[Federal Register Volume 79, Number 123 (Thursday, June 26, 2014)]
[Proposed Rules]
[Pages 36252-36264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14919]


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

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 709

RIN 3133-AE41


Safe Harbor

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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

SUMMARY: The NCUA Board (``Board'') proposes to amend its regulations 
regarding the treatment by the Board, as liquidating agent or 
conservator (the ``liquidating agent'' or ``conservator,'' 
respectively) of a federally insured credit union (``FICU'') of 
financial assets transferred by the credit union in connection with a 
securitization or a participation. The proposed rule continues the safe 
harbor for financial assets transferred in connection with 
securitizations and participations in which the financial assets were 
transferred in compliance with the existing regulation and defines the 
conditions for safe harbor protection for securitizations and 
participations for which transfers of financial assets would be made 
after the effective date of this proposed rule.

[[Page 36253]]


DATES: Comments must be received on or before August 25, 2014.

ADDRESSES: You may submit comments by any of the following methods 
(please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name]--Comments on Proposed Rule--Safe Harbor'' in the email subject 
line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Dale Klein, Senior Capital Markets 
Specialist, Office of Examination and Insurance, at the above address 
or telephone (703) 518-6360; or Lisa Henderson, Staff Attorney, Office 
of General Counsel, at the above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    1. 2000 Rule
    2. Modifications to GAAP Accounting Standards
    3. FCU Act Changes
    4. Why is NCUA proposing this rule?
II. Proposed Rule
    1. Generally
    2. Capital Structure and Financial Assets
    3. Disclosure
    4. Documentation and Recordkeeping
    5. Compensation
    6. Origination and Retention Requirements
    7. Additional Conditions
    8. The Safe Harbor
    9. Consent to Certain Payments and Servicing
    10. Miscellaneous
III. Regulatory Procedures
    1. Regulatory Flexibility Act
    2. Paperwork Reduction Act
    3. Executive Order 13132
    4. Assessment of Federal Regulations and Policies on Families

I. Background

1. 2000 Rule

    In 2000, the Board clarified the scope of its statutory authority 
as conservator or liquidating agent to disaffirm or repudiate contracts 
of a FICU with respect to transfers of financial assets by a FICU in 
connection with a securitization or participation when it adopted a 
regulation codified at 12 CFR 709.10 (the ``2000 Rule''). The 2000 Rule 
provides that a conservator or liquidating agent will not use its 
statutory authority to disaffirm or repudiate contracts to reclaim, 
recover, or recharacterize as property of a FICU or the liquidation 
estate any financial assets transferred by the FICU in connection with 
a securitization or in the form of a participation, provided that such 
transfer meets all conditions for sale accounting treatment under 
generally accepted accounting principles (``GAAP'').\1\ The rule was a 
clarification, rather than a limitation, of the repudiation power. Such 
power authorizes the conservator or liquidating agent to disaffirm a 
contract or lease entered into by a FICU and be legally excused from 
further performance, but it is not an avoiding power enabling the 
conservator or liquidating agent to recover assets that were previously 
sold and no longer reflected on the books and records of a FICU.
---------------------------------------------------------------------------

    \1\ NCUA has not previously stated that federal credit unions 
(``FCUs'') have the authority to issue asset-backed securities 
(``ABS'') and does not believe that any FCUs have done so. NCUA also 
does not believe that any state-chartered, federally insured credit 
unions (``FISCUs'') have issued ABS. Therefore, the securitization 
aspect of the 2000 Rule has not been applied. In connection with 
this proposed update to the 2000 Rule, the Board has issued a 
companion proposal, published elsewhere in today's Federal Register, 
which adds new Sec.  721.3(n) to clarify the authority of FCUs to 
securitize assets. If the Board ultimately adopts that rule, and an 
FCU (or a FISCU if permitted by state law) issues ABS, these 
proposed amendments to Sec.  709.10 are necessary to preserve the 
safe harbor established by the current rule.
---------------------------------------------------------------------------

    The 2000 Rule provided a ``safe harbor'' by confirming ``legal 
isolation'' if all other standards for off balance sheet accounting 
treatment, along with some additional conditions focusing on the 
enforceability of the transaction, were met by the transfer in 
connection with a securitization or a participation. Satisfaction of 
``legal isolation'' was vital to securitization transactions because of 
the risk that the pool of financial assets transferred into the 
securitization trust could be recovered in bankruptcy or in a credit 
union liquidation. Generally, to satisfy the legal isolation condition, 
the transferred financial assets must have been presumptively placed 
beyond the reach of the transferor, its creditors, a bankruptcy 
trustee, or in the case of a FICU, NCUA as conservator or liquidating 
agent. The 2000 Rule, thus, addressed only purported sales which met 
the conditions for off balance sheet accounting treatment under GAAP. 
However, in recent years, the implementation of new accounting rules 
has created uncertainty for potential securitization participants.

2. Modifications to GAAP Accounting Standards

    In 2009, the Financial Accounting Standards Board (``FASB'') 
finalized modifications to GAAP through Statement of Financial 
Accounting Standards No. 166, (now codified in FASB Accounting 
Standards Codification (ASC) Topic 860, Transfers and Servicing) and 
Statement of Financial Accounting Standards No. 167 (now codified in 
FASB ASC Topic 810, Consolidation) (together, the ``2009 GAAP 
Modifications''). The 2009 GAAP Modifications made changes that affect 
whether a special purpose entity (``SPE'') must be consolidated for 
financial reporting purposes, thereby subjecting many SPEs to GAAP 
consolidation requirements. These accounting changes may require a FICU 
to consolidate an issuing entity to which financial assets have been 
transferred for securitization on to its balance sheet for financial 
reporting purposes primarily because an affiliate of the FICU retains 
control over the financial assets. Given the 2009 GAAP Modifications, 
legal and accounting treatment of a transaction may no longer be 
aligned. As a result, the safe harbor provision of the 2000 Rule may 
not apply to a transfer in connection with a securitization that does 
not qualify for off balance sheet accounting treatment.
    FASB ASC Topic 860 also affects the treatment of participation 
interests transferred by a FICU, in that it defines participating 
interests as pari-passu pro-rata interests in financial assets, and 
subjects the sale of a participation interest to the same conditions as 
the sale of financial assets. FASB ASC Topic 860 provides that 
transfers of participation interests that do not qualify for sale 
treatment will be viewed as secured borrowings. While the GAAP 
modifications have some effect on participations, most participations 
are likely to continue to meet the conditions for sale accounting 
treatment under GAAP.

3. FCU Act Changes

    In 2005, Congress enacted Section 207(c)(13)(C) \2\ of the Federal 
Credit Union Act (the ``FCU Act'').\3\ In relevant part, this paragraph 
provides that generally no person may exercise any right or power to 
terminate, accelerate, or declare a default under a contract to which 
the FCU is a party, or obtain possession of or exercise control over

[[Page 36254]]

any property of the FCU, or affect any contractual rights of the FCU, 
without the consent of the conservator or liquidating agent, as 
appropriate, during the 45-day period beginning on the date of the 
appointment of the conservator or the 90-day period beginning on the 
date of the appointment of the liquidating agent. If a securitization 
is treated as a secured borrowing, section 207(c)(13)(C) could prevent 
the investors from recovering monies due to them for up to 90 days. 
Consequently, securitized assets that remain property of the FCU (but 
subject to a security interest) would be subject to the stay, raising 
concerns that any attempt by securitization investors to exercise 
remedies with respect to the FCU's assets would be delayed. During the 
stay, interest and principal on the securitized debt could remain 
unpaid. This 90-day delay could cause substantial downgrades in the 
ratings provided on existing securitizations and could prevent planned 
securitizations for multiple asset classes, such as credit cards, 
automobile loans, and other credits, from being brought to market.
---------------------------------------------------------------------------

    \2\ 12 U.S.C. 1787(c)(13)(C).
    \3\ 12 U.S.C. 1751 et. seq.
---------------------------------------------------------------------------

4. Why is NCUA proposing this rule?

    The Federal Deposit Insurance Corporation (FDIC) has issued 
proposed and final rules to resolve the issues raised by the 2009 GAAP 
modifications and parallel 2005 changes to the Federal Deposit 
Insurance Act.\4\ This preamble and proposed rule track the language of 
the FDIC's final rule, codified at 12 CFR 360.6.
---------------------------------------------------------------------------

    \4\ 75 FR 60287 (Sept. 30, 2010) (Final Rule); 75 FR 27471 (May 
17, 2010) (Proposed Rule).
---------------------------------------------------------------------------

    The Board believes that several of the issues of concern for 
securitization investors and loan participants regarding the impact of 
the 2009 GAAP Modifications on the eligibility of transfers of 
financial assets for safe harbor protection can be addressed by 
clarifying the position of the conservator or liquidating agent under 
established law. Under Section 207(c)(12) of the FCU Act,\5\ the 
conservator or liquidating agent cannot use its statutory power to 
repudiate or disaffirm contracts to avoid a legally enforceable and 
perfected security interest in transferred financial assets. This 
provision applies whether or not a securitization or participation 
transaction meets the conditions for sale accounting. The proposed rule 
would clarify that, prior to any monetary default or repudiation, the 
conservator or liquidating agent would consent to the making of 
required payments of principal and interest and other amounts due on 
the securitized obligations during the statutory stay period. In 
addition, the proposed rule states that, if the conservator or 
liquidating agent decides to repudiate the securitization transaction, 
the payment of repudiation damages in an amount equal to the par value 
of the outstanding obligations on the date of liquidation will 
discharge the lien on the securitization assets. This clarification in 
paragraphs (d)(3) and (e) of the proposed rule addresses the scope of 
the stay codified in 12 U.S.C. 1787(c)(13)(C).
---------------------------------------------------------------------------

    \5\ 12 U.S.C. 1787(c)(12).
---------------------------------------------------------------------------

    A conservator or liquidating agent generally makes a determination 
of what constitutes the property of a FICU based on the books and 
records of the FICU. If a securitization is reflected on the books and 
records of a FICU for accounting purposes, the conservator or 
liquidating agent would evaluate all facts and circumstances existing 
at the time of conservatorship or liquidation, as applicable, to 
determine whether a transaction is a sale under applicable state law or 
a secured borrowing. Given the 2009 GAAP Modifications, there may be 
circumstances in which a sale transaction will continue to be reflected 
on the books and records of the FICU because the FICU or a credit union 
service organization controlled by the FICU continues to exercise 
control over the assets either directly or indirectly. The proposed 
rule would provide comfort that conforming securitizations which do not 
qualify for off balance sheet treatment would have access to the assets 
in a timely manner irrespective of whether a transaction is viewed as a 
legal sale.
    If a transfer of financial assets by a FICU to an issuing entity in 
connection with a securitization is not characterized as a sale, the 
securitized assets would be viewed as subject to a perfected security 
interest. This is significant because the conservator or liquidating 
agent is prohibited by statute from avoiding a legally enforceable or 
perfected security interest, except where such an interest is taken in 
contemplation of insolvency or with the intent to hinder, delay, or 
defraud the institution or the creditors of such institution.\6\ 
Consequently, the ability of the conservator or liquidating agent to 
reach financial assets transferred by a FICU to an issuing entity in 
connection with a securitization, if such transfer is characterized as 
a transfer for security, is limited by the combination of the status of 
the entity as a secured party with a perfected security interest in the 
transferred assets and the statutory provision that prohibits the 
conservator or liquidating agent from avoiding a legally enforceable or 
perfected security interest.
---------------------------------------------------------------------------

    \6\ 12 U.S.C. 1787(c)(12).
---------------------------------------------------------------------------

    Thus, for securitizations that are consolidated on the books of a 
FICU, the proposed rule would provide a meaningful safe harbor 
irrespective of the legal characterization of the transfer. There are 
two situations in which consent to expedited access to transferred 
assets would be given--(i) monetary default under a securitization by 
the conservator or liquidating agent or (ii) repudiation of the 
securitization agreements by the conservator or liquidating agent. The 
proposed rule provides that in the event of a monetary default under 
the securitization documents and the default continues for a period of 
ten business days after written notice of the default, the conservator 
or liquidating agent will be deemed to consent pursuant to 12 U.S.C. 
1787(c)(13)(C) to the exercise of contractual rights under the 
documents on account of such monetary default, and such consent shall 
constitute satisfaction in full of obligations of the FICU and the 
conservator or liquidating agent to the holders of the securitization 
obligations.
    The proposed rule also provides that, in the event the conservator 
or liquidating agent repudiates the securitization asset transfer 
agreement, the conservator or liquidating agent shall have the right to 
discharge the lien on the financial assets included in the 
securitization by paying damages in an amount equal to the par value of 
the obligations in the securitization on the date of the appointment of 
the conservator or liquidating agent, less any principal payments made 
to the date of repudiation. If such damages are not paid within ten 
business days of repudiation, NCUA will be deemed to consent pursuant 
to 12 U.S.C. 1787(c)(13)(C) to the exercise of contractual rights under 
the securitization agreements.
    The proposed rule would also confirm that, if the transfer of the 
assets is viewed as a sale for accounting purposes (and thus the assets 
are not reflected on the books of a FICU), as the conservator or 
liquidating agent would not reclaim, recover, or recharacterize as 
property of the FICU or the liquidation estate assets of a 
securitization through repudiation or otherwise, but only if the 
transactions comply with the requirements set forth in paragraphs (b) 
and (c) of the proposed rule. The treatment of off balance sheet 
transfers of the proposed rule is consistent with the safe harbor under 
the 2000 Rule.
    Pursuant to 12 U.S.C. 1787(c)(13)(C), no person may exercise any 
right or

[[Page 36255]]

power to terminate, accelerate, or declare a default under a contract 
to which the FICU is a party, or to obtain possession of or exercise 
control over any property of the FICU, or affect any contractual rights 
of the FICU, without the consent of the conservator or liquidating 
agent, as appropriate, during the 45-day period beginning on the date 
of the appointment of the conservator or the 90-day period beginning on 
the date of the appointment of the liquidating agent. In order to 
address concerns that the statutory stay could delay repayment of 
investors in a securitization or delay a secured party from exercising 
its rights with respect to securitized financial assets, the proposed 
rule provides for the consent by the conservator or liquidating agent, 
subject to certain conditions, to the continued making of required 
payments under the securitization documents and continued servicing of 
the assets, as well as the ability to exercise self-help remedies after 
a payment default by NCUA or the repudiation of a securitization asset 
transfer agreement during the stay period of 12 U.S.C. 1787(c)(13)(C).

II. Proposed Rule

1. Generally

    The proposed rule would replace the 2000 Rule. Paragraph (a) of the 
proposed rule sets forth definitions of terms used in the proposed 
rule. It retains many of the definitions used in the 2000 Rule but 
modifies or adds definitions to the extent necessary to accurately 
reflect current industry practice in securitizations. Pursuant to these 
definitions, the safe harbor does not apply to certain government 
sponsored enterprises (``Specified GSEs''), affiliates of certain such 
enterprises, or any entity established or guaranteed by those GSEs. In 
addition, the proposed rule is not intended to apply to the Government 
National Mortgage Association (``Ginnie Mae'') or Ginnie Mae-guaranteed 
securitizations. When Ginnie Mae guarantees a security, the mortgages 
backing the security are assigned to Ginnie Mae, an entity owned 
entirely by the United States government. Ginnie Mae's statute contains 
broad authority to enforce its contract with the lender/issuer and its 
ownership rights in the mortgages backing Ginnie Mae-guaranteed 
securities. In the event that an entity otherwise subject to the 
proposed rule issues both guaranteed and non-guaranteed 
securitizations, the securitizations guaranteed by a Specified GSE are 
not subject to the proposed rule.
    Paragraph (b) of the proposed rule imposes conditions to the 
availability of the safe harbor for transfers of financial assets to an 
issuing entity in connection with a securitization. These conditions 
make a clear distinction between the conditions imposed on residential 
mortgage-backed securities (``RMBS'') from those imposed on 
securitizations for other asset classes. In the context of a 
conservatorship or liquidation, the conditions applicable to all 
securitizations will improve overall transparency and clarity through 
disclosure and documentation requirements along with ensuring effective 
incentives for prudent lending by requiring that the payment of 
principal and interest be based primarily on the performance of the 
financial assets and by requiring retention of a share of the credit 
risk in the securitized loans.
    The conditions applicable to RMBS are more detailed and include 
additional capital structure, disclosure, documentation and 
compensation requirements as well as a requirement for the 
establishment of a reserve fund. These requirements are intended to 
address the factors that caused significant losses in RMBS 
securitization structures as demonstrated in the recent crisis. 
Confidence can be restored in RMBS markets only through greater 
transparency and other structures that support sustainable mortgage 
origination practices and require increased disclosures. These 
standards respond to investor demands for greater transparency and 
alignment of the interests of parties to the securitization. In 
addition, they are generally consistent with industry efforts while 
taking into account legislative and regulatory initiatives.

2. Capital Structure and Financial Assets

    For all securitizations, the benefits of the proposed rule should 
be available only to securitizations that are readily understood by the 
market, increase liquidity of the financial assets, and reduce consumer 
costs. Consistent with the Security and Exchange Commission's 
(``SEC's'') new Regulation AB, the documents governing the 
securitization will be required to provide that there be financial 
asset level disclosure as appropriate to the securitized financial 
assets for any re-securitizations (securitizations supported by other 
securitization obligations). These disclosures must include full 
disclosure of the obligations, including the structure and the assets 
supporting each of the underlying securitization obligations, and not 
just the obligations that are transferred in the re-securitization. 
This requirement applies to all re-securitizations, including static 
re-securitizations as well as managed collateralized debt obligations.
    The proposed rule provides that securitizations that are unfunded 
or synthetic transactions are not eligible for expedited consent. To 
support sound lending, the documents governing all securitizations must 
require that payments of principal and interest on the obligations be 
primarily dependent on the performance of the financial assets 
supporting the securitization and that such payments not be contingent 
on market or credit events that are independent of the assets 
supporting the securitization, except for interest rate or currency 
mismatches between the financial assets and the obligations to 
investors.
    For RMBS only, the proposed rule limits the capital structure of 
the securitization to six tranches or fewer to discourage complex and 
opaque structures. The most senior tranche could include time-based 
sequential pay or planned amortization and companion sub-tranches, 
which are not viewed as separate tranches for the purpose of the six 
tranche requirement. This condition will not prevent an issuer from 
creating the economic equivalent of multiple tranches by re-
securitizing one or more tranches, so long as they meet the conditions 
set forth in the rule, including adequate disclosure in connection with 
the re-securitization. In addition, RMBS cannot include leveraged 
tranches that introduce market risks (such as leveraged super senior 
tranches). Although the financial assets transferred into an RMBS will 
be permitted to benefit from asset level credit support, such as 
guarantees (including guarantees provided by governmental agencies, 
private companies, or government-sponsored enterprises), co-signers, or 
insurance, the RMBS cannot benefit from external credit support at the 
issuing entity or pool level. It is intended that guarantees permitted 
at the asset level include guarantees of payment or collection, but not 
credit default swaps or similar items. The temporary payment of 
principal and interest, however, can be supported by liquidity 
facilities. These conditions are designed to limit both the complexity 
and the leverage of an RMBS and therefore the systemic risks introduced 
by them in the market. In addition, the proposed rule provides that the 
securitization obligations can be enhanced by credit support or 
guarantees provided by Specified GSEs.

[[Page 36256]]

However, as noted in the discussion of the definitions above, a 
securitization that is wholly guaranteed by a Specified GSE is not 
subject to the proposed rule and thus not eligible for the safe harbor.
    In formulating the proposed rule, NCUA was mindful of the need to 
permit innovation and accommodate financing needs, and thus attempted 
to strike a balance between permitting multi-tranche structures for 
RMBS transactions, on the one hand, and promoting readily 
understandable securitization structures and limiting overleveraging of 
residential mortgage assets, on the other hand.
    NCUA is of the view that permitting pool level, external credit 
support in an RMBS can lead to overleveraging of assets, as investors 
might focus on the credit quality of the credit support provider as 
opposed to the sufficiency of the financial asset pool to service the 
securitization obligations. However, the proposed rule permits pool 
level credit support by Specified GSEs.
    Finally, although the proposed rule excludes unfunded and synthetic 
securitizations from the safe harbor, NCUA does not view the inclusion 
of existing credit lines that are not fully drawn in a securitization 
as causing such securitization to be an ``unfunded securitization.'' 
The provision is intended to emphasize that the proposed rule applies 
only where there is an actual transfer of financial assets. In 
addition, to the extent an unfunded or synthetic transaction qualifies 
for treatment as a qualified financial contract under Section 207(c) of 
the FCU Act, it would not need the benefits of the safe harbor provided 
in the proposed rule in an NCUA liquidation.\7\
---------------------------------------------------------------------------

    \7\ 12 U.S.C. 1787(c)(10).
---------------------------------------------------------------------------

3. Disclosure

    For all securitizations, disclosure serves as an effective tool for 
increasing the demand for high quality financial assets and thereby 
establishing incentives for robust financial asset underwriting and 
origination practices. By increasing transparency in securitizations, 
the proposed rule would enable investors to decide whether to invest in 
a securitization based on full information with respect to the quality 
of the asset pool and thereby provide additional liquidity only for 
sustainable origination practices.
    The data must enable investors to analyze the credit quality for 
the specific asset classes that are being securitized. The documents 
governing securitizations must, at a minimum, require disclosure for 
all issuances to include the types of information required under 
current Regulation AB or any successor disclosure requirements with the 
level of specificity that applies to public issuances, even if the 
obligations are issued in a private placement or are not otherwise 
required to be registered.
    The documents governing securitizations that will qualify under the 
proposed rule must require disclosure of the structure of the 
securitization and the credit and payment performance of the 
obligations, including the relevant capital or tranche structure and 
any liquidity facilities and credit enhancements. The disclosure must 
be required to include the priority of payments and any specific 
subordination features, as well as any waterfall triggers or priority 
of payment reversal features. The disclosure at issuance will also be 
required to include the representations and warranties made with 
respect to the financial assets and the remedies for breach of such 
representations and warranties, including any relevant timeline for 
cure or repurchase of financial assets, and policies governing 
delinquencies, servicer advances, loss mitigation and write offs of 
financial assets. The documents must also require that periodic reports 
provided to investors include the credit performance of the obligations 
and financial assets, including periodic and cumulative financial asset 
performance data, modification data, substitution and removal of 
financial assets, servicer advances, losses that were allocated to each 
tranche and remaining balance of financial assets supporting each 
tranche as well as the percentage coverage for each tranche in relation 
to the securitization as a whole. Where appropriate for the type of 
financial assets included in the pool, reports must also include asset 
level information that may be relevant to investors (e.g. changes in 
occupancy, loan delinquencies, defaults, etc.). NCUA recognizes that 
for certain asset classes, such as credit card receivables, the 
disclosure of asset level information is less informative and, thus, 
will not be required.
    The securitization documents must also require disclosure to 
investors of the nature and amount of compensation paid to any mortgage 
or other broker, the servicer(s), rating agency or third-party advisor, 
and the originator or sponsor, and the extent to which any risk of loss 
on the underlying financial assets is retained by any of them for such 
securitization. The documents must also require disclosure of changes 
to this information while obligations are outstanding. This disclosure 
should enable investors to assess potential conflicts of interests and 
how the compensation structure affects the quality of the assets 
securitized or the securitization as a whole.
    For RMBS, loan level data as to the financial assets securing the 
mortgage loans, such as loan type, loan structure, maturity, interest 
rate and location of property, will also be required to be disclosed by 
the sponsor. Sponsors of securitizations of residential mortgages will 
be required to affirm compliance in all material respects with 
applicable statutory and regulatory standards for origination of 
mortgage loans. None of the disclosure conditions should be construed 
as requiring the disclosure of personally identifiable information of 
obligors or information that would violate applicable privacy laws. The 
proposed rule also requires sponsors to disclose a third party due 
diligence report on compliance with such standards and the 
representations and warranties made with respect to the financial 
assets.
    Finally, the proposed rule requires that the securitization 
documents require the disclosure by servicers of any ownership interest 
of the servicer or any affiliate of the servicer in other whole loans 
secured by the same real property that secures a loan included in the 
financial asset pool. This provision does not require disclosure of 
interests held by servicers or their affiliates in the securitization 
securities. This provision is intended to give investors information to 
evaluate potential servicer conflicts of interest that might impede the 
servicer's actions to maximize value for the benefit of investors.

4. Documentation and Recordkeeping

    For all securitizations, the operative agreements are required to 
use as appropriate available standardized documentation for each 
available asset class. It is not possible to define in advance when use 
of standardized documentation will be appropriate, but certainly when 
there is general market use of a form of documentation for a particular 
asset class, or where a trade group has formulated standardized 
documentation generally accepted by the industry, such documentation 
must be used.
    The proposed rule also requires that the securitization documents 
define the contractual rights and responsibilities of the parties, 
including but not limited to representations and warranties, ongoing 
disclosure requirements and any measures to avoid conflicts of 
interest. The documents are also required to provide authority for the 
parties to

[[Page 36257]]

fulfill their rights and responsibilities under the securitization 
contracts.
    Additional conditions apply to RMBS to address a significant issue 
that has been demonstrated in the mortgage crisis by requiring that 
servicers have the authority to mitigate losses on mortgage loans 
consistent with maximizing the net present value of the mortgages. 
Therefore, for RMBS, contractual provisions in the servicing agreement 
must provide servicers with the authority to modify loans to address 
reasonably foreseeable defaults and to take other action to maximize 
the value and minimize losses on the securitized financial assets. The 
documents must require servicers to apply industry best practices 
related to asset management and servicing.
    The RMBS documents may not give control of servicing discretion to 
a particular class of investors. The documents must require that the 
servicer act for the benefit of all investors rather for the benefit of 
any particular class of investors. Consistent with the forgoing, the 
documents must require the servicer to commence action to mitigate 
losses no later than ninety days after an asset first becomes 
delinquent unless all delinquencies on such asset have been cured. A 
servicer must also be required to maintain sufficient records of its 
actions to permit appropriate review of its actions.
    NCUA believes that a prolonged period of servicer advances in a 
market downturn misaligns servicer incentives with those of the RMBS 
investors. Servicing advances also serve to aggravate liquidity 
concerns, exposing the market to greater systemic risk. Occasional 
advances for late payments, however, are beneficial to ensure that 
investors are paid in a timely manner. To that end, the servicing 
agreement for RMBS must not require the primary servicer to advance 
delinquent payments of principal and interest by borrowers for more 
than three payment periods unless financing or reimbursement facilities 
to fund or reimburse the primary servicers are available. However, such 
facilities shall not be dependent for repayment on foreclosure 
proceeds.

5. Compensation

    The compensation requirements of the proposed rule apply only to 
RMBS. Due to the demonstrated issues in the compensation incentives in 
RMBS, in this asset class the proposed rule seeks to realign 
compensation to parties involved in the rating and servicing of 
residential mortgage securitizations.
    The securitization documents are required to provide that any fees 
payable credit rating agencies or similar third-party evaluation 
companies must be payable in part over the five year period after the 
initial issuance of the obligations based on the performance of 
surveillance services and the performance of the financial assets, with 
no more than sixty percent of the total estimated compensation due at 
closing. Thus payments to rating agencies must be based on the actual 
performance of the financial assets, not their ratings.
    A second area of concern is aligning incentives for proper 
servicing of the mortgage loans. Therefore, the documents must require 
that compensation to servicers must include incentives for servicing, 
including payment for loan restructuring or other loss mitigation 
activities, which maximizes the net present value of the financial 
assets in the RMBS.

6. Origination and Retention Requirements

    To provide further incentives for quality origination practices, 
several conditions address origination and retention requirements for 
all securitizations. For all securitizations, the sponsor must retain 
an economic interest in a material portion, defined as not less than 
five percent, of the credit risk of the financial assets.\8\ The 
retained interest may be either in the form of an interest of not less 
than five percent in each credit tranche or in a representative sample 
of the securitized financial assets equal to not less than five percent 
of the principal amount of the financial assets at transfer. This 
retained interest cannot be sold, pledged or hedged during the life of 
the transaction, except for the hedging of interest rate. If required 
to retain an economic interest in the asset pool without hedging the 
credit risk of such portion, the sponsor will be less likely to 
originate low quality financial assets. The proposed rule provides that 
upon the effective date of final regulations required by Section 941(b) 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act, such 
final regulations shall exclusively govern the requirement to retain an 
economic interest in a portion of the credit risk of the financial 
assets under the proposed rule.
---------------------------------------------------------------------------

    \8\ For loan participations, an originating lender that is an 
FCU must retain an interest of at least 10 percent of the 
outstanding balance of the loan. 12 U.S.C. 1757(5)(E); 12 CFR 
701.22(b)(3). An originating lender that is a FISCU must retain an 
interest of at least 5 percent of the outstanding balance of the 
loan, unless a higher percentage is required by state law. 12 CFR 
701.22(b)(3).
---------------------------------------------------------------------------

    The proposed rule requires that RMBS securitization documents 
require that a reserve fund be established in an amount equal to at 
least five percent of the cash proceeds due to the sponsor and that 
this reserve be held for twelve months to cover any repurchases 
required for breaches of representations and warranties. This reserve 
fund will ensure that the sponsor bears a significant risk for poorly 
underwritten loans during the first year of the securitization. In 
addition, the securitization documents must include a representation 
that residential mortgage loans in an RMBS have been originated in all 
material respects in compliance with statutory, regulatory and 
originator underwriting standards in effect at the time of origination.
    NCUA believes that requiring the sponsor to retain an economic 
interest in the credit risk relating to each credit tranche or in a 
representative sample of financial assets will help ensure quality 
origination practices. A risk retention requirement that did not cover 
all types of exposure would not be sufficient to create an incentive 
for quality underwriting at all levels of the securitization. The 
recent economic crisis made clear that, if quality underwriting is to 
be assured, it will require true risk retention by sponsors, and that 
the existence of representations and warranties or regulatory standards 
for underwriting will not alone be sufficient.

7. Additional Conditions

    Paragraph (c) of the proposed rule includes general conditions for 
securitizations and the transfer of financial assets. These conditions 
also include requirements that are consistent with good financial 
institution practices.
    The transaction should be an arms-length, bona fide securitization 
transaction and the documents must limit sales to credit union service 
organizations in which the sponsor credit union has an interest (other 
than a wholly-owned credit union service organization consolidated for 
accounting and capital purposes with the credit union), and insiders of 
the sponsor. The securitization agreements must be in writing, approved 
by the board of directors of the credit union or its loan committee (as 
reflected in the minutes of a meeting of the board of directors or 
committee), and have been, continuously, from the time of execution, in 
the official record of the credit union. The securitization also must 
have been entered into in the ordinary course of business, not in 
contemplation of insolvency and with no intent to hinder, delay or 
defraud the credit union or its creditors.

[[Page 36258]]

    The proposed rule applies only to transfers made for adequate 
consideration. The transfer and/or security interest need to be 
properly perfected under the UCC or applicable state law. NCUA 
anticipates that it will be difficult to determine whether a transfer 
complying with the proposed rule is a sale or a security interest, and 
therefore expects that a security interest will be properly perfected 
under the UCC, either directly or as a backup.
    The governing documents must require that the sponsor separately 
identify in its financial asset data bases the financial assets 
transferred into a securitization and maintain an electronic or paper 
copy of the closing documents in a readily accessible form, and that 
the sponsor maintain a current list of all of its outstanding 
securitizations and issuing entities, and the most recent SEC Form 10-K 
or other periodic financial report for each securitization and issuing 
entity. The documents must also provide that if acting as servicer, 
custodian or paying agent, the sponsor is not permitted to commingle 
amounts received with respect to the financial assets with its own 
assets except for the time necessary to clear payments received, and in 
event for more than two business days. The documents must require the 
sponsor to make these records available to NCUA promptly upon request. 
This requirement will facilitate the timely fulfillment of the 
conservator's or liquidating agent's responsibilities upon appointment 
and will expedite the conservator's or liquidating agent's analysis of 
securitization assets. This will also facilitate the conservator's or 
liquidating agent's analysis of the credit union's assets and 
determination of which assets have been securitized and are therefore 
potentially eligible for expedited access by investors.
    In addition, the proposed rule requires that the transfer of 
financial assets and the duties of the sponsor as transferor be 
evidenced by an agreement separate from the agreement governing the 
sponsor's duties, if any, as servicer, custodian, paying agent, credit 
support provider or in any capacity other than transferor.

8. The Safe Harbor

    Paragraph (d)(1) of the proposed rule continues the safe harbor 
provision that was provided by the 2000 Rule with respect to 
participations so long as the participation satisfies the conditions 
for sale accounting treatment set forth by generally accepted 
accounting principles. In addition, last-in first-out participations 
are specifically included in the safe harbor, provided that they 
satisfy requirements for sale accounting treatment other than the pari-
passu, proportionate interest requirement that is not satisfied solely 
as a result of the last-in first-out structure.
    Paragraph (d)(2) of the Rule addresses transfers of financial 
assets made in connection with a securitization for which transfers of 
financial assets are made after the effective date of this rule or 
securitizations from a master trust or revolving trust established 
after the date of adoption of this rule, that (in each case) satisfy 
the conditions for sale accounting treatment under GAAP in effect for 
reporting periods after November 15, 2009. For such securitizations, 
NCUA as conservator or liquidating agent will not, in the exercise of 
its statutory authority to disaffirm or repudiate contracts, reclaim, 
recover, or recharacterize as property of the institution or the 
liquidation estate any such transferred financial assets, provided that 
such securitizations comply with the conditions set forth in paragraphs 
(b) and (c) of the proposed rule.
    Paragraph (d)(3) of the Rule addresses transfers of financial 
assets in connection with a securitization for which transfers of 
financial assets were made after the effective date of this rule or 
securitizations from a master trust or revolving trust established 
after the date of adoption of the rule, that (in each case) satisfy the 
conditions set forth in paragraphs (b) and (c), but where the transfer 
does not satisfy the conditions for sale accounting treatment under 
GAAP in effect for reporting periods after November 15, 2009.
    Paragraph (d)(3)(i) provides that if the conservator or liquidating 
agent is in monetary default due to its failure to pay or apply 
collections from the financial assets received by it in accordance with 
the securitization documents, and remains in monetary default for ten 
business days after actual delivery of a written notice to the 
conservator or liquidating agent requesting exercise of contractual 
rights because of such default, the conservator or liquidating agent 
consents to the exercise of such contractual rights, including any 
rights to obtain possession of the financial assets or the exercise of 
self-help remedies as a secured creditor, provided that no involvement 
of the conservator or liquidating agent is required, other than 
consents, waivers or the execution of transfer documents reasonably 
requested in the ordinary course of business in order facilitate the 
exercise of such contractual rights. This paragraph also provides that 
the consent to the exercise of such contractual rights shall serve as 
full satisfaction for all amounts due.
    Paragraph (d)(3)(ii) provides that, if the conservator or 
liquidating agent gives a written notice of repudiation of the 
securitization agreement pursuant to which assets were transferred and 
does not pay the damages due by reason of such repudiation within ten 
business days following the effective date of the notice, the 
conservator or liquidating agent consents to the exercise of any 
contractual rights, including any rights to obtain possession of the 
financial assets or the exercise of self-help remedies as a secured 
creditor, provided that no involvement of the conservator or 
liquidating agent is required other than consents, waivers or the 
execution of transfer documents reasonably requested in the ordinary 
course of business in order facilitate the exercise of such contractual 
rights. Paragraph 3(d)(ii) also provides that the damages due for these 
purposes shall be an amount equal to the par value of the obligations 
outstanding on the date of liquidation less any payments of principal 
received by the investors through the date of repudiation, plus unpaid, 
accrued interest through the date of repudiation to the extent actually 
received through payments on the financial assets received through the 
date of repudiation, and that upon receipt of such payment all liens on 
the financial assets created pursuant to the securitization documents 
shall be released.
    In computing amounts payable as repudiation damages, consistent 
with the FCU Act, the conservator or liquidating agent will not give 
effect to any provisions of the securitization documents increasing the 
amount payable based on the appointment of as the conservator or 
liquidating agent.\9\ The proposed rule clarifies that repudiation 
damages will be equal to the par value of the obligations as of the 
date of liquidation, less payments of principal received by the 
investors to the date of repudiation, plus unpaid, accrued interest 
through the date of repudiation to the extent actually received through 
payments on the financial assets received through the date of 
repudiation. The proposed rule also provides that the conservator or 
liquidating agent consents to the exercise of remedies by investors, 
including self-help remedies as secured creditors, in the event that 
NCUA repudiates a securitization transfer agreement and does not pay 
damages in such amount within ten business days following the effective 
date of notice of

[[Page 36259]]

repudiation. Thus, if NCUA repudiates and the investors are not paid 
the par value of the securitization obligations, plus unpaid, accrued 
interest through the date of repudiation to the extent actually 
received through payments on the financial assets received through the 
date of repudiation, they will be permitted to obtain the asset pool. 
Accordingly, exercise by the conservator or the liquidating agent of 
its repudiation rights will not expose investors to market value risks 
relating to the asset pool.
---------------------------------------------------------------------------

    \9\ 12 U.S.C. 1787(c)(13).
---------------------------------------------------------------------------

9. Consent to Certain Payments and Servicing

    Paragraph (e) provides that prior to repudiation or, in the case of 
monetary default, prior to the effectiveness of the consent referred to 
in paragraph (d)(3)(i), the conservator or liquidating agent consents 
to the making of, or if acting as servicer agrees to make, required 
payments to the investors during the stay period imposed by 12 U.S.C. 
1787(c)(13)(C). The proposed rule also provides that the conservator or 
liquidating agent consents to any servicing activity required in 
furtherance of the securitization (subject to its rights to repudiate 
the servicing agreements), in connection with securitizations that meet 
the conditions set forth in paragraphs (b) and (c) of the proposed 
rule.

10. Miscellaneous

    Paragraph (f) requires that any party requesting consent pursuant 
to paragraph (d)(3), provide notice to the conservator or liquidating 
agent, together with a statement of the basis upon which the request is 
made, together with copies of all documentation supporting the request. 
This includes a copy of the applicable agreements (such as the transfer 
agreement and the security agreement) and of any applicable notices 
under the agreements.
    Paragraph (g) provides that the conservator or liquidating agent 
will not seek to avoid an otherwise legally enforceable agreement that 
is executed by a FICU in connection with a securitization solely 
because the agreement does not meet the ``contemporaneous'' requirement 
of 12 U.S.C. 1787(b)(9) and 1788(a)(3).
    Paragraph (h) of the proposed rule provides that the consents set 
forth in the proposed rule will not act to waive or relinquish any 
rights granted to NCUA, the conservator, or the liquidating agent, in 
any capacity, pursuant to any other applicable law or any agreement or 
contract except as specifically set forth in the proposed rule, and 
nothing contained in the section will alter the claims priority of the 
securitized obligations.
    Paragraph (i) provides that except as specifically set forth in the 
proposed rule, the proposed rule does not authorize, and shall not be 
construed as authorizing the attachment of any involuntary lien upon 
the property of the conservator or liquidating agent. The proposed rule 
should not be construed as waiving, limiting or otherwise affecting the 
rights or powers of NCUA, the conservator, or the liquidating agent to 
take any action or to exercise any power not specifically mentioned, 
including but not limited to any rights, powers or remedies of the 
conservator or the liquidating agent regarding transfers taken in 
contemplation of the FICU's insolvency or with the intent to hinder, 
delay or defraud the FICU, or the creditors of such FICU, or that is a 
fraudulent transfer under applicable law.
    The right to consent under 12 U.S.C. 1787(c)(13)(C) may not be 
assigned or transferred to any purchaser of property from a conservator 
or liquidating agent, other than to a conservator or bridge credit 
union. The rule can be repealed by NCUA upon 30 days notice provided in 
the Federal Register, but any repeal will not apply to any issuance 
that complied with the rule before such repeal.

III. Regulatory Procedures

1. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
of any significant economic impact any proposed regulation may have on 
a substantial number of small entities (primarily those under $50 
million in assets).\10\ The proposed rule will only apply to the 
largest credit unions, as they are the only ones with the 
infrastructure and resources to securitize assets. Accordingly, it will 
not have an economic impact on small credit unions.
---------------------------------------------------------------------------

    \10\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
---------------------------------------------------------------------------

2. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or increases an existing burden.\11\ For purposes of the PRA, 
a paperwork burden may take the form of a reporting or recordkeeping 
requirement, both referred to as information collections. The proposed 
changes to part 709 impose new information collection requirements. As 
required by the PRA, NCUA is submitting a copy of this proposal to OMB 
for its review and approval. Persons interested in submitting comments 
with respect to the information collection aspects of the proposed rule 
should submit them to OMB at the address noted below.
---------------------------------------------------------------------------

    \11\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------

a. Estimated PRA Burden

    The information collection requirements are related to federal 
security filings, which NCUA estimates will take a total of 83.5 hours 
per year to complete. As NCUA further estimates that only one FCU will 
undertake asset securitization activities, the annual paperwork burden 
is 83.5 hours.

b. Submission of Comments

    NCUA considers comments by the public on this proposed collection 
of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of NCUA, 
including whether the information will have a practical use;
     evaluating the accuracy of NCUA's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
     enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    The PRA requires OMB to make a decision concerning the collection 
of information contained in the proposed regulation between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to NCUA on the substantive 
aspects of the proposed regulation.
    Comments on the proposed information collection requirements should 
be sent to: Office of Information and Regulatory Affairs, OMB, New 
Executive Office Building, Washington, DC 20503; Attention: NCUA Desk 
Officer, with a copy to Tracy Crews at the National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

[[Page 36260]]

3. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. The proposed rule does not have substantial 
direct effects on the states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has, 
therefore, determined that this proposal does not constitute a policy 
that has federalism implications for purposes of the executive order.

4. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this proposed rule will not affect family 
well-being within the meaning of Sec.  654 of the Treasury and General 
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681 
(1998).

List of Subjects

12 CFR Part 709

    Credit unions, Liquidations.

    By the National Credit Union Administration Board, on June 19, 
2014.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the National Credit Union 
Administration proposes to amend part 709 as follows:

PART 709--INVOLUNTARY LIQUIDATION OF FEDERAL CREDIT UNIONS AND 
ADJUDICATION OF CREDITOR CLAIMS INVOLVING FEDERALLY INSURED CREDIT 
UNIONS IN LIQUIDATION

0
1. The authority citation for part 709 continues to read as follows:

    Authority: 12 U.S.C. 1757, 1766, 1767, 1786(h), 1787, 1789, 
1789a.

0
2. Revise Sec.  709.10 to read as follows:


Sec.  709.10  Treatment of financial assets transferred in connection 
with a securitization or participation.

    (a) Definitions.
    Financial asset means cash or a contract or instrument that conveys 
to one entity a contractual right to receive cash or another financial 
instrument from another entity.
    Investor means a person or entity that owns an obligation issued by 
an issuing entity.
    Issuing entity means an entity that owns a financial asset or 
financial assets transferred by the sponsor and issues obligations 
supported by such asset or assets. Issuing entities may include, but 
are not limited to, corporations, partnerships, trusts, and limited 
liability companies and are commonly referred to as special purpose 
vehicles or special purpose entities. To the extent a securitization is 
structured as a multi-step transfer, the term issuing entity would 
include both the issuer of the obligations and any intermediate 
entities that may be a transferee. Notwithstanding the foregoing, a 
Specified GSE or an entity established or guaranteed by a Specified GSE 
does not constitute an issuing entity.
    Monetary default means a default in the payment of principal or 
interest when due following the expiration of any cure period.
    Obligation means a debt or equity (or mixed) beneficial interest or 
security that is primarily serviced by the cash flows of one or more 
financial assets or financial asset pools, either fixed or revolving, 
that by their terms convert into cash within a finite time period, or 
upon the disposition of the underlying financial assets, and by any 
rights or other assets designed to assure the servicing or timely 
distributions of proceeds to the security holders issued by an issuing 
entity. The term may include beneficial interests in a grantor trust, 
common law trust or similar issuing entity to the extent that such 
interests satisfy the criteria set forth in the preceding sentence, but 
does not include LLC interests, partnership interests, common or 
preferred equity, or similar instruments evidencing ownership of the 
issuing entity.
    Participation means the transfer or assignment of an undivided 
interest in all or part of a financial asset, that has all of the 
characteristics of a ``participating interest,'' from a seller, known 
as the ``lead,'' to a buyer, known as the ``participant,'' without 
recourse to the lead, pursuant to an agreement between the lead and the 
participant. ``Without recourse'' means that the participation is not 
subject to any agreement that requires the lead to repurchase the 
participant's interest or to otherwise compensate the participant upon 
the borrower's default on the underlying obligation.
    Securitization means the issuance by an issuing entity of 
obligations for which the investors are relying on the cash flow or 
market value characteristics and the credit quality of transferred 
financial assets (together with any external credit support permitted 
by this section) to repay the obligations.
    Servicer means any entity responsible for the management or 
collection of some or all of the financial assets on behalf of the 
issuing entity or making allocations or distributions to holders of the 
obligations, including reporting on the overall cash flow and credit 
characteristics of the financial assets supporting the securitization 
to enable the issuing entity to make payments to investors on the 
obligations. The term ``servicer'' does not include a trustee for the 
issuing entity or the holders of obligations that makes allocations or 
distributions to holders of the obligations if the trustee receives 
such allocations or distributions from a servicer and the trustee does 
not otherwise perform the functions of a servicer.
    Specified GSE means each of the following: (i) The Federal National 
Mortgage Association and any affiliate thereof; (ii) Federal Home Loan 
Mortgage Corporation and any affiliate thereof; (iii) the Government 
National Mortgage Association; and (iv) any federal or state sponsored 
mortgage finance agency.
    Sponsor means a person or entity that organizes and initiates a 
securitization by transferring financial assets, either directly or 
indirectly, including through an affiliate, to an issuing entity, 
whether or not such person owns an interest in the issuing entity or 
owns any of the obligations issued by the issuing entity.
    Transfer means: (i) The conveyance of a financial asset or 
financial assets to an issuing entity; or (ii) the creation of a 
security interest in such asset or assets for the benefit of the 
issuing entity.
    (b) Coverage. This section applies to securitizations that meet the 
following criteria:
    (1) Capital structure and financial assets. The documents creating 
the securitization must define the payment structure and capital 
structure of the transaction.
    (i) Requirements applicable to all securitizations:
    (A) The securitization may not consist of re-securitizations of 
obligations or collateralized debt obligations unless the documents 
creating the securitization require that disclosures required in 
paragraph (b)(2) of this section are made available to investors for 
the underlying assets supporting the securitization at initiation and 
while obligations are outstanding; and
    (B) The documents creating the securitization must require that 
payment of principal and interest on the securitization obligation will 
be primarily based on the performance of

[[Page 36261]]

financial assets that are transferred to the issuing entity and, except 
for interest rate or currency mismatches between the financial assets 
and the obligations, will not be contingent on market or credit events 
that are independent of such financial assets. The securitization may 
not be an unfunded securitization or a synthetic transaction.
    (ii) Requirements applicable only to securitizations in which the 
financial assets include any residential mortgage loans:
    (A) The capital structure of the securitization must be limited to 
no more than six credit tranches and cannot include ``sub-tranches,'' 
grantor trusts or other structures. Notwithstanding the foregoing, the 
most senior credit tranche may include time-based sequential pay or 
planned amortization and companion sub-tranches; and
    (B) The credit quality of the obligations cannot be enhanced at the 
issuing entity or pool level through external credit support or 
guarantees. However, the credit quality of the obligations may be 
enhanced by credit support or guarantees provided by Specified GSEs and 
the temporary payment of principal and/or interest may be supported by 
liquidity facilities, including facilities designed to permit the 
temporary payment of interest following appointment of the NCUA Board 
as conservator or liquidating agent. Individual financial assets 
transferred into a securitization may be guaranteed, insured, or 
otherwise benefit from credit support at the loan level through 
mortgage and similar insurance or guarantees, including by private 
companies, agencies or other governmental entities, or government-
sponsored enterprises, and/or through co-signers or other guarantees.
    (2) Disclosures. The documents must require that the sponsor, 
issuing entity, and/or servicer, as appropriate, will make available to 
investors, information describing the financial assets, obligations, 
capital structure, compensation of relevant parties, and relevant 
historical performance data set forth in paragraph (b)(2) of this 
section.
    (i) Requirements applicable to all securitizations:
    (A) The documents must require that, on or prior to issuance of 
obligations and at the time of delivery of any periodic distribution 
report and, in any event, at least once per calendar quarter, while 
obligations are outstanding, information about the obligations and the 
securitized financial assets will be disclosed to all potential 
investors at the financial asset or pool level and security level, as 
appropriate for the financial assets, to enable evaluation and analysis 
of the credit risk and performance of the obligations and financial 
assets. The documents must require that such information and its 
disclosure, at a minimum, complies with the requirements of Securities 
and Exchange Commission Regulation AB, or any successor disclosure 
requirements for public issuances, even if the obligations are issued 
in a private placement or are not otherwise required to be registered. 
Information that is unknown or not available to the sponsor or the 
issuer after reasonable investigation may be omitted if the issuer 
includes a statement in the offering documents disclosing that the 
specific information is otherwise unavailable.
    (B) The documents must require that, on or prior to issuance of 
obligations, the structure of the securitization and the credit and 
payment performance of the obligations will be disclosed, including the 
capital or tranche structure, the priority of payments, and specific 
subordination features; representations and warranties made with 
respect to the financial assets, the remedies for, and the time 
permitted for cure of any breach of representations and warranties, 
including the repurchase of financial assets, if applicable; liquidity 
facilities and any credit enhancements permitted by this rule, any 
waterfall triggers, or priority of payment reversal features; and 
policies governing delinquencies, servicer advances, loss mitigation, 
and write-offs of financial assets.
    (C) The documents must require that while obligations are 
outstanding, the issuing entity will provide to investors information 
with respect to the credit performance of the obligations and the 
financial assets, including periodic and cumulative financial asset 
performance data, delinquency and modification data for the financial 
assets, substitutions and removal of financial assets, servicer 
advances, as well as losses that were allocated to such tranche and 
remaining balance of financial assets supporting such tranche, if 
applicable, and the percentage of each tranche in relation to the 
securitization as a whole.
    (D) In connection with the issuance of obligations, the documents 
must disclose the nature and amount of compensation paid to the 
originator, sponsor, rating agency or third-party advisor, any mortgage 
or other broker, and the servicer(s), and the extent to which any risk 
of loss on the underlying assets is retained by any of them for such 
securitization be disclosed. The securitization documents must require 
the issuer to provide to investors while obligations are outstanding 
any changes to such information and the amount and nature of payments 
of any deferred compensation or similar arrangements to any of the 
parties.
    (ii) Requirements applicable only to securitizations in which the 
financial assets include any residential mortgage loans:
    (A) Prior to issuance of obligations, sponsors must disclose loan 
level information about the financial assets including, but not limited 
to, loan type, loan structure (for example, fixed or adjustable, 
resets, interest rate caps, balloon payments, etc.), maturity, interest 
rate and/or Annual Percentage Rate, and location of the property.
    (B) Prior to issuance of obligations, sponsors must affirm 
compliance in all material respects with applicable statutory and 
regulatory standards for the underwriting and origination of 
residential mortgage loans. Sponsors must disclose a third party due 
diligence report on compliance with such standards and the 
representations and warranties made with respect to the financial 
assets.
    (C) The documents must require that prior to issuance of 
obligations and while obligations are outstanding, servicers will 
disclose any ownership interest by the servicer or an affiliate of the 
servicer in other whole loans secured by the same real property that 
secures a loan included in the financial asset pool. The ownership of 
an obligation, as defined in this regulation, does not constitute an 
ownership interest requiring disclosure.
    (3) Documentation and recordkeeping. The documents creating the 
securitization must specify the respective contractual rights and 
responsibilities of all parties and include the requirements described 
in paragraph (b)(3) of this section and use as appropriate any 
available standardized documentation for each different asset class.
    (i) Requirements applicable to all securitizations. The documents 
must define the contractual rights and responsibilities of the parties, 
including but not limited to representations and warranties and ongoing 
disclosure requirements, and any measures to avoid conflicts of 
interest; and provide authority for the parties, including but not 
limited to the originator, sponsor, servicer, and investors, to fulfill 
their respective duties and exercise their rights under the contracts 
and clearly distinguish between any multiple roles performed by any 
party.
    (ii) Requirements applicable only to securitizations in which the 
financial

[[Page 36262]]

assets include any residential mortgage loans:
    (A) Servicing and other agreements must provide servicers with 
authority, subject to contractual oversight by any master servicer or 
oversight advisor, if any, to mitigate losses on financial assets 
consistent with maximizing the net present value of the financial 
asset. Servicers must have the authority to modify assets to address 
reasonably foreseeable default, and to take other action to maximize 
the value and minimize losses on the securitized financial assets. The 
documents must require that the servicers apply industry best practices 
for asset management and servicing. The documents must require the 
servicer to act for the benefit of all investors, and not for the 
benefit of any particular class of investors, that the servicer must 
commence action to mitigate losses no later than ninety days after an 
asset first becomes delinquent unless all delinquencies on such asset 
have been cured, and that the servicer maintains records of its actions 
to permit full review by the trustee or other representative of the 
investors.
    (B) The servicing agreement may not require a primary servicer to 
advance delinquent payments of principal and interest for more than 
three payment periods, unless financing or reimbursement facilities are 
available, which may include, but are not limited to, the obligations 
of the master servicer or issuing entity to fund or reimburse the 
primary servicer, or alternative reimbursement facilities. Such 
``financing or reimbursement facilities'' under this paragraph may not 
be dependent for repayment on foreclosure proceeds.
    (4) Compensation. The following requirements apply only to 
securitizations in which the financial assets include any residential 
mortgage loans. Compensation to parties involved in the securitization 
of such financial assets must be structured to provide incentives for 
sustainable credit and the long-term performance of the financial 
assets and securitization as follows:
    (i) The documents must require that any fees or other compensation 
for services payable to credit rating agencies or similar third-party 
evaluation companies are payable, in part, over the five-year period 
after the first issuance of the obligations based on the performance of 
surveillance services and the performance of the financial assets, with 
no more than sixty percent of the total estimated compensation due at 
closing; and
    (ii) The documents must provide that compensation to servicers will 
include incentives for servicing, including payment for loan 
restructuring or other loss mitigation activities, which maximizes the 
net present value of the financial assets. Such incentives may include 
payments for specific services, and actual expenses, to maximize the 
net present value or a structure of incentive fees to maximize the net 
present value, or any combination of the foregoing that provides such 
incentives.
    (5) Origination and retention requirements--(i) Requirements 
applicable to all securitizations. (A) Prior to the effective date of 
regulations required under new Section 15G of the Securities Exchange 
Act, 15 U.S.C. 78a et seq., added by Section 941(b) of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, the documents must 
require that the sponsor retain an economic interest in a material 
portion, defined as not less than five percent, of the credit risk of 
the financial assets. This retained interest may be either in the form 
of an interest of not less than five percent in each of the credit 
tranches sold or transferred to the investors or in a representative 
sample of the securitized financial assets equal to not less than five 
percent of the principal amount of the financial assets at transfer. 
This retained interest may not be sold or pledged or hedged, except for 
the hedging of interest rate risk, during the term of the 
securitization.
    (B) Upon the effective date of regulations required under new 
Section 15G of the Securities Exchange Act, 15 U.S.C. 78a et seq., 
added by Section 941(b) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, such final regulations will exclusively govern 
the requirement to retain an economic interest in a portion of the 
credit risk of the financial assets under this rule.
    (ii) Requirements applicable only to securitizations in which the 
financial assets include any residential mortgage loans:
    (A) The documents must require the establishment of a reserve fund 
equal to at least five (5) percent of the cash proceeds of the 
securitization payable to the sponsor to cover the repurchase of any 
financial assets required for breach of representations and warranties. 
The balance of such fund, if any, must be released to the sponsor one 
year after the date of issuance.
    (B) The documents must include a representation that the assets 
were originated in all material respects in compliance with statutory, 
regulatory, and originator underwriting standards in effect at the time 
of origination. The documents must include a representation that the 
mortgages included in the securitization were underwritten at the fully 
indexed rate, based upon the borrowers' ability to repay the mortgage 
according to its terms, and rely on documented income and comply with 
all existing all laws, rules, regulations, and guidance governing the 
underwriting of residential mortgages by federally insured credit 
unions.
    (c) Other requirements. (1) The transaction should be an arms 
length, bona fide securitization transaction. The documents must 
require that the obligations issued in a securitization shall not be 
predominantly sold to a credit union service organization in which the 
sponsor credit union has an interest (other than a wholly-owned credit 
union service organization consolidated for accounting and capital 
purposes with the credit union) or insider of the sponsor;
    (2) The securitization agreements are in writing, approved by the 
board of directors of the credit union or its loan committee (as 
reflected in the minutes of a meeting of the board of directors or 
committee), and have been, continuously, from the time of execution in 
the official record of the credit union;
    (3) The securitization was entered into in the ordinary course of 
business, not in contemplation of insolvency and with no intent to 
hinder, delay, or defraud the credit union or its creditors;
    (4) The transfer was made for adequate consideration;
    (5) The transfer and/or security interest was properly perfected 
under the UCC or applicable state law;
    (6) The transfer and duties of the sponsor as transferor must be 
evidenced in a separate agreement from its duties, if any, as servicer, 
custodian, paying agent, credit support provider, or in any capacity 
other than the transferor; and
    (7) The documents must require that the sponsor separately identify 
in its financial asset data bases the financial assets transferred into 
any securitization and maintain (i) an electronic or paper copy of the 
closing documents for each securitization in a readily accessible form, 
(ii) a current list of all of its outstanding securitizations and the 
respective issuing entities, and (iii) the most recent Securities and 
Exchange Commission Form 10-K, if applicable, or other periodic 
financial report for each securitization and issuing entity. The 
documents must provide that to the extent serving as servicer, 
custodian, or paying agent for the securitization, the sponsor may not 
comingle amounts received with respect to the financial assets with its 
own assets except for the time, not to exceed two business days,

[[Page 36263]]

necessary to clear any payments received. The documents must require 
that the sponsor will make these records readily available for review 
by NCUA promptly upon written request.
    (d) Safe harbor--(1) Participations. With respect to transfers of 
financial assets made in connection with participations, the NCUA Board 
as conservator or liquidating agent will not, in the exercise of its 
statutory authority to disaffirm or repudiate contracts, reclaim, 
recover, or recharacterize as property of the credit union or the 
liquidation estate any such transferred financial assets, provided that 
such transfer satisfies the conditions for sale accounting treatment 
under generally accepted accounting principles, except for the ``legal 
isolation'' condition that is addressed by this section. The foregoing 
sentence applies to a last-in, first-out participation, provided that 
the transfer of a portion of the financial asset satisfies the 
conditions for sale accounting treatment under generally accepted 
accounting principles that would have applied to such portion if it had 
met the definition of a ``participating interest,'' except for the 
``legal isolation'' condition that is addressed by this section.
    (2) For securitizations meeting sale accounting requirements. With 
respect to any securitization for which transfers of financial assets 
were made after adoption of this rule, or from a master trust or 
revolving trust established after adoption of this rule, and which 
complies with the requirements applicable to that securitization as set 
forth in paragraphs (b) and (c) of this section, the NCUA Board as 
conservator or liquidating agent will not, in the exercise of its 
statutory authority to disaffirm or repudiate contracts, reclaim, 
recover, or recharacterize as property of the credit union or the 
liquidation estate such transferred financial assets, provided that 
such transfer satisfies the conditions for sale accounting treatment 
under generally accepted accounting principles in effect for reporting 
periods after November 15, 2009, except for the ``legal isolation'' 
condition that is addressed by this paragraph (d)(2).
    (3) For securitizations not meeting sale accounting requirements. 
With respect to any securitization for which transfers of financial 
assets were made after adoption of this rule, or from a master trust or 
revolving trust established after adoption of this rule, and which 
complies with the requirements applicable to that securitization as set 
forth in paragraphs (b) and (c) of this section, but where the transfer 
does not satisfy the conditions for sale accounting treatment set forth 
by generally accepted accounting principles in effect for reporting 
periods after November 15, 2009, the following conditions apply:
    (i) Monetary default. If, at any time after appointment, the NCUA 
Board as conservator or liquidating agent is in a monetary default 
under a securitization due to its failure to pay or apply collections 
from the financial assets received by it in accordance with the 
securitization documents, whether as servicer or otherwise, and remains 
in monetary default for ten business days after actual delivery of a 
written notice to the NCUA Board as conservator or liquidating agent 
pursuant to paragraph (f) of this section requesting the exercise of 
contractual rights because of such monetary default, the NCUA Board as 
conservator or liquidating agent hereby consents pursuant to 12 U.S.C. 
1787(c)(13)(C) to the exercise of any contractual rights in accordance 
with the documents governing such securitization, including but not 
limited to taking possession of the financial assets and exercising 
self-help remedies as a secured creditor under the transfer agreements, 
provided no involvement of the conservator or liquidating agent is 
required other than such consents, waivers, or execution of transfer 
documents as may be reasonably requested in the ordinary course of 
business in order to facilitate the exercise of such contractual 
rights. Such consent does not waive or otherwise deprive the NCUA Board 
as conservator or liquidating agent or its assignees of any seller's 
interest or other obligation or interest issued by the issuing entity 
and held by the conservator or liquidating agent or its assignees, but 
shall serve as full satisfaction of the obligations of the insured 
credit union in conservatorship or liquidation and the NCUA Board as 
conservator or liquidating agent for all amounts due.
    (ii) Repudiation. If the NCUA Board as conservator or liquidating 
agent provides a written notice of repudiation of the securitization 
agreement pursuant to which the financial assets were transferred, and 
does not pay damages, defined in this paragraph, within ten business 
days following the effective date of the notice, the NCUA Board as 
conservator or liquidating agent hereby consents pursuant to 12 U.S.C. 
1787(c)(13)(C) to the exercise of any contractual rights in accordance 
with the documents governing such securitization, including but not 
limited to taking possession of the financial assets and exercising 
self-help remedies as a secured creditor under the transfer agreements, 
provided no involvement of the conservator or liquidating agent is 
required other than such consents, waivers, or execution of transfer 
documents as may be reasonably requested in the ordinary course of 
business in order to facilitate the exercise of such contractual 
rights. For purposes of this paragraph, the damages due will be in an 
amount equal to the par value of the obligations outstanding on the 
date of appointment of the conservator or liquidating agent, less any 
payments of principal received by the investors through the date of 
repudiation, plus unpaid, accrued interest through the date of 
repudiation in accordance with the contract documents to the extent 
actually received through payments on the financial assets received 
through the date of repudiation. Upon payment of such repudiation 
damages, all liens or claims on the financial assets created pursuant 
to the securitization documents shall be released. Such consent does 
not waive or otherwise deprive the NCUA Board as conservator or 
liquidating agent or its assignees of any seller's interest or other 
obligation or interest issued by the issuing entity and held by the 
conservator or liquidating agent or its assignees, but serves as full 
satisfaction of the obligations of the insured credit union in 
conservatorship or liquidation and the NCUA Board as conservator or 
liquidating agent for all amounts due.
    (iii) Effect of repudiation. If the NCUA Board as conservator or 
liquidating agent repudiates or disaffirms a securitization agreement, 
it will not assert that any interest payments made to investors in 
accordance with the securitization documents before any such 
repudiation or disaffirmance remain the property of the conservatorship 
or liquidation.
    (e) Consent to certain actions. Prior to repudiation or, in the 
case of a monetary default referred to in paragraph (d)(3)(i) of this 
section, prior to the effectiveness of the consent referred to therein, 
the NCUA Board as conservator or liquidating agent consents pursuant to 
12 U.S.C. 1787(c)(13)(C) to the making of, or if serving as servicer, 
does make, the payments to the investors to the extent actually 
received through payments on the financial assets (but in the case of 
repudiation, only to the extent supported by payments on the financial 
assets received through the date of the giving of notice of 
repudiation) in accordance with the securitization documents, and, 
subject to the conservator's or liquidating agent's rights to repudiate 
such agreements, consents to any servicing

[[Page 36264]]

activity required in furtherance of the securitization or, if acting as 
servicer, the conservator or liquidating agent performs such servicing 
activities in accordance with the terms of the applicable servicing 
agreements, with respect to the financial assets included in 
securitizations that meet the requirements applicable to that 
securitization as set forth in paragraphs (b) and (c) of this section.
    (f) Notice for consent. Any party requesting the NCUA Board's 
consent as conservator or liquidating agent under 12 U.S.C. 
1787(c)(13)(C) pursuant to paragraph (d)(3)(i) of this section must 
provide notice to the President, NCUA Asset Management & Assistance 
Center, 4807 Spicewood Springs Road, Suite 5100, Austin, TX 78759-8490, 
and a statement of the basis upon which such request is made, and 
copies of all documentation supporting such request, including without 
limitation a copy of the applicable agreements and of any applicable 
notices under the contract.
    (g) Contemporaneous requirement. The NCUA Board as conservator or 
liquidating agent will not seek to avoid an otherwise legally 
enforceable agreement that is executed by an insured credit union in 
connection with a securitization or in the form of a participation 
solely because the agreement does not meet the ``contemporaneous'' 
requirement of 12 U.S.C.1787(b)(9) and 1788(a)(3).
    (h) Limitations. The consents set forth in this section do not act 
to waive or relinquish any rights granted to NCUA in any capacity, 
including the NCUA Board as conservator or liquidating agent, pursuant 
to any other applicable law or any agreement or contract except as 
specifically set forth herein. Nothing contained in this section alters 
the claims priority of the securitized obligations.
    (i) No waiver. This section does not authorize the attachment of 
any involuntary lien upon the property of the NCUA Board as conservator 
or liquidating agent. Nor does this section waive, limit, or otherwise 
affect the rights or powers of NCUA in any capacity, including the NCUA 
Board as conservator or liquidating agent, to take any action or to 
exercise any power not specifically mentioned, including but not 
limited to any rights, powers or remedies of the NCUA Board as 
conservator or liquidating agent regarding transfers or other 
conveyances taken in contemplation of the credit union's insolvency or 
with the intent to hinder, delay or defraud the credit union or the 
creditors of such credit union, or that is a fraudulent transfer under 
applicable law.
    (j) No assignment. The right to consent under 12 U.S.C. 
1787(c)(13)(C) may not be assigned or transferred to any purchaser of 
property from the NCUA Board as conservator or liquidating agent, other 
than to a conservator or bridge credit union.
    (k) Repeal. This section may be repealed by NCUA upon 30 days' 
notice provided in the Federal Register, but any repeal does not apply 
to any issuance made in accordance with this section before such 
repeal.

[FR Doc. 2014-14919 Filed 6-25-14; 8:45 am]
BILLING CODE 7535-01-P