[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.
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\13\ 12 U.S.C. 1787(c)(13).
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[[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.
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\14\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
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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.
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\16\ 5 U.S.C. 551.
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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