) Is bankruptcy remote or otherwise isolated for insolvency 
purposes from the eligible ABCP conduit, the originator-seller, and any 
majority-owned OS affiliate that, directly or indirectly, sells or 
transfers assets to such intermediate SPV;
    (3) Acquires assets that are originated by the originator-seller or 
its majority-owned OS affiliate from the originator-seller or majority-
owned OS affiliate, or acquires asset-backed securities issued by 
another intermediate SPV or the original seller that are collateralized 
solely by such assets; and
    (4) Issues asset-backed securities collateralized solely by such 
assets, as applicable.
    Majority-owned OS affiliate means an entity that, directly or 
indirectly, majority controls, is majority controlled by or is under 
common majority control with, an originator-seller participating in an 
eligible ABCP conduit. For purposes of this definition, majority 
control means ownership of more than 50 percent of the equity of an 
entity, or ownership of any other controlling financial interest in the 
entity, as determined under GAAP.
    Originator-seller means an entity that originates assets and sells 
or transfers those assets directly, or through a majority-owned OS 
affiliate, to an intermediate SPV.
    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.
    (b) In general. An ABCP conduit sponsor satisfies the risk 
retention requirement of Sec.  ----.3 with respect to the issuance of 
ABCP by an eligible ABCP conduit in a securitization transaction if, 
for each ABS interest the ABCP conduit acquires from an intermediate 
SPV:
    (1) The intermediate SPV's originator-seller retains an economic 
interest in the credit risk of the assets collateralizing the ABS 
interest acquired by the eligible ABCP conduit in accordance with 
paragraph (b)(2) of this section, in the same form, amount, and manner 
as would be required under Sec. Sec.  ----.4 or ----.5; and
    (2) The ABCP conduit sponsor:
    (i) Approves each originator-seller and any majority-owned OS 
affiliate permitted to sell or transfer assets, directly or indirectly, 
to an intermediate SPV from which an eligible ABCP conduit acquires ABS 
interests;
    (ii) Approves each intermediate SPV from which an eligible ABCP 
conduit is permitted to acquire ABS interests;
    (iii) Establishes criteria governing the ABS interests, and the 
assets underlying the ABS interests, acquired by the ABCP conduit;
    (iv) Administers the ABCP conduit by monitoring the ABS interests 
acquired by the ABCP conduit and the assets supporting those ABS 
interests, arranging for debt placement, compiling monthly reports, and 
ensuring compliance with the ABCP conduit documents and with the ABCP 
conduit's credit and investment policy; and
    (v) Maintains and adheres to policies and procedures for ensuring 
that the conditions in this paragraph (b) have been met.
    (c) Originator-seller compliance with risk retention. The use of 
the risk retention option provided in this section by an ABCP conduit 
sponsor does not relieve the originator-seller that sponsors ABS 
interests acquired by an eligible ABCP conduit from such originator-
seller's obligation, if any, to comply with its own risk retention 
obligations under this part.
    (d) Periodic disclosures to investors. An ABCP conduit sponsor 
relying upon this section shall provide, or cause to be provided, to 
each purchaser of ABCP, before or contemporaneously with the first sale 
of ABCP to such purchaser and at least monthly thereafter, to each 
holder of commercial paper issued by the ABCP Conduit, in writing, each 
of the following items of information:

[[Page 58031]]

    (1) The name and form of organization of the regulated liquidity 
provider that provides liquidity coverage to the eligible ABCP conduit, 
including a description of the form, amount, and nature of such 
liquidity coverage, and notice of any failure to fund.
    (2) With respect to each ABS interest held by the ABCP conduit:
    (A) The asset class or brief description of the underlying 
receivables;
    (B) The standard industrial category code (SIC Code) for the 
originator-seller or majority-owned OS affiliate that will retain (or 
has retained) pursuant to this section an interest in the 
securitization transaction; and
    (C) A description of the form, fair value (expressed as a 
percentage of the fair value of all of the ABS interests issued in the 
securitization transaction and as a dollar amount (or corresponding 
amount in the foreign currency in which the ABS are issued, as 
applicable)), as applicable, and nature of such interest in accordance 
with the disclosure obligations in Sec.  ----.4(d).
    (e) Disclosures to regulators regarding originator-sellers and 
majority-owned OS affiliates. An ABCP conduit sponsor relying upon this 
section shall provide, or cause to be provided, upon request, to the 
Commission and its appropriate Federal banking agency, if any, in 
writing, all of the information required to be provided to investors in 
paragraph (d) of this section, and the name and form of organization of 
each originator-seller or majority-owned OS affiliate that will retain 
(or has retained) pursuant to this section an interest in the 
securitization transaction.
    (f) Duty to comply. (1) The ABCP conduit retaining sponsor shall be 
responsible for compliance with this section.
    (2) An ABCP conduit 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 and 
any majority-owned OS affiliate which sells assets to the eligible ABCP 
conduit with the requirements of paragraph (b)(1) of this section; and
    (ii) In the event that the ABCP conduit sponsor determines that an 
originator-seller or majority-owned OS affiliate no longer complies 
with the requirements of paragraph (b)(1) of this section, shall:
    (A) Promptly notify the holders of the ABCP, the Commission and its 
appropriate Federal banking agency, if any, in writing of:
    (1) The name and form of organization of any originator-seller that 
fails to retain risk in accordance with paragraph (b)(2)(i) of this 
section and the amount of asset-backed securities issued by an 
intermediate SPV of such originator-seller and held by the ABCP 
conduit;
    (2) The name and form of organization of any originator-seller or 
majority-owned OS affiliate that hedges, directly or indirectly through 
an intermediate SPV, its risk retention in violation of paragraph 
(b)(1) of this section and the amount of asset-backed securities issued 
by an intermediate SPV of such originator-seller or majority-owned OS 
affiliate and held by the ABCP conduit; and
    (3) Any remedial actions taken by the ABCP conduit sponsor or other 
party with respect to such asset-backed securities; and
    (B) Take other appropriate steps pursuant to the requirements of 
paragraphs (b)(2)(iv) and (b)(2)(v) of this section which may include, 
as appropriate, curing any breach of the requirements in this section, 
or removing from the eligible ABCP conduit any asset-backed security 
that does not comply with the requirements in this section.


Sec.  ----.7  Commercial mortgage-backed securities.

    (a) Definitions. For purposes of this section, the following 
definition shall apply:
    Special servicer means, with respect to any securitization of 
commercial real estate loans, any servicer that, upon the occurrence of 
one or more specified conditions in the servicing agreement, has the 
right to service one or more assets in the transaction.
    (b) Third-Party Purchaser. A sponsor may satisfy some or all of its 
risk retention requirements under Sec.  ----.3 with respect to a 
securitization transaction if a third party purchases and holds for its 
own account an eligible horizontal residual interest in the issuing 
entity in the same form, amount, and manner as would be held by the 
sponsor under Sec.  ----.4 and all of the following conditions are met:
    (1) Number of third-party purchasers. At any time, there are no 
more than two third-party purchasers of an eligible horizontal residual 
interest. If there are two third-party purchasers, each third-party 
purchaser's interest must be pari passu with the other third-party 
purchaser's interest.
    (2) Composition of collateral. The securitization transaction is 
collateralized solely by commercial real estate loans and servicing 
assets.
    (3) Source of funds. (i) Each third-party purchaser pays for the 
eligible horizontal residual interest in cash at the closing of the 
securitization transaction.
    (ii) No third-party purchaser obtains financing, directly or 
indirectly, for the purchase of such interest from any other person 
that is a party to, or an affiliate of a party to, the securitization 
transaction (including, but not limited to, the sponsor, depositor, or 
servicer other than a special servicer affiliated with the third-party 
purchaser), other than a person that is a party to the transaction 
solely by reason of being an investor.
    (4) Third-party review. Each third-party purchaser conducts an 
independent review of the credit risk of each securitized asset prior 
to the sale of the asset-backed securities in the securitization 
transaction that includes, at a minimum, a review of the underwriting 
standards, collateral, and expected cash flows of each commercial real 
estate loan that is collateral for the asset-backed securities.
    (5) Affiliation and control rights. (i) Except as provided in 
paragraph (b)(5)(ii) of this section, no third-party purchaser is 
affiliated with any party to the securitization transaction (including, 
but not limited to, the sponsor, depositor, or servicer) other than 
investors in the securitization transaction.
    (ii) Notwithstanding paragraph (b)(5)(i) of this section, a third-
party purchaser may be affiliated with:
    (A) The special servicer for the securitization transaction; or
    (B) One or more originators of the securitized assets, as long as 
the assets originated by the affiliated originator or originators 
collectively comprise less than 10 percent of the unpaid principal 
balance of the securitized assets included in the securitization 
transaction at closing of the securitization transaction.
    (6) Operating Advisor. The underlying securitization transaction 
documents shall provide for the following:
    (i) The appointment of an operating advisor (the Operating Advisor) 
that:
    (A) Is not affiliated with other parties to the securitization 
transaction;
    (B) Does not directly or indirectly have any financial interest in 
the securitization transaction other than in fees from its role as 
Operating Advisor; and
    (C) Is required to act in the best interest of, and for the benefit 
of, investors as a collective whole;
    (ii) Standards with respect to the Operating Advisor's experience, 
expertise and financial strength to fulfill its duties and 
responsibilities under the applicable transaction documents over the 
life of the securitization transaction;

[[Page 58032]]

    (iii) The terms of the Operating Advisor's compensation with 
respect to the securitization transaction;
    (iv) When the eligible horizontal residual interest has a principal 
balance of 25 percent or less of its initial principal balance, the 
special servicer for the securitized assets must consult with the 
Operating Advisor in connection with, and prior to, any material 
decision in connection with its servicing of the securitized assets, 
including, without limitation:
    (A) Any material modification of, or waiver with respect to, any 
provision of a loan agreement (including a mortgage, deed of trust, or 
other security agreement);
    (B) Foreclosure upon or comparable conversion of the ownership of a 
property; or
    (C) Any acquisition of a property.
    (v) The Operating Advisor shall have adequate and timely access to 
information and reports necessary to fulfill its duties under the 
transaction documents and shall be responsible for:
    (A) Reviewing the actions of the special servicer;
    (B) Reviewing all reports made by the special servicer to the 
issuing entity;
    (C) Reviewing for accuracy and consistency calculations made by the 
special servicer with the transaction documents; and
    (D) 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 the special servicer is operating in 
compliance with any standard required of the special servicer as 
provided in the applicable transaction documents; and
    (2) With which, if any, standards the Operating Advisor believes, 
in its sole discretion exercised in good faith, the special servicer 
has failed to comply.
    (vi) (A) The Operating Advisor shall have the authority to 
recommend that the special servicer be replaced by a successor special 
servicer if the Operating Advisor determines, in its sole discretion 
exercised in good faith, that:
    (1) The special servicer has failed to comply with a standard 
required of the special servicer as provided in the applicable 
transaction documents; and
    (2) Such replacement would be in the best interest of the investors 
as a collective whole; and
    (B) If a recommendation described in paragraph (b)(6)(vi)(A) of 
this section is made, the special servicer shall be replaced upon the 
affirmative vote of a majority of the outstanding principal balance of 
all ABS interests voting on the matter, with a minimum of a quorum of 
ABS interests voting on the matter. For purposes of such vote, the 
holders of 5 percent of the outstanding principal balance of all ABS 
interests in the issuing entity shall constitute a quorum.
    (7) Disclosures. The sponsor provides, or causes to be provided, to 
potential investors a reasonable period of time prior to the sale of 
the asset-backed securities as part of the securitization transaction 
and, upon request, to the Commission and its appropriate Federal 
banking agency, if any, the following disclosure in written form under 
the caption ``Credit Risk Retention'':
    (i) The name and form of organization of each initial third-party 
purchaser that acquired an eligible horizontal residual interest at the 
closing of a securitization transaction;
    (ii) A description of each initial third-party purchaser's 
experience in investing in commercial mortgage-backed securities;
    (iii) Any other information regarding each initial third-party 
purchaser or each initial third-party purchaser's retention of the 
eligible horizontal residual interest that is material to investors in 
light of the circumstances of the particular securitization 
transaction;
    (iv) A description of the fair value (expressed as a percentage of 
the fair value of all of the ABS interests issued in the securitization 
transaction and dollar amount (or corresponding amount in the foreign 
currency in which the ABS are issued, as applicable)) of the eligible 
horizontal residual interest that will be retained (or was retained) by 
each initial third-party purchaser, as well as the amount of the 
purchase price paid by each initial third-party purchaser for such 
interest;
    (v) The fair value (expressed as a percentage of the fair value of 
all of the ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS are issued, as applicable)) of the eligible horizontal residual 
interest in the securitization transaction that the sponsor would have 
retained pursuant to Sec.  ----.4 if the sponsor had relied on 
retaining an eligible horizontal residual interest in that section to 
meet the requirements of Sec.  ----.3 with respect to the transaction;
    (vi) A description of the material terms of the eligible horizontal 
residual interest retained by each initial third-party purchaser, 
including the same information as is required to be disclosed by 
sponsors retaining horizontal interests pursuant to Sec.  ----.4;
    (vii) The material terms of the applicable transaction documents 
with respect to the Operating Advisor, including without limitation:
    (A) The name and form of organization of the Operating Advisor;
    (B) The standards required by paragraph (b)(6)(ii) of this section 
and a description of how the Operating Advisor satisfies each of the 
standards; and
    (C) The terms of the Operating Advisor's compensation under 
paragraph (b)(6)(iii) of this section; and
    (viii) The representations and warranties concerning the 
securitized assets, a schedule of any securitized assets that are 
determined 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.
    (8) Hedging, transfer and pledging--(i) General rule. Except as set 
forth in paragraph (b)(8)(ii) of this section, each third-party 
purchaser must comply with the hedging and other restrictions in Sec.  
----.12 as if it were the retaining sponsor with respect to the 
securitization transaction and had acquired the eligible horizontal 
residual interest pursuant to Sec.  ----.4.
    (ii) Exceptions--(A) Transfer by initial third-party purchaser or 
sponsor. An initial third-party purchaser that acquired an eligible 
horizontal residual interest at the closing of a securitization 
transaction in accordance with this section, or a sponsor that acquired 
an eligible horizontal residual interest at the closing of a 
securitization transaction in accordance with this section, may, on or 
after the date that is five years after the date of the closing of a 
securitization transaction, transfer that interest to a subsequent 
third-party purchaser that complies with paragraph (b)(8)(ii)(C) of 
this section. The initial third-party purchaser shall provide the 
sponsor with complete identifying information for the subsequent third-
party purchaser.
    (B) Transfer by subsequent third-party purchaser. At any time, a 
subsequent third-party purchaser that acquired an eligible horizontal 
residual interest pursuant to this paragraph (b)(8)(ii)(B) may transfer 
its interest to a different third-party purchaser that complies with 
paragraph (b)(8)(ii)(C) of this section. The transferring third-party 
purchaser shall provide the sponsor

[[Page 58033]]

with complete identifying information for the acquiring third-party 
purchaser.
    (C) Requirements applicable to subsequent third-party purchasers. A 
subsequent third-party purchaser is subject to all of the requirements 
of paragraphs (b)(1), (b)(3) through (b)(5), and (b)(8) of this section 
applicable to third-party purchasers, provided that obligations under 
paragraphs (b)(1), (b)(3) through (b)(5), and (b)(8) of this section 
that apply to initial third-party purchasers at or before the time of 
closing of the securitization transaction shall apply to successor 
third-party purchasers at or before the time of the transfer of the 
eligible horizontal residual interest to the successor third-party 
purchaser.
    (c) Duty to comply. (1) The retaining sponsor shall be responsible 
for compliance with this section by itself and by each initial or 
subsequent third-party purchaser that acquired an eligible horizontal 
residual interest in the securitization transaction.
    (2) A sponsor relying on this section:
    (A) Shall maintain and adhere to policies and procedures to monitor 
each third-party purchaser's compliance with the requirements of 
paragraphs (b)(1), (b)(3) through (b)(5), and (b)(8) of this section; 
and
    (B) In the event that the sponsor determines that a third-party 
purchaser no longer complies with any of the requirements of paragraphs 
(b)(1), (b)(3) through (b)(5), or (b)(8) of this section, shall 
promptly notify, or cause to be notified, the holders of the ABS 
interests issued in the securitization transaction of such 
noncompliance by such third-party purchaser.


Sec.  ----.8  Federal National Mortgage Association and Federal Home 
Loan Mortgage Corporation ABS.

    (a) In general. A sponsor satisfies its risk retention requirement 
under this part if the sponsor fully guarantees the timely payment of 
principal and interest on all ABS interests issued by the issuing 
entity in the securitization transaction and is:
    (1) The Federal National Mortgage Association or the Federal Home 
Loan Mortgage Corporation operating under 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(b), (c), and (d) shall not apply to a sponsor described in 
paragraph (a)(1) or (2) of this section, its affiliates, or the issuing 
entity with respect to a securitization transaction for which the 
sponsor has retained credit risk in accordance with the requirements of 
this section.
    (c) Disclosure. A sponsor relying on this section shall provide to 
investors, in written form under the caption ``Credit Risk Retention'' 
and, upon request, to the Federal Housing Finance Agency and the 
Commission, a description of the manner in which it has met the credit 
risk retention requirements of this part.


Sec.  ----.9  Open market CLOs.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    CLO means a special purpose entity that:
    (1) Issues debt and equity interests, and
    (2) Whose assets consist primarily of loans that are securitized 
assets and servicing assets.
    CLO-eligible loan tranche means a term loan of a syndicated 
facility that meets the criteria set forth in paragraph (c) of this 
section.
    CLO Manager means an entity that manages a CLO, which entity is 
registered as an investment adviser under the Investment Advisers Act 
of 1940, as amended (15 U.S.C. 80b-1 et seq.), or is an affiliate of 
such a registered investment adviser and itself is managed by such 
registered investment adviser.
    Commercial borrower means an obligor under a corporate credit 
obligation (including a loan).
    Initial loan syndication transaction means a transaction in which a 
loan is syndicated to a group of lenders.
    Lead arranger means, with respect to a CLO-eligible loan tranche, 
an institution that:
    (1) Is active in the origination, structuring and syndication of 
commercial loan transactions (as defined in Sec.  ----.14) and has 
played a primary role in the structuring, underwriting and distribution 
on the primary market of the CLO-eligible loan tranche.
    (2) Has taken an allocation of the syndicated credit facility under 
the terms of the transaction that includes the CLO-eligible loan 
tranche of at least 20 percent of the aggregate principal balance at 
origination, and no other member (or members affiliated with each 
other) of the syndication group at origination has taken a greater 
allocation; and
    (3) Is identified at the time of origination in the credit 
agreement and any intercreditor or other applicable agreements 
governing the CLO-eligible loan tranche; represents therein to the 
holders of the CLO-eligible loan tranche and to any holders of 
participation interests in such CLO-eligible loan tranche that such 
lead arranger and the CLO-eligible loan tranche satisfy the 
requirements of this section; and covenants therein to such holders 
that such lead arranger will fulfill the requirements of clause (i) of 
the definition of CLO-eligible loan tranche.
    Open market CLO means a CLO:
    (1) Whose assets consist of senior, secured syndicated loans 
acquired by such CLO directly from the sellers thereof in open market 
transactions and of servicing assets,
    (2) That is managed by a CLO manager, and
    (3) That holds less than 50 percent of its assets, by aggregate 
outstanding principal amount, in loans syndicated by lead arrangers 
that are affiliates of the CLO or originated by originators that are 
affiliates of the CLO.
    Open market transaction means:
    (1) Either an initial loan syndication transaction or a secondary 
market transaction in which a seller offers senior, secured syndicated 
loans to prospective purchasers in the loan market on market terms on 
an arm's length basis, which prospective purchasers include, but are 
not limited to, entities that are not affiliated with the seller, or
    (2) A reverse inquiry from a prospective purchaser of a senior, 
secured syndicated loan through a dealer in the loan market to purchase 
a senior, secured syndicated loan to be sourced by the dealer in the 
loan market.
    Secondary market transaction means a purchase of a senior, secured 
syndicated loan not in connection with an initial loan syndication 
transaction but in the secondary market.
    Senior, secured syndicated loan means a loan made to a commercial 
borrower that:
    (1) Is not subordinate in right of payment to any other obligation 
for borrowed money of the commercial borrower,
    (2) Is secured by a valid first priority security interest or lien 
in or on specified collateral securing the

[[Page 58034]]

commercial borrower's obligations under the loan, and
    (3) The value of the collateral subject to such first priority 
security interest or lien, together with other attributes of the 
obligor (including, without limitation, its general financial 
condition, ability to generate cash flow available for debt service and 
other demands for that cash flow), is adequate (in the commercially 
reasonable judgment of the CLO manager exercised at the time of 
investment) to repay the loan in accordance with its terms and to repay 
all other indebtedness of equal seniority secured by such first 
priority security interest or lien in or on the same collateral, and 
the CLO manager certifies as to the adequacy of the collateral and 
attributes of the borrower under this paragraph in regular periodic 
disclosures to investors.
    (b) In general. A sponsor satisfies the risk retention requirements 
of Sec.  ----.3 with respect to an open market CLO transaction if:
    (1) The open market CLO does not acquire or hold any assets other 
than CLO-eligible loan tranches that meet the requirements of paragraph 
(c) of this section and servicing assets;
    (2) The governing documents of such open market CLO require that, 
at all times, the assets of the open market CLO consist of senior, 
secured syndicated loans that are CLO-eligible loan tranches and 
servicing assets;
    (3) The open market CLO does not invest in ABS interests or in 
credit derivatives other than hedging transactions that are servicing 
assets to hedge risks of the open market CLO;
    (4) All purchases of CLO-eligible loan tranches and other assets by 
the open market CLO issuing entity or through a warehouse facility used 
to accumulate the loans prior to the issuance of the CLO's ABS 
interests are made in open market transactions on an arms-length basis;
    (5) The CLO Manager of the open market CLO is not entitled to 
receive any management fee or gain on sale at the time the open market 
CLO issues its ABS interests.
    (c) CLO-eligible loan tranche. To qualify as a CLO-eligible loan 
tranche, a term loan of a syndicated credit facility to a commercial 
borrower must have the following features:
    (1) A minimum of 5 percent of the face amount of the CLO-eligible 
loan tranche is retained by the lead arranger thereof until the 
earliest of the repayment, maturity, involuntary and unscheduled 
acceleration, payment default, or bankruptcy default of such CLO-
eligible loan tranche, provided that such lead arranger complies with 
limitations on hedging, transferring and pledging in Sec.  ----.12 with 
respect to the interest retained by the lead arranger.
    (2) Lender voting rights within the credit agreement and any 
intercreditor or other applicable agreements governing such CLO-
eligible loan tranche are defined so as to give holders of the CLO-
eligible loan tranche consent rights with respect to, at minimum, any 
material waivers and amendments of such applicable documents, including 
but not limited to, adverse changes to money terms, alterations to pro 
rata provisions, changes to voting provisions, and waivers of 
conditions precedent; and
    (3) The pro rata provisions, voting provisions, and similar 
provisions applicable to the security associated with such CLO-eligible 
loan tranches under the CLO credit agreement and any intercreditor or 
other applicable agreements governing documents such CLO-eligible loan 
tranches are not materially less advantageous to the obligor than the 
terms of other tranches of comparable seniority in the broader 
syndicated credit facility.
    (d) Disclosures. A sponsor relying on this section shall provide, 
or cause to be provided, to potential investors a reasonable period of 
time prior to the sale of the asset-backed securities in the 
securitization transaction and at least annually with respect to the 
information required by paragraph (d)(1) of this section and, upon 
request, to the Commission and its appropriate Federal banking agency, 
if any, the following disclosure in written form under the caption 
``Credit Risk Retention'':
    (1) Open market CLOs. A complete list of every asset held by an 
open market CLO (or before the CLO's closing, in a warehouse facility 
in anticipation of transfer into the CLO at closing), including the 
following information:
    (i) The full legal name and Standard Industrial Classification 
(SIC) category code of the obligor of the loan or asset;
    (ii) The full name of the specific loan tranche held by the CLO;
    (iii) The face amount of the loan tranche held by the CLO;
    (iv) The price at which the loan tranche was acquired by the CLO; 
and
    (v) For each loan tranche, the full legal name of the lead arranger 
subject to the sales and hedging restrictions of Sec.  ----.12 and the; 
and
    (2) CLO manager. The full legal name and form of organization of 
the CLO manager.


Sec.  ----.10  Qualified tender option bonds.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    Municipal security or municipal securities shall have the same 
meaning as municipal securities in Section 3(a)(29) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(29)) and any rules promulgated 
pursuant to such section.
    Qualified tender option bond entity means an issuing entity with 
respect to tender option bonds for which each of the following applies:
    (1) Such entity is collateralized solely by servicing assets and 
municipal securities that have the same municipal issuer and the same 
underlying obligor or source of payment (determined without regard to 
any third-party credit enhancement), and such municipal securities are 
not subject to substitution.
    (2) Such entity issues no securities other than:
    (i) a single class of tender option bonds with a preferred variable 
return payable out of capital that meets the requirements of paragraph 
(b) of this section and
    (ii) a single residual equity interest that is entitled to all 
remaining income of the TOB issuing entity. Both of these types of 
securities must constitute ``asset-backed securities'' as defined in 
Section 3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79)).
    (3) The municipal securities held as assets by such entity are 
issued in compliance with Section 103 of the Internal Revenue Code of 
1986, as amended (the ``IRS Code'', 26 U.S.C. 103), such that the 
interest payments made on those securities are excludable from the 
gross income of the owners under Section 103 of the IRS Code.
    (4) The holders of all of the securities issued by such entity are 
eligible to receive interest that is excludable from gross income 
pursuant to Section 103 of the IRS Code or ``exempt-interest 
dividends'' pursuant to Section 852(b)(5) of the IRS Code (26 U.S.C. 
852(b)(5)) in the case of regulated investment companies under the 
Investment Company Act of 1940, as amended.
    (5) Such entity has a legally binding commitment from a regulated 
liquidity provider as defined in Sec.  ----.6(a), to provide a 100 
percent guarantee or liquidity coverage with respect to all of the 
issuing entity's outstanding tender option bonds.
    (6) Such entity qualifies for monthly closing elections pursuant to 
IRS Revenue Procedure 2003-84, as amended or supplemented from time to 
time.

[[Page 58035]]

    Tender option bond means a security which:
    (1) Has features which entitle the holders to tender such bonds to 
the TOB issuing entity for purchase at any time upon no more than 30 
days' notice, for a purchase price equal to the approximate amortized 
cost of the security, plus accrued interest, if any, at the time of 
tender; and
    (2) Has all necessary features so such security qualifies for 
purchase by money market funds under Rule 2a-7 under the Investment 
Company Act of 1940, as amended.
    (b) Standard risk retention. Notwithstanding anything in this 
section, the sponsor with respect to an issuance of tender option bonds 
by a qualified tender option bond entity may retain an eligible 
vertical interest or eligible horizontal residual interest, or any 
combination thereof, in accordance with the requirements of Sec.  --
--.4.
    (c) Tender option termination event. The sponsor with respect to an 
issuance of tender option bonds by a qualified tender option bond 
entity may retain an interest that upon issuance meets the requirements 
of an eligible horizontal residual interest but that upon the 
occurrence of a ``tender option termination event'' as defined in 
Section 4.01(5) of IRS Revenue Procedure 2003-84, as amended or 
supplemented from time to time will meet requirements of an eligible 
vertical interest.
    (d) Retention of a municipal security outside of the qualified 
tender option bond entity. The sponsor with respect to an issuance of 
tender option bonds by a qualified tender option bond entity may 
satisfy their risk retention requirements under this Section by holding 
municipal securities from the same issuance of municipal securities 
deposited in the qualified tender option bond entity, the face value of 
which retained municipal securities is equal to 5 percent of the face 
value of the municipal securities deposited in the qualified tender 
option bond entity.
    (e) Disclosures. The sponsor 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 under 
the caption ``Credit Risk Retention'' the name and form of organization 
of the qualified tender option bond entity, and a description of the 
form, fair value (expressed as a percentage of the fair value of all of 
the ABS interests issued in the securitization transaction and as a 
dollar amount), and nature of such interest in accordance with the 
disclosure obligations in Sec.  ----.4(d).
    (f) Prohibitions on Hedging and Transfer. The prohibitions on 
transfer and hedging set forth in Sec.  ----.12, apply to any municipal 
securities retained by the sponsor with respect to an issuance of 
tender option bonds by a qualified tender option bond entity pursuant 
to paragraph (d) of this section.

Subpart C--Transfer of Risk Retention


Sec.  ----.11  Allocation of risk retention to an originator.

    (a) In general. A sponsor choosing to retain an eligible vertical 
interest or an eligible horizontal residual interest (including an 
eligible horizontal cash reserve account), or combination thereof under 
Sec.  ----.4, with respect to a securitization transaction may offset 
the amount of its risk retention requirements under Sec.  ----.4 by the 
amount of the eligible interests, respectively, acquired by an 
originator of one or more of the securitized assets if:
    (1) At the closing of the securitization transaction:
    (i) The originator acquires the eligible interest from the sponsor 
and retains such interest in the same manner as the sponsor under Sec.  
----.4, as such interest was held prior to the acquisition by the 
originator;
    (ii) The ratio of the fair value of eligible interests acquired and 
retained by the originator to the total fair value of eligible 
interests otherwise required to be retained by the sponsor pursuant to 
Sec.  ----.4, does not exceed the ratio of:
    (A) The unpaid principal balance of all the securitized assets 
originated by the originator; to
    (B) The unpaid principal balance of all the securitized assets in 
the securitization transaction;
    (iii) The originator acquires and retains at least 20 percent of 
the aggregate risk retention amount otherwise required to be retained 
by the sponsor pursuant to Sec.  ----.4; and
    (iv) The originator purchases the eligible interests from the 
sponsor at a price that is equal, on a dollar-for-dollar basis, to the 
amount by which the sponsor's required risk retention is reduced in 
accordance with this section, by payment to the sponsor in the form of:
    (A) Cash; or
    (B) A reduction in the price received by the originator from the 
sponsor or depositor for the assets sold by the originator to the 
sponsor or depositor for inclusion in the pool of securitized assets.
    (2) Disclosures. In addition to the disclosures required pursuant 
to Sec.  ----.4(d), 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 (or 
corresponding amount in the foreign currency in which the ABS are 
issued, as applicable)), and nature of the interest, as well as the 
method of payment for such interest under paragraph (a)(1)(iv) of this 
section.
    (3) Hedging, transferring and pledging. The originator complies 
with the hedging and other restrictions in Sec.  ----.12 with respect 
to the interests retained by the originator pursuant to this section as 
if it were the retaining sponsor and was required to retain the 
interest under subpart B of this part.
    (b) Duty to comply. (1) The retaining sponsor shall be responsible 
for compliance with this section.
    (2) A retaining sponsor relying on this section:
    (A) 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
    (B) 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.  ----.12  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 majority-owned affiliate of the sponsor.
    (b) Prohibited hedging by sponsor and affiliates. A retaining 
sponsor and its affiliates may not purchase or sell a security, or 
other financial instrument, or enter into an agreement, derivative or 
other position, with any other person if:

[[Page 58036]]

    (1) Payments on the security or other financial instrument or under 
the agreement, derivative, or position are materially related to the 
credit risk of one or more particular ABS interests that the retaining 
sponsor 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 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 ABS interests 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 ABS 
interests 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 under paragraph (b) or 
(c) of this section:
    (1) Hedging the interest rate risk (which does not include the 
specific interest rate risk, known as spread risk, associated with the 
ABS interest that is otherwise considered part of the credit risk) or 
foreign exchange risk arising from one or more of the particular ABS 
interests required to be retained by the sponsor 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 (or corresponding weighted average in the currency in 
which the ABS is issued, as applicable) of all instruments included in 
the index; and
    (ii) All classes of ABS interests in all issuing entities that were 
issued in connection with any securitization transaction in which the 
sponsor 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 (or 
corresponding weighted average in the currency in which the ABS is 
issued, as applicable) of all instruments included in the index.
    (e) Prohibited non-recourse financing. Neither a retaining sponsor 
nor any of its affiliates may pledge as collateral for any obligation 
(including a loan, repurchase agreement, or other financing 
transaction) any ABS interest that the sponsor is required to retain 
with respect to a securitization transaction pursuant to subpart B of 
this part unless such obligation is with full recourse to the sponsor 
or affiliate, respectively.
    (f) Duration of the hedging and transfer restrictions--(1) General 
rule. Except as provided in paragraph (f)(2) of this section, the 
prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of 
this section shall expire on or after the date that is the latest of:
    (i) The date on which the total unpaid principal balance of the 
securitized assets that collateralize the securitization transaction 
has been reduced to 33 percent of the total unpaid principal balance of 
the securitized assets as of the closing of the securitization 
transaction;
    (ii) The date on which the total unpaid principal obligations under 
the ABS interests issued in the securitization transaction has been 
reduced to 33 percent of the total unpaid principal obligations of the 
ABS interests at closing of the securitization transaction; or
    (iii) Two years after the date of the closing of the securitization 
transaction.
    (2) Securitizations of residential mortgages. (i) If all of the 
assets that collateralize a securitization transaction subject to risk 
retention under this part are residential mortgages, the prohibitions 
on sale and hedging pursuant to paragraphs (a) and (b) of this section 
shall expire on or after the date that is the later of:
    (A) Five years after the date of the closing of the securitization 
transaction; or
    (B) The date on which the total unpaid principal balance of the 
residential mortgages that collateralize the securitization transaction 
has been reduced to 25 percent of the total unpaid principal balance of 
such residential mortgages at the closing of the securitization 
transaction.
    (ii) Notwithstanding paragraph (f)(2)(i) of this section, the 
prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of 
this section shall expire with respect to the sponsor of a 
securitization transaction described in paragraph (f)(2)(i) of this 
section on or after the date that is seven years after the date of the 
closing of the securitization transaction.
    (3) Conservatorship or receivership of sponsor. A conservator or 
receiver of the sponsor (or any other person holding risk retention 
pursuant to this part) of a securitization transaction is permitted to 
sell or hedge any economic interest in the securitization transaction 
if the conservator or receiver has been appointed pursuant to any 
provision of federal or State law (or regulation promulgated 
thereunder) that provides for the appointment of the Federal Deposit 
Insurance Corporation, or an agency or instrumentality of the United 
States or of a State as conservator or receiver, including without 
limitation any of the following authorities:
    (i) 12 U.S.C. 1811;
    (ii) 12 U.S.C. 1787;
    (iii) 12 U.S.C. 4617; or
    (iv) 12 U.S.C. 5382.

Subpart D--Exceptions and Exemptions


Sec.  ----.13  Exemption for qualified residential mortgages.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    Currently performing means the borrower in the mortgage transaction 
is not currently thirty (30) days past due, in whole or in part, on the 
mortgage transaction.
    Qualified residential mortgage means a ``qualified mortgage'' as 
defined in section 129 C of the Truth in Lending Act (15 U.S.C. 1639c) 
and regulations issued thereunder.
    (b) Exemption. A sponsor shall be exempt from the risk retention

[[Page 58037]]

requirements in subpart B of this part with respect to any 
securitization transaction, if:
    (1) All of the assets that collateralize the asset-backed 
securities are qualified residential mortgages or servicing assets;
    (2) None of the assets that collateralize the asset-backed 
securities are 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 or servicing assets and has concluded that its internal 
supervisory controls are effective; and
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls must be performed, for each issuance of 
an asset-backed security in reliance on this section, as of a date 
within 60 days of the cut-off date or similar date for establishing the 
composition of the asset pool collateralizing such asset-backed 
security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (b)(4)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
the Commission and its appropriate Federal banking agency, if any.
    (c) Repurchase of loans subsequently determined to be non-qualified 
after closing. A sponsor that has relied on the exemption provided in 
paragraph (b) of this section with respect to a securitization 
transaction shall not lose such exemption with respect to such 
transaction if, after closing of the securitization transaction, it is 
determined that one or more of the residential mortgage loans 
collateralizing the asset-backed securities does not meet all of the 
criteria to be a qualified residential mortgage provided that:
    (1) The depositor complied with the certification requirement set 
forth in paragraph (b)(4) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at 
a price at least equal to the remaining aggregate unpaid principal 
balance and accrued interest on the loan(s) no later than 90 days after 
the determination that the loans do not satisfy the requirements to be 
a qualified residential mortgage; and
    (3) The sponsor promptly notifies, or causes to be notified, the 
holders of the asset-backed securities issued in the securitization 
transaction of any loan(s) included in such securitization transaction 
that is (or are) required to be repurchased by the sponsor pursuant to 
paragraph (c)(2) of this section, including the amount of such 
repurchased loan(s) and the cause for such repurchase.


Sec.  ----.14  Definitions applicable to qualifying commercial loans, 
qualifying commercial real estate loans, and qualifying automobile 
loans.

    The following definitions apply for purposes of Sec. Sec.  ----.15 
through ----.18:
    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 that is secured by a first lien on, a passenger car or 
other passenger vehicle, such as a minivan, van, sport-utility vehicle, 
pickup truck, or similar light truck for personal, family, or household 
use; and
    (2) Does not include any:
    (i) Loan to finance fleet sales;
    (ii) Personal cash loan secured by a previously purchased 
automobile;
    (iii) Loan to finance the purchase of a commercial vehicle or farm 
equipment that is not used for personal, family, or household purposes;
    (iv) Lease financing
    (v) Loan to finance the purchase of a vehicle with a salvage title; 
or
    (vi) Loan to finance the purchase of a vehicle intended to be used 
for scrap or parts.
    Combined loan-to-value (CLTV) ratio means, at the time of 
origination, the sum of the principal balance of a 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.  ----.17(a)(2)(ii); or
    (2) For refinancing, the estimated market value of the real 
property based on an appraisal that meets the requirements set forth in 
Sec.  ----.17(a)(2)(ii).
    Commercial loan means a secured or unsecured loan to a company or 
an individual for business purposes, other than any:
    (1) Loan to purchase or refinance a one-to-four family residential 
property;
    (2) Commercial real estate loan.
    Commercial real estate (CRE) loan: (1) Means a loan secured by a 
property with five or more single family units, or by nonfarm 
nonresidential real property, the primary source (50 percent or more) 
of repayment for which is expected to be:
    (i) The proceeds of the sale, refinancing, or permanent financing 
of the property; or
    (ii) Rental income associated with the property; 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; or
    (iii) An unsecured loan to a developer.
    Debt service coverage (DSC) ratio means:
    (1) For qualifying leased CRE loans, qualifying multi-family loans, 
and other CRE loans:
    (i) The annual NOI less the annual replacement reserve of the CRE 
property at the time of origination of the CRE loans divided by
    (ii) The sum of the borrower's annual payments for principal and 
interest on any debt obligation.
    (2) For commercial loans:
    (i) The borrower's EBITDA as of the most recently completed fiscal 
year divided by
    (ii) The sum of the borrower's annual payments for principal and 
interest on all debt obligations.
    Debt to income (DTI) ratio means the borrower's total debt, 
including the monthly amount due on the automobile loan, divided by the 
borrower's monthly income.
    Earnings before interest, taxes, depreciation, and amortization 
(EBITDA) means the annual income of a business before expenses for 
interest, taxes, depreciation and amortization are deducted, as 
determined in accordance with GAAP.
    Environmental risk assessment means a process for determining 
whether a property is contaminated or exposed to any condition or 
substance that could result in contamination that has an adverse effect 
on the market value of the property or the realization of the 
collateral value.
    First lien means a lien or encumbrance on property that has 
priority over all other liens or encumbrances on the property.
    Junior lien means a lien or encumbrance on property that is lower 
in priority relative to other liens or encumbrances on the property.

[[Page 58038]]

    Leverage ratio means the borrower's total debt divided by the 
borrower's EBITDA.
    Loan-to-value (LTV) ratio means, at the time of origination, the 
principal balance of a first-lien mortgage loan on the property divided 
by:
    (1) For acquisition funding, the lesser of the purchase price or 
the estimated market value of the real property based on an appraisal 
that meets the requirements set forth in Sec.  ----.17(a)(2)(ii); or
    (2) For refinancing, the estimated market value of the real 
property based on an appraisal that meets the requirements set forth in 
Sec.  ----.17(a)(2)(ii).
    Model year means the year determined by the manufacturer and 
reflected on the vehicle's Motor Vehicle Title as part of the vehicle 
description.
    Net operating income (NOI) refers to the income a CRE property 
generates for the borrower after all expenses have been deducted for 
federal income tax purposes, except for depreciation, debt service 
expenses, and federal and State income taxes, and excluding any unusual 
and nonrecurring items of income.
    Operating affiliate means an affiliate of a borrower that is a 
lessor or similar party with respect to the commercial real estate 
securing the loan.
    Payments-in-kind means payments of principal or accrued interest 
that are not paid in cash when due, and instead are paid by increasing 
the principal balance of the loan or by providing equity in the 
borrowing company.
    Purchase money security interest means a security interest in 
property that secures the obligation of the obligor incurred as all or 
part of the price of the property.
    Purchase price means the amount paid by the borrower for the 
vehicle net of any incentive payments or manufacturer cash rebates.
    Qualified tenant means:
    (1) A tenant with a lease who has satisfied all obligations with 
respect to the property in a timely manner; or
    (2) A tenant who originally had a lease that subsequently expired 
and currently is leasing the property on a month-to-month basis, has 
occupied the property for at least three years prior to the date of 
origination, and has satisfied all obligations with respect to the 
property in a timely manner.
    Qualifying leased CRE loan means a CRE loan secured by commercial 
nonfarm real property, other than a multi-family property or a hotel, 
inn, or similar property:
    (1) That is occupied by one or more qualified tenants pursuant to a 
lease agreement with a term of no less than one (1) month; and
    (2) Where no more than 20 percent of the aggregate gross revenue of 
the property is payable from one or more tenants who:
    (i) Are subject to a lease that will terminate within six months 
following the date of origination; or
    (ii) Are not qualified tenants.
    Qualifying multi-family loan means a CRE loan secured by any 
residential property (other than a hotel, motel, inn, hospital, nursing 
home, or other similar facility where dwellings are not leased to 
residents):
    (1) That consists of five or more dwelling units (including 
apartment buildings, condominiums, cooperatives and other similar 
structures) primarily for residential use; and
    (2) Where at least 75 percent of the NOI is derived from 
residential rents and tenant amenities (including income from parking 
garages, health or swim clubs, and dry cleaning), and not from other 
commercial uses.
    Rental income means:
    (1) Income derived from a lease or other occupancy agreement 
between the borrower or an operating affiliate of the borrower and a 
party which is not an affiliate of the borrower for the use of real 
property or improvements serving as collateral for the applicable loan, 
and
    (2) Other income derived from hotel, motel, dormitory, nursing 
home, assisted living, mini-storage warehouse or similar properties 
that are used primarily by parties that are not affiliates or employees 
of the borrower or its affiliates.
    Replacement reserve means the monthly capital replacement or 
maintenance amount based on the property type, age, construction and 
condition of the property that is adequate to maintain the physical 
condition and NOI of the property.
    Salvage title means a form of vehicle title branding, which notes 
that the vehicle has been severely damaged and/or deemed a total loss 
and uneconomical to repair by an insurance company that paid a claim on 
the vehicle.
    Total debt, with respect to a borrower, means:
    (1) In the case of an automobile loan, the sum of:
    (i) All monthly housing payments (rent- or mortgage-related, 
including property taxes, insurance and home owners association fees); 
and
    (ii) Any of the following that 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 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.
    Trade-in allowance means the amount a vehicle purchaser is given as 
a credit at the purchase of a vehicle for the fair exchange of the 
borrower's existing vehicle to compensate the dealer for some portion 
of the vehicle purchase price, not to exceed the highest trade-in value 
of the existing vehicle, as determined by a nationally recognized 
automobile pricing agency and based on the manufacturer, year, model, 
features, mileage, and condition of the vehicle, less the payoff 
balance of any outstanding debt collateralized by the existing vehicle.
    Uniform Standards of Professional Appraisal Practice means the 
standards issued by the Appraisal Standards Board for the performance 
of an appraisal, an appraisal review, or an appraisal consulting 
assignment.


Sec.  ----.15  Qualifying commercial loans, commercial real estate 
loans, and automobile loans.

    (a) General exception for qualifying assets. Commercial loans, 
commercial real estate loans, and automobile loans that are securitized 
through a securitization transaction shall be subject to a 0 percent 
risk retention requirement under subpart B, provided that the following 
conditions are met:
    (1) The assets meet the underwriting standards set forth in 
Sec. Sec.  ----.16 (qualifying commercial loans), ----.17 (qualifying 
CRE loans), or ----.18 (qualifying automobile loans) of this part, as 
applicable;
    (2) The securitization transaction is collateralized solely by 
loans of the same asset class and by servicing assets;
    (3) The securitization transaction does not permit reinvestment 
periods; and
    (4) The sponsor provides, or causes to be provided, to potential 
investors a

[[Page 58039]]

reasonable period of time prior to the sale of asset-backed securities 
of the issuing entity, and, upon request, to the Commission, and to its 
appropriate Federal banking agency, if any, in written form under the 
caption ``Credit Risk Retention'':
    (i) A description of the manner in which the sponsor determined the 
aggregate risk retention requirement for the securitization transaction 
after including qualifying commercial loans, qualifying CRE loans, or 
qualifying automobile loans with 0 percent risk retention; and
    (ii) Descriptions of the qualifying commercial loans, qualifying 
CRE loans, and qualifying automobile loans (qualifying assets) and 
descriptions of the assets that are not qualifying assets, and the 
material differences between the group of qualifying assets and the 
group of assets that are not qualifying assets with respect to the 
composition of each group's loan balances, loan terms, interest rates, 
borrower credit information, and characteristics of any loan 
collateral.
    (b) Risk retention requirement. For any securitization transaction 
described in paragraph (a) of this section, the amount of risk 
retention required under Sec.  ----.3(b)(1) is reduced by the same 
amount as the ratio of the unpaid principal balance of the qualifying 
commercial loans, qualifying CRE loans, or qualifying automobile loans 
(as applicable) to the total unpaid principal balance of commercial 
loans, CRE loans, or automobile loans (as applicable) that are included 
in the pool of assets collateralizing the asset-backed securities 
issued pursuant to the securitization transaction (the qualifying asset 
ratio); provided that:
    (1) The qualifying asset ratio is measured as of the cut-off date 
or similar date for establishing the composition of the pool assets 
collateralizing the asset-backed securities issued pursuant to the 
securitization transaction; and
    (2) The qualifying asset ratio does not exceed 50 percent.
    (c) Exception for securitizations of qualifying assets only. 
Notwithstanding other provisions of this section, the risk retention 
requirements of subpart B of this part shall not apply to 
securitization transactions where the transaction is collateralized 
solely by servicing assets and either qualifying commercial loans, 
qualifying CRE loans, or qualifying automobile loans.


Sec.  ----.16  Underwriting standards for qualifying commercial loans.

    (a) Underwriting, product and other standards. (1) Prior to 
origination of the commercial loan, the originator:
    (i) Verified and documented the financial condition of the 
borrower:
    (A) As of the end of the borrower's two most recently completed 
fiscal years; and
    (B) During the period, if any, since the end of its most recently 
completed fiscal year;
    (ii) Conducted an analysis of the borrower's ability to service its 
overall debt obligations during the next two years, based on reasonable 
projections;
    (iii) Determined that, based on the previous two years' actual 
performance, the borrower had:
    (A) A total liabilities ratio of 50 percent or less;
    (B) A leverage ratio of 3.0 or less; and
    (C) A DSC ratio of 1.5 or greater;
    (iv) Determined that, based on the two years of projections, which 
include the new debt obligation, following the closing date of the 
loan, the borrower will have:
    (A) A total liabilities ratio of 50 percent or less;
    (B) A leverage ratio of 3.0 or less; and
    (C) A DSC ratio of 1.5 or greater.
    (2) Prior to, upon or promptly following the inception of the loan, 
the originator:
    (i) If the loan is originated on a secured basis, obtains a 
perfected security interest (by filing, title notation or otherwise) 
or, in the case of real property, a recorded lien, on all of the 
property pledged to collateralize the loan; and
    (ii) If the loan documents indicate the purpose of the loan is to 
finance the purchase of tangible or intangible property, or to 
refinance such a loan, obtains a first lien on the property.
    (3) The loan documentation for the commercial loan includes 
covenants that:
    (i) Require the borrower to provide to the servicer of the 
commercial loan the borrower's financial statements and supporting 
schedules on an ongoing basis, but not less frequently than quarterly;
    (ii) Prohibit the borrower from retaining or entering into a debt 
arrangement that permits payments-in-kind;
    (iii) Impose limits on:
    (A) The creation or existence of any other security interest or 
lien with respect to any of the borrower's property that serves as 
collateral for the loan;
    (B) The transfer of any of the borrower's assets that serve as 
collateral for the loan; and
    (C) Any change to the name, location or organizational structure of 
the borrower, or any other party that pledges collateral for the loan;
    (iv) Require the borrower and any other party that pledges 
collateral for the loan to:
    (A) Maintain insurance that protects against loss on the collateral 
for the commercial loan at least up to the amount of the loan, and that 
names the originator or any subsequent holder of the loan as an 
additional insured or loss payee;
    (B) Pay taxes, charges, fees, and claims, where non-payment might 
give rise to a lien on any collateral;
    (C) Take any action required to perfect or protect the security 
interest and first lien (as applicable) of the originator or any 
subsequent holder of the loan in any collateral for the commercial loan 
or the priority thereof, and to defend any collateral against claims 
adverse to the lender's interest;
    (D) Permit the originator or any subsequent holder of the loan, and 
the servicer of the loan, to inspect any collateral for the commercial 
loan and the books and records of the borrower; and
    (E) Maintain the physical condition of any collateral for the 
commercial loan.
    (4) Loan payments required under the loan agreement are:
    (i) Based on 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.
    (5) The primary source of repayment for the loan is revenue from 
the business operations of the borrower.
    (6) The loan was funded within the six (6) months prior to the 
closing of the securitization transaction.
    (7) At the closing of the securitization transaction, all payments 
due on the loan are contractually current.
    (8)(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 qualifying commercial 
loans that collateralize the asset-backed security and that reduce the 
sponsor's risk retention requirement under Sec.  ----.15 meet all of 
the requirements set forth in paragraphs (a)(1) through (a)(7) of this 
section and has concluded that its internal supervisory controls are 
effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (a)(8)(i)

[[Page 58040]]

of this section shall be performed, for each issuance of an asset-
backed security, as of a date within 60 days of the cut-off date or 
similar date for establishing the composition of the asset pool 
collateralizing such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (a)(8)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any.
    (b) Cure or buy-back requirement. If a sponsor has relied on the 
exception provided in Sec.  ----.15 with respect to a qualifying 
commercial loan and it is subsequently determined that the loan did not 
meet all of the requirements set forth in paragraphs (a)(1) through 
(a)(7) of this section, the sponsor shall not lose the benefit of the 
exception with respect to the commercial loan if the depositor complied 
with the certification requirement set forth in paragraph (a)(8) of 
this section and:
    (1) The failure of the loan to meet any of the requirements set 
forth in paragraphs (a)(1) through (a)(7) of this section is not 
material; or
    (2) No later than 90 days after the determination that the loan 
does not meet one or more of the requirements of paragraphs (a)(1) 
through (a)(7) of this section, the sponsor:
    (i) Effectuates cure, establishing conformity of the loan to the 
unmet requirements as of the date of cure; or
    (ii) Repurchases the loan(s) from the issuing entity at a price at 
least equal to the remaining principal balance and accrued interest on 
the loan(s) as of the date of repurchase.
    (3) If the sponsor cures or repurchases pursuant to paragraph 
(b)(2) of this section, the sponsor must promptly notify, or cause to 
be notified, the holders of the asset-backed securities issued in the 
securitization transaction of any loan(s) included in such 
securitization transaction that is required to be cured or repurchased 
by the sponsor pursuant to paragraph (b)(2) of this section, including 
the principal amount of such loan(s) and the cause for such cure or 
repurchase.


Sec.  ----.17  Underwriting standards for qualifying CRE loans.

    (a) Underwriting, product and other standards. (1) The CRE loan 
must be secured by the following:
    (i) An enforceable first lien, documented and recorded 
appropriately pursuant to applicable law, on the commercial real estate 
and improvements;
    (ii)(A) An assignment of:
    (1) Leases and rents and other occupancy agreements related to the 
commercial real estate or improvements or the operation thereof for 
which the borrower or an operating affiliate is a lessor or similar 
party and all payments under such leases and occupancy agreements; and
    (2) All franchise, license and concession agreements related to the 
commercial real estate or improvements or the operation thereof for 
which the borrower or an operating affiliate is a lessor, licensor, 
concession granter or similar party and all payments under such other 
agreements, whether the assignments described in this paragraph 
(a)(1)(ii)(A)(2) are absolute or are stated to be made to the extent 
permitted by the agreements governing the applicable franchise, license 
or concession agreements;
    (B) An assignment of all other payments due to the borrower or due 
to any operating affiliate in connection with the operation of the 
property described in paragraph (a)(1)(i) of this section; and
    (C) The right to enforce the agreements described in paragraph 
(a)(1)(ii)(A) of this section and the agreements under which payments 
under paragraph (a)(1)(ii)(B) of this section are due against, and 
collect amounts due from, each lessee, occupant or other obligor whose 
payments were assigned pursuant to paragraphs (a)(1)(ii)(A) or 
(a)(1)(ii)(B) of this section upon a breach by the borrower of any of 
the terms of, or the occurrence of any other event of default (however 
denominated) under, the loan documents relating to such CRE loan; and
    (iii) A security interest:
    (A) In all interests of the borrower and any applicable operating 
affiliate in all tangible and intangible personal property of any kind, 
in or used in the operation of or in connection with, pertaining to, 
arising from, or constituting, any of the collateral described in 
paragraphs (a)(1)(i) or (a)(1)(ii) of this section; and
    (B) In the form of a perfected security interest if the security 
interest in such property can be perfected by the filing of a financing 
statement, fixture filing, or similar document pursuant to the law 
governing the perfection of such security interest;
    (2) Prior to origination of the CRE loan, the originator:
    (i) Verified and documented the current financial condition of the 
borrower and each operating affiliate;
    (ii) Obtained a written appraisal of the real property securing the 
loan that:
    (A) 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 promulgated 
by the Appraisal Standards Board and the appraisal requirements \1\ of 
the Federal banking agencies; and
---------------------------------------------------------------------------

    \1\ 12 CFR part 34, subpart C (OCC); 12 CFR part 208, subpart E, 
and 12 CFR part 225, subpart G (Board); and 12 CFR part 323 (FDIC).
---------------------------------------------------------------------------

    (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, not exceeding 25 years, or 30 
years for a qualifying multi-family property;
    (iv) Conducted an environmental risk assessment to gain 
environmental information about the property securing the loan and took 
appropriate steps to mitigate any environmental liability determined to 
exist based on this assessment;
    (v) Conducted an analysis of the borrower's ability to service its 
overall debt obligations during the next two years, based on reasonable 
projections;
    (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 1.25 or greater, if the loan is a qualifying 
multi-family property loan; or
    (C) A DSC ratio of 1.7 or greater, if the loan is any other type of 
CRE loan;
    (vii) Determined that, based on two years of projections, which 
include the new debt obligation, following the origination date of the 
loan, the borrower will have:
    (A) A DSC ratio of 1.5 or greater, if the loan is a qualifying 
leased CRE loan, net of any income derived from a tenant(s) who is not 
a qualified tenant(s);
    (B) A DSC ratio of 1.25 or greater, if the loan is a qualifying 
multi-family property loan; or
    (C) A DSC ratio of 1.7 or greater, if the loan is any other type of 
CRE loan.
    (3) The loan documentation for the CRE loan includes covenants 
that:
    (i) Require the borrower to provide the borrower's financial 
statements and

[[Page 58041]]

supporting schedules to the servicer on an ongoing basis, but not less 
frequently than quarterly, including information on existing, maturing 
and new leasing or rent-roll activity for the property securing the 
loan, as appropriate; and
    (ii) Impose prohibitions on:
    (A) The creation or existence of any other security interest with 
respect to the collateral for the CRE loan described in paragraphs 
(a)(1)(i) and (a)(1)(ii)(A) of this section, except as provided in 
paragraph (a)(4) of this section;
    (B) The transfer of any collateral for the CRE loan described in 
paragraph (b)(1)(i) or (b)(1)(ii)(A) of this section or of any other 
collateral consisting of fixtures, furniture, furnishings, machinery or 
equipment other than any such fixture, furniture, furnishings, 
machinery or equipment that is obsolete or surplus; and
    (C) Any change to the name, location or organizational structure of 
any borrower, operating affiliate or other pledgor unless such 
borrower, operating affiliate or other pledgor shall have given the 
holder of the loan at least 30 days advance notice and, pursuant to 
applicable law governing perfection and priority, the holder of the 
loan is able to take all steps necessary to continue its perfection and 
priority during such 30-day period.
    (iii) Require each borrower and each operating affiliate to:
    (A) Maintain insurance that protects against loss on collateral for 
the CRE loan described in paragraph (a)(1)(i) of this section 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 collateral for the CRE loan described in 
paragraphs (a)(1)(i) and (a)(1)(ii) of this section;
    (C) Take any action required to:
    (1) protect the security interest and the enforceability and 
priority thereof in the collateral described in paragraph (a)(1)(i) and 
(a)(1)(ii)(A) of this section and defend such collateral against claims 
adverse to the originator's or any subsequent holder's interest; and
    (2) perfect the security interest of the originator or any 
subsequent holder of the loan in any other collateral for the CRE loan 
to the extent that such security interest is required by this section 
to be perfected;
    (D) Permit the originator or any subsequent holder of the loan, and 
the servicer, to inspect any collateral for the CRE loan and the books 
and records of the borrower or other party relating to any collateral 
for the CRE loan;
    (E) Maintain the physical condition of collateral for the CRE loan 
described in paragraph (a)(1)(i) of this section;
    (F) Comply with all environmental, zoning, building code, licensing 
and other laws, regulations, agreements, covenants, use restrictions, 
and proffers applicable to collateral for the CRE loan described in 
paragraph (a)(1)(i) of this section;
    (G) Comply with leases, franchise agreements, condominium 
declarations, and other documents and agreements relating to the 
operation of collateral for the CRE loan described in paragraph 
(a)(1)(i) of this section, and to not modify any material terms and 
conditions of such agreements over the term of the loan without the 
consent of the originator or any subsequent holder of the loan, or the 
servicer; and
    (H) Not materially alter collateral for the CRE loan described in 
paragraph (a)(1)(i) of this section without the consent of the 
originator or any subsequent holder of the loan, or the servicer.
    (4) The loan documentation for the CRE loan prohibits the borrower 
and each operating affiliate from obtaining a loan secured by a junior 
lien on collateral for the CRE loan described in paragraph (a)(1)(i) or 
(a)(1)(ii)(A) of this section, unless:
    (i) The sum of the principal amount of such junior lien loan, plus 
the principal amount of all other loans secured by collateral described 
in paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section, does not 
exceed the applicable CLTV ratio in paragraph (a)(5) of this section, 
based on the appraisal at origination of such junior lien loan; or
    (ii) Such loan is a purchase money obligation that financed the 
acquisition of machinery or equipment and the borrower or operating 
affiliate (as applicable) pledges such machinery and equipment as 
additional collateral for the CRE loan.
    (5) At origination, the applicable loan-to-value ratios for the 
loan are:
    (i) LTV less than or equal to 65 percent and CLTV less than or 
equal to 70 percent; or
    (ii) LTV less than or equal to 60 percent and CLTV less than or 
equal to 65 percent, if the capitalization rate used in an appraisal 
that meets the requirements set forth in paragraph (a)(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's 
H.15 Report (or any successor report) as of the date concurrent with 
the effective date of an appraisal that meets the requirements set 
forth in paragraph (a)(2)(ii) of this section; and
    (B) 300 basis points.
    (iii) The capitalization rate used in an appraisal under paragraph 
(a)(2)(ii) of this section must be disclosed to potential investors in 
the securitization.
    (6) All loan payments required to be made under the loan agreement 
are:
    (i) Based on straight-line amortization of principal and interest 
over a term that does not exceed 25 years, or 30 years for a qualifying 
multifamily loan; and
    (ii) To be made no less frequently than monthly over a term of at 
least ten years.
    (7) Under the terms of the loan agreement:
    (i) Any maturity of the note occurs no earlier than ten years 
following the date of origination;
    (ii) The borrower is not permitted to defer repayment of principal 
or payment of interest; and
    (iii) The interest rate on the loan is:
    (A) A fixed interest rate; 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 qualifying CRE loans 
that collateralize the asset-backed security and that reduce the 
sponsor's risk retention requirement under Sec.  ----.15 meet all of 
the requirements set forth in paragraphs (a)(1) through (9) of this 
section and has concluded that its internal supervisory controls are 
effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (a)(10)(i) of 
this section shall be performed, for each issuance of an 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;
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (a)(10)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any; and
    (11) Within two weeks of the closing of the CRE loan by its 
originator or, if

[[Page 58042]]

sooner, prior to the transfer of such CRE loan to the issuing entity, 
the originator shall have obtained a UCC lien search from the 
jurisdiction of organization of the borrower and each operating 
affiliate, that does not report, as of the time that the security 
interest of the originator in the property described in paragraph 
(a)(1)(iii) of this section was perfected, other higher priority liens 
of record on any property described in paragraph (a)(1)(iii) of this 
section, other than purchase money security interests.
    (b) Cure or buy-back requirement. If a sponsor has relied on the 
exception provided in Sec.  ------.15 with respect to a qualifying CRE 
loan and it is subsequently determined that the CRE loan did not meet 
all of the requirements set forth in paragraphs (a)(1) through (a)(9) 
and (a)(11) of this section, the sponsor shall not lose the benefit of 
the exception with respect to the CRE loan if the depositor complied 
with the certification requirement set forth in paragraph (a)(10) of 
this section, and:
    (1) The failure of the loan to meet any of the requirements set 
forth in paragraphs (a)(1) through (a)(9) and (a)(11) of this section 
is not material; or;
    (2) No later than 90 days after the determination that the loan 
does not meet one or more of the requirements of paragraphs (a)(1) 
through (a)(9) or (a)(11) of this section, the sponsor:
    (i) Effectuates cure, restoring conformity of the loan to the unmet 
requirements as of the date of cure; or
    (ii) Repurchases the loan(s) from the issuing entity at a price at 
least equal to the remaining principal balance and accrued interest on 
the loan(s) as of the date of repurchase.
    (3) If the sponsor cures or repurchases pursuant to paragraph 
(b)(2) of this section, the sponsor must promptly notify, or cause to 
be notified, the holders of the asset-backed securities issued in the 
securitization transaction of any loan(s) included in such 
securitization transaction that is required to be cured or repurchased 
by the sponsor pursuant to paragraph (b)(2) of this section, including 
the principal amount of such repurchased loan(s) and the cause for such 
cure or repurchase.


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

    (a) Underwriting, product and other standards. (1) Prior to 
origination of the automobile loan, the originator:
    (i) Verified and documented that within 30 days of the date of 
origination:
    (A) The borrower was not currently 30 days or more past due, in 
whole or in part, on any debt obligation;
    (B) Within the previous 24 months, the borrower has not been 60 
days or more past due, in whole or in part, on any debt obligation;
    (C) Within the previous 36 months, the borrower has not:
    (1) Been a debtor in a proceeding commenced under Chapter 7 
(Liquidation), Chapter 11 (Reorganization), Chapter 12 (Family Farmer 
or Family Fisherman plan), or Chapter 13 (Individual Debt Adjustment) 
of the U.S. Bankruptcy Code; or
    (2) Been the subject of any federal or State judicial judgment for 
the collection of any unpaid debt;
    (D) Within the previous 36 months, no one-to-four family property 
owned by the borrower has been the subject of any foreclosure, deed in 
lieu of foreclosure, or short sale; or
    (E) Within the previous 36 months, the borrower has not had any 
personal property repossessed;
    (ii) Determined and documented that the borrower has at least 24 
months of credit history; and
    (iii) Determined and documented that, upon the origination of the 
loan, the borrower's DTI ratio is less than or equal to 36 percent.
    (A) For the purpose of making the determination under paragraph 
(a)(1)(iii) of this section, the originator must:
    (1) Verify and document all income of the borrower that the 
originator includes in the borrower's effective monthly income (using 
payroll stubs, tax returns, profit and loss statements, or other 
similar documentation); and
    (2) On or after the date of the borrower's written application and 
prior to origination, obtain a credit report regarding the borrower 
from a consumer reporting agency that compiles and maintain files on 
consumers on a nationwide basis (within the meaning of 15 U.S.C. 
1681a(p)) and verify that all outstanding debts reported in the 
borrower's credit report are incorporated into the calculation of the 
borrower's DTI ratio under paragraph (a)(1)(ii) of this section;
    (2) An originator will be deemed to have met the requirements of 
paragraph (a)(1)(i) of this section if:
    (i) The originator, no more than 30 days before the closing of the 
loan, obtains a credit report regarding the borrower from a consumer 
reporting agency that compiles and maintains files on consumers on a 
nationwide basis (within the meaning of 15 U.S.C. 1681a(p));
    (ii) Based on the information in such credit report, the borrower 
meets all of the requirements of paragraph (a)(1)(i) of this section, 
and no information in a credit report subsequently obtained by the 
originator before the closing of the loan contains contrary 
information; and
    (iii) The originator obtains electronic or hard copies of the 
credit report.
    (3) At closing of the automobile loan, the borrower makes a down 
payment from the borrower's personal funds and trade-in allowance, if 
any, that is at least equal to the sum of:
    (i) The full cost of the vehicle title, tax, and registration fees;
    (ii) Any dealer-imposed fees;
    (iii) The full cost of any additional warranties, insurance or 
other products purchased in connection with the purchase of the 
vehicle; and
    (iv) 10 percent of the vehicle purchase price.
    (4) The originator records a first lien securing the loan on the 
purchased vehicle in accordance with State law.
    (5) The terms of the loan agreement provide a maturity date for the 
loan that does not exceed the lesser of:
    (i) Six years from the date of origination, or
    (ii) 10 years minus the difference between the current model year 
and the vehicle's model year.
    (6) The terms of the loan agreement:
    (i) Specify a fixed rate of interest for the life of the loan;
    (ii) Provide for a level monthly payment amount that fully 
amortizes the amount financed over the loan term;
    (iii) Do not permit the borrower to defer repayment of principal or 
payment of interest; and
    (iv) Require the borrower to make the first payment on the 
automobile loan within 45 days of the loan's contract date.
    (7) At the closing of the securitization transaction, all payments 
due on the loan are contractually current; and
    (8)(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 qualifying automobile 
loans that collateralize the asset-backed security and that reduce the 
sponsor's risk retention requirement under Sec.  ----.15 meet all of 
the requirements set forth in paragraphs (a)(1) through (a)(7) of this 
section and has concluded that its internal supervisory controls are 
effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (a)(8)(i) of this 
section shall be performed, for each issuance of an asset-backed 
security, as of a date within 60 days of the cut-off date or similar 
date for establishing the composition of the asset

[[Page 58043]]

pool collateralizing such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (a)(8)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any.
    (b) Cure or buy-back requirement. If a sponsor has relied on the 
exception provided in Sec.  ------.15 with respect to a qualifying 
automobile loan and it is subsequently determined that the loan did not 
meet all of the requirements set forth in paragraphs (a)(1) through 
(a)(7) of this section, the sponsor shall not lose the benefit of the 
exception with respect to the automobile loan if the depositor complied 
with the certification requirement set forth in paragraph (a)(8) of 
this section, and:
    (1) The failure of the loan to meet any of the requirements set 
forth in paragraphs (a)(1) through (a)(7) of this section is not 
material; or
    (2) No later than ninety (90) days after the determination that the 
loan does not meet one or more of the requirements of paragraphs (a)(1) 
through (a)(7) of this section, the sponsor:
    (i) Effectuates cure, establishing conformity of the loan to the 
unmet requirements as of the date of cure; or
    (ii) Repurchases the loan(s) from the issuing entity at a price at 
least equal to the remaining principal balance and accrued interest on 
the loan(s) as of the date of repurchase.
    (3) If the sponsor cures or repurchases pursuant to paragraph 
(b)(2) of this section, the sponsor must promptly notify, or cause to 
be notified, the holders of the asset-backed securities issued in the 
securitization transaction of any loan(s) included in such 
securitization transaction that is required to be cured or repurchased 
by the sponsor pursuant to paragraph (b)(2) of this section, including 
the principal amount of such loan(s) and the cause for such cure or 
repurchase.


Sec.  ----.19  General exemptions.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    First pay class means a class of ABS interests for which all 
interests in the class are entitled to the same priority of payment and 
that, at the time of closing of the transaction, is entitled to 
repayments of principal and payments of interest prior to or pro-rata 
with all other classes of securities collateralized by the same pool of 
first-lien residential mortgages, until such class has no principal or 
notional balance remaining.
    Inverse floater means an ABS interest issued as part of a 
securitization transaction for which interest or other income is 
payable to the holder based on a rate or formula that varies inversely 
to a reference rate of interest.
    (b) This part shall not apply to:
    (1) U.S. Government-backed securitizations. Any securitization 
transaction that:
    (i) Is collateralized solely by residential, multifamily, or health 
care facility mortgage loan assets that are insured or guaranteed (in 
whole or in part) as to the payment of principal and interest by the 
United States or an agency of the United States, and servicing assets; 
or
    (ii) Involves the issuance of 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 by residential, multifamily, or 
health care facility mortgage loan assets or interests in such assets, 
and servicing assets.
    (2) Certain agricultural loan securitizations. Any securitization 
transaction that is collateralized solely by loans or other assets 
made, insured, guaranteed, or purchased by any institution that is 
subject to the supervision of the Farm Credit Administration, including 
the Federal Agricultural Mortgage Corporation, and servicing assets;
    (3) State and municipal securitizations. Any asset-backed security 
that is a security issued or guaranteed by any State, or by any 
political subdivision of a State, or by any public instrumentality of a 
State that is exempt from the registration requirements of the 
Securities Act of 1933 by reason of section 3(a)(2) of that Act (15 
U.S.C. 77c(a)(2)); and
    (4) Qualified scholarship funding bonds. Any asset-backed security 
that meets the definition of a qualified scholarship funding bond, as 
set forth in section 150(d)(2) of the Internal Revenue Code of 1986 (26 
U.S.C. 150(d)(2)).
    (5) Pass-through resecuritizations. Any securitization transaction 
that:
    (i) Is collateralized solely by servicing assets, and by existing 
asset-backed securities:
    (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.
    (6) First-pay-class securitizations. Any securitization transaction 
that:
    (i) Is collateralized solely by servicing assets, and by first-pay 
classes of asset-backed securities collateralized by first-lien 
residential mortgages on properties located in any state and servicing 
assets:
    (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) Does not provide for any ABS interest issued in the 
securitization transaction to share in realized principal losses other 
than pro rata with all other ABS interests based on current unpaid 
principal balance of the ABS interests at the time the loss is 
realized;
    (iii) Is structured to reallocate prepayment risk;
    (iv) Does not reallocate credit risk (other than as a consequence 
of reallocation of prepayment risk); and
    (v) Does not include any inverse floater or similarly structured 
ABS interest.
    (7) Seasoned loans. (i) Any securitization transaction that is 
collateralized solely by servicing assets, and by seasoned loans that 
meet the following requirements:
    (A) The loans have not been modified since origination; and
    (B) None of the loans have been delinquent for 30 days or more.
    (ii) For purposes of this paragraph, a seasoned loan means:
    (A) With respect to asset-backed securities backed by residential 
mortgages, a loan that has been outstanding and performing for the 
longer of:
    (1) A period of five years; or
    (2) Until the outstanding principal balance of the loan has been 
reduced to 25 percent of the original principal balance.
    (3) Notwithstanding paragraphs (b)(7)(ii)(A)(1) and 
(b)(7)(ii)(A)(2) of this section, any residential mortgage loan that 
has been outstanding and performing for a period of at least seven 
years shall be deemed a seasoned loan.
    (B) With respect to all other classes of asset-backed securities, a 
loan that has been outstanding and performing for the longer of:
    (1) A period of at least two years; or
    (2) Until the outstanding principal balance of the loan has been 
reduced to

[[Page 58044]]

33 percent of the original principal balance.
    (8) Certain public utility securitizations. (i) Any securitization 
transaction where the asset-back securities issued in the transaction 
are secured by the intangible property right to collect charges for the 
recovery of specified costs and such other assets, if any, of an 
issuing entity that is wholly owned, directly or indirectly by an 
investor owned utility company that is subject to the regulatory 
authority of a State public utility commission or other appropriate 
State agency.
    (ii) For purposes of this paragraph:
    (A) Specified cost means any cost identified by a State legislature 
as appropriate for recovery through securitization pursuant to 
specified cost recovery legislation; and
    (B) Specified cost recovery legislation means legislation enacted 
by a State that:
    (1) Authorizes the investor owned utility company to apply for, and 
authorizes the public utility commission or other appropriate State 
agency to issue, a financing order determining the amount of specified 
costs the utility will be allowed to recover;
    (2) Provides that pursuant to a financing order, the utility 
acquires an intangible property right to charge, collect, and receive 
amounts necessary to provide for the full recovery of the specified 
costs determined to be recoverable, and assures that the charges are 
non-bypassable and will be paid by customers within the utility's 
historic service territory who receive utility goods or services 
through the utility's transmission and distribution system, even if 
those customers elect to purchase these goods or services from a third 
party; and
    (3) Guarantees that neither the State nor any of its agencies has 
the authority to rescind or amend the financing order, to revise the 
amount of specified costs, or in any way to reduce or impair the value 
of the intangible property right, except as may be contemplated by 
periodic adjustments authorized by the specified cost recovery 
legislation.
    (c) Exemption for securitizations of assets issued, insured or 
guaranteed by the United States. This part shall not apply to any 
securitization transaction if the asset-backed securities issued in the 
transaction are:
    (1) Collateralized solely by obligations issued by the United 
States or an agency of the United States and servicing assets;
    (2) Collateralized solely by assets that are fully insured or 
guaranteed as to the payment of principal and interest by the United 
States or an agency of the United States (other than those referred to 
in paragraph (b)(1)(i) of this section) and servicing assets; or
    (3) Fully guaranteed as to the timely payment of principal and 
interest by the United States or any agency of the United States;
    (d) Federal Deposit Insurance Corporation securitizations. This 
part shall not apply to any securitization transaction that is 
sponsored by the Federal Deposit Insurance Corporation acting as 
conservator or receiver under any provision of the Federal Deposit 
Insurance Act or of Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.
    (e) Reduced requirement for certain student loan securitizations. 
The 5 percent risk retention requirement set forth in Sec.  ----.4 
shall be modified as follows:
    (1) With respect to a securitization transaction that is 
collateralized solely by student loans made under the Federal Family 
Education Loan Program (``FFELP loans'') that are guaranteed as to 100 
percent of defaulted principal and accrued interest, and servicing 
assets, the risk retention requirement shall be 0 percent;
    (2) With respect to a securitization transaction that is 
collateralized solely by FFELP loans that are guaranteed as to at least 
98 percent of defaulted principal and accrued interest, and servicing 
assets, the risk retention requirement shall be 2 percent; and
    (3) With respect to any other securitization transaction that is 
collateralized solely by FFELP loans, and servicing assets, the risk 
retention requirement shall be 3 percent.
    (f) 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.  ----.20  Safe harbor for certain foreign-related transactions.

    (a) Definitions. For purposes of this section, the following 
definition shall apply:
    U.S. person means:
    (1) Any of the following:
    (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 any State or 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; and
    (2) ``U.S. person(s)'' 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 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

[[Page 58045]]

Reconstruction and Development, the Inter-American Development Bank, 
the Asian Development Bank, the African Development Bank, the United 
Nations, and their agencies, affiliates and pension plans, and any 
other similar international organizations, their agencies, affiliates 
and pension plans.
    (b) In general. This part shall not apply to a securitization 
transaction if all the following conditions are met:
    (1) The securitization transaction is not required to be and is not 
registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.);
    (2) No more than 10 percent of the dollar value (or equivalent 
amount in the currency in which the ABS is issued, as applicable) of 
all classes of ABS interests in the securitization transaction are sold 
or transferred to U.S. persons or for the account or benefit of U.S. 
persons;
    (3) Neither the sponsor of the securitization transaction nor the 
issuing entity is:
    (i) Chartered, incorporated, or organized under the laws of the 
United States or any State;
    (ii) An unincorporated branch or office (wherever located) of an 
entity chartered, incorporated, or organized under the laws of the 
United States or any State; or
    (iii) An unincorporated branch or office located in the United 
States or any State of an entity that is chartered, incorporated, or 
organized under the laws of a jurisdiction other than the United States 
or any State; and
    (4) If the sponsor or issuing entity is chartered, incorporated, or 
organized under the laws of a jurisdiction other than the United States 
or any State, no more than 25 percent (as determined based on unpaid 
principal balance) of the assets that collateralize the ABS interests 
sold in the securitization transaction were acquired by the sponsor or 
issuing entity, directly or indirectly, from:
    (i) A majority-owned affiliate of the sponsor or issuing entity 
that is chartered, incorporated, or organized under the laws of the 
United States or any State; or
    (ii) An unincorporated branch or office of the sponsor or issuing 
entity that is located in the United States or any State.
    (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) of this section, 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.  ----.21  Additional exemptions.

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

End of Common Rule

List of Subjects

12 CFR Part 43

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

12 CFR Part 244

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

12 CFR Part 373

    Automobile loans, Banks and banking, Commercial loans, Commercial 
real estate, Credit risk, Mortgages, Reporting and recordkeeping 
requirements, Risk retention, Savings associations, Securitization.

12 CFR Part 1234

    Government sponsored enterprises, Mortgages, Securities.

17 CFR Part 246

    Reporting and recordkeeping requirements, Securities.

24 CFR Part 267

    Mortgages.

Adoption of the Common Rule Text

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

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons stated in the common preamble and under the 
authority of 12 U.S.C. 93a, 1464, 5412(b)(2)(B), and 15 U.S.C. 78o-11, 
the Office of the Comptroller of the Currency proposes to amend chapter 
I of title 12, Code of Federal Regulations as follows:

PART 43--CREDIT RISK RETENTION

0
1. The authority for part 43 is added to read as follows:

    Authority: 12 U.S.C. 1 et seq., 93a, 161, 1464, 1818, 
5412(b)(2)(B), and 15 U.S.C. 78o-11.

0
2. Part 43 is added as set forth at the end of the Common Preamble.
0
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, 1464, 1818, 5412(b)(2)(B), and 15 U.S.C. 78o-11.
    (b) Purpose. (1) This part requires securitizers to retain an 
economic interest in a portion of the credit risk for any asset that 
the securitizer, through the issuance of an asset-backed security, 
transfers, sells, or conveys to a third party. This part specifies the 
permissible types, forms, and amounts of credit risk retention, and it 
establishes certain exemptions for securitizations collateralized by 
assets that meet specified underwriting standards.
    (2) Nothing in this part shall be read to limit the authority of 
the OCC to take supervisory or enforcement action, including action to 
address unsafe or unsound practices or conditions, or violations of 
law.
    (c) Scope. This part applies to any securitizer that is a national 
bank, a Federal savings association, a Federal branch or agency of a 
foreign bank, or a subsidiary thereof.
    (d) Effective dates. This part shall become effective:
    (1) With respect to any securitization transaction collateralized 
by residential

[[Page 58046]]

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

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)

0
4. The authority citation for part 244 is added to reads as follows:

    Authority:  12 U.S.C. 221 et seq., 1461 et seq., 1818, 1841 et 
seq., 3103 et seq., and 15 U.S.C. 78o-11.

0
4a. The part heading for part 244 is revised as set forth above.
0
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.); the 
Home Owners' Loan Act of 1933 (HOLA) (12 U.S.C. 1461 et seq.); section 
165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) (12 U.S.C. 5365); and the International Banking Act of 
1978, as amended (12 U.S.C. 3101 et seq.).
    (2) Nothing in this part shall be read to limit the authority of 
the Board to take action under provisions of law other than 15 U.S.C. 
78o-11, including action to address unsafe or unsound practices or 
conditions, or violations of law or regulation, under section 8 of the 
FDI Act.
    (b) Purpose. This part requires any securitizer to retain an 
economic interest in a portion of the credit risk for any asset that 
the securitizer, through the issuance of an asset-backed security, 
transfers, sells, or conveys to a third party in a transaction within 
the scope of section 15G of the Exchange Act. This part specifies the 
permissible types, forms, and amounts of credit risk retention, and 
establishes certain exemptions for securitizations collateralized by 
assets that meet specified underwriting standards or that otherwise 
qualify for an exemption.
    (c) Scope. (1) This part applies to any securitizer that is:
    (i) A state member bank (as defined in 12 CFR 208.2(g)); or
    (ii) Any subsidiary of a state member bank.
    (2) Section 15G of the Exchange Act and the rules issued thereunder 
apply to any securitizer that is:
    (i) A bank holding company (as defined in 12 U.S.C. 1842);
    (ii) A foreign banking organization (as defined in 12 CFR 
211.21(o));
    (iii) An Edge or agreement corporation (as defined in 12 CFR 
211.1(c)(2) and (3));
    (iv) A nonbank financial company that the Financial Stability 
Oversight Council has determined under section 113 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (12 
U.S.C. 5323) shall be supervised by the Board and for which such 
determination is still in effect; or
    (v) A savings and loan holding company (as defined in 12 U.S.C. 
1467a); and
    (vi) Any subsidiary of the foregoing. 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.

Federal Deposit Insurance Corporation

12 CFR Chapter III

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

0
6. The authority citation for part 373 is added to reads as follows:

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

0
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. (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 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);
    (3) A state savings association (as defined in 12 U.S.C. 
1813(b)(3)); or
    (4) Any subsidiary of an entity described in paragraphs (1), (2), 
or (3) of this section.

Federal Housing Finance Agency

    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

0
8. The authority citation for part 1234 is added to read as follows:


[[Page 58047]]


    Authority:  12 U.S.C. 4511(b), 4526, 4617; 15 U.S.C. 78o-
11(b)(2).
0
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 [INSERT DATE ONE YEAR AFTER DATE OF 
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.
0
10. Amend Sec.  1234.14 as follows:
0
a. Revise the heading to read as set forth below.
0
b. In the introductory paragraph, remove the words ``Sec. Sec.  1234.15 
through 1234.18'' and add in their place the words ``Sec. Sec.  1234.15 
and 1234.17''.
0
c. Remove the definitions of ``Automobile loan'', ``Commercial loan'', 
``Debt-to-income (DTI) ratio'', ``Earnings before interest, taxes, 
depreciation, and amortization (EBITDA)'', ``Lease financing'', 
``Leverage Ratio'', ``Machinery and equipment (M&E) collateral'', 
``Model year'', ``Payment-in-kind'', ``Purchase price'', ``Salvage 
title'', ``Total debt'', ``Total liabilities ratio'', and ``Trade-in 
allowance''.
0
d. Revise the definition of ``Debt service coverage (DSC) ratio'' to 
read as follows:


Sec.  1234.14  Definitions applicable to qualifying commercial real 
estate loans.

* * * * *
    Debt service coverage (DSC) ratio means the ratio of:
    (1) The annual NOI less the annual replacement reserve of the CRE 
property at the time of origination of the CRE loans; to
    (2) The sum of the borrower's annual payments for principal and 
interest on any debt obligation.
* * * * *
0
11. Revise Sec.  1234.15 to read as follows:


Sec.  1234.15  Qualifying commercial real estate loans.

    (a) General exception. Commercial real estate loans that are 
securitized through a securitization transaction shall be subject to a 
0 percent risk retention requirement under subpart B, provided that the 
following conditions are met:
    (1) The CRE assets meet the underwriting standards set forth in 
Sec.  1234.16;
    (2) The securitization transaction is collateralized solely by CRE 
loans and by servicing assets;
    (3) The securitization transaction does not permit reinvestment 
periods; and
    (4) The sponsor provides, or causes to be provided, to potential 
investors a reasonable period of time prior to the sale of asset-backed 
securities of the issuing entity, and, upon request, to the Commission, 
and to the FHFA, in written form under the caption ``Credit Risk 
Retention'':
    (i) A description of the manner in which the sponsor determined the 
aggregate risk retention requirement for the securitization transaction 
after including qualifying CRE loans with 0 percent risk retention; and
    (ii) Descriptions of the qualifying CRE loans and descriptions of 
the CRE loans that are not qualifying CRE loans, and the material 
differences between the group of qualifying CRE loans and CRE loans 
that are not qualifying loans with respect to the composition of each 
group's loan balances, loan terms, interest rates, borrower credit 
information, and characteristics of any loan collateral.
    (b) Risk retention requirement. For any securitization transaction 
described in paragraph (a) of this section, the amount of risk 
retention required under Sec.  1234.3(b)(1) is reduced by the same 
amount as the ratio of the unpaid principal balance of the qualifying 
CRE loans to the total unpaid principal balance of CRE loans that are 
included in the pool of assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction (the 
qualifying asset ratio); provided that;
    (1) The qualifying asset ratio is measured as of the cut-off date 
or similar date for establishing the composition of the pool assets 
collateralizing the asset-backed securities issued pursuant to the 
securitization transaction; and
    (2) The qualifying asset ratio does not exceed 50 percent.
    (c) Exception for securitizations of qualifying CRE only. 
Notwithstanding other provisions of this section, the risk retention 
requirements of subpart B of this part shall not apply to 
securitization transactions where the transaction is collateralized 
solely by servicing assets and qualifying CRE loans.


Sec. Sec.  1234.16 and 1234.18  [Removed and Reserved]

0
12. Remove and reserve Sec. Sec.  1234.16 and 1234.18.

Securities and Exchange Commission

    For the reasons stated in the Supplementary Information, the 
Securities and Exchange Commission proposes the amendments 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.
    For the reasons set out above, title 17, chapter II of the Code of 
Federal Regulations is proposed to be amended as follows:

PART 246--CREDIT RISK RETENTION

0
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

0
14. Part 246 is added as set forth at the end of the Common Preamble.
0
15. Section 246.1 is added to read as follows:


Sec.  246.1  Purpose, scope, and authority.

    (a) Authority and purpose. This part (Regulation RR) is issued by 
the Securities and Exchange Commission (``Commission'') jointly with 
the Board of Governors of the Federal Reserve System, the Federal 
Deposit Insurance Corporation, the Office of the Comptroller of the 
Currency, and, in the case of the securitization of any residential 
mortgage asset, together with the Secretary of Housing and Urban 
Development and the Federal Housing Finance Agency, pursuant to Section 
15G of the Securities Exchange Act of 1934 (15 U.S.C. 78o-11). The 
Commission also is issuing this part pursuant to its authority under 
Sections 7, 10, 19(a), and 28 of the Securities Act and Sections 3, 13, 
15, 23, and 36 of the Exchange Act. This part requires securitizers to 
retain an economic interest in a portion of the credit risk for any 
asset that the securitizer, through the issuance of an asset-backed 
security, transfers, sells, or conveys to a third party. This part 
specifies the

[[Page 58048]]

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

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

0
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).

0
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: August 28, 2013.
Thomas J. Curry,
Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, August 27, 2013.
Robert deV. Frierson,
Secretary of the Board.

    Dated at Washington, DC, this 28 of August 2013.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

    Dated: August 28, 2013.

    By the Securities and Exchange Commission.
Elizabeth M. Murphy
Secretary.

    Dated: August 28, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.

    Dated: August 26, 2013.

    By the Department of Housing and Urban Development.
Shaun Donovan,
Secretary.
[FR Doc. 2013-21677 Filed 9-19-13; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6741-01-P; 8010-01-P; 8070-01-P;