[Federal Register Volume 82, Number 125 (Friday, June 30, 2017)]
[Rules and Regulations]
[Pages 29699-29710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13636]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 709

RIN 3133-AE41


Safe Harbor

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (``Board'') is issuing this final rule to amend 
its regulations regarding the treatment by the Board, as liquidating 
agent or conservator (``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 final rule replaces NCUA's 
current 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 rule.

DATES: The effective date for this rule is July 31, 2017.

FOR FURTHER INFORMATION CONTACT: John Nilles, Senior Capital Markets 
Specialist, Office of Examination and Insurance, at (703) 518-1174; or 
John H. Brolin, Senior Staff Attorney, Office of General Counsel, at 
(703) 518-6438; National Credit Union Administration, 1775 Duke Street, 
Alexandria, VA 22314.

SUPPLEMENTARY INFORMATION:

I. Background

    In 2000, when it adopted a regulation codified at 12 CFR 709.10,\1\ 
the Board clarified the scope of its statutory authority as conservator 
or liquidating agent to disaffirm or repudiate contracts of an FICU 
with respect to transfers of financial assets by a FICU in connection 
with a securitization or participation. Current Sec.  709.10 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'').\2\ Current Sec.  
709.10 also provides 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'' is 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. Thus, current Sec.  709.10 addresses only purported sales which 
meet the conditions for off balance sheet accounting treatment under 
GAAP. The implementation of accounting rules since 2000, however, has 
created uncertainty for loan participation and potential securitization 
participants.
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    \1\ 65 FR 55442 (Sept. 14, 2000).
    \2\ In the Proposal, NCUA stated that the agency had not 
previously stated that federal credit unions (``FCUs'') have the 
authority to issue asset-backed securities (``ABS'') and that its 
understanding was that no FCU had done so. NCUA also does not 
believe that any federally insured, state-chartered credit unions 
(``FISCUs'') have issued ABS. Therefore, the securitization aspect 
of the 2000 Rule has not been applied. In connection with this final 
rule updating the 2000 Rule, the Office of General Counsel recently 
published a legal opinion letter on NCUA's Web site, which finds 
that the securitization of assets is a power incidental to the 
operation of FCUs. Accordingly, if an FCU (or a FISCU if permitted 
by state law) issues ABS, these amendments to Sec.  709.10 are 
necessary to preserve the safe harbor for investors.
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A. 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 could 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

[[Page 29700]]

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.

B. FCU Act Changes

    In 2005, Congress enacted Section 207(c)(13)(C) \3\ of the Federal 
Credit Union Act (the ``FCU Act'').\4\ This paragraph generally 
provides that 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 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 could 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.
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    \3\ 12 U.S.C. 1787(c)(13)(C).
    \4\ 12 U.S.C. 1751 et seq.
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C. Notice of Proposed Rulemaking

    In response to the changes outlined above, on June 26, 2014, the 
Board issued a notice of proposed rulemaking (Proposal) to revise the 
agency's safe harbor provisions.\5\ The Proposal was prompted in part 
by the Federal Deposit Insurance Corporation's (FDIC's) decision in 
2010 to issue a final rule to resolve the issues raised by the 2009 
GAAP modifications and parallel 2005 changes to the Federal Deposit 
Insurance Act.\6\ To avoid unnecessary complexity and assure loan 
participants and securitization investors, the Proposal was modeled on 
the FDIC's safe harbor rule, which is codified at 12 CFR 360.6, 
Treatment of Financial Assets Transferred in Connection with a 
Securitization or Participation.
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    \5\ 79 FR 36252 (June 26, 2014).
    \6\ 75 FR 60287 (Sept. 30, 2010).
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    The Proposal sought to address concerns of 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 by clarifying the position of the conservator or 
liquidating agent under established law. Under section 207(c)(12) of 
the FCU Act, 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 ``except where such an interest is 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.'' \7\ 
This provision applies whether or not a securitization or participation 
transaction meets the conditions for sale accounting. The Proposal 
sought to 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.
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    \7\ 12 U.S.C. 1787(c)(12).
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    In addition, the Proposal stated 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.
    Following issuance of NCUA's Proposal, the FDIC issued two 
additional rules revising its securitization safe harbor rule to (1) be 
consistent with regulations required under Section 15G of the 
Securities and Exchange Act, 15 U.S.C. 78a et seq. pursuant to section 
941(b) of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act; \8\ and (2) clarify that the documents governing a securitization 
transaction need not require an action prohibited under Regulation X 
(12 CFR part 1024).\9\ The Board has reviewed these changes and 
believes they are within the scope of the Proposal; consistent with 
current accepted standards and practices within the securitization 
industry; and uncontroversial enough in nature so that the public would 
not reasonably benefit from being given an additional opportunity to 
provide comments on these minor changes. Accordingly, the Board has 
amended the original proposed language to incorporate those conforming 
amendments into Sec.  709.10(b)(5)(i) and (b)(3)(ii)(A) of this final 
rule. The amendments are discussed in more detail below.
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    \8\ 80 FR 73087 (Nov. 24, 2015).
    \9\ 81 FR 41422 (June 27, 2016).
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II. Comments on the Proposal

    NCUA received seven comments on the Proposal to continue the safe 
harbor for financial assets transferred in connection with 
securitizations and participations in which the financial assets 
transferred in connection with the securitization. All the commenters 
supported the Proposal, stating that investors would have no interest 
in pursuing securitizations without the safe harbor protections. Two 
commenters, however, did question the proposed limit of six tranches in 
a securitization. One commenter also questioned the proposed limits on 
external credit enhancements. These comments are discussed in more 
detail below. Based on the rationale previously set forth, the 
commenters overwhelming support, and for the reasons explained in more 
detail below, the Board has decided to finalize the Proposal with only 
the slight modification mentioned above to Sec.  709.10(b)(5)(i).

III. Final Rule

A. General Considerations

    Consistent with the Proposal, this final rule replaces current 
Sec.  709.10 of NCUA's regulations. Section 709.10(a) of the rule sets 
forth definitions of terms used in the rule. It retains many of the 
definitions used in the current Sec.  709.10(a), 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 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

[[Page 29701]]

securities. In the event that an entity otherwise subject to the rule 
issues both guaranteed and non-guaranteed securitizations, the 
securitizations guaranteed by a Specified GSE are not subject to the 
rule.
    Section 709.10(b) of this final 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 2007-2008 financial 
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.

B. Capital Structure and Financial Assets

    The benefits of this final 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'') 
Regulation AB, the documents governing the securitization must provide 
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.
    All securitizations. Consistent with the Proposal, this final 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.
    RMBS only. In formulating the rule, the Board sought to permit 
innovation and accommodate financing needs, and thus attempted to 
strike a balance between permitting multi-tranche structures for RMBS 
transactions and promoting readily understandable securitization 
structures and limiting overleveraging of residential mortgage assets.
    For RMBS only, the Proposal limited the capital structure of the 
securitization to six or fewer tranches 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 would not have prevented 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 could not include leveraged 
tranches that introduced market risks (such as leveraged super senior 
tranches). Although the financial assets transferred into an RMBS would 
have been 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 could not benefit from external credit support at 
the issuing entity or pool level. The Proposal 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, could be 
supported by liquidity facilities. These conditions were 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 
Proposal provided that the securitization obligations could be enhanced 
by credit support or guarantees provided by Specified GSEs. However, as 
noted in the discussion on the definitions in the Proposal, a 
securitization that was wholly guaranteed by a Specified GSE would not 
have been subject to the rule and thus would not have been eligible for 
the safe harbor.
Public Comments on the Proposal
    Two commenters expressed concern that codifying a limit of six 
credit tranches in a securitization may have the unintended consequence 
of limiting a FCU's ability to access the market or issuing a 
securitization at the best possible price. The commenter recommended 
that, because there is no empirical evidence that structures with more 
than six tranches create materially more risk than those with less than 
six, the Board should eliminate this requirement from the safe harbor. 
In addition, one commenter urged elimination of the prohibition on 
external credit enhancements for RMBS.
Discussion
    The Board disagrees with the commenter's recommendations. As 
previously stated, the rule was intentionally modeled on Sec.  360.6 of 
the FDIC's regulations to encourage a market for securitization 
participants and help assure investors. The limiting language in Sec.  
709.10(b)(1)(ii)(A) and (B) of the Proposal is nearly identical \10\ to 
the language in Sec.  360.6(b)(1)(ii)(A) and (B) of FDIC's regulation. 
Retaining the six credit tranche limitation and the prohibition on 
external credit enhancements will not disadvantage FICUs relative to 
banks, and will help limit the complexity of assigning a value to 
securities in the event of liquidation. Accordingly, the Board has 
decided to retain the proposed language in

[[Page 29702]]

Sec. Sec.  709.10(b)(1)(ii)(A) and (B) in the final rule without 
change.
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    \10\ The text of the provision in NCUA's rule uses the word 
``must'' instead of the word ``shall,'' which is used in the FDIC 
rule, the provisions are otherwise identical. No material difference 
is intended by the use of the word must instead of the word shall in 
NCUA's rule.
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C. 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. Consistent with the Proposal, this final rule 
increases transparency in securitizations by enabling 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 qualify under the 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 must 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 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, consistent with the Proposal, this final rule requires 
the sponsor to disclose 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. 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 rule requires sponsors to 
disclose a third-party due diligence report on compliance with 
standards and representations and warranties made about the financial 
assets.
    Finally, this final rule, consistent with the Proposal, specifies 
that the securitization documents require 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.

D. Documentation and Recordkeeping

    For all securitizations, this final rule, consistent with the 
Proposal, requires operative agreements to use 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 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.
    Consistent with the Proposal, the rule also requires that 
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 required to 
provide authority for the parties to fulfill their rights and 
responsibilities under the securitization contracts.
    Consistent with the Proposal, additional conditions apply to RMBS 
to address a significant issue that has been demonstrated in the 
mortgage crisis by requiring that servicers have authority to mitigate 
losses on mortgage loans consistent with maximizing net present value 
of the mortgages. Therefore, for RMBS, contractual provisions in the 
servicing agreement must provide servicers with 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 than 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 an asset have been cured. A 
servicer must be required to maintain sufficient records of its actions 
to permit appropriate review of its actions.
    In January 2013, the Consumer Financial Protection Bureau 
(``CFPB'') adopted mortgage loan servicing requirements that became 
effective on

[[Page 29703]]

January 10, 2014. One of the requirements, set forth in Subpart C to 
Regulation X, at 12 CFR 1024.41, generally prohibits a servicer from 
commencing a foreclosure unless the borrower's mortgage loan obligation 
is more than 120 days delinquent. This section of Regulation X also 
provides additional rules that, among other things, require a lender to 
further delay foreclosure if the borrower submits a loss mitigation 
application before the lender has commenced the foreclosure process, 
and requires a lender to delay a foreclosure for which it has commenced 
the foreclosure process if a borrower has submitted a complete loss 
mitigation application more than 37 days before a foreclosure sale.\11\
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    \11\ See 12 CFR 1024.41(f) and (g).
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    In response to this change, the Board is now making minor 
amendments in this final rule to clarify that the 90-day loss 
mitigation requirement does not conflict with the foreclosure 
commencement delays mandated by the CFPB under Regulation X. In 
particular, Sec.  709.10(b)(3)(ii)(A) retains the original language 
proposed, but now includes additional language stating that the loss 
mitigation action requirement thereunder ``will not be deemed to 
require that the documents include any provision concerning loss 
mitigation that requires any action that may conflict with the 
requirements of Regulation X. . . .''
    In addition, 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, 
consistent with the Proposal, 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.

E. Compensation

    Consistent with the Proposal, the compensation requirements of this 
final rule apply only to RMBS. Due to the demonstrated issues in the 
compensation incentives in RMBS, the 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 60% 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.

F. Origination and Retention Requirements

    As discussed above and consistent with the Proposal, this final 
rule imposes conditions addressing origination and retention 
requirements for all securitizations to provide further incentives for 
quality origination practices. Because the regulations required under 
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 have now gone into effect,\12\ the Board has 
amended this final rule to eliminate the references to the retention 
requirements for securities issued prior to the effective dates of that 
rulemaking. Accordingly, the final rule now provides that for any 
securitization, the documents creating the securitization shall require 
retention of an economic interest in the credit risk of the financial 
assets in accordance with the regulations required under 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, including restrictions on sale, pledging and hedging set forth 
therein.
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    \12\ 79 FR 77602 (Dec. 24, 2014) (Providing that the effective 
dates for under the Section 15G Regulations is December 24, 2015 for 
residential mortgage securitizations and December 24, 2016 for all 
other securitizations.).
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    The Board continues to believe 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.

G. Additional Conditions

    Consistent with the Proposal, Sec.  709.10(c) of this final 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 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.
    The rule applies only to transfers made for adequate consideration. 
The transfer and/or security interest need to be properly perfected 
under the Uniform Commercial Code (UCC) or applicable state law. NCUA 
anticipates that it will be difficult to determine whether a transfer 
complying with the 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

[[Page 29704]]

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 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.

H. The Safe Harbor

    Consistent with the Proposal, Sec.  709.10(d)(1) of the 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.
    Consistent with the Proposal, Sec.  709.10(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 rule.
    Consistent with the Proposal, Sec.  709.10(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.
    Consistent with the Proposal, Sec.  709.10(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.
    Consistent with the Proposal, Sec.  709.10(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.\13\ The 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 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 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.
---------------------------------------------------------------------------

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

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

[[Page 29705]]

I. Consent to Certain Payments and Servicing

    Consistent with the Proposal, Sec.  709.10(e) provides that prior 
to repudiation or, in the case of monetary default, prior to the 
effectiveness of the consent referred to in Sec.  709.10(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 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 Sec.  709.10 of the rule.

J. Miscellaneous

    Consistent with the Proposal, Sec.  709.10(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.
    Consistent with the Proposal, Sec.  709.10(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).
    Consistent with the Proposal, Sec.  709.10(h) of the rule provides 
that the consents set forth in the 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 rule, and nothing contained in the section will alter the claims 
priority of the securitized obligations.
    Consistent with the Proposal, Sec.  709.10(i) provides that except 
as specifically set forth in the rule, the 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 
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 $100 
million in assets).\14\ The final rule will apply only to the largest 
credit unions, as they are the only ones with the infrastructure and 
resources to securitize assets. Accordingly, the Board certifies it 
will not have an economic impact on any small credit unions.
---------------------------------------------------------------------------

    \14\ 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.\15\ 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 changes 
to part 709 impose new information collection requirements.
---------------------------------------------------------------------------

    \15\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------

    Estimated PRA Burden: The information collection requirements are 
related to federal security filings. As discussed above, because this 
final rule is based on 12 CFR 360.6, the NCUA has also based its 
information collection requirements on the information collection 
estimates provided under that regulation. According, NCUA's burden 
estimates for the applications are as follows:
1. 10K Annual Report
    Non Reg AB Compliant:
    Estimated Number of Respondents: 2.
    Affected Public: NCUA-insured credit unions.
    Frequency of Response: 1 time per year.
    Average Time per Response: 27 hours.
    Estimated Annual Burden: 54 hours.
    Reg AB Compliant:
    Estimated Number of Respondents: 2.
    Affected Public: NCUA-insured credit unions.
    Frequency of Response: 1 time per year.
    Average Time per Response: 4.5 hours.
    Estimated Annual Burden: 9 hours.
2. 8K Annual Report
    Non Reg AB Compliant:
    Estimated Number of Respondents: 2.
    Affected Public: NCUA-insured credit unions.
    Frequency of Response: 2 time per year.
    Average Time per Response: 27 hours.
    Estimated Annual Burden: 108 hours.
    Reg AB Compliant:
    Estimated Number of Respondents: 2.
    Affected Public: NCUA-insured credit unions.
    Frequency of Response: 2 time per year.
    Average Time per Response: 4.5 hours.
    Estimated Annual Burden: 18 hours.
3. 10D Annual Report
    Non Reg AB Compliant:
    Estimated Number of Respondents: 2.
    Affected Public: NCUA-insured credit unions.
    Frequency of Response: 5 time per year.
    Average Time per Response: 27 hours.
    Estimated Annual Burden: 270 hours.
    Reg AB Compliant:
    Estimated Number of Respondents: 2.
    Affected Public: NCUA-insured credit unions.
    Frequency of Response: 5 time per year.
    Average Time per Response: 4.5 hours.
    Estimated Annual Burden: 45 hours.
4. 12b-25 Notification
    Estimated Number of Respondents: 2.
    Affected Public: NCUA-insured credit unions.
    Frequency of Response: 2 time per year.
    Average Time per Response: 2.5 hours.
    Estimated Annual Burden: 10 hours.

3. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to

[[Page 29706]]

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. This final 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 final 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 rule will not affect family well-
being within the meaning of section 654 of the Treasury and General 
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681 
(1998).

5. Small Business Regulatory Enforcement Act Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) provides generally for congressional review 
of agency rules. A reporting requirement is triggered in instances 
where NCUA issues a final rule as defined by Section 551 of the 
Administrative Procedure Act.\16\ NCUA does not believe this final rule 
is a ``major rule'' within the meaning of the relevant sections of 
SBREFA. As required by SBREFA, NCUA has filed the appropriate reports 
so that this final rule may be reviewed.
---------------------------------------------------------------------------

    \16\ 5 U.S.C. 551.
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 709

    Credit unions, Liquidations.

    By the National Credit Union Administration Board, on June 23, 
2017.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the National Credit Union 
Administration amends 12 CFR 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:
    (1) The Federal National Mortgage Association and any affiliate 
thereof;
    (2) Federal Home Loan Mortgage Corporation and any affiliate 
thereof;
    (3) The Government National Mortgage Association; and
    (4) 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:
    (1) The conveyance of a financial asset or financial assets to an 
issuing entity; or
    (2) 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

[[Page 29707]]

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 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 this paragraph (b)(2).
    (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

[[Page 29708]]

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 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 shall 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 shall require that the 
servicers apply industry best practices for asset management and 
servicing. The documents shall 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 maintain records of its actions 
to permit full review by the trustee or other representative of the 
investors and that the servicer must commence action to mitigate losses 
no later than ninety (90) days after an asset first becomes delinquent 
unless all delinquencies have been cured, provided that this 
requirement will not be deemed to require that the documents include 
any provision concerning loss mitigation that requires any action that 
may conflict with the requirements of Regulation X (12 CFR part 1024), 
as Regulation X may be amended or modified from time to time.
    (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. For any securitization, the 
documents creating the securitization shall require retention of an 
economic interest in the credit risk of the financial assets in 
accordance with the regulations required under 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, 
including restrictions on sale, pledging and hedging set forth therein.
    (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, 
necessary to clear any payments received. The documents must require 
that the sponsor will make these records

[[Page 29709]]

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 activity required in 
furtherance of the securitization or, if acting as servicer, the 
conservator or liquidating agent

[[Page 29710]]

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. 2017-13636 Filed 6-29-17; 8:45 am]
 BILLING CODE 7535-01-P