
[Federal Register Volume 79, Number 247 (Wednesday, December 24, 2014)]
[Rules and Regulations]
[Pages 77601-77766]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29256]



[[Page 77601]]

Vol. 79

Wednesday,

No. 247

December 24, 2014

Part II





Department of the Treasury





Office of the Comptroller of the Currency





12 CFR Part 43





Federal Reserve System

12 CFR Part 244





Federal Deposit Insurance Corporation

12 CFR Part 373





Federal Housing Finance Agency

12 CFR Part 1234





Securities and Exchange Commission

17 CFR Part 246





Department of Housing and Urban Development

24 CFR Part 267





Credit Risk Retention; Rule

  Federal Register / Vol. 79 , No. 247 / Wednesday, December 24, 2014 / 
Rules and Regulations  

[[Page 77602]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 43

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

FEDERAL RESERVE SYSTEM

12 CFR Part 244

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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 373

RIN 3064-AD74

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1234

RIN 2590-AA43

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 246

[Release No. 34-73407; File No. S7-14-11]
RIN 3235-AK96

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 267

RIN 2501-AD53


Credit Risk Retention

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

ACTION: Final rule.

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SUMMARY: The OCC, Board, FDIC, Commission, FHFA, and HUD (the agencies) 
are adopting a joint final rule (the rule, or the final rule) to 
implement the credit risk retention requirements of section 15G of the 
Securities Exchange Act of 1934, as added by section 941 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the Act or Dodd-
Frank Act). Section 15G generally requires the securitizer of asset-
backed securities to retain not less than 5 percent of the credit risk 
of the assets collateralizing the asset-backed securities. Section 15G 
includes a variety of exemptions from these requirements, including an 
exemption for asset-backed securities that are collateralized 
exclusively by residential mortgages that qualify as ``qualified 
residential mortgages,'' as such term is defined by the agencies by 
rule.

DATES: Effective date: The final rule is effective February 23, 2015.
    Compliance dates: Compliance with the rule with respect to asset-
backed securities collateralized by residential mortgages is required 
beginning December 24, 2015. Compliance with the rule with regard to 
all other classes of asset-backed securities is required beginning 
December 24, 2016.

FOR FURTHER INFORMATION CONTACT:
    OCC: Kevin Korzeniewski, Attorney, Legislative and Regulatory 
Activities Division, (202) 649-5490, for persons who are deaf or hard 
of hearing, TTY, (202) 649-5597, Office of the Comptroller of the 
Currency, 400 7th Street SW., Washington, DC 20219.
    Board: April C. Snyder, Senior Counsel, (202) 452-3099; Brian P. 
Knestout, Counsel, (202) 452-2249; Flora H. Ahn, Counsel, (202) 452-
2317; David W. Alexander, Senior Attorney, (202) 452-2877; or Matt 
Suntag, Attorney, (202) 452-3694, Legal Division; Thomas R. Boemio, 
Manager, (202) 452-2982; Donald N. Gabbai, Senior Supervisory Financial 
Analyst, (202) 452-3358; or Sean M. Healey, Senior Financial Analyst, 
(202) 912-4611, Division of Banking Supervision and Regulation; Karen 
Pence, Adviser, Division of Research & Statistics, (202) 452-2342; or 
Nikita Pastor, Counsel, (202) 452-3667, Division of Consumer and 
Community Affairs, Board of Governors of the Federal Reserve System, 
20th and C Streets NW., Washington, DC 20551.
    FDIC: Rae-Ann Miller, Associate Director, (202) 898-3898; George 
Alexander, Assistant Director, (202) 898-3718; Kathleen M. Russo, 
Supervisory Counsel, (703) 562-2071; or Phillip E. Sloan, Counsel, 
(703) 562-6137, Federal Deposit Insurance Corporation, 550 17th Street 
NW., Washington, DC 20429.
    Commission: Arthur Sandel, Special Counsel; David Beaning, Special 
Counsel; Lulu Cheng, Special Counsel; or Katherine Hsu, Chief, (202) 
551-3850, in the Office of Structured Finance, Division of Corporation 
Finance, U.S. Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-3628.
    FHFA: Ronald P. Sugarman, Principal Legislative Analyst, 
Ron.Sugarman@fhfa.gov, (202) 649-3208; Phillip Millman, Principal 
Capital Markets Specialist, Phillip.Millman@fhfa.gov, (202) 649-3080; 
or Thomas E. Joseph, Associate General Counsel, Thomas.Joseph@fhfa.gov, 
(202) 649-3076; Federal Housing Finance Agency, Constitution Center, 
400 7th Street SW., Washington, DC 20024. The telephone number for the 
Telecommunications Device for the Hearing Impaired is (800) 877-8339.
    HUD: Michael P. Nixon, Office of Housing, Department of Housing and 
Urban Development, 451 7th Street SW., Room 10226, Washington, DC 
20410; telephone number 202-402-5216 (this is not a toll-free number). 
Persons with hearing or speech impairments may access this number 
through TTY by calling the toll-free Federal Information Relay Service 
at 800-877-8339.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Overview of the Revised Proposal and Public Comment
    C. Overview of the Final Rule
    D. Post-Adoption Interpretation and Guidance
II. General Definitions and Scope
III. General Risk Retention Requirement
    A. Minimum Risk Retention Requirement
    B. Permissible Forms of Risk Retention--Menu of Options
    1. Standard Risk Retention
    2. Master Trusts: Revolving Pool Securitizations
    3. Representative Sample
    4. Asset-Backed Commercial Paper Conduits
    5. Commercial Mortgage-Backed Securities
    6. Government-Sponsored Enterprises
    7. Open Market Collateralized Loan Obligations
    8. Municipal Bond ``Repackaging'' Securitizations
    C. Allocation to the Originator
    D. Hedging, Transfer, and Financing Restrictions
    E. Safe Harbor for Certain Foreign-Related Securitizations
    F. Sunset on Hedging and Transfer Restrictions
IV. General Exemptions
    A. Exemption for Federally Insured or Guaranteed Residential, 
Multifamily, and Health Care Mortgage Loan Assets
    B. Exemption for Securitizations of Assets Issued, Insured, or 
Guaranteed by the United States or any Agency of the United States 
and Other Exemptions
    C. Federal Family Education Loan Program and Other Student Loan 
Securitizations
    D. Certain Public Utility Securitizations
    E. Seasoned Loan Securitizations
    F. Federal Deposit Insurance Corporation Securitizations
    G. Exemption for Certain Resecuritization Transactions

[[Page 77603]]

    H. Other Exemptions from Risk Retention Requirements
    1. Legacy Loan Securitizations
    2. Corporate Debt Repackagings
    3. Securitizations of Servicer Advance Receivables
V. Reduced Risk Retention Requirements and Underwriting Standards 
for ABS Interests Collateralized by Qualifying Commercial, 
Commercial Real Estate, or Automobile Loans
    A. Qualifying Commercial Loans
    B. Qualifying Commercial Real Estate Loans
    1. Definition of Commercial Real Estate Loan
    2. Single Borrower Underwriting Standard
    3. Proposed QCRE Loan Criteria
    4. Ability to Repay Criteria and Term
    5. Loan-to-Value Requirement
    6. Collateral
    7. Risk Management and Monitoring
    C. Qualifying Automobile Loans
    1. Ability to Repay Criteria
    2. Loan Terms
    3. Reviewing Credit History
    4. Down Payment Requirement
VI. Qualified Residential Mortgages
    A. Background
    B. Overview of the Reproposed Rule
    C. Overview of Public Comments
    1. Comments Received on the Reproposed QRM Definition
    2. Comments Received on the Alternative Approach to QRM
    D. Summary and Analysis of Final QRM Definition
    1. Alignment of QRM with QM
    2. Periodic Review of the QRM Definition
    3. Definition of QRM
    E. Certification and Other QRM Issues
    F. Repurchase of Loans Subsequently Determined to be Non-
Qualified After Closing
VII. Additional Exemptions
VIII. Severability
IX. Plain Language
X. Administrative Law Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Commission Economic Analysis
    D. OCC Unfunded Mandates Reform Act of 1995 Determination
    E. FHFA: Considerations of Differences between the Federal Home 
Loan Banks and the Enterprises

I. Introduction

    The agencies are adopting a final rule to implement the 
requirements of section 941 of the Dodd-Frank Act.\1\ Section 15G of 
the Exchange Act, as added by section 941(b) of the Dodd-Frank Act, 
generally requires the Board, the FDIC, the OCC (collectively, the 
Federal banking agencies), the Commission, and, in the case of the 
securitization of any ``residential mortgage asset,'' together with HUD 
and FHFA, to jointly prescribe regulations that (i) require a 
securitizer to retain not less than 5 percent of the credit risk of any 
asset that the securitizer, through the issuance of an asset-backed 
security (ABS), transfers, sells, or conveys to a third party, and (ii) 
prohibit a securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to retain 
under section 15G and the agencies' implementing rules.\2\ Compliance 
with the final rule with respect to securitization transactions 
involving asset-backed securities collateralized by residential 
mortgages is required beginning one year after the date of publication 
in the Federal Register and with respect to securitization transactions 
involving all other classes of asset-backed securities is required 
beginning two years after the date of publication in the Federal 
Register. References in this Supplemental Information and the rule 
itself to the effective date of the rule (or similar references to the 
date on which the rule becomes effective) are to the date on which 
compliance is required.
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010). Section 941 of 
the Dodd-Frank Act amends the Securities Exchange Act of 1934 (the 
Exchange Act) and adds a new section 15G of the Exchange Act. 15 
U.S.C. 78o-11.
    \2\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
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    Section 15G of the Exchange Act exempts certain types of 
securitization transactions from these risk retention requirements and 
authorizes the agencies to exempt or establish a lower risk retention 
requirement for other types of securitization transactions. For 
example, section 15G specifically provides that a securitizer shall not 
be required to retain any part of the credit risk for an asset that is 
transferred, sold, or conveyed through the issuance of ABS interests by 
the securitizer, if all of the assets that collateralize the ABS 
interests are ``qualified residential mortgages'' (QRMs), as that term 
is jointly defined by the agencies, which definition can be ``no 
broader than'' the definition of a ``qualified mortgage'' (QM) as that 
term is defined under section 129C of the Truth in Lending Act 
(TILA),\3\ as amended by the Dodd-Frank Act, and regulations adopted 
thereunder.\4\ In addition, section 15G provides that a securitizer may 
retain less than 5 percent of the credit risk of commercial mortgages, 
commercial loans, and automobile loans that are transferred, sold, or 
conveyed through the issuance of ABS interests by the securitizer if 
the loans meet underwriting standards established by the Federal 
banking agencies.\5\
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    \3\ 15 U.S.C. 1639c.
    \4\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (e)(4)(A) and (B).
    \5\ See id. at sections 78o-11(c)(1)(B)(ii) and (2).
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    Section 15G allocates the authority for writing rules to implement 
its provisions among the agencies in various ways. As a general matter, 
the agencies collectively are responsible for adopting joint rules to 
implement the risk retention requirements of section 15G for 
securitizations that are collateralized by residential mortgage assets 
and for defining what constitutes a QRM for purposes of the exemption 
for QRM-backed ABS interests.\6\ The Federal banking agencies and the 
Commission, however, are responsible for adopting joint rules that 
implement section 15G for securitizations collateralized by all other 
types of assets,\7\ and are authorized to adopt rules in several 
specific areas under section 15G.\8\ In addition, the Federal banking 
agencies are jointly responsible for establishing, by rule, 
underwriting standards for non-QRM residential mortgages, commercial 
mortgages, commercial loans, and automobile loans (or any other asset 
class established by the Federal banking agencies and the Commission) 
that would qualify sponsors of ABS interests collateralized by these 
types of loans for a risk retention requirement of less than 5 
percent.\9\ Accordingly, when used in this final rule, the term 
``agencies'' shall be deemed to refer to the appropriate agencies that 
have rulewriting authority with respect to the asset class, 
securitization transaction, or other matter discussed.
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    \6\ See id. at sections 78o-11(b)(2), (e)(4)(A) and (B).
    \7\ See id. at section 78o-11(b)(1).
    \8\ See, e.g. id. at sections 78o-11(b)(1)(E) (relating to the 
risk retention requirements for ABS collateralized by commercial 
mortgages); (b)(1)(G)(ii) (relating to additional exemptions for 
assets issued or guaranteed by the United States or an agency of the 
United States); (d) (relating to the allocation of risk retention 
obligations between a securitizer and an originator); and (e)(1) 
(relating to additional exemptions, exceptions or adjustments for 
classes of institutions or assets).
    \9\ See id. at section 78o-11(b)(2)(B).
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    For ease of reference, the final rule of the agencies is referenced 
using a common designation of section 1 to section 21 (excluding the 
title and part designations for each agency). With the exception of 
HUD, each agency is codifying the rule within its respective title of 
the Code of Federal Regulations.\10\ Section 1 of each

[[Page 77604]]

agency's rule identifies the entities or transactions subject to such 
agency's rule.
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    \10\ Specifically, the agencies codify the rule as follows: 12 
CFR part 43 (OCC); 12 CFR part 244 (Regulation RR) (Board); 12 CFR 
part 373 (FDIC); 17 CFR part 246 (Commission); 12 CFR part 1234 
(FHFA). As required by section 15G, HUD has jointly prescribed the 
final rule for a securitization that is collateralized by any 
residential mortgage asset and for purposes of defining a qualified 
residential mortgage. Because the final rule exempts the programs 
and entities under HUD's jurisdiction from the requirements of the 
final rule, HUD does not codify the rule into its title of the Code 
of Federal Regulations.
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    Consistent with section 15G of the Exchange Act, the risk retention 
requirements will become effective, for securitization transactions 
collateralized by residential mortgages, one year after the date on 
which the final rule is published in the Federal Register, and two 
years after the date on which the final rule is published in the 
Federal Register for any other securitization transaction.
    In April 2011, the agencies published a joint notice of proposed 
rulemaking that proposed to implement section 15G of the Exchange Act 
(the ``original proposal'').\11\ The agencies invited and received 
comment from the public on the original proposed rule. In September 
2013, the agencies published a second joint notice of proposed 
rulemaking (the ``revised proposal'' or ``reproposal'') that proposed 
significant modifications to the original proposal and that again 
invited comment from the public.\12\ As described in more detail below, 
the agencies are adopting the revised proposal with some changes in 
response to comments received.
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    \11\ Credit Risk Retention; Proposed Rule, 76 FR 24090 (April 
29, 2011).
    \12\ Credit Risk Retention; Proposed Rule, 78 FR 57928 
(September 20, 2013).
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    As discussed further below, the final rule retains the framework of 
the revised proposal. Unless an exemption under the rule applies, 
sponsors of securitizations that issue ABS interests must retain risk 
in accordance with the standardized risk retention option (an eligible 
horizontal residual interest (as defined in the rule) or an eligible 
vertical interest (as defined in the rule) or a combination of both) or 
in accordance with one of the risk retention options available for 
specific types of asset classes, such as asset-backed commercial paper 
(ABCP). The final rule includes, with some modifications, those 
exemptions set forth in the revised proposal, including for QRMs. In 
addition, in response to comments and for the reasons discussed in Part 
VII of this Supplementary Information, the agencies are providing an 
additional exemption from risk retention for certain types of 
community-focused residential mortgages that are not eligible for QRM 
status under the final rule and are exempt from the ability-to-pay 
rules under the TILA.\13\ The agencies are not exempting managers of 
certain collateralized loan obligations (CLOs) from risk retention, as 
requested by commenters, for the reasons discussed in Part III.B.7 of 
this Supplementary Information.
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    \13\ 15 U.S.C. 1639c.
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    The agencies have made adjustments and modifications to the risk 
retention and underwriting requirements, as discussed in further detail 
below. Of particular note, under the final rule, the agencies are not 
adopting the proposed requirement that a sponsor holding an eligible 
horizontal residual interest be subject to the cash flow restrictions 
in the revised proposal or any similar cash flow restrictions. In 
addition, the agencies accepted commenters' views that a fair value 
calculation was not necessary for vertical retention and are not 
requiring the eligible vertical interest to be measured using fair 
value. The agencies are also making some adjustments to the disclosure 
requirements associated with the fair value calculation for an eligible 
horizontal residual interest. The final rule also includes a provision 
that requires the agencies to periodically review the definition of 
QRM, the exemption for certain community-focused residential mortgages, 
and the exemption for certain three-to-four unit residential mortgage 
loans and consider whether they should be modified, as discussed 
further below in Parts VI and VII of this Supplementary Information. 
The final rule also includes several adjustments and modifications to 
the proposed risk retention options for specific asset classes in order 
to address specific functional concerns and avoid unintended 
consequences.

A. Background

    As the agencies observed in the preambles to the original and 
revised proposals, the securitization markets are an important link in 
the chain of entities providing credit to U.S. households and 
businesses, and state and local governments.\14\ When properly 
structured, securitization provides economic benefits that can lower 
the cost of credit.\15\ However, when incentives are not properly 
aligned and there is a lack of discipline in the credit origination 
process, securitization can result in harmful consequences to 
investors, consumers, financial institutions, and the financial system.
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    \14\ Securitization may reduce the cost of funding, which is 
accomplished through several different mechanisms. For example, 
firms that specialize in originating new loans and that have 
difficulty funding existing loans may use securitization to access 
more-liquid capital markets for funding. In addition, securitization 
can create opportunities for more efficient management of the asset-
liability duration mismatch generally associated with the funding of 
long-term loans, for example, with short-term bank deposits. 
Securitization also allows the structuring of securities with 
differing maturity and credit risk profiles from a single pool of 
assets that appeal to a broad range of investors. Moreover, 
securitization that involves the transfer of credit risk allows 
financial institutions that primarily originate loans to particular 
classes of borrowers, or in particular geographic areas, to limit 
concentrated exposure to these idiosyncratic risks on their balance 
sheets.
    \15\ Report to the Congress on Risk Retention, Board of 
Governors of the Federal Reserve System, at 8 (October 2010), 
available at http://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf (Board Report).
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    During the financial crisis, securitization transactions displayed 
significant vulnerabilities arising from inadequate information and 
incentive misalignment among various parties involved in the 
process.\16\ Investors did not have access to the same information 
about the assets collateralizing asset-backed securities as other 
parties in the securitization chain (such as the sponsor of the 
securitization transaction or an originator of the securitized 
loans).\17\ In addition, assets were resecuritized into complex 
instruments, which made it difficult for investors to discern the true 
value of, and risks associated with, an investment in the 
securitization, as well as exercise their rights in the instrument.\18\ 
Moreover, some lenders loosened their underwriting standards, believing 
that the loans could be sold through a securitization by a sponsor, and 
that both the lender and sponsor would retain little or no continuing 
exposure to the loans.\19\ Arbitrage between various markets and market 
participants, and in particular between the Enterprises and the private 
securitization markets, resulted in lower underwriting standards which 
undermined the quality of the instruments collateralized by such loans 
and ultimately the health of the financial markets and their 
participants.\20\
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    \16\ See Board Report at 8-9.
    \17\ See S. Rep. No. 111-176, at 128 (2010).
    \18\ See id.
    \19\ See id.
    \20\ See, e.g., Viral V. Acharya, Governments as Shadow Banks: 
The Looming Threat to Financial Stability, at 32 (Sept. 2011), 
available at http://www.federalreserve.gov/events/conferences/2011/rsr/papers/Acharya.pdf.
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    Congress intended the risk retention requirements mandated by 
section 15G to help address problems in the securitization markets by 
requiring that securitizers, as a general matter, retain an economic 
interest in the credit risk of the assets they securitize. By requiring 
that a securitizer retain a portion of the credit risk of the 
securitized assets, the requirements of section 15G provide 
securitizers an incentive to monitor and ensure the quality of the 
securitized assets

[[Page 77605]]

underlying a securitization transaction, and, thus, help align the 
interests of the securitizer with the interests of investors. 
Additionally, in circumstances where the securitized assets 
collateralizing the ABS interests meet underwriting and other standards 
designed to help ensure the securitized assets pose low credit risk, 
the statute provides or permits an exemption.\21\
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    \21\ See 15 U.S.C. 78o-11(c)(1)(B)(ii), (e)(1)-(2).
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    Accordingly, the credit risk retention requirements of section 15G 
are an important part of the legislative and regulatory efforts to 
address weaknesses and failures in the securitization process and the 
securitization markets. Section 15G also complements other parts of the 
Dodd-Frank Act intended to improve the securitization markets. Such 
other parts include provisions that strengthen the regulation and 
supervision of nationally recognized statistical rating organizations 
(NRSROs) and improve the transparency of credit ratings; \22\ provide 
for issuers of registered asset-backed securities offerings to perform 
a review of the securitized assets underlying the asset-backed 
securities and disclose the nature of the review; \23\ require issuers 
of asset-backed securities to disclose the history of the requests they 
received and repurchases they made related to their outstanding asset-
backed securities; \24\ prevent sponsors and certain other 
securitization participants from engaging in material conflicts of 
interest with respect to their securitizations; \25\ and require 
issuers of asset-backed securities to disclose, for each tranche or 
class of security, information regarding the assets collateralizing 
that security, including asset-level or loan-level data, if such data 
is necessary for investors to independently perform due diligence.\26\ 
Additionally, various efforts regarding mortgage servicing should also 
have important benefits for the securitization markets.\27\
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    \22\ See, e.g. sections 932, 935, 936, 938, and 943 of the Dodd-
Frank Act (15 U.S.C. 78o-7, 78o-8).
    \23\ See section 945 of the Dodd-Frank Act (15 U.S.C. 77g).
    \24\ See section 943 of the Dodd-Frank Act (15 U.S.C. 78o-7).
    \25\ See section 621 of the Dodd-Frank Act (15 U.S.C. 77z-2a).
    \26\ See section 942(b) of the Dodd-Frank Act (15 U.S.C. 
77g(c)).
    \27\ See, e.g., Mortgage Servicing Rules Under the Real Estate 
Settlement Act (Regulation X); Final Rule, 78 FR 10696 (Feb. 14, 
2013).
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    The original proposal provided several options from which sponsors 
could choose to meet section 15G's risk retention requirements, 
including retention of either a 5 percent ``vertical'' interest in each 
class of ABS interests issued in the securitization or a 5 percent 
``horizontal'' first-loss interest in the securitization, and other 
options designed to reflect market practice in asset-backed 
securitization transactions. The original proposal also included a 
special ``premium capture'' mechanism designed to prevent a sponsor 
from structuring a securitization transaction in a manner that would 
allow the sponsor to offset or minimize its retained economic exposure 
to the securitized assets.
    As required by section 15G, the original proposal provided a 
complete exemption from the risk retention requirements for asset-
backed securities that are collateralized solely by QRMs and 
established the terms and conditions under which a residential mortgage 
would qualify as a QRM.\28\ The original proposal would generally have 
prohibited QRMs from having product features that were observed to 
contribute significantly to the high levels of delinquencies and 
foreclosures since 2007 and included underwriting standards associated 
with lower risk of default. The original proposal also provided that 
sponsors would not have to hold risk retention for securitized 
commercial, commercial real estate, and automobile loans that met 
proposed underwriting standards. In the original proposal, the agencies 
specified that securitization transactions sponsored by the Federal 
National Mortgage Association (Fannie Mae) and the Federal Home Loan 
Mortgage Corporation (Freddie Mac) (jointly, the Enterprises) would 
meet risk retention requirements for as long as the Enterprises 
operated under the conservatorship or receivership of FHFA with capital 
support from the United States.
---------------------------------------------------------------------------

    \28\ See Original Proposal, 76 FR at 24117-24129 and 24164-
24167.
---------------------------------------------------------------------------

    In response to the original proposal, the agencies received 
comments from over 10,500 persons, institutions, or groups. A 
significant number of comments supported the proposed menu-based 
approach of providing sponsors flexibility to choose from a number of 
permissible forms of risk retention, although several requested more 
flexibility in selecting risk retention options, including using 
multiple options simultaneously. Many commenters expressed significant 
concerns with the proposed standards for horizontal risk retention and 
the ``premium capture'' mechanism. Other commenters expressed concerns 
with respect to standards in the original proposal for specific asset 
classes and underwriting standards for non-residential asset classes 
and the application of the original proposal to managers of certain CLO 
transactions. A majority of commenters opposed the agencies' proposed 
QRM standard, and several asserted that the agencies should align the 
QRM definition with the QM definition, then under development by the 
Consumer Financial Protection Bureau (CFPB).\29\
---------------------------------------------------------------------------

    \29\ See 78 FR 6407 (January 30, 2013), as amended by 78 FR 
35429 (June 12, 2013), 78 FR 44686 (July 24, 2013), and 78 FR 60382 
(October 1, 2013) (collectively, ``Final QM rule'').
---------------------------------------------------------------------------

    The agencies considered the many comments received on the original 
proposal and engaged in additional analysis of the securitization and 
lending markets in light of the comments. The agencies subsequently 
issued the reproposal in September 2013, modifying significant aspects 
of the original proposal and again inviting public comment on the 
revised design of the risk retention regulatory framework to help 
determine whether the revised framework was appropriately structured.

B. Overview of the Revised Proposal and Public Comment

    The agencies proposed in 2013 a risk retention rule that would have 
retained much of the structure of the original proposal, but with more 
flexibility in how risk retention could be held and with a broader 
definition of QRM.\30\
---------------------------------------------------------------------------

    \30\ See Revised Proposal, 78 FR 57928.
---------------------------------------------------------------------------

    Among other things, the revised proposal provided a variety of 
options for complying with a minimum 5 percent risk retention 
requirement, an exemption from risk retention for residential mortgage 
loans meeting the QRM standard, and exemptions from risk retention for 
auto, commercial real estate, and commercial loans that met proposed 
underwriting standards. With respect to the standard risk retention 
option, the revised proposal provided sponsors with additional 
flexibility in complying with the regulation. The revised proposal 
permitted a sponsor to satisfy its obligation by retaining any 
combination of an ``eligible vertical interest'' with a pro rata 
interest in all ABS interests issued and a first-loss ``eligible 
horizontal residual interest'' to meet the 5 percent minimum 
requirement. A sponsor using solely the vertical interest option would 
retain a single security or a portion of each class of ABS interests 
issued in the securitization equal to at least 5 percent of all 
interests, regardless of the nature of the interests themselves (for 
example, whether such interests were senior or subordinated). The 
agencies also proposed that the eligible horizontal residual interest 
be measured using fair

[[Page 77606]]

value. The agencies proposed a mechanism designed to limit payments to 
holders of an eligible horizontal residual interest, in order to 
prevent a sponsor from structuring a transaction so that the holder of 
the eligible horizontal residual interest could receive 
disproportionate payments with respect to its interest. In the revised 
proposal, sponsors were required to make a one-time cash flow 
projection based on fair value and certify to investors that its cash 
payment recovery percentages were not projected to be larger than the 
recovery percentages for all other ABS interests on any future payment 
date. The agencies also invited comment on an alternative proposal 
relating to the amount of principal payments received by the eligible 
horizontal residual interest. Under that alternative, the cumulative 
amount paid to an eligible horizontal residual interest on any payment 
date would not have been permitted to exceed a proportionate share of 
the cumulative amount paid to all ABS interests in the transaction.
    The revised proposal also included asset class-specific options for 
risk retention with some modifications from the original proposal to 
better reflect existing market practices and operations. For example, 
with respect to revolving pool securitizations, the agencies removed a 
restriction from the original proposal that prohibited the use of the 
seller's interest risk retention option for master trust 
securitizations collateralized by non-revolving assets. With respect to 
ABCP conduits, the agencies made a number of modifications intended to 
allow the ABCP option to accommodate certain market practices discussed 
in the comments and to permit more flexibility on behalf of the 
originator-sellers and their majority-owned affiliates that finance 
through ABCP conduits. Similarly, the agencies modified the risk 
retention option designed for commercial mortgage-backed securities 
(CMBS) to allow for up to two third-party purchasers to retain the 
required risk retention interest, each taking a pari passu interest in 
an eligible horizontal residual interest.
    Also responding to commenters' concerns, the revised proposal did 
not include the premium capture cash reserve account mechanism and 
``representative sample'' option included in the original proposal. 
With respect to the premium capture cash reserve account mechanism, the 
agencies considered that using fair value to measure the standard risk 
retention amount would meaningfully mitigate the ability of a sponsor 
to evade the risk retention requirement through the use of improper 
deal structures intended to be addressed by the premium capture cash 
reserve account. With respect to the representative sample option in 
the original proposal, the agencies considered the comments received 
and eliminated the option in the revised proposal on the basis that 
such an option would be difficult to implement in a way that would not 
result in costs that outweighed its benefits.
    The agencies retained, to a significant degree, standards for the 
expiration of the hedging and transfer restrictions in the regulation. 
The agencies decided in the reproposal to limit the sponsor's ability 
to have all or a portion of the required retention held by its 
affiliates to only a sponsor's majority-owned affiliates rather than 
all consolidated affiliates as would have been allowed in the original 
proposal. The agencies have included this approach in the final rule 
because it ensures that any loss suffered by the holder of risk 
retention will be suffered by either the sponsor or an entity in which 
the sponsor has a substantial economic interest. The agencies also 
largely carried over the terms of the original proposal with respect to 
securitizations collateralized by qualifying commercial, commercial 
real estate, or automobile loans, although modifications were proposed 
to reflect commenter observations and concerns, such as permitting 
junior liens to collateralize qualifying commercial loans, increasing 
the amortization period on commercial real estate loans to 30 years for 
multifamily residential qualified commercial real estate (QCRE) loans 
and 25 years for other QCRE loans, and amending the amortization 
standards for qualifying automobile loans.
    The agencies also invited comment on new exemptions from risk 
retention for certain resecuritizations, seasoned loans, and certain 
types of securitization transactions with low credit risk. In addition, 
the agencies proposed a new risk retention option for CLOs, similar to 
the allocation to originator concept proposed for sponsors generally.
    The agencies proposed to broaden and simplify the scope of the 
definition of a QRM in the revised proposal to align the definition 
with the definition of a QM under section 129C of the TILA \31\ and its 
implementing regulations, as adopted by the CFPB.\32\ As discussed in 
the revised proposal, the agencies concluded that a QRM definition that 
was aligned with the QM definition would meet the statutory goals and 
directive of section 15G of the Exchange Act to limit credit risk and 
preserve access to affordable credit, while at the same time 
facilitating compliance.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 1639c.
    \32\ See 78 FR 6407 (January 30, 2013), as amended by 78 FR 
35429 (June 12, 2013) and 78 FR 44686 (July 24, 2013).
---------------------------------------------------------------------------

    Along with this proposed approach to defining QRM, the agencies 
also invited comment on an alternative approach that would require that 
the borrower meet certain credit history criteria and that the loan be 
for a principal dwelling, meet certain lien requirements, and have a 
certain loan to value ratio.
    The revised proposal included a provision excluding certain foreign 
sponsors of ABS interests from the risk retention requirements of 
section 15G of the Exchange Act, which did not differ materially from 
the corresponding provision in the original proposal.
    In response to the revised proposal, the agencies received comments 
from more than 250 persons, institutions, or groups, including nearly 
150 unique comment letters. The agencies received comments and 
observations on many aspects of the reproposed rule. Numerous 
commenters supported most aspects of the rule, but many suggested or 
asked for further modifications. As discussed in further detail below, 
a significant number of commenters commented on the agencies' use of 
fair value to measure risk retention. Commenters' key concerns included 
the timing of any fair value measurement and potential alternative 
methodologies to measuring risk retention. Many commenters also 
expressed concern about the proposed disclosure requirements for fair 
value, and some asked for a ``safe harbor'' from liability with respect 
to the disclosures.
    As with the original proposal, a number of commenters on the 
revised proposal asserted that managers of open market CLOs are not 
``securitizers'' within the definition in section 15G of the Exchange 
Act and should not be required to retain risk. In addition, commenters 
asked for an exemption from risk retention for CLOs that would meet 
certain structural criteria and for a new option to allow third-party 
investors in CLOs to hold risk retention instead of CLO managers. 
Commenters also generally opposed the agencies' proposed alternative 
for risk retention for open market CLOs in which a lead arranger in a 
syndicated loan was allowed to satisfy the risk retention requirement, 
asserting that this option was inconsistent with current market 
practice and that lead arranger banks would be hesitant to retain risk 
as proposed in the revised proposal without being allowed to hedge or 
transfer that risk because they would be

[[Page 77607]]

concerned about criticism from bank regulators.
    The agencies' proposed definition of a QRM was also the subject of 
significant commentary. Overall, commenters supported the agencies' 
proposal to align the QRM definition with the QM definition. Several 
commenters asked that the QRM definition accommodate the use of blended 
pools of QRM and non-QRM loans. Other commenters sought more specific 
expansions of the definition, including an exemption for loans 
originated by community development financial institutions and other 
community-focused lenders that are exempt from the ability-to-repay 
requirements (and, as a result, do not qualify to be QMs under TILA), 
imposition of a less than 5 percent risk retention requirement for some 
loans that did not qualify for QM, and the inclusion of non-U.S. 
originated loans. Several commenters expressed concern with both the 
alignment of the QRM definition with the QM definition as well as the 
alternative, more restrictive, definition of QRM for which the agencies 
had invited comment, suggesting that the agencies use the definition of 
QRM in the original proposal.
    Commenters expressed concerns on certain other aspects of the rule. 
Numerous commenters opposed the cash flow restrictions on the eligible 
horizontal residual interest option, making various assertions on 
impracticalities and impacts on different asset classes that could 
result from the restrictions. Commenters also expressed concerns about 
the scope of the seller's interest option for revolving pool 
securitization arrangements and whether it would comport with current 
market practices. With respect to CMBS, some commenters were concerned 
that the third-party purchaser options were too expansive, while other 
commenters asked for further reductions in the restrictions on B-piece 
risk retention. Commenters also asked for a number of modifications to 
the proposed underwriting standards for qualifying commercial, 
commercial real estate, and automobile loans, including an exemption 
for CMBS transactions where all the securitized assets are extensions 
of credit to one borrower or its affiliates.

C. Overview of the Final Rule

    After considering all comments received in light of the purpose of 
the statute and concerns from investors and individuals seeking credit, 
and after engaging in additional analysis of the securitization and 
lending markets, the agencies have adopted the revised proposal with 
some modifications, as discussed below. The agencies are adopting the 
final QRM definition, as proposed, to mean a QM, as defined in section 
129C of TILA \33\ and its implementing regulations, as amended from 
time to time.\34\ The agencies continue to believe that a QRM 
definition that aligns with the definition of a QM meets the statutory 
goals and directive of section 15G of the Exchange Act to protect 
investors and enhance financial stability, in part by limiting credit 
risk, while also preserving access to affordable credit and 
facilitating compliance. As discussed in further detail below, the 
agencies will review the definition of QRM periodically--beginning not 
later than four years after the effective date of the rule with respect 
to securitizations of residential mortgages, and every five years 
thereafter. These timeframes are designed to coordinate the agencies' 
review of the QRM definition with the timing of the CFPB's statutorily 
mandated assessment of QM, as well as to better ensure that the QRM 
definition continues to meet the goals and directive of section 15G. 
The final rule also provides that any of the agencies may request a 
review of the definition of QRM at any time as circumstances warrant.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 1639c.
    \34\ See Final QM rule.
---------------------------------------------------------------------------

    In addition, the agencies are adopting the minimum risk retention 
requirement and risk retention options, with some modifications to 
address specific commenter concerns. As discussed in more detail below, 
and consistent with the revised proposal, the final rule applies a 
minimum 5 percent base risk retention requirement to all securitization 
transactions that are within the scope of section 15G of the Exchange 
Act and prohibits the sponsor from hedging or otherwise transferring 
its retained interest prior to the applicable sunset date. The final 
rule also allows a sponsor to satisfy its risk retention obligation by 
retaining an eligible vertical interest, an eligible horizontal 
residual interest, or any combination thereof as long as the amount of 
the eligible vertical interest and the amount of the eligible 
horizontal residual interest combined is no less than 5 percent. The 
amount of the eligible vertical interest is equal to the percentage of 
each class of ABS interests issued in the securitization transaction 
held by the sponsor as eligible vertical risk retention. The amount of 
eligible horizontal residual interest is equal to the fair value of the 
eligible horizontal residual interest divided by the fair value of all 
ABS interests issued in the securitization transaction. After 
considering the numerous comments received, the agencies have concluded 
that the proposed cash flow restriction on the eligible horizontal 
residual interest (as well as the alternative described in the 
reproposal) could lead to unintended consequences or have a disparate 
impact on some asset classes. The agencies have therefore decided not 
to include such restrictions under the final rule.
    With respect to the proposed disclosure requirements related to the 
fair value calculation of eligible horizontal residual interests, the 
agencies continue to believe that it is important to the functioning of 
the final rule to ensure that investors and the markets, as well as 
regulators, are provided with key information about the methodologies 
and assumptions that are used by sponsors under the final rule to 
calculate the amount of their eligible horizontal residual interests in 
accordance with fair value standards. Because the agencies believe that 
disclosures of the assumptions inherent in fair value calculations are 
necessary to enable investors to make informed investment decisions, 
the agencies are generally retaining the proposed fair value disclosure 
requirements, with some modifications in response to commenter concern, 
as further discussed below.
    Furthermore, as discussed in more detail below, the agencies are 
adopting the revised proposal's provisions for CMBS third-party 
purchasers with some modifications to respond to specific commenter 
concerns. In addition, the agencies are retaining the proposed five-
year period during which transfer among qualified third-party 
purchasers of CMBS eligible horizontal residual interests that are 
retained in satisfaction of the final rule will not be permitted. The 
agencies are also adopting the proposed underwriting standards for 
commercial, commercial real estate, and automobile loans, with some 
minor adjustments to the commercial real estate underwriting standards 
as described below. The agencies are also adopting the revised 
proposal's treatment of allocation to originators, tender option bonds, 
and ABCP conduits, with some limited modifications, as described below. 
With respect to revolving pool securitizations--described in the 
reproposal as revolving master trusts--the agencies are adopting the 
reproposal with several refinements designed to expand availability of 
the seller's interest option. The final rule also contains the various 
proposed

[[Page 77608]]

exemptions for government-related transactions and certain 
resecuritizations from the revised proposal.
    The agencies also, as proposed, are applying risk retention to CLO 
managers as ``securitizers'' of CLO transactions under section 15G of 
the Exchange Act and, as discussed in further detail below, are not 
adopting structural exemptions or third-party options as suggested by 
some commenters. After carefully considering comments, the suggested 
exemptions and alternatives, the purposes of section 15G of the 
Exchange Act, and the features and dynamics of CLOs and the leveraged 
loan market, the agencies have concluded that risk retention is 
appropriately applied to CLO managers and a structural exemption or 
third-party option would likely undermine the consistent application of 
the final rule. Furthermore, the agencies are retaining in the final 
rule the proposed alternative for open market CLOs whereby, for each 
loan purchased by the CLO, risk may be retained by a lead arranger. The 
agencies appreciate that this option may not reflect current practice, 
but have concluded that the option may provide a sound method for 
meaningful risk retention for the CLO market in the future.

D. Post-Adoption Interpretation and Guidance

    The preambles to the original and revised proposals described the 
agencies' intention to jointly approve certain types of written 
interpretations concerning the scope of section 15G and the final rule 
issued thereunder. Several commenters on the original proposal, and 
some commenters on the reproposal, expressed concern about the 
agencies' process for issuing written interpretations jointly and the 
possible uncertainty about the interpretation of the rule that may 
arise due to this process.
    The agencies have endeavored to provide specificity and clarity in 
the final rule to avoid conflicting interpretations or uncertainty. In 
the future, if the agencies determine that further guidance would be 
beneficial for market participants, the agencies may jointly publish 
interpretive guidance, as the Federal banking agencies have done in the 
past. In addition, the agencies note that market participants can, as 
always, seek guidance concerning the rule from their primary Federal 
banking regulator or, if such market participant is not a depository 
institution, the Commission. In light of the joint nature of the 
agencies' rule writing authority, the agencies continue to view the 
consistent application of the final rule as a benefit and intend to 
consult with each other when adopting staff interpretations or guidance 
on the final rule that would be shared with the public generally in 
order to attempt to achieve full consensus on such interpretations and 
guidance.\35\ In order to facilitate this goal, the Federal banking 
agencies and the Commission intend to coordinate as needed to discuss 
pending requests for such interpretations and guidance, with the 
participation of HUD and FHFA when such agencies are among the 
appropriate agencies for such matters.
---------------------------------------------------------------------------

    \35\ These items do not include interpretation and guidance in 
staff comment letters and other staff guidance directed to specific 
institutions that is not intended to be relied upon by the public 
generally. Nor do they include interpretations and guidance 
contained in administrative or judicial enforcement proceedings by 
the agencies, or in an agency report of examination or inspection or 
similar confidential supervisory correspondence.
---------------------------------------------------------------------------

II. General Definitions and Scope

    The original proposal defined several terms applicable to the 
overall rule. The original proposal provided that the proposed risk 
retention requirements would have applied to sponsors in 
securitizations that involve the issuance of ``asset-backed 
securities'' and defined the terms ``asset-backed security'' and 
``asset'' consistent with the definitions of those terms in the 
Exchange Act. The original proposal noted that section 15G does not 
appear to distinguish between transactions that are registered with the 
Commission under the Securities Act of 1933 (the Securities Act) and 
those that are exempt from registration under the Securities Act. It 
further noted that the proposed definition of asset-backed security, 
which would have been broader than that in the Commission's Regulation 
AB,\36\ included securities that are typically sold in transactions 
that are exempt from registration under the Securities Act, such as 
collateralized debt obligations (CDOs) and securities issued or 
guaranteed by an Enterprise. As a result, pursuant to the definitions 
in the original proposal, the proposed risk retention requirements 
would have applied to securitizers of offerings of asset-backed 
securities regardless of whether the offering was registered with the 
Commission under the Securities Act.
---------------------------------------------------------------------------

    \36\ See 17 CFR 229.1100 through 17 CFR 229.1123.
---------------------------------------------------------------------------

    Under the original proposal, risk retention requirements would have 
applied to the securitizer in each ``securitization transaction,'' 
defined as a transaction involving the offer and sale of ABS interests 
by an issuing entity. The original proposal also explained that the 
term ``ABS interest'' would refer to all types of interests or 
obligations issued by an issuing entity, whether or not in certificated 
form, including a security, obligation, beneficial interest, or 
residual interest, but would not include interests, such as common or 
preferred stock, in an issuing entity that are issued primarily to 
evidence ownership of the issuing entity, and the payments, if any, 
which are not primarily dependent on the cash flows of the collateral 
held by the issuing entity.
    Section 15G stipulates that its risk retention requirements be 
applied to a ``securitizer'' of an asset-backed security and, in turn, 
that a securitizer is either an issuer of an asset-backed security or a 
person who organizes and initiates a securitization transaction by 
selling or transferring assets, either directly or indirectly, 
including through an affiliate or issuer. The original proposal 
discussed the fact that the second prong of this definition is 
substantially identical to the definition of a ``sponsor'' of a 
securitization transaction in the Commission's Regulation AB \37\ and 
defined the term ``sponsor'' in a manner consistent with the definition 
of that term in the Commission's Regulation AB.
---------------------------------------------------------------------------

    \37\ See Item 1101 of the Commission's Regulation AB (17 CFR 
229.1101) (defining a sponsor as ``a person who organizes and 
initiates an asset-backed securities transaction by selling or 
transferring assets, either directly or indirectly, including 
through an affiliate, to the issuing entity.'').
---------------------------------------------------------------------------

    As noted in the original proposal, the agencies believe that 
applying the risk retention requirement to the sponsor of the ABS 
interests--as provided by section 15G--is appropriate in light of the 
active and direct role that a sponsor typically has in arranging a 
securitization transaction and selecting the assets to be securitized. 
This role best situates the sponsor to monitor and control the credit 
quality of the securitized assets. In some cases, the transfer of 
assets by the sponsor will take place through a wholly-owned subsidiary 
of the sponsor that is often referred to as the ``depositor.'' As noted 
above, the definition of ``securitizer'' in section 15G(a)(3)(A) 
includes the ``issuer of an asset-backed security.'' The term 
``issuer'' when used in the federal securities laws may have different 
meanings depending on the context in which it is used. For example, for 
several purposes under the federal securities laws, including the 
Securities Act \38\ and the Exchange

[[Page 77609]]

Act \39\ (of which section 15G is a part) and the rules promulgated 
under these Acts,\40\ the term ``issuer'' when used with respect to a 
securitization transaction is defined to mean the entity--the 
depositor--that deposits the assets that collateralize the asset-backed 
securities with the issuing entity. As stated in the original proposal, 
the agencies interpret the reference in section 15G(a)(3)(A) to an 
``issuer of an asset-backed security'' as referring to the 
``depositor'' of the securitization transaction, consistent with how 
that term has been defined and used under the federal securities laws 
in connection with asset-backed securities.\41\
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    \38\ Section 2(a)(4) of Securities Act (15 U.S.C. 77b(a)(4)) 
defines the term ``issuer'' in part to include every person who 
issues or proposes to issue any security, except that with respect 
to certificates of deposit, voting-trust certificates, or collateral 
trust certificates, or with respect to certificates of interest or 
shares in an unincorporated investment trust not having a board of 
directors (or persons performing similar functions), the term issuer 
means the person or persons performing the acts and assuming the 
duties of depositor or manager pursuant to the provisions of the 
trust or other agreement or instrument under which the securities 
are issued.
    \39\ See Exchange Act sec. 3(a)(8) (15 U.S.C. 78c(a)(8) 
(defining ``issuer'' under the Exchange Act).
    \40\ See, e.g., Securities Act Rule 191 (17 CFR 230.191) and 
Exchange Act Rule 3b-19 (17 CFR 240.3b-19).
    \41\ For asset-backed securities transactions where there is not 
an intermediate transfer of the assets from the sponsor to the 
issuing entity, the term depositor refers to the sponsor. For asset-
backed securities transactions where the person transferring or 
selling the pool assets is itself a trust (such as in an issuance 
trust structure), the depositor of the issuing entity is the 
depositor of that trust. See section 2 of the final rule. Securities 
Act Rule 191 and Exchange Act Rule 3b-19 also note that the person 
acting as the depositor in its capacity as depositor to the issuing 
entity is a different ``issuer'' from that person in respect of its 
own securities in order to make clear--for example--that any 
applicable exemptions from Securities Act registration that person 
may have with respect to its own securities are not applicable to 
the asset-backed securities. That distinction does not appear 
relevant here because the risk retention rule would not be 
applicable to an issuance by such person of securities that are not 
asset-backed securities.
---------------------------------------------------------------------------

    As noted above, the rule generally applies the risk retention 
requirements of section 15G to a sponsor of the securitization 
transaction. In many cases the depositor and the sponsor are the same 
legal entity; however, even in cases where the depositor and the 
sponsor are not the same legal entity, the depositor is a pass-through 
vehicle for the transfer of assets and is either controlled or funded 
by the sponsor. Therefore, under the rule, the definition of sponsor 
effectively includes the depositor of the securitization transaction, 
and should identify the party subject to the risk retention 
requirements for every securitization transaction. Therefore, in the 
agencies' view, applying the risk retention requirement to the sponsor, 
as defined in the rule, substantively aligns with the definition of 
``securitizer'' in section 15G of the Exchange Act.
    Other than issues concerning CLOs, which are discussed in Part 
III.B.7; issues concerning ABCP, which are discussed in Part III.B.4; 
and issues concerning sponsors of municipal bond repackagings, which 
are discussed in Part III.B.8 of this Supplementary Information, 
comments with regard to the definition of securitizer or sponsor were 
generally limited to requests that the final rule provide that certain 
specified persons--such as underwriting sales agents--be expressly 
excluded from the definition of securitizer or sponsor for the purposes 
of the risk retention requirements.
    In response to comments received relating to various transaction 
parties requesting that the agencies either designate as sponsors, or 
clarify would meet the requirements of the definition of sponsor, the 
agencies are providing some guidance with respect to the definition of 
sponsor. The statute and the rule define a securitizer as a person who 
``organizes and initiates an asset-backed securities transaction by 
selling or transferring assets, either directly or indirectly, 
including through an affiliate, to the issuer.'' \42\ The agencies 
believe that the organization and initiation criteria in both 
definitions are critical to determining whether a person is a 
securitizer or sponsor. The agencies are of the view that, in order to 
qualify as a party that organizes and initiates a securitization 
transaction and, thus, as a securitizer or sponsor, the party must have 
actively participated in the organization and initiation activities 
that would be expected to impact the quality of the securitized assets 
underlying the asset-backed securitization transaction, typically 
through underwriting and/or asset selection. The agencies believe this 
interpretation of the statutory language ``organize and initiate'' is 
reasonable because it further accomplishes the statutory goals of risk 
retention--alignment of the incentives of the sponsor of the 
securitization transaction with the investors and improvement in the 
underwriting and selection of the securitized assets. Without this 
active participation, the holder of retention could be merely a 
speculative investor, with no ability to influence underwriting or 
asset selection. In addition, the interests of a speculative investor 
may not be aligned with those of other investors. For example, another 
asset-backed security issuer would not meet the ``organization and 
initiation'' criteria in the definition of ``sponsor'' as such an 
entity could not be the party that actively makes decisions regarding 
asset selection or underwriting. Additionally, the agencies believe 
that a party who does not engage in this type of active participation 
would be a third-party holder of risk retention, which (with the narrow 
exception of a qualified third-party purchaser in a CMBS transaction) 
is not an acceptable holder of retention under the rule because the 
participation of such a party does not result in the more direct 
alignment of incentives achieved by requiring the party with 
underwriting or asset selection authority to retain risk. Thus, for 
example, an entity that serves only as a pass-through conduit for 
assets that are transferred into a securitization vehicle, or that only 
purchases assets at the direction of an independent asset or investment 
manager, only pre-approves the purchase of assets before selection, or 
only approves the purchase of assets after such purchase has been made 
would not qualify as a ``sponsor''. If such a person retained risk, it 
would be an impermissible third-party holder of risk retention for 
purposes of the rule, because such activities, in and of themselves, do 
not rise to the level of ``organization and initiation''. In addition, 
negotiation of underwriting criteria or asset selection criteria or 
merely acting as a ``rubber stamp'' for decisions made by other 
transaction parties does not sufficiently distinguish passive 
investment from the level of active participation expected of a sponsor 
or securitizer.
---------------------------------------------------------------------------

    \42\ See 15 U.S.C. 78o-11(a)(3)(B) and section 2 of the final 
rule, infra.
---------------------------------------------------------------------------

    The original proposal would have defined the term ``originator'' in 
the same manner as section 15G, namely, as a person who, through the 
extension of credit or otherwise, creates a financial asset that 
collateralizes an asset-backed security, and sells the asset directly 
or indirectly to a securitizer (i.e., a sponsor or depositor). The 
original proposal went on to note that because this definition refers 
to the person that ``creates'' a loan or other receivable, only the 
original creditor under a loan or receivable--and not a subsequent 
purchaser or transferee--would have been an originator of the loan or 
receivable for purposes of section 15G. The revised proposal kept the 
definition from the original proposal.
    The original proposal referred to the assets underlying a 
securitization transaction as the ``securitized assets,'' meaning 
assets that are transferred to a special purpose vehicle (SPV) that 
issues the ABS interests and that stand as collateral for those ABS 
interests. ``Collateral'' was defined as the property that provides the 
cash flow for payment

[[Page 77610]]

of the ABS interests issued by the issuing entity. Taken together, 
these definitions were meant to include the loans, leases, or similar 
assets that the depositor places into the issuing entity at the 
inception of the transaction, though it would have also included other 
assets such as pre-funded cash reserve accounts. Commenters to the 
original proposal stated that, in addition to this property, the 
issuing entity may hold other assets. For example, the issuing entity 
may acquire interest rate derivatives to convert floating rate interest 
income to fixed rate, or the issuing entity may accrete cash or other 
liquid assets in reserve funds that accumulate cash generated by the 
securitized assets. As another example, commenters stated that an ABCP 
conduit may hold a liquidity guarantee from a bank on some or all of 
its securitized assets. The agencies retained these definitions of 
securitized assets and collateral in the revised proposal.
    Some commenters expressed concern with respect to the scope of the 
terms of the definitions of asset-backed securities, securitization 
transactions, and ABS interests in the original proposal and suggested 
specific exemptions or exclusions from their application. Similarly, a 
number of commenters requested clarification of the scope of the 
definition of ``ABS interest,'' or suggested narrowing the definition, 
while other commenters suggested an expansion of the scope of the 
``securitization transaction'' definition. Comments with regard to 
definitions of securitizer and sponsor in the original proposal were 
generally limited to requests that specified persons be expressly 
excluded from, or included in, the definition of securitizer or sponsor 
for the purposes of the risk retention requirements. The agencies 
determined to leave the definitions of securitizer and sponsor 
substantially unchanged in the revised proposal. After consideration of 
all the comments on the original proposal, the agencies did not believe 
that significant changes to most definitions applicable throughout the 
proposed rule were necessary and, in the revised proposal, retained 
most definitions as originally proposed.
    The agencies did add some substantive definitions to the revised 
proposal, including proposing a definition of ``servicing assets,'' 
which would be any rights or other assets designed to assure the 
servicing, timely payment, or timely distribution of proceeds to 
security holders, or assets related or incidental to purchasing or 
otherwise acquiring and holding the issuing entity's securitized 
assets. The agencies noted in the revised proposal that such assets may 
include cash and cash equivalents, contract rights, derivative 
agreements of the issuing entity used to hedge interest rate and 
foreign currency risks, or the collateral underlying the securitized 
assets. As provided in the reproposed rule, ``servicing assets'' also 
include proceeds of assets collateralizing the securitization 
transactions, whether in the form of voluntary payments from obligors 
on the assets or otherwise (such as liquidation proceeds). The agencies 
are adopting this definition substantially as reproposed in order to 
ensure that the provisions appropriately accommodate the need, in 
administering a securitization transaction on an ongoing basis, to hold 
various assets other than the loans or similar assets that are 
transferred into the asset pool by the securitization depositor. In 
this way, the definition is similar to the definition of ``eligible 
assets'' in Rule 3a-7 under the Investment Company Act of 1940, which 
specifies conditions under which the issuer of non-redeemable fixed-
income securities collateralized by self-liquidating financial assets 
will not be deemed to be an investment company.
    In light of the agencies' adoption of the QRM definition from the 
reproposal and the exemption for certain three-to-four unit residential 
mortgages (as discussed in section VII below), the agencies are 
modifying the proposed definition of ``residential mortgage'' to 
clarify that all loans secured by 1-4 unit residential properties will 
be ``residential mortgages'' for the purposes of the final rule and 
subject to the rule's provisions regarding residential mortgages (such 
as the sunset on hedging and transfer restrictions specific to 
residential mortgages) if they do not qualify for an exemption. Under 
the final rule, a residential mortgage would mean a residential 
mortgage that is a ``covered transaction'' as defined in the CFPB's 
Regulation Z; \43\ any transaction that is specifically exempt from the 
definition of ``covered transaction'' under the CFPB's Regulation Z; 
\44\ and, as a modification to the proposed definition, any other loan 
secured by a residential structure that contains one to four units, 
whether or not that structure is attached to real property, including 
condominiums, and if used as residences, mobile homes and trailers.\45\ 
Therefore, the term ``residential mortgage'' would include home equity 
lines of credit, reverse mortgages, mortgages secured by interests in 
timeshare plans, temporary loans, and certain community-focused 
residential mortgages further discussed in Part VII of this 
Supplementary Information. It would also include mortgages secured by 
1-4 unit residential properties even if the credit is deemed for 
business purposes under Regulation Z.
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    \43\ See 12 CFR 1026.43.
    \44\ See 12 CFR 1026.43.
    \45\ This addition to the definition is substantially similar to 
the CFPB's definition of ``dwelling'' in Regulation Z. See 12 CFR 
1026.2(19).
---------------------------------------------------------------------------

    Many comments on the revised proposal were similar to, or repeated, 
the comments on the original proposal. Some commenters asked that 
specific definitions be added to the rule, such as eligible 
participation interest, owner's interest, and participant's interest. 
With respect to the definitions of securitizer and sponsor, several 
commenters on the revised proposal requested that the final rule 
expressly exempt, or include, certain categories or groups of persons--
such as underwriting sales agents, multiple sponsors of transactions, 
affiliated entities, or, in the case of tender-option bonds and ABCP, 
brokers who acquire and securitize assets at the direction of a third 
party. Other commenters requested confirmation that certain categories 
of transactions would not qualify as a sale or transfer of an interest 
for purposes of the rule.
    Three commenters requested that the agencies reconsider their 
decision to treat non-economic residual interests in real estate 
investment conduits (REMICS) as ABS interests, noting the potential 
negative tax consequences for sponsors of REMICS. Another commenter 
requested that lower-tier REMIC interests in tiered structures be 
exempted from treatment as ABS interests, and a separate commenter 
requested an express exclusion of REMIC residual interests entirely. 
One commenter again asserted that the definition of ``securitization 
transaction'' was overly broad because it would include a variety of 
corporate debt repackagings, which the commenter asserted should be 
expressly exempt from risk retention. One commenter requested 
clarification that issuers of securities collateralized by qualifying 
assets could hold hedging agreements, insurance policies, and other 
forms of credit enhancement as permitted by the Commission's Regulation 
AB. One commenter asked that the definition of commercial real estate 
be revised to include land loans, including loans made to owners of fee 
interests in land leased to third parties who own improvements on the 
land.
    While the final rule generally retains the definitions in the 
revised proposal, to address the concerns raised by

[[Page 77611]]

commenters with respect to REMICs,\46\ the agencies have modified the 
definition of ABS interest to exclude (i) a non-economic residual 
interest issued by a REMIC and (ii) an uncertificated regular interest 
in a REMIC that is held only by another REMIC, where both REMICs are 
part of the same structure and a single REMIC issues ABS interests to 
investors. The agencies do not believe that significant changes to the 
general definitions are necessary or appropriate in light of the 
purposes of the statute. All adjustments to the general definitions are 
discussed below in this Supplementary Information in the context of 
relevant risk retention options.
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    \46\ Some commenters expressed concern that including REMICs in 
the ABS interest definition would create tax liabilities unrelated 
to the credit risk of the underlying collateral and would likely 
reduce the intended impact of the risk retention rules since non-
economic residual interests usually have a negative value.
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III. General Risk Retention Requirement

A. Minimum Risk Retention Requirement

    Section 15G of the Exchange Act generally requires that the 
agencies jointly prescribe regulations that require a securitizer to 
retain not less than 5 percent of the credit risk for any asset that 
the securitizer, through the issuance of ABS interests, transfers, 
sells, or conveys to a third party, unless an exemption from the risk 
retention requirements for the securities or transaction is otherwise 
available (e.g., if the ABS interests are collateralized exclusively by 
QRMs). Consistent with the statute, the reproposal generally would have 
required that a sponsor retain an economic interest equal to at least 5 
percent of the aggregate credit risk of the assets collateralizing an 
issuance of ABS interests (the base risk retention requirement). For 
securitizations where two or more entities would each meet the 
definition of sponsor, the reproposal would have required that one of 
the sponsors retain the credit risk of the securitized assets in 
accordance with the requirements of the rule. Under the reproposal, the 
base risk retention requirement would have been available as an option 
to sponsors of all securitization transactions within the scope of the 
rule, regardless of whether the sponsor was an insured depository 
institution, a bank holding company or subsidiary thereof, a registered 
broker-dealer, or another type of entity.
    Some comments addressed the proposed minimum risk retention 
requirement. One commenter expressed support for the proposed minimum 
requirement of 5 percent risk retention, asserting that such a 
requirement would promote higher quality lending, protect investor 
interests, and limit the originate-to-distribute business model. Other 
commenters requested a higher minimum risk retention requirement 
depending on asset quality. One commenter asserted that 5 percent 
should be the minimum and that the purpose of risk retention would be 
defeated by applying 5 percent to situations in which assets are sold 
at a discount from par. That commenter proposed that the requirement 
should be either (i) the greater of 5 percent or the expected losses on 
the assets or (ii) the greater of 5 percent or the conditional expected 
losses on the assets or asset class under a moderate economic stress 
environment. Another commenter stated that some sponsors hold less than 
5 percent because of the high quality of some assets, and requiring 5 
percent retention could potentially double costs in some instances. 
Another commenter asserted that retaining 5 percent may not be 
sufficient as many sponsors held more than 5 percent credit risk in 
their securitizations before the crisis. That same commenter stated 
that investors were likely to insist that originators retain some 
credit risk. One commenter proposed a minimum risk retention 
requirement of 20 percent, while another commenter requested that 
sponsors be required to hold 100 percent risk retention for a specified 
period of time. For securitizations where multiple entities each meet 
the definition of sponsor, one commenter stated that multiple sponsors 
should be permitted to allocate the required amount of risk retention 
among themselves, so long as the aggregate amount retained satisfies 
the requirements of the risk retention rules. Other commenters 
requested a lower minimum for pools that blend assets that would be 
exempt from risk retention by meeting the proposed underwriting 
standards with assets not meeting the standards, which is discussed in 
further detail in Part V of this Supplementary Information.
    After careful consideration of the comments received, the agencies 
are adopting the minimum risk retention requirement as proposed. 
Consistent with the reproposal and the general requirement in section 
15G of the Exchange Act, the final rule applies a minimum 5 percent 
base risk retention requirement to all securitization transactions 
within the scope of section 15G, unless an exemption under the final 
rule applies.\47\ The agencies believe that this requirement will 
provide sponsors with an incentive to monitor and control the 
underwriting of securitized assets and help align the interests of the 
sponsor with those of investors in the ABS interests. The agencies note 
that, while Congress directed that the rule include a risk retention 
requirement of no less than 5 percent of the credit risk for any asset, 
parties to a securitization transaction may agree that more risk will 
be retained. While some commenters asked that the rule calibrate the 
credit risk on an asset class basis (i.e., make a determination that 
the credit risk associated with certain asset classes is lower than for 
other asset classes), the agencies are declining to do that at this 
time because the data provided by commenters do not provide a 
sufficient basis for the calibration of credit risk on an asset class 
basis.\48\ For securitizations where two or more entities would each 
meet the definition of sponsor, the final rule requires that one of the 
sponsors complies with the rule, consistent with the original and 
revised proposals. The final rule does not prohibit multiple sponsors 
from retaining credit risk as long as one of those sponsors complies 
with the requirements of the final rule. The agencies are not allowing 
sponsors to divide the required risk retention generally because 
allowing multiple sponsors to divide required risk retention among 
themselves would dilute the economic risk being retained and, as a 
result, reduce the intended alignment of interest between the sponsor 
and the investors.
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    \47\ See final rule at sections 3 through 10. Similar to the 
proposal, the final rule, in some instances, permits a sponsor to 
allow another person to retain the required amount of credit risk 
(e.g., originators, third-party purchasers in CMBS transactions, and 
originator-sellers in ABCP conduit securitizations). However, in 
such circumstances, the final rule includes limitations and 
conditions designed to ensure that the purposes of section 15G 
continue to be fulfilled. Further, even when another person is 
permitted to retain risk, the sponsor still remains responsible 
under the rule for compliance with the risk retention requirements, 
as discussed below.
    \48\ As required by section 15G, the agencies have established 
automobile, commercial real estate, and commercial loan asset 
classes and related underwriting standards designed to ensure a low 
credit risk for assets originated to those standards. The agencies 
provided for zero risk retention for loans meeting the prescribed 
underwriting standards.
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    The agencies do not believe that it is necessary or appropriate to 
attempt to vary the amount of risk retention based on the quality of 
the assets or other factors and believe that attempting to do so would 
unnecessarily complicate compliance with the rule. As discussed below, 
the agencies are adopting the requirement that an eligible horizontal

[[Page 77612]]

residual interest be measured at fair value using a fair value 
methodology acceptable under U.S. generally accepted accounting 
principles (GAAP). The agencies believe that generally requiring that 
retention be 5 percent of the fair value of the ABS interests issued in 
the securitization transaction will sufficiently calibrate the actual 
amount of retention to the value of the assets, including how that 
value may be affected by expected losses. In addition, subject to 
limited exceptions, such as that applicable to transfers of CMBS 
interests among qualified third-party purchasers after five years, 
transfers to majority-owned affiliates, and certain permitted hedging 
activities, the final rule prohibits the sponsor from hedging or 
otherwise transferring its retained interest prior to the applicable 
sunset date, as discussed in Part IV.F of this Supplementary 
Information.
    The agencies note that the base risk retention requirement is a 
regulatory minimum and not a limit on what investors or other market 
participants may require. The sponsor, originator, or other party to a 
securitization may retain additional exposure to the credit risk of 
assets that the sponsor, originator, or other party helps securitize 
beyond that required by the rule, either on its own initiative or in 
response to the demands or requirements of private market participants.

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

    Section 15G of the Exchange Act expressly provides the agencies the 
authority to determine the permissible forms through which the required 
amount of risk retention must be held.\49\ Accordingly, the reproposal, 
like the original proposal, would have provided sponsors with multiple 
options to satisfy the risk retention requirements of section 15G. The 
flexibility provided in the reproposal's menu of options for complying 
with the risk retention requirement was designed to take into account 
the heterogeneity of securitization markets and practices and to reduce 
the potential for the proposed rules to negatively affect the 
availability and costs of credit to consumers and businesses. As 
proposed, the menu of options approach was designed to be consistent 
with the various ways in which a sponsor or other entity, in historical 
market practices, may have retained exposure to the credit risk of 
securitized assets.\50\ Historically, whether or how a sponsor retained 
exposure to the credit risk of the assets it securitized was determined 
by a variety of factors including the rating requirements of the 
NRSROs, investor preferences or demands, accounting and regulatory 
capital considerations, and whether there was a market for the type of 
interest that might ordinarily be retained (at least initially by the 
sponsor).
---------------------------------------------------------------------------

    \49\ See 15 U.S.C. 78o-11(c)(1)(C)(i); see also S. Rep. No. 111-
176, at 130 (2010) (``The Committee [on Banking, Housing, and Urban 
Affairs] believes that implementation of risk retention obligations 
should recognize the differences in securitization practices for 
various asset classes.'').
    \50\ See Board Report; see also Macroeconomic Effects of Risk 
Retention Requirements, Chairman of the Financial Stability 
Oversight Counsel (January 2011), available at http://www.treasury.gov/initiatives/wsr/Documents/Section946RiskRetentionStudy(FINAL).pdf.
---------------------------------------------------------------------------

    Commenters generally supported the menu-based approach of providing 
sponsors with the flexibility to choose from a number of permissible 
forms of risk retention. While commenters were generally supportive of 
a menu-based approach, several commenters requested that the final rule 
provide additional options and increased flexibility for sponsors to 
comply with the risk retention requirement. In this regard, several 
commenters asserted that the final rule should permit third-party 
credit support as additional forms of risk retention, including 
insurance policies, guarantees, liquidity facilities, and standby 
letters of credit. One commenter stated that such unfunded forms of 
credit support are permitted by the European risk retention framework 
and allowing similar options would provide greater consistency between 
the U.S. and European rules. This commenter further contended that the 
final rule, at a minimum, should permit such forms of unfunded risk 
retention for a subset of sponsors, such as regulated banks. A few 
commenters requested that overcollateralization be permitted as an 
alternative method of risk retention. Further, the agencies received 
several comments requesting that the final rule include an option 
allowing retention to be held in the form of interests in the 
securitized assets themselves. Along these lines, several commenters 
sought additional flexibility under the rule to hold risk retention as 
loan participation interests or companion notes instead of an ABS 
interest. One commenter stated that, while the use of participations in 
securitization transactions may not currently be customary, sponsors 
may find such a structure advantageous in connection with the risk 
retention requirements. A few commenters said that pari passu 
participation interests and structures using pari passu companion notes 
have been used in certain types of CMBS transactions. Other commenters 
requested that the final rule allow for subordinated participation 
interests. These commenters said pari passu participations should 
qualify as vertical risk retention and subordinate participation 
interests should qualify as horizontal risk retention. The main reason 
cited by these commenters for expanding the forms of risk retention 
recognized under the rule to include this form of retention, other than 
future flexibility as to form, was the possibility that the sponsor 
could hold the same economic exposure it would have as an ABS interest 
form of risk retention, while at the same time incurring lower 
regulatory capital charges for that exposure by holding it as a loan, 
and avoiding consolidation of the structure onto its balance sheet. 
Another commenter suggested that the availability of a participation 
option may be important for commercial banks because of their existing 
infrastructure to share risk on a pari passu basis.
    One commenter stated that the final rule should provide more 
flexibility by allowing sponsors to satisfy their risk retention 
requirement through a combination of means and that the rule should not 
mandate forms of risk retention for specific types of asset classes or 
specific types of transactions.
    The agencies have carefully considered the comments and are 
adopting the proposed menu of options approach to risk retention 
largely as proposed. The agencies continue to believe that providing 
options for risk retention is appropriate in order to accommodate the 
variety of securitization structures that will be subject to the final 
rule and that the menu of options, as proposed, provides sufficient 
flexibility for sponsors to satisfy their risk retention obligations.
    After carefully considering the comments requesting loan interests, 
such as loan participations, as an option, the agencies have decided 
not to expand the recognized legal forms of risk retention under the 
rule beyond ABS interests by including pari passu participation 
interests, subordinated participation interests, pari passu companion 
notes, or subordinated companion notes. The agencies are permitting 
specialized forms of participations for two particular asset classes as 
discussed below in connection with CLO securitizations and tender 
option bonds, subject to several requirements under the rule. However, 
the agencies believe that the rule already provides sufficient 
flexibility as to the economic forms of risk retention and an 
additional form of

[[Page 77613]]

risk retention is not necessary. The agencies are concerned that 
offering different legal forms, such as participation interests or 
companion loans, as a standard option would introduce substantial 
complexity to the rule in order to ensure that these forms of retention 
were implemented in a way that ensured that the holder had the same 
economic exposure as the holder of an ABS interest. In addition, given 
the commenters' reasons for requesting that these options be made 
available, the agencies are concerned that permitting these types of 
interests to be held as retention could raise concerns about regulatory 
capital arbitrage.
    The agencies do not believe it would be appropriate to allow 
sponsors to satisfy risk retention obligations through third-party 
credit support, such as insurance policies, guarantees, liquidity 
facilities, or standby letters of credit. As discussed in the 
reproposal, such forms of credit support generally are not funded at 
closing and therefore may not be available to absorb losses at the time 
they occur. Except in the case of the guarantees from the Enterprises 
under the conditions specified, which include the Enterprises' 
operating in conservatorship or receivership with capital support from 
the United States, the agencies continue to believe that unfunded forms 
of risk retention fail to provide sufficient alignment of incentives 
between sponsors and investors and are not including them as eligible 
forms of risk retention.
    The final rule does not permit overcollateralization as a standard 
method of risk retention. While overcollateralization may provide 
credit enhancement to a securitization, the agencies do not believe 
that a credit risk retention option based solely on a comparison of the 
face value \51\ of the securitized assets and the face value of the ABS 
interests would provide meaningful risk retention consistent with the 
goals and intent of section 15G because the face value of both the 
securitized assets and the face value of the ABS interests can 
materially differ from their relative value and/or cost to the 
sponsor.\52\ Moreover, the fair value of an eligible horizontal 
residual interest takes into consideration the overcollateralization 
and excess spread in a securitization transaction as adjusted by 
expected loss and other factors. Further, for the reasons discussed in 
Part III.B.3 of this Supplementary Information, the final rule does not 
include a representative sample option.
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    \51\ The agencies are using the term ``face value'' to mean the 
outstanding principal balance of a loan or other receivable or an 
ABS interest and, with respect to an asset that does not have a 
stated principal balance, it means an equivalent value measurement, 
such as securitization value.
    \52\ The agencies have adopted a risk retention option for 
revolving pool securitizations that relies heavily on a comparison 
of the face value of the securitized assets and the face value of 
the ABS interests. However, reliance on the seller's interest option 
is limited to revolving pool securitizations that include certain 
structural features and alignment of incentives to address many of 
the concerns the agencies had with respect to the reliance on face 
value to measure required credit risk retention. See Part III.B.2 of 
this Supplementary Information.
---------------------------------------------------------------------------

    As in the reproposal, the permitted forms of risk retention in the 
final rule are subject to terms and conditions that are intended to 
help ensure that the sponsor (or other eligible entity) retains an 
economic exposure equivalent to 5 percent of the credit risk of the 
securitized assets at a minimum. As described below, the final rule 
includes several modifications to the various forms of risk retention, 
as well as the terms and conditions that were proposed, to help ensure 
that sponsors have a meaningful stake in the overall performance and 
repayment of the assets that they securitize. Each of the forms of risk 
retention permitted by the final rule and the measures intended to 
ensure that sponsors retain meaningful credit risk are described below.
1. Standard Risk Retention
a. Structure of Standard Risk Retention Option
    Under the revised proposal, standard risk retention could have been 
used by a sponsor for any securitization transaction.\53\ Standard risk 
retention could have taken the form of: (i) Vertical risk retention; 
(ii) horizontal risk retention; and (iii) any combination of vertical 
and horizontal risk retention.\54\ Under the reproposal, a sponsor 
would have been permitted to satisfy its risk retention obligation by 
retaining an eligible vertical interest, an eligible horizontal 
residual interest, or any combination thereof, in a total amount equal 
to no less than 5 percent of the fair value of all ABS interests in the 
issuing entity that are issued as part of the securitization 
transaction.
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    \53\ As discussed above, in the original proposal, a sponsor 
using standard risk retention would have had to choose between a 5 
percent horizontal interest, 5 percent vertical interest, or a 
combination of horizontal and vertical interests that was 
approximately half horizontal and half vertical. The agencies 
reproposed standard risk retention with a more flexible structure in 
response to concerns raised by commenters on the original proposal. 
See Revised Proposal, 78 FR at 57937.
    \54\ See Revised Proposal, 78 FR at 57937.
---------------------------------------------------------------------------

    Through the vertical option, the reproposal would have allowed a 
sponsor to satisfy its risk retention obligation with respect to a 
securitization transaction by retaining at least 5 percent of the fair 
value of each class of ABS interests issued as part of the 
securitization transaction. This would provide the sponsor with an 
interest in the entire securitization transaction. As an alternative, 
the reproposal would have allowed a sponsor to satisfy its risk 
retention requirement under the vertical option by retaining a single 
vertical security. As discussed in the reproposal, a single vertical 
security would be an ABS interest entitling the holder to a specified 
percentage (e.g., 5 percent) of the principal and interest paid on each 
class of ABS interests in the issuing entity (other than such single 
vertical security) that result in the security representing the same 
percentage of fair value of each class of ABS interests.
    Under the reproposal, a sponsor also would have been permitted to 
satisfy its risk retention obligation by retaining an eligible 
horizontal residual interest in the issuing entity in an amount equal 
to no less than 5 percent of the fair value of all ABS interests in the 
issuing entity that are issued as part of the securitization 
transaction. In lieu of holding all or part of its risk retention in 
the form of an eligible horizontal residual interest, the reproposal 
would have allowed a sponsor to cause to be established and funded, in 
cash, a reserve account at closing (eligible horizontal cash reserve 
account) in an amount equal to the same dollar amount (or corresponding 
amount in the foreign currency in which the ABS interests are issued, 
as applicable) as would be required if the sponsor held an eligible 
horizontal residual interest.\55\
---------------------------------------------------------------------------

    \55\ See Revised Proposal, 78 FR 57939.
---------------------------------------------------------------------------

    As reproposed, an interest would have qualified as an eligible 
horizontal residual interest only if it was an interest in a single 
class or multiple classes in the issuing entity with respect to which, 
on any payment date on which the issuing entity would have insufficient 
funds to satisfy its obligation to pay all contractual interest or 
principal due, any resulting shortfall would reduce amounts paid to the 
eligible horizontal residual interest prior to any reduction in the 
amounts paid to any other ABS interest until the amount of such ABS 
interest is reduced to zero. The eligible horizontal residual interest 
would have been required to have the most subordinated claim to 
payments of both principal and interest by the issuing entity.
    Many commenters generally supported the reproposal to allow a 
sponsor to meet its risk retention

[[Page 77614]]

obligation by retaining an eligible vertical residual interest, an 
eligible horizontal residual interest, or any combination of such 
interests. Such commenters generally approved of the flexibility that 
the reproposal would provide to sponsors in structuring their risk 
retention. Further, one commenter expressed support for the single 
vertical security option, asserting that it would simplify compliance 
and monitoring obligations of the sponsor. One commenter, however, 
expressed concern that the definition of single vertical security could 
be read as though the security could have different percentage 
interests in each class and requested that the definition be amended to 
clarify that the specified percentages must result in the fair value of 
each interest in each such class being identical.
    The agencies received several comments regarding the proposed 
method by which a sponsor may satisfy its risk retention requirement by 
holding an eligible horizontal residual interest. One commenter sought 
clarification as to whether advance rates and overcollateralization, 
equipment residual values, reserve accounts and third-party credit 
enhancement would constitute eligible horizontal residual interests. 
Another commenter sought clarification as to whether the eligible 
horizontal residual interest would be required to have the most 
subordinated claim to principal collections.\56\ Further, one commenter 
expressed concern that the eligible horizontal residual interest option 
would create a conflict of interest between the sponsor and the holders 
of the other classes of securities, to the extent that the servicer 
would have control over decisions that could optimize the value of the 
interest at the expense of other tranches.
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    \56\ In response to a similar comment, the agencies confirm that 
a structure under which the interest is at the bottom of the 
priority of payments provisions, or last in line for payment, would 
satisfy this requirement whether or not the interest is ``legally'' 
subordinated.
---------------------------------------------------------------------------

    Regarding the horizontal cash reserve account, one commenter 
requested that the final rule permit a broader range of investments to 
align with market practice regarding standard investments used for 
funds held in collection, reserve and spread accounts. Another 
commenter requested that the final rule permit funds from eligible 
horizontal cash reserve accounts to be used to pay critical expenses, 
so long as such expense payments are made for specified priorities and 
are disclosed to investors. The commenter further proposed that no 
disclosure or calculations should be required for such payments that 
are senior to amounts owed to holders of third-party ABS interests or 
that are made to transaction parties unaffiliated with the securitizer.
    The agencies invited comment on whether the rule should require a 
minimum proportion of risk retention held by a sponsor under the 
standard risk retention option to be composed of a vertical component 
or a horizontal component. Further, the agencies invited comment on 
whether a sponsor should be required to hold a higher percentage of 
risk retention if the sponsor retains only an eligible vertical 
interest or very little horizontal interest. The agencies did not 
receive any comments in favor of these options. One commenter expressed 
opposition to any requirement for a minimum vertical or horizontal 
component, claiming that such a requirement would increase compliance 
costs and increase the risk that sponsors would, as a result of 
accounting standards, have to consolidate securitization entities into 
their financial statements. In addition, two commenters expressed 
opposition to any higher risk retention requirement for sponsors 
retaining only a vertical interest.
    Several commenters expressed opinions on the effect that the 
proposed standard risk retention option would have on decisions by 
sponsors regarding whether they are obligated by accounting standards 
to consolidate a securitization vehicle into their financial 
statements. Two commenters asserted that, because of the flexibility of 
the proposed standard risk retention option, in and of itself, the 
option would not cause a sponsor to have to consolidate its 
securitization vehicles. One of these commenters observed that case-by-
case analyses would be required and that the likelihood of 
consolidation would increase as a sponsor retains a greater portion of 
its required interest as a horizontal interest. Another commenter 
asserted that, if potential investors require the sponsor to hold a 
horizontal rather than a vertical interest, or a combination, the 
consolidation risk will increase. This same commenter stated that 
forthcoming updated guidance from the Financial Accounting Standards 
Board may modify the way sponsors analyze their consolidation 
requirements. One commenter asserted that consolidation concerns may 
cause broker-dealers to limit their secondary market support, with 
respect to certain affiliate transactions, for the duration of the risk 
retention period and that such decisions may have an effect on 
secondary market liquidity. As a way of reducing consolidation risk, 
one commenter stated that securitization agreements should be required 
to give securitization trusts the right to claim 5 percent of losses 
from securitizers as they occur. Such losses, the commenter asserted, 
should be held as contingent liabilities on securitizers' balance 
sheets, against which reserves would need to be held.
    The agencies have carefully considered comments on the reproposed 
structure of the standard risk retention option and, for the reasons 
discussed below and in the reproposal, have decided to adopt the 
approach as set forth in the revised proposal with some modifications. 
However, in the final rule the agencies are adopting several changes to 
the manner in which risk retention must be measured and are eliminating 
the restrictions on cash flow to the eligible horizontal residual 
interest. These changes are discussed in Part III.B.1 of this 
Supplementary Information.
    Consistent with the reproposal, the final rule allows a sponsor to 
satisfy its risk retention obligation by retaining an eligible vertical 
interest, an eligible horizontal residual interest, or any combination 
thereof, as long as the percentage of the eligible vertical interest 
claimed as retention under the rule, when added to the percentage of 
the fair value of the eligible horizontal residual interest claimed as 
retention for purposes of the rule equals no less than five. The final 
rule does not mandate a minimum or specific percentage of horizontal or 
vertical interest that sponsors must hold when they choose to satisfy 
their risk retention obligation by holding a combination of vertical 
and horizontal interests, nor does the final rule require sponsors to 
hold a higher percentage of risk retention if the sponsor retains only 
an eligible vertical interest. The agencies added language to the final 
rule clarifying that the requisite percentage of eligible vertical 
interest, eligible horizontal residual interest, or combination thereof 
retained by the sponsor must be determined as of the closing date of 
the securitization transaction.\57\
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    \57\ For example, a sponsor electing to hold risk retention in 
the form of a combined horizontal and vertical interest could 
determine the minimum amount required to be retained pursuant to the 
rule by determining the percentage of fair value represented by the 
sponsor's eligible horizontal residual interest, and then 
supplementing that amount with a vertical interest of a sufficient 
percentage so that the sum of the two percentage numbers equals 
five. To illustrate: If a sponsor holds an eligible horizontal 
residual interest with a fair value of 3.25 percent of the fair 
value of all the ABS interests in the issuing entity, the sponsor 
must also hold (at a minimum) a vertical interest equal to 1.75 
percent of each class of ABS interests in the issuing entity. 
Alternatively, the sponsor may retain a single vertical security 
representing 1.75 percent of the cash flows paid on each class of 
ABS interests in the issuing entity (other than the single vertical 
security itself). The rule does not prohibit the sponsor from 
retaining additional amounts of horizontal interests, vertical 
interests, or both.

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[[Page 77615]]

    The final rule allows a sponsor to satisfy its risk retention 
obligation under the vertical option by retaining a portion of each 
class of the ABS interests issued in the transaction or a single 
vertical security which represents an interest in each class of the ABS 
interests issued in the securitization. The rule specifies the minimum 
retention to be held by a sponsor. As such, the fact that provisions 
such as the definition of eligible vertical interest and single 
vertical security require the sponsor to hold the same proportion of or 
interest in each class of ABS interests does not preclude the sponsor 
from holding different proportions of or in each class. However, it 
does preclude the sponsor from claiming risk retention credit under the 
rule for any proportional interest in a class that is not the same 
across all classes. For example, a sponsor which holds a vertical 
interest of 5 percent of the most junior class and 3 percent of all 
other classes issued by the entity can only claim credit for a 3 
percent vertical interest.
    A sponsor choosing to satisfy its retention obligation solely 
through the retention of an interest in each class of ABS interest 
issued will be required to retain at least 5 percent of each class of 
ABS interests issued as part of the securitization transaction. A 
sponsor using this approach will be required to retain at least 5 
percent of each class of ABS interests issued in the securitization 
transaction regardless of the nature of the class of ABS interests 
(e.g., senior or subordinated) and regardless of whether the class of 
interests has a face or par value, was issued in certificated form, or 
was sold to unaffiliated investors. For example, if four classes of ABS 
interests are issued by an issuing entity as part of a securitization--
a senior-rated class, a subordinated class, an interest-only class, and 
a residual interest--a sponsor using this approach with respect to the 
transaction will have to retain at least 5 percent of each such class 
or interest. If a class of interests has no face value, the sponsor 
will have to hold an interest in 5 percent of the cash flows paid on 
that class.
    If a sponsor opts to satisfy its risk retention requirement solely 
by retaining a single vertical security, that ABS interest must entitle 
the holder to 5 percent of the cash flows paid on each class of ABS 
interests in the issuing entity (other than such single vertical 
security). This will provide sponsors an option that is simpler than 
carrying multiple securities representing a percentage share of every 
series, tranche, and class issued by the issuing entity, each of which 
might need to be valued by the sponsor on its financial statements 
every financial reporting period. The single vertical security option 
will provide the sponsor with the same principal and interest payments 
(and losses) as a 5 percent ownership of each series, class, or tranche 
of the securitization, in the form of one security to be held on the 
sponsor's books.
    Also consistent with the revised proposal, the final rule allows a 
sponsor to satisfy its risk retention obligation exclusively through 
the horizontal option by retaining a first loss eligible horizontal 
residual interest in the issuing entity in an amount equal to no less 
than 5 percent of the fair value of all ABS interests in the issuing 
entity that are issued as part of the securitization transaction. The 
eligible horizontal residual interest may consist of either a single 
class or multiple classes in the issuing entity, provided that each 
interest qualifies, individually or in the aggregate, as an eligible 
horizontal residual interest.\58\ In the case of multiple classes, this 
requirement will mean that the classes must be in consecutive order 
based on subordination level. For example, if there are three levels of 
subordinated classes and the two most subordinated classes have a 
combined fair value equal to 5 percent of all ABS interests, the 
sponsor will be required to retain these two most subordinated classes 
if it is going to satisfy its risk retention obligation by holding only 
eligible horizontal residual interests.
---------------------------------------------------------------------------

    \58\ See section 2 of the final rule (definition of ``eligible 
horizontal residual interest'').
---------------------------------------------------------------------------

    In lieu of holding all or part of its risk retention in the form of 
an eligible horizontal residual interest, the final rule will allow a 
sponsor to cause to be established and funded, in cash, an eligible 
horizontal cash reserve account, at closing, in an amount equal to the 
same dollar amount (or corresponding amount in the foreign currency in 
which the ABS interests are issued, as applicable) as would be required 
if the sponsor held an eligible horizontal residual interest. As 
described in the reproposal, the eligible horizontal cash reserve 
account will have to be held by a trustee (or person performing 
functions similar to a trustee) for the benefit of the issuing entity. 
Consistent with the reproposal, the final rule includes several 
important restrictions and limitations on the eligible horizontal cash 
reserve account to ensure that a sponsor that establishes an eligible 
horizontal cash reserve account will be exposed to the same amount and 
type of credit risk on the securitized assets as would be the case if 
the sponsor held an eligible horizontal residual interest. The 
intention of these restrictions is to ensure amounts in the account 
would be available to absorb losses to the same extent as an eligible 
horizontal residual interest. Therefore, investments of funds in the 
account and uses of the account are limited. The agencies are not 
following commenters' suggestion to broaden the range of permissible 
investments of funds in the horizontal cash reserve account because 
that could undermine the capacity of the account to absorb losses as 
they occur to the same extent as an eligible horizontal residual 
interest. Any use of funds other than loss coverage could result in 
fewer funds to absorb losses later. The types of permissible 
investments likewise are restricted to cash and cash equivalents in 
order to ensure that the account will not incur investment losses and 
reduce the capacity of the account to absorb losses of the 
securitization transaction. The agencies view ``cash equivalents'' to 
mean high-quality, highly-liquid short-term investments the maturity of 
which corresponds to the securitization's expected maturity or 
potential need for funds and that are denominated in a currency that 
corresponds to either the securitized assets or the ABS interests. 
Depending on the specific funding needs of a particular securitization, 
``cash equivalents'' might include deposits insured by the FDIC, 
certificates of deposit issued by a regulated U.S. financial 
institution, obligations backed by the full faith and credit of the 
United States, investments in registered money market funds, and 
commercial paper. For securitization transactions whose securitized 
assets or ABS interests are denominated in a foreign currency, cash 
equivalents would include cash equivalents denominated in the foreign 
currency. The agencies believe that the permitted investment options 
provide sufficient flexibility to sponsors that choose to create an 
eligible horizontal cash reserve account, while ensuring that such 
sponsors will be exposed to the same amount and type of credit risk as 
would be the case if the sponsor held an eligible horizontal residual 
interest.
    In response to commenter concerns, the agencies believe that it 
would not violate the requirements of the eligible horizontal cash 
reserve account if as a result of a shortfall in the available cash

[[Page 77616]]

flow, critical expenses of the trust unrelated to credit risk, such as 
litigation expenses or trustee or servicer expenses, are paid from an 
eligible horizontal cash reserve account, so long as such payments, in 
the absence of available funds in the eligible horizontal cash reserve 
account, would be paid prior to any payments to holders of ABS 
interests and such payments are made to parties that are not affiliated 
with the sponsor.
    The agencies believe the standard risk retention option, as 
adopted, provides sponsors with flexibility in choosing how to 
structure their retention of credit risk in a manner that is compatible 
with current practices in the securitization markets. For example, in 
securitization transactions where the sponsor would typically retain 
less than 5 percent of an eligible horizontal residual interest, the 
standard risk retention option will permit the sponsor to hold the 
balance of the risk retention as a vertical interest. Each sponsor will 
have to separately analyze whether the particular option the sponsor 
selects under the rule requires the sponsor to consolidate the assets 
and liabilities of a securitization vehicle onto its own balance sheet 
for accounting purposes. The rule itself does not provide guidance on 
performing the consolidation analysis, either in support of 
deconsolidation or in requirement of consolidation.
b. Risk Retention Measurement and Disclosures
    As explained in the revised proposal, to provide greater clarity 
for the measurement of risk retention and to help prevent sponsors from 
structuring around their risk retention requirement by negating or 
reducing the economic exposure they are required to maintain, the 
agencies proposed to require sponsors to measure their risk retention 
requirement using fair valuation methodologies acceptable under 
GAAP.\59\
---------------------------------------------------------------------------

    \59\ Cf. Financial Accounting Standards Board, Accounting 
Standards Codification Topic 820--Fair Value Measurement.
---------------------------------------------------------------------------

    Several commenters supported the proposed requirement that sponsors 
measure their risk retention requirement using fair value. These 
commenters expressed the view that the use of fair value would be a 
more prudent approach than using face value and would be consistent 
with market practice. Other commenters, however, expressed general 
concern with the proposed method by which sponsors would be required to 
measure their risk retention. One commenter asserted that using fair 
value instead of face value would require sponsors to hold higher risk 
retention levels and attract additional investor capital, leading to 
higher borrowing costs. Two commenters explained that many sponsors who 
consolidate their issuing entities or keep their securitizations on 
their balance sheets do not currently utilize fair value calculations, 
and that requiring such sponsors to measure their risk retention with 
fair value would create significant burden and expense.
    Commenters expressed several specific accounting concerns regarding 
the use of fair value to measure risk retention. Two commenters 
asserted that calculation of fair value under GAAP is not designed to 
provide a definitive value, but a range of values. In this regard, they 
expressed concerns about how the requirements could be met if a sponsor 
calculates multiple possible fair values. One commenter asserted that 
requiring sponsors to determine fair value in accordance with GAAP 
would be burdensome for securitization transactions where the sponsor 
(or other retaining entity) is established outside the United States, 
giving rise to additional work and costs. For such transactions, the 
commenter urged the agencies to allow sponsors to measure fair value 
using local (non-U.S.) GAAP or International Financial Reporting 
Standards (IFRS). One commenter asserted that GAAP does not prescribe 
use of a single valuation technique, but allows entities to use various 
techniques, including market, income and cost approaches. The commenter 
stated, however, that the reproposal implied that sponsors would be 
limited to specific valuation techniques and requested that the final 
rule clarify that sponsors are not so restricted. The commenter also 
asserted that the reproposal equated intrinsic value with fair value, 
which are distinct standards of value. In this regard, the commenter 
stated that reference to intrinsic value should either be excluded from 
the final rule or the agencies should clarify that intrinsic and fair 
value are two separate concepts.
    The agencies invited comment in the reproposal on whether 
accountants would be asked to perform agreed upon procedures reports 
related to measurement of the fair value of sponsors' retained ABS 
interests. One commenter responded that such requests would be unlikely 
and requested that the agencies not mandate agreed upon procedures in 
the final rule.
    One commenter stated that sponsors should be permitted to measure 
their risk retention requirement by using either fair value or 
securitization value (the value specified in the operative documents 
for the securitization transaction, subject to certain limitations) 
methodology. The commenter stated that securitization value is familiar 
to sponsors and investors, and permitting its use would accommodate a 
range of current industry practices. The commenter also stated that 
securitization value would be easier to compute than fair value.
    One commenter asserted that any required risk retention amount for 
ABCP conduits should be calculated by reference to the principal 
balance, and not the fair value, of the ABS interests and asserted that 
using fair value will be difficult, expensive and unnecessary, 
especially given the revolving nature of the asset pool. Commenters 
also requested clarification as to whether, when they are calculating 
the fair value with respect to revolving pool of assets, they can make 
static pool assumptions.
    Having considered the comments described above, the agencies are 
adopting a fair value framework substantially similar to the reproposal 
for calculating eligible horizontal residual interests in the final 
rule. As discussed in the reproposal, this measurement uses methods 
consistent with valuation methodologies familiar to market participants 
and provides a consistent framework for calculating residual risk 
retention across different securitization transactions. It also takes 
into account various economic factors that may affect the 
securitization transaction, which should aid investors in assessing the 
degree to which a sponsor is exposed to the risk of the securitized 
assets. As discussed below, in response to commenters the agencies are 
not adopting the proposed fair value measurement requirement for 
eligible vertical interests because such measurement is not necessary 
to ensure that the sponsor has retained 5 percent of the credit risk of 
the ABS interests issued.
    Consistent with the reproposal, the agencies are not modifying the 
final rule to allow for calculation of fair value using the fair value 
measurement framework under local GAAP or IFRS for securitization 
transactions where the sponsor is established outside the United 
States. The agencies believe that, as of the time the final rule is 
adopted, these alternative valuation frameworks and GAAP have common 
requirements for measuring fair value, which should minimize the burden 
to sponsors established outside the United States of measuring fair 
value using the GAAP framework. The agencies believe that

[[Page 77617]]

the benefits of being able to easily compare the fair value of risk 
retention in two separate issuances of ABS interests regardless of 
where the sponsors are established outweigh any minimal burden imposed 
by the requirement to use GAAP fair value.
    In response to commenters' concerns about the burden of repeatedly 
calculating fair value for a constantly changing pool of securitized 
assets, the agencies believe that no change to the reproposed rule is 
required. Under the final rule, only those securitization transactions 
in which the issuing entity issues ABS interests more than once need to 
calculate the fair value of the eligible horizontal residual interest 
multiple times. The final rule provides specific risk retention options 
for most sponsors of securitizations that issue multiple series of ABS 
interests, including revolving pool securitizations, tender option bond 
programs and ABCP conduits. The agencies also note that those 
securitization structures which issue ABS interests on a frequent 
basis, primarily ABCP conduits and tender option bond programs, 
typically issue short-term securities for which the fair value 
calculation should be less complex. The agencies are clarifying that, 
to the extent that a sponsor uses a valuation methodology that 
calculates fair value based on the pool of securitized assets as of a 
certain date, the sponsor of a securitization of a revolving or dynamic 
pool of securitized assets would be able to calculate the fair value of 
the ABS interests using data with respect to the securitized assets as 
of a cut-off date or similar date, as described below, which the 
agencies believe should alleviate some of the concerns expressed by 
commenters about the burden of repeatedly calculating the fair value of 
the ABS interests issued. The agencies believe that this approach 
appropriately balances commenters' concerns with the agencies' policy 
goals of providing appropriate transparency into a sponsor's 
calculation of the fair value of ABS interests under the final rule.
    Additionally, the agencies have concerns that the alternative 
suggested by commenters of calculating fair value no more than once per 
month would create unintended consequences. For instance, the 
calculation of fair value of ABS interests up to a month before the 
issuance of those ABS interests or up to a month after the issuance of 
those ABS interests could result in disclosure to investors based on 
unreliable assumptions about pricing and the expected volume of ABS 
interests to be issued and possibly the issuance of ABS interests in 
violation of the sponsor's risk retention requirements.
    Under the final rule, to the extent a sponsor uses a valuation 
methodology that calculates fair value based on the pool of securitized 
assets as of a certain date, a sponsor would be permitted to use a cut-
off date for establishing the composition and characteristics of the 
pool of securitized assets collateralizing the asset-backed securities 
(or similar date) that is not more than 60 days prior to the date of 
first use of the fair value calculation with investors, except in the 
case of a securitization transaction that makes distributions to 
investors on a quarterly or less frequent basis, in which case the 
sponsor may use a cut-off date or similar date not more than 135 days 
prior to the date of first use of the fair value calculation with 
investors.\60\ The final rule requires that disclosures to investors be 
based on information about the asset pool (such as the characteristics 
of and assumptions regarding the pool that will be used to determine 
fair value) as of the cut-off date or similar date specified by the 
sponsor. The actual balance of the securitized assets (and the 
calculation of fair value) may include anticipated additions to and 
removals of assets that the sponsor will make between the cut-off date 
or similar date and the closing date. For purposes of the fair value 
calculation, the ABS interests must include all ABS interests issued 
prior to, and expected to be issued in, the pending offering of ABS 
interests.\61\ The agencies believe this will accommodate the reporting 
described by commenters and the evaluation of pool assets suggested by 
commenters with respect to fair value calculations. The agencies 
recognize that not all securitization transactions update information 
about securitized assets on a monthly basis. The final rule permits 
sponsors to rely on information about the securitized assets based on a 
date not more than 135 days prior to the date of first use with 
investors for subsequent issuances of ABS interests by the same issuing 
entity with the same sponsor for which the securitization transaction 
distributes amounts to investors on a quarterly or less frequent 
basis.\62\
---------------------------------------------------------------------------

    \60\ The agencies expect that a sponsor will include disclosure 
about the cut-off date as an aspect of the fair valuation 
methodology it used.
    \61\ The sponsor may include adjustments to the balance of ABS 
interests that are expected to occur in the ordinary course of 
events, such as scheduled principal reductions and planned issuances 
expected to occur after the pending offering of ABS interests.
    \62\ The 135-day period provides sponsors with approximately 45 
days after the end of any quarter in which to provide the required 
information to investors if the issuing entity makes distributions 
to investors no more frequently than quarterly. This period 
parallels timeframes for prospectus and static pool information 
under Regulation AB. See Items 1104 and 1105 of Regulation AB.
---------------------------------------------------------------------------

    As discussed in the reproposal, fair value is a measurement 
framework that requires an extensive use of judgment for certain types 
of financial instruments, for which significant unobservable inputs are 
necessary to determine their fair value. To provide transparency to 
investors, regulators and others on how the sponsor calculates fair 
value in order to determine its eligible horizontal residual interest, 
and to ensure that this calculation adequately reflects the amount of a 
sponsor's economic ``skin in the game,'' the agencies proposed to 
require disclosure of the sponsor's fair value methodology and all 
significant inputs used to measure its eligible horizontal residual 
interest. Under the reproposal, sponsors that elected to utilize the 
horizontal risk retention option would have been required to disclose 
the reference data set or other historical information used to develop 
the key inputs and assumptions intended to meaningfully inform third 
parties of the reasonableness of the key cash flow assumptions 
underlying the measure of fair value. Such key assumptions could 
include default, prepayment, and recovery. As discussed in the 
reproposal, the agencies believed that these valuation inputs would 
help investors assess whether the fair value measure used by the 
sponsor to determine the amount of its risk retention is comparable to 
investors' expectations.
    Specifically, with respect to eligible horizontal residual 
interests, the reproposal would have required that sponsors provide (or 
cause to be provided) to potential investors a reasonable time prior to 
the sale of ABS interests in the issuing entity and, upon request, to 
the Commission and its appropriate Federal banking agency (if any) 
disclosure of:
     The fair value (expressed as a percentage of the fair 
value of all ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS interests are issued, as applicable)) of the eligible 
horizontal residual interest that would be retained (or was retained) 
by the sponsor at closing, and the fair value (expressed as a 
percentage of the fair value of all ABS interests issued in the 
securitization transaction and dollar amount (or corresponding amount 
in the foreign currency in which the ABS interests are issued, as 
applicable)) of

[[Page 77618]]

the eligible horizontal residual interest required to be retained by 
the sponsor in connection with the securitization transaction;
     A description of the material terms of the eligible 
horizontal residual interest to be retained by the sponsor;
     A description of the methodology used to calculate the 
fair value of all classes of ABS interests;
     The key inputs and assumptions used in measuring the total 
fair value of all classes of ABS interests and the fair value of the 
eligible horizontal residual interest retained by the sponsor 
(including the range of information considered in arriving at such key 
inputs and assumptions and an indication of the weight ascribed 
thereto) and the sponsor's technique(s) to derive the key inputs; and
     The historical data that would enable investors and other 
stakeholders to assess the reasonableness of the key cash flow 
assumptions underlying the fair value of the eligible horizontal 
residual interest. Examples of key cash flow assumptions may include 
default, prepayment, and recovery.
    The agencies received significant comment on the proposed 
disclosure requirements with respect to the eligible horizontal 
residual interest, particularly regarding the proposed timing of 
disclosures and fair value calculations. Commenters expressed a number 
of concerns regarding the pre-sale disclosure requirement. Several 
commenters stated that there is an inherent conflict between the 
proposed requirement that fair value disclosures be made a reasonable 
time prior to the sale of ABS interests and the requirement that fair 
value be determined as of the day on which the price of the ABS 
interests to be sold to third parties is determined. Further, several 
commenters asserted that the most objective and accurate way to 
calculate fair value is to base the valuation on an observable market 
price, but this option is unavailable to sponsors in advance of 
pricing. In order to comply with the pre-sale disclosure requirement, 
they contended that sponsors would be required to make material 
assumptions, based on less reliable secondary sources, regarding 
interest, default, recovery and prepayment rates, as well as timing of 
reinvestments for revolving pools. Doing so, they asserted, would often 
result in differences between the pre-sale and final fair value and 
would confuse investors.
    One commenter raised a concern about the proposed requirement that 
fair value be calculated as of the day on which the price of ABS 
interests sold to third-party investors is determined. The commenter, 
asserting that pricing for different classes in single-securitization 
transactions often occurs on different days, urged the agencies to 
clarify that the determination of fair value should be done for all 
classes of asset-backed securities at a single time after a specified 
percentage threshold of classes of asset-backed securities have priced.
    As a proposed solution to the timing concerns summarized above, two 
commenters recommended that the final rule should require fair value 
determinations to be made after pricing but before closing of the 
transaction. The commenters stated that this would allow sponsors to 
more accurately determine fair value based on pricing of the 
securitization transaction. The commenters further stated that sponsors 
could still be required to disclose the expected form of risk retention 
prior to sale, but they should only be required to determine the fair 
value of those interests shortly after pricing.
    In addition to timing concerns, many commenters expressed concerns 
about the proposed requirement that sponsors disclose the key inputs 
and assumptions used in measuring fair value and the sponsor's 
technique(s) used to derive the key inputs. Two commenters specifically 
stated that requiring such disclosures may mislead investors by making 
such inputs and assumptions seem authoritative. Further, several 
commenters asserted that the proposal would require sponsors to 
disclose information that is proprietary, highly confidential and 
commercially sensitive. Such information, they contended, could be used 
by third parties to the competitive disadvantage of the sponsor. One 
commenter raised specific concerns regarding the disclosure of 
reference data sets, noting that disclosure of such information could 
allow the reverse-engineering of proprietary models.
    While two commenters expressed support for the reproposal's 
requirements that sponsors disclose the various components that were 
used to make fair value determinations, many others requested 
significant modifications to the disclosure requirements. Several 
commenters asserted that the rule should only require a simple 
disclosure to the effect that risk retention has been measured as 
required by the final rule. Several commenters stated that sponsors 
should only be required to make disclosures to the Commission and 
banking agencies, rather than to investors. Two such commenters 
proposed that issuers should be required to retain the documentation 
about assumptions and methodology used in calculating their risk 
retention obligations for a specified period of time and make such 
information available for inspection by the Commission and banking 
agencies, if requested. Further, one commenter proposed that sponsors 
should only be required to provide the agencies with a post-
securitization fair value report within a reasonable time after the 
issue date.
    Significant concern was raised regarding potential liability and 
litigation that commenters stated may result when fair value 
projections, assumptions and calculations disclosed to investors turn 
out to be incorrect. A few commenters expressed the view that liability 
risk would be particularly high from incorrect loss projections. 
Several commenters asserted that litigation risks may undermine the 
horizontal option by convincing many sponsors to rely instead on the 
vertical option. Another commenter asserted such concerns may convince 
sponsors to hold risk retention closer to the 5 percent minimum than 
they otherwise would because it is easier to demonstrate that a 
projected 5 percent risk retention would be accomplished than it would 
be for a larger percentage. Several commenters urged the agencies to 
provide a safe harbor from liability for all fair value calculations, 
which would protect sponsors as long as the methodology and assumptions 
used to make such calculations are reasonable and made in good faith.
    Two commenters proposed that for simple structures, sponsors should 
not be required to make fair value determinations or related 
disclosures, nor should the cash flow restriction (as described below) 
apply. The commenters requested that such relief be provided to 
structures with the following characteristics: (1) The principal amount 
of the ABS interests sold to third parties is less than 95 percent of 
the principal amount of the securitized assets (and, in the case of 
pre-funded transactions, any cash held in a pre-funded account); (2) 
the weighted average interest rate (for leases, the implicit interest 
rate used to calculate the lease payments) on the securitized assets 
(or the discount rate in the case of a securitization value 
calculation) is not expected to be less than the time-weighted average 
interest rate on the ABS interests sold to third parties (for revolving 
and pre-funded transactions, this condition would be satisfied upon the 
completion of each addition of additional assets); (3) all of the ABS 
interests sold to third parties are traditional interest-bearing debt 
securities; and (4) the residual interest

[[Page 77619]]

retained by the sponsor or other holder of a retained interest 
otherwise meets the requirements of an eligible horizontal residual 
interest.
    The agencies have carefully considered the concerns of commenters 
with respect to the proposed disclosure requirements related to the 
fair value calculation of eligible horizontal residual interests. The 
agencies continue to believe that it is important to the functioning of 
the final rule to ensure that investors and the markets, as well as 
regulators, are provided with key information about the methodology and 
assumptions used by sponsors under the final rule to calculate the 
amount of their eligible horizontal residual interests using the fair 
value measurement framework under GAAP. As the agencies have previously 
observed, fair value is a measurement framework that for certain types 
of instruments requires an extensive use of judgment. In situations 
where significant unobservable inputs are used to determine fair value, 
disclosures of those assumptions are necessary to enable investors to 
effectively evaluate the fair value calculation. Therefore, the 
agencies are generally retaining the proposed fair value disclosure 
requirements with some modifications in response to commenter concerns, 
as further discussed below.
    The agencies have considered the concerns raised by commenters 
about the potential conflict between pre-sale disclosure and timing of 
the fair value measurement. The agencies believe that it is important 
that investors be provided with information that would allow them to 
better evaluate how sponsors will measure the fair value of the 
eligible horizontal residual interest to be retained and that such 
information be provided prior to the investor's investment decision. 
The final rule continues to require certain fair value disclosures to 
be provided to investors a reasonable period of time prior to the sale 
of an asset-backed security. Nonetheless, the agencies recognize that 
any valuation information given prior to sale may often be preliminary. 
Therefore, the agencies have revised the final rule to address these 
concerns. The final rule allows sponsors, for disclosures provided 
prior to sale, to disclose the sponsor's determination of a range of 
fair values for the eligible horizontal residual interest that the 
sponsor expects to retain at the close of the securitization 
transaction. Under the final rule, a sponsor may provide a range of 
fair values for the eligible horizontal residual interest only if the 
specific prices, sizes or rates of interest of each tranche of the 
securitization are not available. Additionally, this range of fair 
values must be based on a range of bona fide estimates or specified 
prices, sizes, or rates of interest of each tranche of the 
securitization. The agencies note that in practice this will allow the 
sponsor to provide fair value disclosures based on the pricing guidance 
traditionally provided to investors prior to sale.\63\ The sponsor must 
also disclose the method by which it determined any range of bona fide 
estimates or specified prices, tranche sizes or rates of interest.
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    \63\ The agencies expect that the range of bona fide estimates 
or specified prices, tranche sizes or rates of interest should be 
reasonably narrow, reflecting then current market conditions and the 
relationship between the sponsor's range of bona fide estimates or 
specified prices, tranche sizes or rates of interest and the 
historical data or other information used to derive the range of 
bona fide estimates or specified prices, tranche sizes or rates of 
interest. The agencies also expect that in most instances the range 
of assumed sale prices and tranche sizes will correspond closely to 
any pricing guidance provided to potential purchasers prior to sale.
---------------------------------------------------------------------------

    The final rule also requires the sponsor to provide to investors a 
reasonable time after the closing of the securitization transaction the 
actual fair value measurement of the ABS interests and the eligible 
horizontal residual interest that the sponsor is required to retain, 
expressed as a dollar amount and percentage. This post-closing 
disclosure must be based on actual sale prices and finalized tranche 
sizes and corresponding interest rates at the closing of the 
securitization transaction.
    The agencies continue to believe that the fair value of the 
eligible horizontal residual interest held by the sponsor as calculated 
post-closing must not be less than the amount required under the rule 
to be held by the sponsor. Although commenters expressed some concern 
about possible adjustments to the transaction occurring prior to 
closing that may impact the fair value of the eligible horizontal 
residual interest, the agencies expect that, if necessary, as part of 
the pricing process, the sponsor will make adjustments to tranche 
sizes, increase the percentage of vertical interest retained by the 
sponsor, or otherwise take actions to ensure that the actual fair value 
of the eligible horizontal residual interest held by the sponsor 
satisfies the sponsor's risk retention obligations.
    The sponsor also must disclose at that time any material 
differences between the inputs and assumptions that had been disclosed 
by the sponsor to potential investors prior to sale (as required by the 
final rule) and the actual methodology, inputs, and assumptions used by 
the sponsor to measure fair value for purposes of the final rule. The 
agencies believe that this bifurcated approach to the timing of 
disclosures, as well as clarification that the pre-closing disclosures 
are based on a sponsor's range of bona fide estimates or specified 
prices, tranche sizes or rates of interest with relation to the fair 
value measurement of the ABS interests, should effectively balance the 
benefits investors and others receive from the disclosures against the 
concerns of sponsors.
    The final rule generally retains the proposed requirement that the 
sponsor disclose a description of the methodology it uses to measure 
the fair value of the ABS interests and its eligible horizontal 
residual interest. For example, under the final rule sponsors are 
required to disclose the valuation methodology the sponsor used to 
determine fair value, such as discounted cash flow analysis, comparable 
market data, vendor pricing, or internal-model based analysis.
    As discussed above, a number of commenters expressed concern about 
heightened legal risk and other risks due to the proposed requirement 
to disclose quantitative information about key inputs and assumptions, 
and various commenters requested that the agencies not require these 
disclosures to be provided to investors. The agencies continue to 
believe that disclosure of descriptive information with respect to key 
inputs and assumptions used in fair value measurement is important for 
helping investors to assess whether the fair value measure used by the 
sponsor to determine its eligible horizontal residual interest is 
comparable to market expectations. However, in response to commenter 
concerns, the agencies are modifying these requirements to take into 
account the preliminary and estimated nature of pricing information 
that may need to be used to calculate fair value prior to the sale of 
an asset-backed security.
    The agencies believe that the disclosure required by the accounting 
standards that gives investors and others an understanding of how 
companies measure fair value is also pertinent to investors' and 
regulators' understanding how sponsors calculate the fair value of 
their eligible horizontal residual interests under the rule. Therefore, 
the final rule requires that the sponsor disclose, at a minimum, a 
description of all the inputs and assumptions it uses to calculate the 
fair value of the ABS interests and its eligible horizontal residual 
interest, including, as applicable and relevant to the calculation, 
disclosures on discount rates, loss given default (recovery rates), 
prepayment rates, default rates, the lag time between default and 
recovery, and

[[Page 77620]]

the basis of forward interest rates used. The agencies have not 
prescribed the exact format of the description of key inputs and 
assumptions that sponsors are required to provide under the final rule. 
The agencies expect that the format of the required description will be 
tailored to the key inputs and assumptions and the reference data sets 
or other historical information underlying those key inputs and 
assumptions being described. The agencies believe that the descriptions 
may be disclosed in quantitative or narrative form or in a graphical or 
tabular format, as appropriate.
    The sponsor is required to provide descriptions of all inputs and 
assumptions that either could have a material impact on the fair value 
calculation or would be material to a prospective investor's ability to 
evaluate the sponsor's fair value calculations. The required 
description of the material terms of the eligible horizontal residual 
interest to be retained by the sponsor should include a description of 
the rate of interest and other payment terms, including contractually 
pre-determined events that would reasonably be likely to result in a 
materially disproportionate payment of principal to the holder of the 
residual interest, as well as any reductions in overcollateralization. 
To the extent the required disclosure includes a description of a curve 
or curves in connection with the sponsor's fair value calculations, the 
sponsor must disclose a description of the methodology that was used to 
derive each curve and a description of any aspects or features of each 
curve that could materially impact the fair value calculation or the 
ability of a prospective investor to evaluate the sponsor's fair value 
calculation. The agencies expect that a description of the material 
aspects of a curve would include any aspects of the curve that could be 
reasonably expected to have a material impact on the timing and amounts 
of distributions expected to be paid to the holder of the eligible 
horizontal residual interest (or released from the eligible horizontal 
cash reserve account).
    For example, if the sponsor uses curves with respect to certain key 
inputs and assumptions in the fair value calculations, the agencies 
expect that the description of those key inputs and assumptions would 
not assume straight lines (e.g., zero-loss assumptions). As a further 
example, if the sponsor uses a prepayment curve to calculate the fair 
value of the ABS interests and its eligible horizontal residual 
interest for a residential mortgage securitization transaction, the 
disclosure might indicate that estimated annual prepayments are 
expected to range from X percent to Y percent, notably increasing after 
36 months of amortization and peaking after 84 months of amortization. 
Furthermore, to the extent the inputs and assumptions are observable 
and based on market prices or other public information, the sponsor 
should disclose those inputs and assumptions or their source in order 
to fulfill its requirement under the final rule.
    The post-closing fair value disclosure, which is required a 
reasonable time after the closing, obligates the sponsor to disclose 
any material differences between the range of bona fide estimates or 
specified prices, tranche sizes or rates of interests disclosed 
previously, as the case may be, and the actual prices, tranche sizes or 
rates of interest used by the sponsor in its calculation of the fair 
value under the rule for the ABS interests sold at closing. This 
permits sponsors to use the actual pricing of the ABS interests as the 
basis for their final disclosure requirement, which addresses certain 
of the concerns raised by commenters discussed above.
    The agencies believe that the revisions made to the rule 
appropriately balance the agencies' concerns that fair value disclosure 
requirements adequately allow an investor to analyze the amount of a 
sponsor's economic ``skin in the game'' with commenters' concerns about 
the level of detail required by the fair value disclosure requirements.
    The agencies observe that financial companies commonly provide 
company or portfolio-level disclosure in their financial statements 
about estimated ranges (and weighted averages) for certain inputs, such 
as interest rates and prepayment rates. Furthermore, sponsors of recent 
publicly-offered securitization transactions have disclosed modeling 
assumptions for prepayment rates based on the characteristics of 
securitized loans. The agencies believe that the disclosures required 
under the final rule are similar in nature, albeit more detailed, than 
these public disclosures already being made for financial reporting and 
similar purposes. The agencies understand that some types of inputs and 
assumptions have generally not been publicly disclosed, and that most 
sponsors have disclosed certain inputs at the balance sheet or 
portfolio level for different types of assets, with varying degrees of 
granularity that have generally not included disclosures for individual 
transactions. However, the agencies observe that some of the concerns 
that commenters have raised about potential liability for disclosure of 
inputs and assumptions at the transactional level could also be 
pertinent at the portfolio level if the inputs and assumptions were 
later proved incorrect. Furthermore, the agencies believe that the 
modifications to the disclosure requirement that permit the sponsor to 
disclose a range of fair values based on assumptions about pricing, 
appropriately balances commenters' concerns with the agencies' policy 
goals of providing appropriate transparency into a sponsor's 
calculation of the fair value of ABS interests and eligible horizontal 
residual interest under the final rule. In response to commenters' 
concerns about the proposed requirement to disclose the reference data 
set or other historical information used to develop the key inputs and 
assumptions used in the fair value measurement of the ABS interests, 
the agencies have modified significantly that requirement in the final 
rule. The agencies understand there may be significant legal concerns 
with disclosing this data, including the proprietary nature and value 
of the data and contractual restrictions with respect to disclosure 
when the data is provided by third parties. The agencies believe that 
investors may in many cases independently obtain representative data 
sets for evaluating the ABS interests offered for purposes of 
evaluating the sponsor's fair value measurement, including the 
disclosures on the sponsor's inputs and assumptions required by the 
final rule and described above.
    The final rule requires that the sponsor provide a summary 
description of the reference data set or other historical information 
used to develop the key inputs and assumptions used in the sponsor's 
calculation of the fair value of the ABS interests, including loss 
given default and default rates. This disclosure should meaningfully 
inform third parties of the reasonableness of the key cash flow 
assumptions underlying the sponsor's measurement of fair value. 
Relevant information may include the number of data points, the time 
period covered by the data set, the identity of the party that 
collected the data, the purpose for which the data was collected and, 
if the data is publicly available, how the data may be accessed. The 
agencies believe that this represents an appropriate balance between 
the information required for an investor to evaluate the sponsor's fair 
value disclosure and commenter's concerns about the disclosure of the 
reference data set or other historical information. In response to 
commenters' requests that the agencies provide a safe

[[Page 77621]]

harbor from liability for all fair value calculations, as long as the 
methodology and assumptions used to make such calculations are 
reasonable and made in good faith, the agencies do not believe a new 
safe harbor is necessary. The final rule does not alter any existing 
antifraud liability provisions of the Federal securities laws. 
Furthermore, sponsors may provide additional disclosure to take 
advantage of the existing safe harbor for forward-looking statements 
under section 27A of the Securities Act,\64\ if applicable, and the 
``bespeaks caution'' defense developed through case law.\65\
---------------------------------------------------------------------------

    \64\ See 15 U.S.C. 77z-2.
    \65\ See, e.g., Polin v. Conductron Corp., 552 F.2d 797, 806 
n.28 (8th Cir. 1977); Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir. 
1986); In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 364 (3d 
Cir. 1993); P. Stolz Family P'ship L.P. v. Daum, 355 F.3d 92, 96-97 
(2d Cir. 2004); and Iowa Pub. Emps.' Ret. Sys. v. MF Global Ltd., 
620 F.3d 137, 141-142 (2d Cir. 2010).
---------------------------------------------------------------------------

    To this end, the sponsor should consider carefully the disclosure 
requirements under the Federal securities laws. The sponsor should be 
cognizant of surrounding disclosure and should determine if the 
disclosure of such fair value methodology and related assumptions 
requires additional statements or information.\66\
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    \66\ See, e.g., Rule 408 under the Securities Act; Sections 11, 
12(a)(2) and 17(a) of the Securities Act; Section 10(b) of the 
Exchange Act; Rule 10b-5 under the Exchange Act; and Rule 12b-20 
under the Exchange Act.
---------------------------------------------------------------------------

    To the extent the assumptions made in connection with the 
methodology used to measure fair value are not entirely consistent with 
other disclosure regarding the securitization structure and the 
transaction parties, the sponsor may need to include additional 
statements or information that reduce the potential confusion among 
investors. Alternatively, to the extent allowed under the fair value 
measurement framework under GAAP, a sponsor could use a methodology and 
assumptions that are more consistent with the sponsor's other 
disclosures regarding the securitization structure and the transaction 
parties.
    The agencies did not provide an option for ``simple structures'' 
based on the face value of the securitized assets and the face value of 
the ABS interests. The agencies believe that the face value of both the 
securitized assets and the face value of the ABS interests do not 
necessarily reflect the actual value of the securitized assets or the 
ABS interests, respectively. For certain assets such as leases, the 
``face value'' of the underlying assets is a number calculated solely 
for purposes of the securitization transaction and the calculation 
involves many of the inputs and assumptions discussed above in relation 
to fair value. The face value of certain ABS interests such as the CMBS 
B-piece does not reflect the substantial discount to face value at 
which such ABS interests are often sold to investors. As the face value 
of both the securitized assets and the face value of the ABS interests 
can materially differ from their relative value and cost to the 
sponsor, the agencies do not believe that a credit risk retention 
option based solely on a comparison of the face value of the underlying 
assets and the face value of the ABS interests would provide meaningful 
risk retention consistent with the goals and intent of section 15G.\67\
---------------------------------------------------------------------------

    \67\ See supra note 52.
---------------------------------------------------------------------------

    In addition to the measurement and disclosure requirements 
applicable to eligible horizontal residual interests, the reproposal 
would have required sponsors holding their risk retention through 
eligible vertical interests to measure such interests using fair value 
and to comply with certain disclosure requirements. With respect to the 
vertical option, the reproposal would have required that sponsors 
provide (or cause to be provided) to potential investors a reasonable 
time prior to the sale of ABS interests in the issuing entity and, upon 
request, to the Commission and its appropriate Federal banking agency 
(if any) disclosure of:
     Whether any retained vertical interest is retained as a 
single vertical security or as separate proportional interests in each 
ABS interest;
     Each class of ABS interests in the issuing entity 
underlying the single vertical security at the closing of the 
securitization transaction and the percentage of each class of ABS 
interests in the issuing entity that the sponsor would have been 
required to retain if the sponsor held the eligible vertical interest 
as a separate proportional interest in each class of ABS interest in 
the issuing entity;
     The fair value (expressed as a percentage of the fair 
value of all ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS interests are issued, as applicable)) of any single vertical 
security or separate proportional interests that would be (or was 
retained) by the sponsor at closing, and the fair value (expressed as a 
percentage of the fair value of all ABS interests issued in the 
securitization transaction and dollar amount (or corresponding amount 
in the foreign currency in which the ABS interests are issued, as 
applicable)) of the single vertical security or separate proportional 
interests required to be retained by the sponsor in connection with the 
securitization transaction;
     A description of the methodology used to calculate the 
fair value of all classes of ABS interests; and
     The key inputs and assumptions used in measuring the total 
fair value of all classes of ABS interests (including the range of 
information considered in arriving at such key inputs and assumptions 
and an indication of the weight ascribed thereto) and the sponsor's 
technique(s) to derive the key inputs.
    Several commenters asserted that the final rule should not require 
sponsors to measure and disclose the fair value of eligible vertical 
interests, so long as the underlying ABS interests have either a 
principal or notional balance. The commenters stated that a 5 percent 
interest in the cash flow of each class would always be equivalent to 5 
percent of each class. In this regard, the commenters stated that 
requiring fair value measurement and disclosures for the vertical 
option would be unnecessary for ensuring compliance with the rule.
    The agencies agree that calculation of fair value for eligible 
vertical interests is unnecessary. The agencies note that only those 
sponsors that rely exclusively on an eligible vertical interest to meet 
their risk retention requirements would not have to calculate the fair 
value of the ABS interests and make the related disclosures. A sponsor 
that wishes to receive credit for any residual interest that meets the 
requirements of an eligible horizontal residual interest (other than 
any portion of the residual retained as part of an eligible vertical 
interest) would be required to calculate the fair value of the ABS 
interests and make the related disclosures.
c. Restriction on Projected Cash Flows to Eligible Horizontal Residual 
Interest
    The reproposal would have placed limits on projected payments to 
holders of the eligible horizontal residual interest. Specifically, the 
reproposal included a restriction on projected cash flows to be paid to 
the eligible horizontal residual interest that would have limited how 
quickly the sponsor would have been able to recover the fair value 
amount of the eligible horizontal residual interest in the form of cash 
payments from the securitization (or, if an eligible horizontal cash 
reserve account were established, released to the sponsor or other 
holder of such account). The sponsor would have been

[[Page 77622]]

prohibited from structuring a deal where it was projected to receive 
such amounts at a faster rate than the rate at which principal was 
projected to be paid to investors on all ABS interests in the 
securitization. The restriction was designed with an intention of 
enabling sponsors to satisfy their risk retention requirements with the 
retention of an eligible horizontal residual interest in a variety of 
ABS structures, including those structures that do not distinguish 
between principal and interest payments and between principal losses 
and other losses. The restriction was discussed in detail in the 
reproposal.\68\
---------------------------------------------------------------------------

    \68\ Revised Proposal, 78 FR at 57938.
---------------------------------------------------------------------------

    The agencies invited comment in the reproposal on whether an 
alternative provision should be adopted relating to the amount of 
principal payments that could be received by the eligible horizontal 
residual interest. Under this alternative, on any payment date, in 
accordance with the transaction's governing documents, the cumulative 
amount paid to an eligible horizontal residual interest would not be 
permitted to exceed a proportionate share of the cumulative amount paid 
to all holders of ABS interests in the transaction. The proportionate 
share would equal the percentage, as measured on the date of issuance, 
of the fair value of all of the ABS interests issued in the transaction 
that is represented by the fair value of the eligible horizontal 
residual interest.\69\
---------------------------------------------------------------------------

    \69\ See Revised Proposal, 78 FR at 57941.
---------------------------------------------------------------------------

    The agencies received a significant number of comments regarding 
the proposed cash flow restrictions as well as the alternative approach 
on which they invited comment. Several commenters requested that the 
proposed cash flow restriction to the eligible horizontal residual 
interest and related certification be eliminated, either entirely or 
for specific asset classes, while one commenter proposed that the 
restriction be eliminated at sunset.
    Several commenters suggested that the proposed restriction on cash 
flow distributions would be incompatible with a variety of 
securitization structures, such as those organized to have increasing 
overcollateralization over time, large amounts of excess spread at 
closing, or bullet maturities. Commenters stated that the reproposal's 
failure to distinguish between payments of interest and principal on 
the eligible horizontal residual interest would be particularly 
problematic for many transactions. Such structures highlighted by 
commenters included CMBS, where monthly cash flow comes predominantly 
from interest payments for much of the life of the securitization, with 
the result that these existing structures would not meet the test and 
would not have an economically attractive eligible horizontal residual 
interest (or B-piece) if they did meet the test. Several commenters 
also stated that the proposed cash flow restriction would be 
problematic for CLOs and other structures that use principal proceeds 
to reinvest in additional assets, but continue to pay interest, for 
significant reinvestment periods. One such commenter suggested that the 
final rule should specify that the use of proceeds to acquire new 
assets and reinvest does not constitute a payment with respect to the 
eligible horizontal residual interest.
    Commenters raised a number of specific concerns regarding the 
calculations and projections that would be required by the proposed 
cash flow restriction. One commenter stated that the calculations that 
sponsors would be required to compare in order to determine whether 
restrictions are required would be too different to make effective 
comparison possible. Several commenters asserted that the calculations, 
disclosures, and certifications required by the proposed cash flow 
restriction were incompatible with revolving structures, since the 
asset pools of revolving structures change over time and the time at 
which the amortization period will commence is not always known at the 
closing date. These commenters suggested an alternative certification 
and calculation method for revolving structures. Another commenter 
suggested that when the ABS interest is a variable funding note that 
may have periodic increases and decreases in principal amount, the date 
of any increase or decrease should be treated as a new issue date for 
purposes of calculating the proposed cash flow restriction.
    A few commenters asserted that the proposed cash flow restriction 
would significantly change the nature of the residual structure, since, 
for many structures, it would eliminate or severely restrict the 
payment of interest or yield to holders of the eligible horizontal 
residual interest. One commenter stated that if the holder of an 
eligible horizontal residual interest is not able to receive a return 
commensurate with the risk of the interest, the fair value of the 
interest will decrease, requiring that it represent a significantly 
greater portion of the capital structure of the securitization in order 
to reach 5 percent of the fair value of all ABS interests issued. 
Another commenter asserted that the proposed cash flow restriction 
would discourage sponsors from structuring offerings of ABS interests 
with excess spread exceeding 5 percent of the fair value of the 
transaction because the restriction would effectively prevent sponsors 
from reducing such excess spread to 5 percent during the life of the 
transaction.
    The certifications and disclosures to investors that would have 
been required by the proposed cash flow restriction were also a focus 
of concern for commenters. Several commenters expressed concern about 
potential liability that could result from the proposed requirement 
that sponsors certify to investors that they had performed the required 
calculations and to certify their expectations regarding the cash flow 
to the eligible horizontal residual interest as compared to more senior 
ABS interests. Commenters stated that sponsors could be subject to 
liability, if their projections and assumptions differed from actual 
results. One commenter specifically contended that the difficulty in 
accurately modeling prepayment risks heightens the risk of liability. 
Two commenters suggested that a safe harbor should be granted to 
protect sponsors from such liability risk. One such commenter requested 
limiting the safe harbor to sponsors who utilize reasonable 
methodologies in making the required calculations. A different 
commenter suggested that, rather than requiring the sponsor to make the 
certifications to investors, the sponsor should only have to maintain a 
record of the closing date calculations, including the methodology and 
material assumptions underlying them, and make those records available 
to the Commission and banking agencies upon request for five years. One 
commenter suggested that the proposed certification to investors should 
be replaced with a requirement that the sponsor disclose to investors, 
in the offering documents, that it has performed and met the cash flow 
restriction test.
    The agencies also received comments regarding the proposed 
requirement that sponsors would have to disclose their past performance 
in respect to the cash flow calculations. One commenter raised concern 
that requiring such disclosures could create potential liability issues 
concerning false disclosures. Two commenters suggested a modification 
to the proposed requirement such that the sponsor would have to 
disclose the number of payment dates on which the actual payments made 
to the sponsor under the eligible horizontal residual interest exceeded 
the amounts projected to be paid to the sponsor on such payment

[[Page 77623]]

dates. These commenters asserted that the focus of this disclosure 
should be on the cumulative amount of payments made to the holder of 
the eligible horizontal residual interests, rather than the cash flow 
projected to be paid to the sponsor on the payment dates.
    Several commenters offered qualified support for the alternative 
proposal on which the agencies invited comment. Such support was 
largely based on the fact that the alternative proposal would have 
required the comparison of all forms of payment to both the eligible 
horizontal residual interest and the investor interests, while the 
proposed cash flow restriction would have required the comparison of 
all forms of payment to the eligible horizontal residual interest and 
only principal payments to the investor interests. Two commenters 
asserted that, without a detailed proposal, it is difficult to 
determine what type of cash flow comparisons the agencies intended to 
cover with the alternative proposal and that they would not support any 
proposal that does not allow for market rates of return to be paid to 
the eligible horizontal residual interest. One commenter would support 
the alternative proposal if it were modified to clarify that a residual 
interest, in order to be considered an eligible horizontal residual 
interest, be limited in the amount of principal repayments it may 
receive, such that the cumulative amount of payments applied to reduce 
its principal or notional balance as of any payment date is 
proportionate to (or less than) the cumulative amount of payments 
applied to reduce the principal or notional balance of all ABS 
interests in the transaction as of such payment date. One commenter 
requested a modified version of the alternative proposal that the 
commenter said would be more appropriate for CMBS transactions. The 
commenter asserted that, since CMBS bonds associated with the 
horizontal risk retention interest are sold at a discount, the 
alternative proposal should allow the percentage of cash flow paid to 
the horizontal risk retention holder to be based on the face value, 
rather than the fair value, of their purchased interest.
    Commenters also offered various alternative proposals to the 
proposed cash flow restriction. One commenter requested that a sponsor 
be considered to have met its risk retention obligation if it satisfies 
one of the following tests on the closing date based on projections or 
assumptions of timely payment: (1) The projected fair value of the 
amount retained as of each payment date will not be less than the 
required 5 percent; (2) the level of overcollateralization calculated 
based on the amortizing balance of the ABS interests as of each payment 
date, is not projected to decline below 5 percent over the life of the 
transaction; or (3) the projected principal payments to be paid to the 
eligible horizontal residual interest, as of each payment date, will 
not exceed its pro rata share of all payments made to ABS interest 
holders on such payment date. One commenter suggested that the test 
should be limited to a projection that the retained risk will be equal 
to at least 5 percent of the sum of the projected aggregate fair value 
of all ABS interests in the issuing entity, other than the eligible 
horizontal residual interest, and the projected fair value of the 
eligible horizontal residual interest.
    After careful consideration of the comments, the agencies agree 
that the restrictions on projected cash flow to the eligible horizontal 
residual interest included in the proposed rule would not operate 
without significant risk of unintended consequences. Furthermore, the 
agencies have not identified a cash flow restriction mechanism that 
would function effectively across asset classes without having an 
unduly restrictive impact on particular asset classes. While the 
agencies could consider different tests for different classes, the 
agencies believe that would lead to a more complicated rule that could 
be difficult to administer and that would likely engender more 
opportunity to undermine the impact of the final rule on the alignment 
of interests between the sponsor and investors. Additionally, the 
agencies believe that alternatives suggested by commenters that 
proposed to restrict cash flows based on a comparison of projections of 
the face value of securitized assets and the face value of outstanding 
ABS interests (which do not capture expected credit losses, among other 
things) and alternatives that focused only on repayment of principal 
either would be easily evaded or would not effectively further the 
statutory goals and directive of section 15G of the Exchange Act to 
limit credit risk and promote sound underwriting. Accordingly, the 
agencies are not including in the final rule the proposed cash flow 
restriction, the alternative described in the reproposal, or the 
alternatives suggested by commenters.
    The agencies are concerned that risk retention may become less 
meaningful when a sponsor quickly recovers the value of risk retention 
through distributions. However, the agencies note that the final rule 
requires disclosure regarding the material terms of the risk retention 
interest, and the timing of cash flows and determination of fair value, 
which is designed to facilitate investor determination of whether the 
risk retention interest to be held by the sponsor remains meaningful 
over time. In addition, while the rule requires that the sponsor 
measure an eligible horizontal residual interest only as of the closing 
of a transaction (and, under certain circumstances, if additional ABS 
interests are issued thereafter), the rule also restricts the ability 
of a sponsor to transfer or hedge any interest in the credit risk of 
the securitized assets it is required to retain until the expiration of 
specified periods. Therefore, the rule is designed so that the sponsor 
remains exposed to the credit risk of securitized assets, up to the 
amount required to be retained. If the agencies observe that either the 
assumptions and methodologies used to calculate the fair value of 
horizontal risk retention or the structuring of securitization 
transactions--including structuring of payments to the residual 
interest--tends to undermine the ability of the risk retention to align 
the interests of sponsor and investors, the agencies will consider 
whether modifications to the rule should be made to address these 
issues.
2. Master Trusts: Revolving Pool Securitizations
a. Overview of the Reproposal and Public Comments
    Many securitization sponsors face a mismatch between the maturities 
of the assets they seek to securitize and the maturities of bonds 
sought by investors in the market. In order to obtain best execution 
for a securitization of those assets--or in other cases, in order to 
obtain any investor interest in the market of any kind--the sponsor 
must use a structure that transforms the available cash flow from the 
assets into debt with a maturity and repayment type (amortizing or 
bullet) sought by investors. Furthermore, if the sponsor's business 
generates an ongoing stream of assets to be securitized under these 
circumstances, especially (but not always) if the assets are 
receivables generated from revolving credit lines, the sponsor faces 
unique challenges in structuring its securitization.
    One solution to these issues, which has evolved over the last 25 
years, is a type of revolving pool securitization commonly known as a 
``master trust'' securitization. Master trusts generally issue multiple 
series of asset-backed securities over time, collateralized by a common 
pool of securitized assets. The transaction documentation requires the 
sponsor to maintain the collateral

[[Page 77624]]

balance at an amount that is at all times sufficient to back the 
aggregate amount of outstanding investor ABS interests with a specified 
amount of collateral above that amount. The amount of outstanding 
investor ABS interests changes over time as new series are issued or 
existing series are paid down. Moreover, as each series is issued, it 
begins with a revolving period (typically for some number of years), 
during which the holders of investor ABS interests receive only 
interest, and cash from borrower principal repayments on the 
securitized assets are used to buy additional assets for the pool from 
the sponsor. This provides the sponsor with ongoing funding for its 
operations, and maintains the level of securitized assets over time. 
Then, at a date specified under the terms of the series, the revolving 
phase for the series comes to an end, and cash from borrower principal 
repayments on securitized assets is used to repay investors and retire 
that series of investor ABS interests.
    Separately from the issue of credit enhancement for the investor 
ABS interests, which is discussed below, investors are concerned that 
the total amount and quality of securitized assets does not decline 
unacceptably during the revolving period of the series. If that were to 
happen, the master trust could face difficulties repaying investors 
months or years later when the series matures. To protect against this, 
the sponsor is typically required, at various intervals, to measure the 
amount by which the aggregate principal balance of the securitized 
assets exceeds the aggregate principal balance of the outstanding 
investor ABS interests. If this ``cushion'' of securitized assets falls 
below a target level, the sponsor has a specified cure period in which 
it may add more assets to restore the pool to its required target 
size.\70\ Credit quality problems with the securitized assets would 
lead to elevated charge-offs of securitized assets, which in turn could 
cause the pool to fall below the target level.\71\
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    \70\ Instead of adding assets, the sponsor might also avail 
itself of options described in the transaction documents to reduce 
or repay outstanding investor ABS interests.
    \71\ The level of securitized assets in the pool might also fall 
if securitized assets are repaid according to their terms and the 
master trust does not use the repaid principal to acquire 
replacement securitized assets from the sponsor.
---------------------------------------------------------------------------

    If the sponsor cannot restore the pool balance to its required 
target level within the cure period, the master trust commences an 
``early amortization mode.'' Once that occurs, the sponsor may no 
longer use borrower payments on the securitized assets to purchase 
additional loans to transfer to the securitization, and interest and 
principal payments on the securitized assets are used to begin paying 
down outstanding investor ABS interests as rapidly as practicable. The 
consequences to the sponsor are significant, since early amortization 
of the master trust means the sponsor will no longer have access to 
securitized funding through the master trust for future securitized 
assets generated in connection with the sponsor's operations.
    The agencies' reproposal would have recognized the ``seller's 
interest'' retained by a master trust sponsor as an acceptable form of 
risk retention to meet the sponsor's obligations under the rule. In 
many master trusts, the ``seller's interest'' is the amount by which 
the outstanding principal balance (or equivalent measurement) of the 
assets held by the master trust exceeds the outstanding principal 
balance of the outstanding ABS interests and is required by the series 
transaction documents to be maintained at or above a specified 
percentage of the aggregate outstanding investor ABS interests, 
measured monthly (e.g., the seller's interest in the principal balance 
of pool collateral is required to equal at least 5 percent of the 
principal balance of all outstanding investor ABS interests). The 
seller's interest is not attached to specific pool collateral; it is an 
undivided interest in the entire pool akin to a participation interest, 
representing the sponsor's entitlement to a percentage of the total 
principal and interest or finance charge payments received on the 
pooled securitized assets for every payment period (typically monthly). 
Investors in the various series of ABS interests issued by the master 
trust have claims on the remaining principal and interest or finance 
charge payments, as the source of repayment for the ABS interests they 
purchased from the master trust. The seller's interest in these 
structures is generally pari passu with the investor ABS interests, 
resulting in the sponsor incurring a pro rata share of credit losses on 
securitized assets, in a percentage amount equal to the percentage 
amount of the seller's interest as calculated under the terms of the 
transaction documents.\72\
---------------------------------------------------------------------------

    \72\ A 5 percent pari passu seller's interest is commonly 
required in credit card master trusts.
---------------------------------------------------------------------------

    The agencies' reproposal would have treated a pari passu seller's 
interest as a separate form of risk retention. The reproposal would 
have allowed this option to be used only by issuing entities organized 
as master trusts, established to issue on multiple issuance dates one 
or more series of ABS interests, all of which are collateralized by a 
common pool of assets that will change in composition over time. The 
reproposal would have required distributions to the sponsor on the 
seller's interest to be pari passu with each series of investor ABS 
interests, prior to an early amortization event as defined in the 
transaction documents. The sponsor would have been required to meet the 
5 percent threshold for its seller's interest at the closing of each 
issuance of ABS interests by the master trust, and at each seller's 
interest measurement date specified in the transaction documents, but 
no less often than monthly. The reproposal would have required the 
seller's interest to be retained by the sponsor or by a wholly-owned 
affiliate of the sponsor.
    For so-called ``legacy master trusts''--which hold revolving pools 
of collateral and issue a certificate that entitles the holder to 
distributions on that collateral to another one of the sponsor's master 
trusts, which in turn securitizes those distributions into investor ABS 
interests--the reproposal would have allowed the seller's interest with 
respect to the legacy trust assets to be held by the sponsor at the 
level of either trust, in proportion to their differing asset pools. 
The agencies also proposed to allow an offset against the required 
seller's interest, on a dollar-for-dollar basis, for so-called ``excess 
funding accounts.'' These accounts receive distributions that would 
otherwise be paid to the holder of the seller's interest if the sponsor 
fails to meet the minimum seller's interest requirement. In the event 
of an early amortization of the master trust, funds from the excess 
funding account would be used to make distributions to outstanding 
investor ABS interests, in the same manner as distributions on pool 
collateral during early amortization.
    In the reproposal, the agencies also observed that some of the 
master trusts in the market are not structured to include a pari passu 
seller's interest of a sufficient size to meet the proposed rule's 5 
percent trust-wide requirement. In an effort to accommodate sponsors of 
these trusts, the reproposal would have allowed the sponsor to reduce 
its 5 percent pari passu seller's interest requirement by whatever 
corresponding percentage of horizontal ABS interest the sponsor held in 
the structure. The reproposal would have given the sponsor credit for 
an eligible horizontal residual interest under section 4 for these 
purposes, as well as an alternative form of horizontal risk retention 
based

[[Page 77625]]

on excess spread (described below). The sponsor would have been 
required to determine the percentages of horizontal retention on a fair 
value basis, consistent with the reproposal's treatment of other 
subordinated forms of risk retention. Furthermore, any gap between the 
amount of trust-wide pari passu seller's interest held by the sponsor 
and the 5 percent minimum requirement would have been required to be 
offset with an equivalent fair value percentage of the permitted 
horizontal interests for every outstanding series issued by the master 
trust.
    Another alternative form of horizontal risk retention that would 
have been recognized by the reproposal was designed to allow sponsors 
to receive risk retention credit for excess spread, which constitutes a 
significant portion of the credit enhancement in master trusts 
collateralized by credit card receivables. These master trusts are 
structured with two separate cash waterfalls, one for principal 
repayments collected from borrowers and one for interest and fees 
(finance charges) collected from borrowers. Interest and fees collected 
from borrowers each payment period are used to cover the master trust's 
expenses and to pay interest due on outstanding investor ABS interests 
for the period, and the remaining interest and fee collections are then 
made available to cover principal charge-offs on securitized assets. 
The sponsor is then entitled to collect whatever interest and fee 
collections remain. Absent application of the excess interest and fee 
collections to cover principal charge-offs, the principal charge-offs 
would result in the balance of outstanding investor ABS interests being 
reduced. Accordingly, the reproposal would have recognized the 
sponsor's interest in the residual interest and fees (excess spread) as 
a subordinated form of horizontal risk retention, if it was structured 
in the manner described in this paragraph, so long as the master trust 
continued to revolve, and the sponsor determined and disclosed the fair 
value of the residual interest and fees on the same monthly basis as 
its pari passu seller's interest.
    The reproposal also included provisions clarifying that a master 
trust entering early amortization and winding down would not, as a 
result, violate the rule's requirement that the seller's interest be 
pari passu. During early amortization, distributions on this form of 
seller's interest typically become subordinated to investor interests, 
to allow for the repayment of the outstanding investor ABS interests 
more rapidly.
    The agencies received extensive comments on the overall design and 
the details of the reproposal's option for master trusts. Commenters 
stated that the agencies needed to make numerous revisions to the 
mechanics of the reproposal for master trusts or the seller's interest 
option would not be useable by most revolving pool securitization 
structures in the market. Moreover, commenters stated that most 
revolving pool securitizations in the market would be left with no 
mechanism for horizontal risk retention under the rule whatsoever, 
because the requirements in section 4 of the reproposed rule for an 
eligible horizontal residual interest conflicted with key provisions of 
those revolving pool securitizations. Commenters pointed out that 
revolving pool securitization structures have evolved beyond credit 
cards and automobile dealer floorplan financing, to encompass numerous 
specialized asset classes important to the U.S. economy. Examples they 
cited included a wide variety of floorplan and trade receivable 
financing for commercial manufacturing firms, other non-revolving 
short-term assets such as insurance premium loans and servicer advance 
receivables, a broad variety of equipment leasing programs, and home 
equity line receivables. Commenters identified two overarching concerns 
with the reproposal, and also made numerous, more detailed 
recommendations for revisions to the mechanics of the rule.
    The first area of overarching concern for commenters centered on 
the agencies' proposed treatment of subordinated forms of risk 
retention in the master trust context. In the reproposal, the agencies 
noted the existence of subordinated forms of seller's interests in the 
market. The agencies invited comment on whether subordinated seller's 
interests should be given risk retention credit under the rule, but 
also pointed out that the agencies were inclined to require it to be 
measured on a fair value basis, consistent with the treatment of other 
forms of subordinated risk retention under the reproposal. Commenters 
said many revolving pool securitizations in the market relied on 
subordinated seller's interests as the principal source of credit 
enhancement and, therefore, it was critical for the agencies to include 
it in the rule.\73\ Commenters also said that monthly calculations of 
fair value, as suggested by the agencies in the reproposal, would be 
immensely burdensome. Commenters said this burden was especially 
unwarranted in the case of revolving pool securitizations, which do not 
monetize excess spread and, therefore, do not present the risks of 
evasion through deal structures that motivated the agencies' 
restrictions on other forms of horizontal risk retention. Commenters 
also said that the agencies' concerns about sponsor manipulation and 
evasion were misplaced, because revolving pool securitization sponsors 
rely on the funding they thereby obtain as a principal source of 
ongoing funding for their business operations. Commenters said this 
creates an alignment of interests between sponsors and investors that 
is the opposite of the originate-to-distribute model.\74\
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    \73\ One group of commenters said the typical pari passu 
seller's interest in a floorplan securitization was zero percent, 
and they were aware of no floorplan securitization with one higher 
than 2 percent. These commenters said that a subordinated seller's 
interest was, like a pari passu seller's interest, typically 
calculated as a set percentage of additional assets required to be 
held in the collateral pool, over and above an amount equal to the 
total amount of outstanding investor ABS interests (though this 
percentage is often determined on a series-by-series basis rather 
than a trust-wide basis). Principal and interest payments made with 
respect to this subordinated seller's interest are distributed to 
the sponsor, after they are first applied to cover any charge-offs 
of securitized assets that would otherwise reduce the principal 
amount of outstanding investor ABS interests. The sponsor's share of 
principal and interest distributions is also available to cover 
shortfalls in payments of principal and interest due to investors.
    \74\ Commenters representing automobile, equipment, and dealer 
floorplan manufacturers were among those advocating for a simplified 
risk retention alternative, without fair value requirements and cash 
flow restrictions, for ``simple'' securitization structures that 
issue only ``traditional'' interest bearing asset-backed securities 
with 5 to 10 percent overcollateralization on a face value basis and 
weighted average interest rates on the issued asset-backed 
securities in line with that of the securitized assets. The agencies 
note that the elimination of the cash flow restrictions from section 
4 of the rule, accompanied by the treatment of subordinated seller's 
interests adopted in the final rule, should significantly address 
the source of commenters' concerns in this regard.
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    The other areas of concern for commenters were differences between 
the reproposal's requirements for the eligible horizontal residual 
interest and the terms of existing revolving pool securitizations in 
the market. First, commenters said the cash flow recovery percentage 
calculations were structurally incompatible with revolving pool 
securitizations.\75\ Second, commenters expressed heightened concerns 
about their potential liability for disclosing predictions and 
assumptions about the future performance of a revolving pool 
securitization, in connection with making the fair value determination

[[Page 77626]]

required by the rule. Third, commenters asserted that the requirement 
for the eligible horizontal residual interest to be the most 
subordinated claim to payments of both principal and interest could not 
be achieved when the sponsor is also entitled to collect residual 
interest and fees, because there are separate interest and principal 
waterfalls and the subordinated junior bond in the series held by the 
sponsor (whether or not it is certificated or rated) is usually 
structured to be paid interest before the allocation of interest and 
fee collections to cover charge-offs otherwise allocable to senior 
bonds (and in some cases, charge-offs allocable to the junior interests 
held by the sponsor as well).
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    \75\ The agencies note that the elimination of the cash flow 
restrictions from section 4 of the rule addresses commenters' 
concerns in this regard.
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    Commenters said that sponsors sought the ability to continue 
incorporating subordinated seller's interest or residual ABS interest 
in excess interest and fees into their deal structures and 
simultaneously retain a junior bond, while still having the flexibility 
to choose which combination of those interests the sponsor would use to 
comply with the risk retention requirements. Commenters placed 
particular importance on retaining the flexibility to do this without 
being required to engage in fair value determinations for the interests 
the sponsor does not count for purposes of regulatory compliance.
    In addition, commenters expressed concerns about paragraphs (2) and 
(3) of the eligible horizontal residual interest definition in 
connection with the series-level allocations and delinked structures 
used in revolving pool securitizations.
    Commenters also asked the agencies to modify the rule's 
subordination requirements to allow a subordinated tranche held as an 
eligible horizontal residual interest to be repaid prior to later-
maturing senior tranches, noting that, in delinked structures, a 
subordinated tranche which enhances one or more senior tranches may 
mature before the senior tranche. In these circumstances, commenters 
said the securitization transaction documents contain terms requiring 
the subordinated tranche to be replaced to the extent the remaining 
senior tranches still require credit enhancement under the terms of the 
transaction documents.
    In addition to these concerns, commenters requested numerous 
changes they said were necessary to recognize the risk retention 
existing in revolving pool securitizations in the current market.
    Commenters said many revolving securitization structures that are 
commonly referred to as ``master trusts'' do not, in fact, use issuing 
entities organized in the form of a trust, and their organizational 
documents do not necessarily state that they are established to issue 
multiple series. Commenters also expressed concern about whether 
sponsors universally hold their seller's interests in the form of an 
``ABS interest'' as defined in the reproposed rule.
    Commenters requested clarification as to whether the requirement 
that the master trust be collateralized by a common pool of securitized 
assets means that every series must be secured by every asset held by 
the issuing entity. Commenters explained that some revolving pool 
securitizations may use collateral groupings, and further that 
principal accumulation and interest reserve accounts may be held only 
for the benefit of an identified series. Commenters also requested 
clarification as to whether the common pool requirement prevents the 
issuing entity from holding assets that are not eligible to support 
issuance of additional ABS interests to investors (such as excess 
concentration receivables), but are nonetheless pledged as collateral 
to the structure, with proceeds from these ineligible assets being 
allocated to the sponsor, sometimes with varying extents of 
subordination to one or more series of outstanding investor ABS 
interests.
    In the reproposal, the agencies invited comment on whether, if a 
sponsor is relying on the seller's interest as its required credit risk 
retention under the rule, the final rule should preclude the master 
trust from monetizing excess spread, in exchange for allowing the 
seller's interest to be calculated on the basis of the principal 
balance of outstanding investor ABS interests instead of the fair value 
of outstanding investor ABS interests. Commenters questioned the 
agencies' rationale for this restriction, asserting that revolving pool 
securitizations that generate excess spread do not monetize it through 
the issuance of interest-only securities or premium bonds. Commenters 
said revolving pool securitizations do exactly the opposite, making 
excess spread available to cover losses that would otherwise reduce the 
principal repayments to outstanding investor ABS interests.\76\
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    \76\ Commenters also expressed concern as to how the agencies 
could define the difference between premium bonds and bonds that 
price above par due to investor enthusiasm for a particular bond.
---------------------------------------------------------------------------

    Commenters questioned why the reproposal would, as a general rule, 
permit a majority-owned affiliate of a securitizer to hold the 
securitizer's risk retention interest required by the rule, but in the 
case of revolving pool securitizations would only permit the seller's 
interest or special horizontal interest to be held by the securitizer 
or a wholly-owned affiliate of the securitizer.
    Commenters also requested that the agencies revise the rule to 
permit risk retention in legacy master trusts to be held at the legacy 
master trust level, not only for seller's interests, as the agencies 
proposed, but also for horizontal forms of risk retention permitted 
under the rule.
    Commenters requested that the agencies make changes to the details 
of the definition of seller's interest concerning the requirement that 
the sponsor's distributions on the seller's interest be pari passu 
prior to an early amortization event. Commenters pointed out that 
principal distributions on the seller's interest are subordinated to a 
series of outstanding investor ABS interests in a controlled 
accumulation phase or amortization, because the transaction documents 
typically fix the proportions for allocation of principal distributions 
to the series at the start of the accumulation phase or amortization 
period.\77\
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    \77\ Moreover, some revolving pool securitizations allocate 
principal during an accumulation phase pursuant to a formula that 
captures all available principal collections from the assets that 
are not otherwise needed for other principal accumulation accounts 
and acquisition of new pool collateral.
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    With respect to the reproposal's requirement for master trusts to 
measure the seller's interest on the measurement date specified in the 
transaction documents, no less than monthly, commenters requested two 
changes. First, commenters stated that some revolving pool 
securitizations require measurements of the seller's interest on a more 
frequent basis, and that they should not be required to measure the 
seller's interest for regulatory compliance purposes more often than 
monthly (and at the closing of each issuance of ABS interests).\78\ 
Second, commenters requested the agencies to recognize the cure period 
afforded them under their transaction documents. Commenters also 
requested changes to the specifics of the disclosure requirements with 
respect to the cut-off dates for disclosing the amount of seller's 
interest retained by the sponsor.
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    \78\ Commenters said that the measurement referred to by the 
agencies in the reproposal, for purposes of determining whether the 
sponsor must add more assets to the collateral pool, generally takes 
place monthly. However, the seller's interest is measured more 
frequently (as often as daily) for other purposes, such as verifying 
whether cash may be released to the sponsor.
---------------------------------------------------------------------------

    Commenters also requested changes to the details of the reproposed 
rule's

[[Page 77627]]

treatment of excess funding accounts and the provisions on early 
amortization, to better reflect the way early amortization triggers are 
currently structured.
    Commenters supported the reproposal's inclusion of residual 
interest and fees as a recognized form of risk retention for revolving 
pool securitizations. They recognized the rationale for requiring 
sponsors using the option to measure it on a fair value basis, but 
expressed concern that the burdens of performing the valuation monthly 
would be so substantial as to dissuade all but a few revolving pool 
securitizations from using the option. Commenters also requested some 
changes and clarifications to the mechanics of the rule language in the 
reproposal, to accommodate established structures being used in the 
market. They also requested that the agencies eliminate the requirement 
for separate interest and principal waterfalls.
    Commenters supported the reproposal's inclusion of provisions 
allowing revolving pool securitizations to offset and reduce their 5 
percent seller's interest with corresponding amounts of horizontal 
interests. They objected to the agencies' requirement that the 
offsetting amount be held with respect to every series in the trust, 
and requested that the agencies permit the offset to be determined on a 
weighted average basis across all series of outstanding investor ABS 
interests. Commenters also requested that, if a sponsor held the 
horizontal interest jointly with an investor, the sponsor be allowed to 
take credit for its proportional holding in that horizontal interest.
    Commenters agreed with the agencies that it is not practicable to 
create a grandfathered status for seller's interest, since it 
represents the sponsor's undivided interest in, and exposure to, the 
common pool of securitized assets in the trust, on a trust-wide basis. 
Commenters suggested that a revolving pool securitization relying on 
horizontal interests to offset any portion of the seller's interest 
should be allowed to do so on a grandfathered basis, whereby the 
sponsor would only be required to hold that horizontal element with 
respect to series issued after the applicable effective date of the 
rule.
    Commenters also described a type of revolving pool securitization 
that securitizes mortgage servicer advance receivables, in which the 
seller's interest is fully subordinated to all expenses and investor 
obligations. These commenters requested inclusion of these subordinated 
interests as part of the master trust option, and inclusion of certain 
series-specific interest reserve accounts as an offset to the minimum 
seller's interest.
b. Description of the Final Rule
    The agencies are revising the master trust option in the final rule 
in order to make the option available to more commercial firms that 
currently rely on revolving pool securitizations as an important 
component of their funding base. These revisions recognize and 
accommodate the meaningful exposure to credit risk currently held by 
sponsors of these vehicles, in light of the heightened alignment of 
incentives between sponsors and investors that attaches to their 
revolving nature. The agencies are also making a number of other 
refinements in the final rule in order to align it more closely with 
the mechanics of revolving pool securitizations as they are structured 
in the market today.
    The pari passu seller's interest option proposed by the agencies 
represents a special form of over-collateralization for the ABS 
interests issued by a revolving pool securitization. Under the final 
rule, sponsors must maintain the size of the seller's interest 
position, which they most commonly do through the ongoing addition of 
assets to the pool or repayment of investor ABS interests, if the 
existing pool is diminished by charge-offs exceeding expected loss 
rates.
    The agencies are also adopting an additional change requested by 
commenters to accommodate other revolving pool securitizations that are 
common in the market and rely on over-collateralization in a different 
manner, which varies between asset classes. Commenters described two 
different structures, one of which the agencies are persuaded should be 
recognized as an eligible form of risk retention under the final rule. 
This form was described by commenters as a common feature of some asset 
classes, such as equipment leasing and floorplan financing. In these 
revolving pool securitizations, the sponsor is obligated, as is the 
case in the pari passu seller's interest structure, to maintain an 
undivided interest in the securitized assets in the collateral pool, in 
an amount equal to a specified percentage of the trust's outstanding 
investor ABS interests. Whereas the pari passu seller's interest is a 
trust-level interest equal to a minimum percentage of the revolving 
pool securitization's combined outstanding investor ABS interests, the 
minimum percentage in these structures may be tied to the outstanding 
investor ABS interests in each separate series. While the sponsor's 
right to receive distributions on the seller's interest included in the 
reproposal was required to be pari passu, the sponsor's right to 
receive its share of distributions on its subordinated seller's 
interest may be subordinated to varying extents to the series' share of 
credit losses.
    Importantly, notwithstanding these differences with the pari passu 
seller's interest, the sponsor of this form of revolving pool 
securitization is still required under the transaction documents to 
maintain the specified minimum percentage amount of securitized assets 
in the pool if the securitization is to continue revolving, through the 
ongoing addition of extra securitized assets to the pool if necessary. 
The agencies believe this requirement to maintain the specified minimum 
percentage amount creates incentives for the sponsor to monitor the 
quality of the securitized assets added to the pool in both structures. 
If the sponsor replaces depleted pool collateral with poorly 
underwritten assets, those assets will, in turn, underperform, and the 
sponsor will be obligated to add even more assets. If this cycle is 
perpetuated and the specified minimum percentage amount is breached, 
the deal will enter early amortization, and the sponsor's access to 
future funding from the structure will be terminated. In consideration 
of this, the agencies have made modifications so that the final rule 
recognizes this subordinated form of seller's interest as an eligible 
form of risk retention for revolving pool securitizations, because the 
agencies believe this form aligns the interests of sponsors and 
investors in a manner similar to other forms of risk retention 
recognized pursuant to the final rule.
    The second form of revolving pool securitization described by 
commenters as used in some asset classes, such as equipment leasing and 
floorplan financing, represents various types of excess securitized 
assets. The transaction documents for revolving pool securitizations 
typically impose eligibility requirements on the securitized assets 
that are allowed to be included as collateral for purposes of 
calculating the total amount of outstanding investor ABS interests that 
may be issued by the revolving trust. According to commenters, these 
eligibility requirements include concentration limits on securitized 
assets with common characteristics, such as those originating from a 
particular manufacturer or dealer or a particular geographic area. The 
sponsor places assets in the revolving pool securitization that do not 
meet these requirements (excess concentration

[[Page 77628]]

receivables), but these ineligible assets are not included when 
calculating the total amount of outstanding investor ABS interests the 
revolving pool securitization may issue. Commenters asserted that these 
ineligible assets are often subject to the pledge of collateral to the 
ABS investors, but distributions on these assets are typically 
allocated to the sponsor. Depending on the terms of the securitization, 
the sponsor's claim to the cash flow from these excess assets may be 
partially or fully subordinated to investor interests, and these 
subordination features may be at the trust level, at the series level, 
or some combination of both.
    The agencies are not persuaded that the sponsor's interest in these 
receivables should be included as eligible risk retention. By their 
terms, these are assets that are not representative of the assets that 
stand as the principal repayment source for investor ABS issued by the 
revolving pool securitization.
    To accommodate revolving pool securitizations with subordinated 
seller's interest, the agencies have revised the distribution language 
in the definition of seller's interest to include seller's interests 
that are pari passu with each series of investor ABS interests, or 
partially or fully subordinated to one or more series in identical or 
varying amounts with respect to the allocation of all distributions and 
losses on the securitized assets. This language retains the vertical 
nature of the proposed seller's interest, since the sponsor must 
receive at least its pro rata share of losses on securitized assets 
through the pari passu aspect of the distribution. The sponsor is also 
free to use its pari passu share of distributions from securitized 
assets to provide loss protection to outstanding investor ABS 
interests, thereby subordinating its interest. The final rule provides 
that these levels of subordination may be varied, thereby affording the 
sponsor flexibility with regard to the extent of this subordination. 
For example, the sponsor may provide varying levels of subordination to 
different series, or provide different levels of subordination 
depending on the occurrence of triggers specified in the transaction 
documents.
    Commenters stated that structures with pari passu seller's interest 
also often include elements of conditional subordination that are 
included to accommodate investor or rating agency concerns that vary 
from transaction to transaction. These are also permitted pursuant to 
the final rule. The agencies believe this flexibility is necessary to 
accommodate the kinds of variations in current market practice from 
deal to deal that commenters described in their comment letters. 
Nevertheless, the flexibility afforded under the rule does not permit 
the sponsor to participate in distributions to any extent greater than 
pari passu. Therefore, the seller's interest may not be senior to any 
series of investor ABS interests with respect to allocation of 
distributions pursuant to the seller's interest.
    Commenters asserted that revolving pool securitizations typically 
provide different distribution regimes for seller's interests if the 
securitization moves into early amortization. The reproposed rule 
contained language reflecting this, relieving the seller's interest 
from the pari passu distribution requirement only after an ``early 
amortization event.'' In response to these comments, the agencies have 
removed the technical reference to a triggering event and substituted 
functional language describing a revolving pool securitization in early 
amortization, as specified in the securitization transaction 
documents.\79\
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    \79\ As discussed above, the definition of seller's interest has 
also been revised to allow, prior to early amortization, 
subordinated distributions.
---------------------------------------------------------------------------

    In addition, the agencies have modified slightly the operational 
portion of the final rule text allowing retention of a seller's 
interest to satisfy a sponsor's risk retention obligation. Whereas the 
reproposal obligated the sponsor to ``retain a seller's interest of not 
less than 5 percent,'' the final rule requires the sponsor to 
``maintain a seller's interest of not less than 5 percent'' (emphasis 
added). The agencies believe that the sponsor's obligation to replenish 
the seller's interest underlies the alignment of interests unique to 
the revolving pool securitization structure. Commenters indicated that 
there are some forms of subordinated seller's interest that the sponsor 
is not required to replenish. These do not qualify for the seller's 
interest option under the final rule.
    The definition of seller's interest in the final rule provides that 
ineligible assets--specifically, assets which are not eligible under 
the terms of the securitization transaction to be included when making 
periodic determinations whether the revolving pool securitization holds 
aggregate securitized assets in the required specified proportions to 
aggregate outstanding investor ABS interests issued by the revolving 
pool securitization (e.g., excess concentration receivables)--are not 
to be considered a component of the seller's interest.\80\ By the terms 
of the transaction documents, these are assets that are typically not 
representative of the assets that stand as the principal repayment 
source for investor ABS interests issued by the revolving pool 
securitization, and the agencies are declining to grant commenter's 
request that they be recognized as a form of risk retention comparable 
to the forms of seller's interest recognized under the rule. The 
agencies have also clarified the proposed exclusion from seller's 
interest of assets that have been allocated as collateral only for a 
specific series. As the agencies discussed in the reproposal, this 
exclusion was designed to accommodate limited forms of exclusion in 
connection with administering the trust, accumulating principal, and 
reserving interest.\81\ To reflect this condition within the rule text 
itself, the agencies have revised the exclusion so it applies only to 
servicing assets.
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    \80\ One group of commenters recommended that the agencies 
simply modify the seller's interest definition to exclude assets 
within the revolving pool securitization that secure less than all 
of the ABS interests. The agencies are implementing this approach in 
a more targeted way by identifying the particular categories of 
assets to be excluded.
    \81\ Revised Proposal, 78 FR at 57943, n.52.
---------------------------------------------------------------------------

    To address certain comments about the application of the definition 
of eligible horizontal residual interest to revolving pool 
securitizations, the agencies have modified paragraph (2) of the 
definition of eligible horizontal residual interest to refer to 
allocation dates as well as payment dates.\82\ The agencies also 
confirm that, in applying the eligible horizontal residual interest 
definition to a revolving securitization with multiple series, the 
requirements in paragraphs (2) and (3) specifying priority of payment 
with respect to amounts due to other interest holders and requiring 
subordination are to be applied with respect to the series supported by 
the particular eligible horizontal residual interest (including, where 
applicable, certain delinked structures), and should only be construed 
to refer to all outstanding investor ABS interests if the eligible 
horizontal residual interest is, in fact, structured to function as an 
enhancement to all outstanding investor ABS interests issued by that 
revolving pool securitization. To accommodate delinked structures, 
commenters requested that the agencies allow replacement of a 
subordinate tranche before maturity of the senior tranches it supports. 
The agencies are not adopting

[[Page 77629]]

this requested modification. The agencies note that, to serve as risk 
retention pursuant to the rule, the sponsor must retain an eligible 
horizontal retention interest for the life of the securitization it 
supports, and the agencies believe sponsors can readily structure their 
retained residual interests to achieve this outcome.\83\
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    \82\ Commenters stated that the reproposal's definition of 
eligible horizontal residual interest refers to loss allocations 
occurring on ABS interest payment dates, whereas revolving pool 
securitizations allocate losses periodically, in advance of ABS 
interest payment dates.
    \83\ The agencies are also concerned that the approach suggested 
by commenters is inconsistent with the rule's approach to the timing 
of the fair value determination for retained eligible horizontal 
residual interests under the standard risk retention option, under 
which the fair value ratio of residual to ABS interests issued is 
measured at the time of issuance. Although sponsors noted that the 
terms of a delinked revolving pool securitization transaction 
include requirements for minimum levels of subordination to be 
maintained in connection with the maturity and replacement of 
subordinated interests, these measures do not necessarily ensure 
equivalent fair value for a replacement subordination interest. 
Commenters did not suggest any alternatives to address this area of 
concern.
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    The risk retention options described in section 5 of the final rule 
are available only to a specific category of securitization vehicles, 
originally defined as ``revolving master trusts'' but now defined as 
``revolving pool securitizations.'' \84\ The option is not available to 
an issuing entity that issues series of ABS interests at different 
times collateralized by segregated independent pools of securitized 
assets within the issuing entity such as a series trust, or an issuing 
entity that issues shorter-term ABS interests collateralized by a 
static pool of securitized assets, or an issuing entity with a 
predetermined re-investment period that precedes an ultimate 
amortization period.
---------------------------------------------------------------------------

    \84\ The agencies made this change, and eliminated language in 
the definition requiring the issuing entity to be a ``master 
trust,'' in response to comments indicating sponsors sometimes 
organize the issuing entity as a different type of legal entity.
---------------------------------------------------------------------------

    Commenters expressed concern that language in the revolving pool 
securitization definition requiring the issuing entity to be 
``established to issue on multiple issuance dates one or more series'' 
would require them to re-constitute their issuing entities. The 
agencies note that the rule does not require specific statements of 
intention to issue multiple series in the issuing entity's 
organizational documents. That being said, the agencies believe that 
the ability to issue more than one series of ABS interests is one of 
the defining characteristics of the structure.\85\ In light of this, 
the agencies are replacing the ``one or more'' language with rule text 
requiring the issuing entity to be established to issue ``more than 
one'' series. While the rule requires no specialized documentation of 
this intention to be made in connection with the issuing entity's legal 
organization, the sponsor must be able to establish that, under the 
constituent legal powers of the entity pursuant to applicable law, the 
issuing entity has the authority to issue more than one series. The 
agencies also recognize that a business organization might establish a 
revolving pool securitization vehicle and, after issuing one series, 
changes in circumstances could prevent the sponsor from seeking to 
issue any additional series, with the structure ceasing to revolve and 
amortizing out. The agencies typically would not dispute this issuing 
entity's eligibility under section 5 of the rule in hindsight, absent 
facts and circumstances indicating the sponsor sought to use the 
structure to improperly avoid the standard risk retention obligations 
of section 4 of the rule. A business organization that did so more than 
once would face a heightened burden to establish that its reliance on 
section 5 of the rule was not a violation of its obligations under the 
rule.
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    \85\ Although ``series'' could be considered a term of art in 
securitization, it is not a defined term in the rule. The rule text 
in this regard refers to ``more than one series, class, subclass, or 
tranche.'' Section 5(a) of the final rule. The agencies believe the 
text is sufficiently flexible to accommodate, regardless of 
transaction labels used, the concept of a discrete issuance of ABS 
interests of a certain maturity, albeit one with a renewable or 
renegotiated maturity, as well as delinked structures. However, in 
the same vein, the rule's reference to a class, subclass, or 
tranche, which are terms commonly used to describe subsets within a 
series, is not an invitation to sponsors to assert that subdivisions 
of an issuance qualify as multiple issuances for these purposes.
---------------------------------------------------------------------------

    The final rule retains the reproposal's requirement that the 
issuing entity's ABS interests are collateralized by a common pool of 
securitized assets that will change in composition over time. This is 
another defining characteristic of a revolving pool securitization 
eligible to use section 5 of the rule. Under these structures, 
principal collections on the securitized assets (net of funds required 
to amortize the principal of outstanding investor ABS interests or to 
accumulate such funds) are used to purchase additional assets to 
collateralize existing and future investor ABS interests in the 
securitization on a revolving basis, with no predetermined end 
date.\86\ Revolving pool securitizations allow sponsors to restructure 
the cash flows on the securitized assets not only for credit 
enhancement, but for mismatches between the maturities of the 
securitized assets and the maturities of ABS interests that are sought 
by the market on attractive terms.\87\
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    \86\ The agencies also recognize that the extent to which the 
sponsoring organization utilizes investor funding to fund the 
securitized assets may vary according to business need, as well as 
the availability of alternate sources of funds at more favorable 
rates.
    \87\ In referring to maturities in this aspect of the 
discussion, the agencies do not focus on legal maturity, or to 
effective maturity or duration, as those terms are used in finance, 
but to the actual lifespan of the assets and interests. For example, 
in many revolving pool securitizations, such as credit card, 
automobile floor plan, construction loan, and trade receivable 
deals, the maturity of the securitized assets is so short that the 
structure is used to lengthen the maturity of the asset-backed 
securities to attract investors. In other revolving pool 
securitizations, such as UK residential mortgage deals, the 
structure is used to create shorter maturity bullet asset-backed 
securities to attract investors.
---------------------------------------------------------------------------

    Commenters requested further clarification about the common pool 
requirement. One concern centered on the presence of ineligible assets, 
including so-called ``excess concentration'' receivables. The agencies 
observe that, on the one hand, these ineligible assets are part of the 
asset pool, and proceeds from them may even be used to cover losses 
that would otherwise be allocated to investors. On the other hand, the 
bulk, or in many cases all, of the proceeds from the ineligible assets 
are directed to the sponsor, and the receivables are not eligible to be 
included when determining the revolving pool's limit on outstanding 
investor ABS interests. The agencies do not consider these arrangements 
to violate the common pool requirement, though as noted above the final 
rule does not permit these assets to be included when calculating the 
size of the seller's interest.
    Notwithstanding the agencies' willingness to accommodate these 
ineligible assets that are allocated to the sponsor, if a revolving 
pool securitization designated a collateral group as the securitized 
assets for a specific series, the arrangement would not meet the common 
pool requirement. In this vein, commenters requested clarification as 
to whether a revolving pool securitization with collateral groups meets 
the common pool requirement. Commenters did not provide details about 
these grouping practices, and the agencies believe the use of 
collateral groups may not satisfy the common pool requirement. If the 
arrangement were analogous to a construct with multiple revolving pool 
securitizations being operated out of a single issuing entity, and the 
sponsor could demonstrate that each group would comply with the rule's 
requirements on an independent basis, the arrangement could meet the 
common pool standard. On the other hand, if the arrangement is 
analogous to a revolving pool securitization in one group and a series 
trust in another

[[Page 77630]]

group, the arrangement would be extremely unlikely to satisfy the 
common pool standard. If distributions and losses from any ``group'' 
are designated to a single outstanding series, the arrangement would 
not meet the common pool standard.\88\ To accommodate the possibility 
of a multiple group arrangement, the agencies have modified the rule 
text of the common pool requirement slightly to eliminate the 
requirement that the common pool collateralize ``all'' series issued by 
the revolving pool securitization, as well as a similar requirement in 
the definition of seller's interest. Nevertheless, a sponsor that 
relies on section 5 of the rule for a multiple group arrangement bears 
ultimate responsibility to demonstrate full compliance with the rule's 
common pool requirement.
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    \88\ The use by a revolving pool securitization of excess cash 
flows resulting from allocations of distributions to one series of 
ABS interests as credit enhancement to cover shortfalls in periodic 
interest obligations, periodic losses, and similar exposures 
experienced by other specified series of ABS interests (but not all 
other series of ABS interests) does not violate the common pool 
requirement. The agencies do not believe this sharing of allocations 
of distributions among ``groups'' of outstanding series raises the 
same concerns as separate groups of collateral. Similarly, principal 
accumulation formulas would not violate the common pool requirement. 
As discussed above, some revolving pool securitizations allocate 
principal collections from pool assets during an accumulation phase 
pursuant to a formula that captures all available principal 
collections from pool assets that are not otherwise needed for other 
principal accumulation accounts and acquisition of new pool 
collateral.
---------------------------------------------------------------------------

    As discussed above, the reproposal also noted that revolving pool 
securitizations do not monetize excess spread, and the agencies invited 
comment as to whether the rule should be modified to expressly prohibit 
structures that rely on the seller's interest option from issuing 
senior interest-only bonds or premium bonds.\89\ In light of 
commenters' concerns about the feasibility of incorporating this 
restriction into a regulatory requirement and attendant grandfathering 
issues with respect to structures that have classes of bonds previously 
issued with idiosyncratic interest rates, the agencies are taking a 
different approach. The agencies have added to the definition of a 
revolving pool securitization the requirement that the sponsor does not 
monetize excess spread from its securitized assets. The ability of a 
sponsor to meet this standard with respect to its outstanding investor 
ABS interests depends on the facts and circumstances of the issuance, 
including whether the revolving pool securitization issues ABS 
interests that price materially above par in light of all the features 
of the ABS interests and market conditions, or the revolving pool 
securitization issues ABS interests that pay investors interest on 
notional principal absent issuance of a corresponding issuance of 
principal-only bonds to support the revolving pool securitization.
---------------------------------------------------------------------------

    \89\ Revised Proposal, 78 FR at 57944.
---------------------------------------------------------------------------

    Consistent with the reproposal, the final rule requires the 
seller's interest to be not less than 5 percent of the aggregate unpaid 
principal balance of all outstanding investor ABS interests in the 
issuing entity. The phrase ``all outstanding investor ABS interests 
issued'' refers to ABS interests issued to persons other than the 
sponsor and wholly-owned affiliates of the sponsor. Although the 
reproposal suggested that ABS interests held by the sponsor would still 
be treated as outstanding investor ABS interests if those asset-backed 
securities were ``issued under a series,'' the agencies are simplifying 
the final rule to eliminate this distinction, which could raise 
associated interpretive issues as to whether certain retained interests 
met that description. Accordingly, in determining the 5 percent ratio, 
a sponsor is not required to include in the denominator the amount of 
ABS interests that are held by the sponsor or its wholly-owned 
affiliates, but only if the sponsor (or its wholly-owned affiliates) 
retains them for the life of the ABS interests. This treatment applies 
for ABS interests held by the sponsor and its wholly-owned affiliates 
for purposes of complying with the risk retention rule, or held for 
other reasons.\90\ In order to maintain consistency with a sponsor's 
disclosures as to the manner of its compliance with the seller's 
interest requirement, which are communicated to investors in connection 
with the issuance of a series of ABS interests, the sponsor must make a 
threshold determination as to whether it intends to retain excluded ABS 
interests for their life and disclose this election to investors. If a 
sponsor wishes to retain the flexibility to transfer an ABS interest in 
the future, the sponsor must, from the time of the issuance of the ABS 
interest onward, include such ABS interest in the denominator.\91\
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    \90\ There are several circumstances in which a sponsor might 
retain additional ABS interests. Investors may not be inclined to 
purchase investor ABS interests unless the sponsor holds a greater 
interest in the securitization transaction. The sponsor's cost of 
funds to place a subordinated tranche of a series may be greater 
than the sponsor's cost to fund that tranche through other means, or 
the sponsor's overall cost of funds may be lower than the funding 
that can be obtained by issuance of a new series. If the ABS 
interest is being retained by the sponsor as part of its required 
risk retention pursuant to the rule, the interest is subject to 
hedging and transfer restrictions of section 12 of the rule.
    \91\ An ABS interest retained in this manner and that is not 
being used to satisfy the minimum risk retention requirements under 
the rule, and that is excluded from the denominator, is not subject 
to the restrictions of the final rule that apply to ABS interests 
retained to meet the risk retention obligations under the final 
rule. For instance, the sponsor would be permitted to hedge the 
risks related to holding such an interest.
---------------------------------------------------------------------------

    The agencies have also added language clarifying that, if the 
transaction documents set minimum required seller's interest as a 
proportion of the unpaid principal balance of the outstanding investor 
ABS interests in one or more identified series, rather than all 
outstanding investor ABS interests of the revolving pool securitization 
as a whole, seller's interest may be measured on that basis. However, 
the percentage of each series' specific seller's interest must (when 
combined with the percentage of securitization-wide seller's interest, 
if any) equal at least 5 percent other than for any series issued prior 
to the applicable effective date. For example, the final rule does not 
permit a sponsor to include in the numerator of the seller's interest 
ratio a reserve account that only covers shortfalls of principal and 
interest payments to holders of a specific series of investor ABS 
interests.
    The final rule requires the 5 percent minimum seller's interest 
test to be determined and satisfied at the closing of each issuance of 
ABS interests to investors by the issuing entity, and at least monthly. 
The agencies have made several adjustments to the measurement details, 
in response to comments. Sponsors must measure the seller's interest at 
a seller's interest measurement date specified in the transaction 
documents at least monthly. If the seller's interest does not meet the 
minimum percentage requirement on any measurement date and the 
transaction documents specify a cure period, the minimum percentage 
requirement must be satisfied within the cure period, but no later than 
one month after the original measurement date.
    For purposes of determining the size of the seller's interest at 
the closing of each issuance of ABS interests to investors, the final 
rule permits the sponsor to use a specified ``as of'' date or cut-off 
date for data in establishing the outstanding value of the revolving 
pool securitization's securitized assets and an ``as-of'' date or cut-
off date for data in establishing the value of the revolving pool 
securitization's outstanding ABS interests. The agencies expect that 
sponsors of revolving pool securitizations will, as a practical

[[Page 77631]]

matter, continue their past practice of using cut-off dates or similar 
dates as the basis for disclosures about the amount of securitized 
assets held by the issuing entity, and similarly using investor 
reporting or distribution dates as the basis for disclosures about the 
amount of outstanding investor ABS interests. The final rule 
accommodates this, both for disclosure purposes and for determining 
compliance with the regulatory minimum seller's interest requirement. 
The sponsor is required to describe its use of specified dates for 
these purposes in connection with the associated investor disclosures 
for the issuance of ABS interests by the revolving pool securitization. 
In addition, in the interests of ensuring sponsors use up-to-date 
information, the rule requires the specified dates to be no more than 
60 days prior to the date of first use with investors. To accommodate 
revolving pool securitizations that only make investor distributions 
quarterly (or less frequently), rather than monthly, the final rule 
permits the specified dates to be up to 135 days prior to the date of 
first use with investors.\92\
---------------------------------------------------------------------------

    \92\ See supra note 62.
---------------------------------------------------------------------------

    In addition, the final rule's disclosure requirements require the 
sponsor to provide pre-sale descriptions of the percentage of seller's 
interest the sponsor expects to retain at closing. To accommodate this, 
the final rule permits sponsors to describe adjustments to their 
specified-date data reflecting increases or decreases for additions or 
removals of assets the sponsor expects to make before the closing 
date.\93\ The sponsor, in describing the amount of additional investor 
ABS interest that are expected to be added by the securitization 
transaction, may also describe other adjustments to the issuing 
entity's outstanding investor ABS interest data resulting from expected 
increases and decreases of those interests under the control of the 
sponsor, such as additional issuances, or scheduled principal payments 
on outstanding investor ABS interests that the sponsor expects will be 
made before the closing date. If the amount of seller's interest the 
sponsor determines that it retains at the closing of the securitization 
transaction is materially different from the amount described in the 
pre-closing disclosures, the sponsor must disclose the amount as of 
closing, within a reasonable time after the closing.
---------------------------------------------------------------------------

    \93\ In providing the sponsor this operational flexibility, the 
final rule does not allow the sponsor to adjust the asset total for 
changes other than additions or removals of assets made by the 
sponsor itself. Accordingly, the rule does not permit the sponsor to 
adjust the asset total to take into account seasonal changes in 
borrowers' revolving credit drawdown rates, expected changes in 
borrower repayment rates, or other estimated factors.
---------------------------------------------------------------------------

    Consistent with the reproposal, the seller's interest amount is the 
unpaid principal balance of the seller's interest in the common pool of 
receivables or loans. The minimum required seller's interest cannot be 
less than 5 percent of the aggregate unpaid principal balance of all 
outstanding investor ABS interests issued by the issuing entity. The 
agencies have added language clarifying the measurement of this ratio. 
Consistent with the definition of seller's interest, the final rule 
also clarifies that the sponsor may not include in the numerator of the 
seller's interest ratio ineligible assets, or those servicing assets 
allocated as collateral for a particular series. The agencies have also 
added language permitting the sponsor to take a deduction from the 
denominator (the principal of outstanding investor ABS interests) equal 
to the amount of funds held in a segregated principal accumulation 
account for the repayment of outstanding investor ABS interests, 
subject to certain conditions specified in the rule.\94\ For 
securitized assets without a principal or stated balance, such as 
royalty payments or leases, the amount of the securitized assets is the 
value of the collateral as determined under the transaction documents 
for purposes of measuring the seller's interest required for the 
revolving pool securitization.
---------------------------------------------------------------------------

    \94\ The terms of the securitization documents must prevent 
funds in the accumulation account from being applied for any purpose 
other than the repayment of the unpaid principal of outstanding 
investor ABS, and the funds in the account may only be invested in 
the types of assets permitted for a horizontal cash reserve account 
pursuant to section 4 of the rule.
---------------------------------------------------------------------------

    The requirements from the reproposal are unchanged with respect to 
the holding of the seller's interests. The rule permits wholly-owned 
affiliates of the sponsor to retain the seller's interest (and the 
horizontal interests described in section 5 of the rule, described 
below). The agencies decline to permit holding by majority-owned 
affiliates, as requested by commenters. The agencies are affording the 
treatment provided to seller's interest in section 5 of the rule 
because of the special alignment of incentives created by the sponsor's 
interest in maintaining access to continued funding through the 
revolving pool securitization, and the agencies seek to maintain this 
alignment through this stricter holding requirement under the final 
rule. The final rule includes changes to the other affiliate-holding 
provisions within section 5 to maintain consistency with this approach. 
The final rule also clarifies the provisions allowing seller's interest 
for ``legacy trust'' assets to be held at either the legacy trust level 
or the issuing entity level. The final rule, like the reproposal, 
limits the amount of seller's interest that may be held at the legacy 
trust level to its proportional share of the combined securitized 
assets of the two trusts. The text has been clarified to indicate that 
this proportional share is determined based on the principal balance of 
the securitized assets in each trust. The final rule also clarifies 
that the proportion of seller's interest held at the legacy trust level 
must be equal to this proportion.\95\ Commenters requested the agencies 
permit legacy trusts to retain horizontal forms of risk retention at 
either level, but the comments did not provide details of these 
structures. Without more details about the structures commenters seek 
to accommodate, the agencies have not made changes to section 5 of the 
rule in this regard.
---------------------------------------------------------------------------

    \95\ The reproposal indicated that the legacy trust must hold at 
least that proportion of seller's interest, but also suggested the 
sponsor would be permitted to hold a greater proportion of seller's 
interest at the legacy trust. The final rule clarifies that the 
proportion must be the same.
---------------------------------------------------------------------------

    The agencies made changes requested by commenters to allow for 
dollar-for-dollar offset from the 5 percent seller's interest 
requirement for funds maintained in a segregated excess funding account 
that is funded from distributions otherwise payable to the holder of 
the seller's interest. The agencies expanded the funding trigger 
requirements for the account to include the sponsor's failure to meet 
the minimum seller's interest requirement, and the failure to meet 
other minimum securitized asset balance tests under the transaction 
documents.\96\ The agencies agree with the commenters that losses would 
not be allocated to an excess funding account, and have removed a pari 
passu requirement on the priority of such distributions to the 
account.\97\ In order to expand the issuing entity's flexibility 
slightly to hold the account in a form other than cash deposits, the 
agencies have also decided to add language permitting investments in 
the same assets permitted for a horizontal

[[Page 77632]]

cash reserve account pursuant to section 4 of the rule.
---------------------------------------------------------------------------

    \96\ Commenters described a common test requiring the principal 
balance of the securitized assets to be not less than the sum of the 
numerators used for each series' calculation of its seller's 
interest ratio to allocate principal collections to the investor ABS 
interests.
    \97\ As in the reproposal, the account must, in the event of 
early amortization, pay out to outstanding investor ABS interest 
holders in the same manner as distributions on the securitized 
assets.
---------------------------------------------------------------------------

    The final rule retains the reproposal's provisions allowing the 
sponsor to reduce its seller's interest to a percentage lower than 5 
percent to the extent that, for all series of investor ABS interests 
issued by the revolving pool securitization, the sponsor retains, at a 
minimum, a corresponding fair value percentage of subordinated risk 
retention. This treatment is available with respect to the same two 
forms of subordinated risk retention the agencies included in the 
reproposal. As discussed in more detail below, the agencies have 
revised the requirements of each type slightly, in light of sponsor 
comments stating that existing structures would not be able to comply 
with the reproposed rule. An example of the reduction in seller's 
interest permitted by the final rule is as follows: a revolving pool 
securitization sponsor holds a seller's interest in the issuing 
entity's common collateral pool equal to 2 percent of the aggregate 
balance of outstanding investor ABS interests issued by the 
securitization. The securitization has two outstanding series; for one 
series the sponsor retains a residual interest in excess interest and 
fees with a fair value of 5 percent of the fair value of outstanding 
investor ABS interests in that series, and for the other, the sponsor 
retains a horizontal interest with a fair value of 3 percent of the 
fair value of outstanding investor ABS interests in that series. This 
revolving pool securitization holds adequate risk retention to comply 
with section 5 of the rule. So long as the structure in this example 
only holds 2 percent seller's interest, every future series issued to 
investors will be required to be supported by at least a 3 percent fair 
value subordinated interest.
    For revolving pool securitizations relying on both seller's 
interest and subordinated risk retention, commenters requested the 
agencies grandfather all series issued prior to the applicable 
effective date of the rule with respect to the subordinated portion of 
risk retention. For example, for a revolving pool securitization in 
which the sponsor holds 2 percent seller's interest, these commenters 
urged the agencies to permit the structure to come into compliance with 
the rule by continuing to maintain the 2 percent seller's interest and 
supplement it with at least a 3 percent horizontal interest to support 
each series issued to investors after the applicable effective date of 
the rule. Commenters said that, unless the agencies permit this 
grandfathering approach, a revolving pool securitization with less than 
5 percent seller's interest would have no option other than to increase 
its seller's interest to 5 percent. Commenters asserted it was not 
feasible to grandfather existing series issued before the applicable 
effective date of the rule with respect to a seller's interest, since a 
seller's interest is an interest in the securitization's entire 
collateral pool, and this factor raises serious obstacles to 
implementing it on a series-by-series basis. The agencies agree that 
the grandfathering approach requested by commenters should achieve 
meaningful risk retention in ABS interests issued in a revolving pool 
securitization after the applicable effective date of the rule, and the 
approach is reflected in the final rule text.\98\
---------------------------------------------------------------------------

    \98\ Specifically, section 5(f) of the rule provides that the 
seller's interest requirement would be reduced by the subordinated 
portion of risk retention support for all series of ABS interests 
issued by the revolving pool securitization after the applicable 
effective date of the rule.
---------------------------------------------------------------------------

    In the reproposal, the agencies sought to give revolving pool 
securitizations the above-described offset credit against a seller's 
interest for two different forms of horizontal risk retention. The 
first form was based on the sponsor's interest in excess interest and 
fees, as described above, made available to the sponsor periodically 
after covering the trust's expenses, interest due on more senior ABS 
interests in the series for that payment date, and charge-offs for that 
period that would otherwise be allocated to more senior ABS interests. 
Some revolving pool securitizations allocate each series its ratable 
share of interest and fee collections from the pool collateral and 
apply the interest and fee collections only within each series, while 
others permit sharing of excess interest and fee collections to cover 
shortfalls in another series after application of its share of interest 
and fee collections. The agencies proposed to allow sponsors to use the 
fair value of this residual ABS interest in excess interest and fees, 
as a percentage of the fair value of outstanding investor ABS 
interests, to reduce their 5 percent minimum seller's interest. As 
discussed above, commenters said they anticipated the burden of 
calculating the fair value of these excess interest and fees on a 
monthly basis would be so high that few, if any, sponsors would avail 
themselves of the option. The agencies note that this is a residual 
interest comprised of a stream of future cash flows, and no commenter 
suggested any other reasonable methodology to assign a value to it for 
purposes of determining the required amount of risk retention. To 
address this burden, the final rule does not require the sponsor to 
disclose its fair value determination to investors monthly. The sponsor 
also must continue to calculate the fair value of the residual ABS 
interest in excess interest and fees at the same time the sponsor 
calculates the seller's interest, to verify that it continues to hold 
at least the minimum required amount of risk retention.\99\
---------------------------------------------------------------------------

    \99\ To reduce burden further, the rule permits the periodic 
determinations of this residual interest's fair value percentage to 
be made without re-determining the fair value of the outstanding 
investor ABS interests in the denominator. The sponsor may, at its 
option, carry forward the fair values of the outstanding investor 
ABS interests from the determinations made for the closings of the 
transactions in which those outstanding investor ABS interests were 
issued (which are likely to be based on observable market data at 
that time). Only the fair value of the residual ABS interest in the 
numerator of the ratio needs to be determined every period. The 
agencies recognize that, for revolving pool securitizations with one 
or more amortizing series, this approach may result in a larger 
denominator and thus a larger residual ABS interest in excess 
interest and fees. The final rule permits a sponsor to elect to make 
monthly redeterminations of the fair value of such amortizing series 
in connection with their periodic determinations.
---------------------------------------------------------------------------

    The agencies have made two clarifying changes to the text of the 
final rule. First, at the request of commenters, the agencies have 
eliminated the requirement that the sponsor's residual claim to the 
interest and fee cash flows for any interest payment period be 
subordinated to all accrued and payable principal due on the payment 
date to more senior ABS interests in the series for that period. 
Commenters asserted this requirement was correct for interest due (as 
the rule provides), but not for principal.\100\ The agencies have 
eliminated the ``and principal'' language contained in the interest 
subordination paragraph, and have also eliminated the requirement that 
the residual have the most subordinated claim to any part of the 
series' share of principal repayment cash flows.\101\ In addition, the 
agencies have clarified that, in applying interest and fees to reduce 
the series' share of

[[Page 77633]]

losses for the applicable period, these losses must include charge-offs 
that were not covered by available interest and fees in previous 
periods. The agencies believe this clarification is appropriate to 
prevent sponsors from receiving payments of excess spread on a period-
by-period basis for pools that have suffered un-covered losses on 
securitized assets in previous periods.\102\
---------------------------------------------------------------------------

    \100\ One group of commenters also said the obligation to pay 
default-rate interest is typically subordinated to payment of the 
contract-rate interest and coverage for allocated charge-offs. The 
agencies regard this as desirable in that it uses available excess 
spread first to protect investors from losses. At any rate, the 
arrangement described by commenters in this regard means that the 
sponsor only claims excess interest and fee collections remaining 
after covering both types of ``interest,'' which is in compliance 
with the rule text.
    \101\ Commenters requested the agencies eliminate the separate 
waterfall requirement from the option, citing concern that single-
waterfall revolving pool securitizations could not utilize the 
structure. Commenters did not elaborate on how the residual ABS 
interest in excess interest and fees would be separately identified 
or valued in such an approach. Since the separate waterfall 
requirement is a central element of the option, the agencies have 
retained it.
    \102\ This eliminates possible incentives for sponsors to 
attempt to cluster charge-offs into particular periods.
---------------------------------------------------------------------------

    The second form of subordinated risk retention the agencies would 
have recognized in the reproposal for purposes of reducing the required 
amount of seller's interest would have been an eligible horizontal 
residual interest the sponsor simultaneously held in the 
securitization's outstanding series of ABS interests. The reproposal 
required these interests to meet all the requirements for the standard 
form of eligible horizontal residual interest pursuant to section 4 of 
the reproposed rule. Commenters asserted that revolving pool 
securitizations that retain a residual ABS interest in excess interest 
and fees could not simultaneously satisfy the requirement pursuant to 
section 4 that the eligible horizontal residual interest have the most 
subordinated claim to interest and principal. Commenters said a 
residual ABS interest in excess interest and fees is typically 
structured first to apply a series' share of excess interest and fees 
each period to cover the series' share of trust expenses and the 
interest due to each tranche of ABS interests in the series; second to 
apply remaining excess interest and fees to cover charge-offs allocated 
to more senior ABS interests in the series; and third to make the 
remainder available to the sponsor (net of portions shared with other 
series, in some structures). Commenters said that this subordinated 
interest is typically structured to pay interest to the holder before 
excess interest and fee collections are applied to cover the series' 
share of charge-offs. Accordingly, this residual interest would not 
have the most subordinated claim to interest.\103\ The agencies note 
that, now that the final rule recognizes subordinated forms of seller's 
interest, the residual interest may not be the most subordinated claim 
to principal distributions to the sponsor from the seller's interest, 
depending on the particulars of the transaction.
---------------------------------------------------------------------------

    \103\ Commenters also said the cash flow restrictions in section 
4 were not workable for revolving pool securitizations. As discussed 
elsewhere in this Supplementary Information, these restrictions are 
not included in the final rule.
---------------------------------------------------------------------------

    In order to permit sponsors to offset their seller's interest with 
either of the two forms of horizontal risk retention included in the 
reproposal, the agencies have modified the subordination requirements 
that would be required for eligible horizontal residual interest, to 
accommodate the issues described in the preceding paragraph. The final 
rule provides that a sponsor may take the seller's interest offset for 
ABS interests that would meet the definition of eligible horizontal 
residual interest in section 2 of the rule but for the sponsor's 
simultaneous holding of subordinated seller's interests, residual ABS 
interest in excess interest and fees, or a combination thereof. In 
connection with this approach, the sponsor's fair value determination 
for this horizontal residual interest must not incorporate any value 
attributable to the sponsor's holdings of subordinated seller's 
interest or residual ABS interest in excess interest and fees.
    Under the final rule, if the sponsor is also taking risk retention 
credit for its residual ABS interest in excess interest and fees, the 
sponsor may not include any of the interest payments to itself on this 
offset eligible horizontal residual interest (``offset EHRI'') in 
determining the fair value of the offset EHRI. Similarly, if the 
sponsor is taking risk retention credit for subordinated seller's 
interest that is used to reduce charge-offs that would otherwise be 
allocated to reduce the principal of the offset EHRI, the sponsor may 
not include any principal payments on the offset EHRI in determining 
the fair value of the offset EHRI. The agencies believe this bright-
line rule provides an appropriate compromise between flexibility for 
sponsors and clarity for investors and regulators as to the nature of 
the risk retention interests upon which a sponsor relies to comply with 
the final rule.
    Under the final rule, if the sponsor seeks to rely on offset EHRI 
as part of its risk retention interest for purpose of compliance with 
the rule, any subordinated seller's interest or residual ABS interest 
in excess interest and fees retained by the sponsor must also comply 
with the applicable requirements of section 5 of the rule. This is true 
even if the sponsor is not asserting reliance on these subordinated 
seller's interests or residual ABS interests in excess interest and 
fees as part of its retained risk retention interests to comply with 
the rule.
    Commenters said that sponsors sought the ability to continue 
incorporating subordinated seller's interest or residual ABS interest 
in excess interest and fees into their deal structures and 
simultaneously retain a junior bond, while still having the flexibility 
to choose which combination of those interests the sponsor would use to 
comply with the risk retention requirements. Commenters placed 
particular importance on retaining the flexibility to do this without 
being required to engage in fair value determinations for the interests 
the sponsor does not count for purposes of regulatory compliance. Taken 
together, the agencies believe that these rules for offset EHRI provide 
an appropriate framework to accommodate that flexibility.\104\
---------------------------------------------------------------------------

    \104\ As an example, a sponsor could rely on a pari passu 
seller's interest and supplement it with the fair value of principal 
payments on an offset EHRI, at the same time the sponsor retained a 
residual interest in excess spread but did not rely on that interest 
for purposes of satisfying its risk retention requirements. Or for a 
revolving pool securitization of assets that do not generate 
significant excess spread, the sponsor might rely on a subordinated 
seller's interest and supplement it with the fair value of interest 
payments on an offset EHRI, since its residual interest in excess 
interest and fee collections would provide a lesser contribution to 
satisfying the sponsor's risk retention obligations.
---------------------------------------------------------------------------

    The final rule requires the sponsor to make the percentage fair 
value determination for offset EHRI, and to make investor disclosures, 
at the same time and in the same manner as is required for the standard 
form of eligible horizontal residual interest pursuant to section 4 of 
the rule. Consistent with the treatment of the standard form of 
eligible horizontal residual interest pursuant to section 4 of the 
rule, the sponsor is only required to perform the fair value 
determination for offset EHRI with respect to the initial issuance of 
the ABS interests supported by the offset eligible horizontal residual 
interest. The final rule similarly requires a sponsor using a residual 
ABS interest in excess interest and fees to disclose the fair value of 
the interest in the same manner as required for eligible horizontal 
residual interests pursuant to section 4. To accommodate the 
fluctuating nature of securitized assets and outstanding investor ABS 
interests present in revolving pool securitizations, the final rule's 
valuation and disclosure provisions for offset EHRI and residual ABS 
interests in excess interest and fees allow the use of specific dates 
for data on securitized assets and outstanding investor ABS interests, 
and adjustments to these amounts in connection with pre-sale 
disclosures. These provisions are the same as those governing the 
determination of minimum seller's interest, as described above.
    Consistent with the agencies' reproposal, the final rule also makes

[[Page 77634]]

clear that there is no sunset date for revolving pool securitization 
risk retention interests. The basis for the agencies' decision to 
propose a sunset date for risk retention was that sound underwriting is 
less likely to be effectively promoted by risk retention after a 
certain period of time has passed and a peak number of delinquencies 
for an asset class has occurred. In the case of a revolving pool 
securitization, this rationale does not apply, since the sponsor 
continually transfers additional assets into the common pool of 
collateral.\105\ For a seller's interest, the rule text continues to 
specify that the seller's interest must be measured and satisfied at 
least monthly until no ABS interest in the issuing entity is held by 
any person which is not a wholly-owned affiliate of the sponsor.\106\ 
For other forms of risk retention employed by a revolving pool 
securitization sponsor, the applicable provision on sunset is in 
section 12(f) of the rule. Notably, this provision only lifts the 
transfer and hedging restrictions of section 12 of the rule at ``the 
latest of'' amortization of the securitized assets to 33 percent of the 
original balance, amortization of the principal amount of the ABS 
interests to 33 percent of their original balance, or two years after 
closing. Since the common pool of securitized assets continually 
revolves and the ABS interests typically are not paid principal until 
maturity, neither the securitized assets nor the ABS interests amortize 
down to 33 percent of the original unpaid balance (absent an early 
amortization).
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    \105\ Even if the pool consists of receivables created by 
revolving accounts, successful underwriting of revolving account 
credits is an ongoing process for the life of the credit line.
    \106\ The agencies have modified the rule text to clarify that 
holding by an affiliate for these purposes means holding by a 
wholly-owned affiliate. This is consistent with the other 
affiliation requirements of section 5 of the rule.
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    Commenters requested several additional changes concerning the 
rules for holding and measuring a seller's interest. One commenter 
requested the agencies strike the element of the definition of seller's 
interest that describes it as an ABS interest. The commenter requested 
the agencies allow sponsors to hold anything that was the economic 
equivalent of the seller's interest, regardless of form. The agencies 
are not making this change because they believe the rule's definition 
of ``ABS interest'' provides sufficient flexibility, balanced against 
the agencies' interest in certainty and clarity regarding how a sponsor 
achieves compliance with the rule. With respect to the form 
requirements for an ABS interest, the definition applies to any type of 
interest, whether certificated or uncertificated, and includes 
beneficial interests and residual interests. This provides flexibility 
for sponsors and imposes no specific requirements as to form or 
documentation, but at the same time maintains a basic requirement for 
the sponsor to be able to demonstrate that the legal source of its 
entitlement to payments from, and its obligation to share losses of, 
the securitized assets are consistent with the rule's requirements for 
a risk retention interest.
    Another group of commenters requested the agencies modify the 
holding requirements for sponsors reducing their 5 percent seller's 
interest requirement with offsetting horizontal interests. As described 
above, the sponsor must demonstrate that it holds the offset percentage 
as a minimum percentage for every series of outstanding investor ABS 
interests.\107\ Commenters requested the agencies permit sponsors to 
determine they satisfied the requirement on a weighted average basis 
taken across all outstanding series. The agencies decline to 
incorporate this approach because it would result in at least some 
series of outstanding investor ABS interests with less than 5 percent 
risk retention. Commenters also requested sponsors be permitted to take 
partial risk retention credit for horizontal interests the sponsor 
holds jointly with another party, on a pro rata basis. The agencies 
note this is not permitted for the standard form of eligible horizontal 
residual interest, and commenters did not provide sufficient 
justification for treating offset EHRI any differently.
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    \107\ Commenters also expressed the view that the reproposal did 
not provide sponsors with the flexibility to offset their minimum 
seller's interest percentage with a form of horizontal risk 
retention that supported more than one outstanding series. In this 
regard, the agencies note that the final rule requires the sponsor 
to satisfy the minimum floor for every series issued after the 
applicable effective date of the rule, but that it does not require 
them to hold that risk retention in each series. The rule does not 
prevent sponsors from incorporating residual ABS interest in excess 
interest and fees or offset EHRI that are structured to support more 
than one series, or structured to support delinked structures, so 
long as the sponsor demonstrates the structure satisfies the rule's 
requirements as to the terms of those horizontal interests.
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    The agencies revised the disclosure requirements of section 5 of 
the rule in a manner consistent with the agencies' revisions to the 
disclosure requirements throughout the rule, with appropriate 
variations for valuation of seller's interest and offsetting 
subordinated interests as described above.
    The reproposal also included provisions clarifying that a master 
trust entering early amortization and winding down would not, as a 
result, violate the rule's requirement that the seller's interest be 
pari passu. Commenters requested changes to the details of these 
provisions, to reflect more accurately the way early amortization 
triggers are actually structured. In response to commenter concerns, 
the agencies have revised the rule text to apply when the 
securitization has entered early amortization, rather than focusing on 
the technical trigger events that result in an early amortization 
commencing.\108\ Nevertheless, the agencies also believe that the 
revisions permitting subordination of the seller's interest make this 
portion of the final rule less significant than it was when the 
agencies would have required the seller's interest to be pari passu.
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    \108\ The agencies have also eliminated the paragraph limiting 
the provision to pools of revolving assets. The language was 
included in the reproposal based on concerns about potential evasive 
structures, but the agencies have now directly addressed that issue 
in the discussion of revolving pool securitizations that amortize 
without issuing a second series of investor ABS interests 
collateralized by the common pool of assets.
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    For servicing advance receivables, the agencies note that the final 
rule permits sponsors of revolving pool securitizations to rely on 
subordinated forms of seller's interest to meet their risk retention 
requirements, which largely addresses the source of the commenters' 
concerns.
3. Representative Sample
a. Overview of Reproposal and Public Comment
    The original proposal would have allowed a sponsor to satisfy its 
risk retention requirement for a securitization transaction by 
retaining ownership of a randomly selected representative sample of 
assets. To ensure that the sponsor retained exposure to substantially 
the same type of credit risk as investors in the securitized 
transaction, the sponsor electing to use the representatives sample 
option would have been required to construct a ``designated pool'' of 
assets consisting of at least 1,000 separate assets from which the 
securitized assets and the assets comprising the representative sample 
would be drawn. The original proposal also would have required a number 
of other measures in calculating the representative sample to ensure 
the integrity of the process of selection, including a requirement to 
obtain a report regarding agreed-upon procedures from an independent 
public accounting firm.\109\
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    \109\ See Original Proposal, 76 FR at 24104.

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[[Page 77635]]

    Many commenters opposed the representative sample in the original 
proposal, noting that it would be impractical to implement this option 
for a variety of reasons, including that it would be unworkable with 
respect to various asset classes, would be subject to manipulation, and 
was too burdensome with respect to its disclosure requirements. Due to 
these concerns and a conclusion that the representative sample option 
would likely be too difficult to implement, the agencies did not 
include a representative sample option in the reproposed rule. Instead, 
the agencies invited comment on whether a representative sample option 
should be included as a form of risk retention, and, if so, how should 
such an option be constructed, and what benefits such an option might 
provide.
    The agencies received several responses to this request for 
comment. While some commenters were supportive of the reproposal's 
elimination of the representative sample option, many commenters urged 
the agencies to reconsider including the option in a simplified form. 
Several commenters recommended a simplified version of a representative 
sample option similar to the representative sample option included in 
the FDIC's safe harbor for securitizations, which (prior to the 
applicable effective date of the final rule) requires that the retained 
sample be representative of the securitized asset pool, but does not 
specify the requirements for establishing that the sample is 
representative and, accordingly, does not itemize specific items, such 
as servicing, accountant reports or other requirements.\110\ Commenters 
asserted that the representative sample option is one of the two 
permitted forms of risk retention under the existing FDIC safe harbor 
and that the approach has been working effectively for several banks 
that issue asset-backed securities. One commenter stated that its 
sponsor members would strongly prefer to have a representative sample 
method as an alternative option, even if the final rule is more 
burdensome than they would prefer.
---------------------------------------------------------------------------

    \110\ See 12 CFR 360.6.
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    Commenters indicated that the representative sample is one of the 
alternative methods of risk retention permitted under Article 122a of 
the European Union's Capital Markets Directive, and that if the 
representative sample is not included it may place U.S. issuers at a 
competitive disadvantage against asset-backed securities issuers from 
outside the United States, and could make it more difficult for global 
offerings of asset-backed securities originated outside the United 
States to be sold to investors in the United States.
    Many commenters indicated that a revised representative sample 
option would be particularly useful for automobile loan and lease 
securitizations. Commenters also stated that the option would be useful 
more generally for large pools of consumer or retail assets, such as 
student loans, and for sponsors that do not securitize all of their 
assets. In order to facilitate use by sponsors for these types of 
securitizations, commenters generally agreed that the agencies should 
revise the option so that (i) a sponsor selects a designated pool of 
assets for securitization (ii) then uses a random selection process to 
select a `sample' of assets with an aggregate unpaid principal balance 
equal to 5 percent of the pool and (iii) that the pool should be 
sufficiently large to ensure that the sample is representative of the 
assets in the pool. To accomplish (iii), commenters suggested that a 
pool size of 5,500 or 6,000 loans would be sufficient to achieve a high 
confidence level that the sample shares significant asset 
characteristics with the securitized pool.
    A commenter suggested that additional criteria could be added such 
as documentation of material asset characteristics and a description of 
the policies and procedures that the sponsor used to ensure that the 
sample identification process complies with the risk retention 
requirement. The commenter also recommended that documentation 
identifying the representative sample be maintained for the same 
duration required for a vertical risk retention interest and that the 
assets be excluded from the securitization pool and from any other 
securitization for such time period. Other commenters favored simpler 
disclosures, such as a statement that the composition of the sample was 
prepared in accordance with the rule's requirements, and a description 
of the method used to randomly select assets.
    A few commenters suggested that additional criteria could be added 
specifically to address smaller pool sizes, such as the criteria above, 
or a `resampling' requirement if the sample is not sufficiently similar 
to the securitized pool. Other commenters expressed the view that a 
sponsor should not be required to `rework' the pool based on a post hoc 
examination of the performance of the sample pool compared to the 
securitized pool.
b. Response to Comments and Final Rule
    Having considered the comments, the agencies have concluded that 
adopting the recommendations made by commenters would be insufficient 
to address concerns about the practicality of obtaining an adequate and 
truly representative sample, while providing sufficient flexibility for 
use of the option in more than extremely limited scenarios. 
Furthermore, the agencies concur with commenters' views that, at a 
minimum, a large number of loans would be required depending on the 
variability of asset characteristics in order to ensure an adequate 
sample, which greatly reduces the number of asset classes that would be 
able to utilize the option.
    The agencies do not believe that adopting the disclosure, 
servicing, and independent review requirements as recommended by 
commenters would be sufficiently robust to ensure the effectiveness of 
the representative sample option and to minimize the ability of 
sponsors to ``cherry pick'' assets favorable to them, which would 
result in the risk retention sample having a better risk profile than 
the assets collateralizing the ABS issued to investors. In addition, 
unless large pools of loans are already largely homogeneous, a random 
sample will not necessarily be a representative sample. The agencies do 
not believe that effective pool consistency standards would be any less 
burdensome or objectionable than the sample validation standards. Even 
if an approach that met the requirements of section 15G of the Exchange 
Act could be developed, the agencies acknowledge that the costs of such 
requirements could be overly burdensome for sponsors. Furthermore, in 
light of the revisions that have been made to other aspects of the 
rule, the agencies believe that the final rule's risk retention options 
should provide a workable risk retention option for various asset 
classes including auto loan, auto lease, and student loan 
securitizations. The agencies believe these additional risk retention 
options will be more cost effective than the representative sample 
option in the original proposal and will more effectively align the 
interests of sponsors and investors. Therefore, the final rule does not 
include a representative sample option.

[[Page 77636]]

4. Asset-Backed Commercial Paper Conduits
a. Overview of the Reproposal and Public Comments
    As explained in the original proposal and reproposal, ABCP is a 
type of liability that is typically issued to investors by a special 
purpose vehicle (commonly referred to as a ``conduit'') sponsored by a 
financial institution or other sponsor. The commercial paper issued by 
the ABCP conduit is collateralized by a pool of asset-backed 
securities, which may change over the life of the entity. Depending on 
the type of ABCP conduit, the securitized assets collateralizing the 
ABS interests that support the ABCP may consist of a wide range of 
assets including securitized automobile loans, commercial loans, trade 
receivables, credit card receivables, student loans, and other loans. 
Historically, these programs came about as a way for banks to extend 
commercial firms credit at a lower cost than bank-funded working 
capital lines or trade receivable financing. Like other types of 
commercial paper, the term of ABCP typically is short, and the 
liabilities are ``rolled,'' or refinanced, at regular intervals. Thus, 
ABCP conduits generally fund longer-term assets with shorter-term 
liabilities.\111\ During the financial crisis, however, ABCP conduits 
experienced acute distress, which revealed significant structural 
weaknesses in certain ABCP conduit structures, particularly those ABCP 
conduits that did not have 100 percent liquidity commitments, and 
exposed investors and the financial system to significant risks.\112\
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    \111\ See section 9 of the Original Proposal.
    \112\ Daniel M. Covitz, Nellie Liang, and Gustavo A. Suarez, 
``The Evolution of a Financial Crisis: Panic in the Asset-Backed 
Commercial Paper Market,'' Finance and Economics Discussion Series 
2009-36 (Washington: Board of Governors of the Federal Reserve 
System, August 2009).
---------------------------------------------------------------------------

    In a typical ABCP conduit, the sponsor approves the originators 
whose loans or receivables will collateralize the ABS interests that 
support the ABCP issued by the conduit. Banks can use ABCP conduits 
that they sponsor to meet the borrowing needs of a bank customer and 
offer that customer a more attractive cost of funds than a commercial 
loan or a traditional debt or equity financing. In such a transaction, 
the customer (an ``originator-seller'') may sell loans or receivables 
to an intermediate, bankruptcy remote SPV. The credit risk of the loans 
or receivables transferred to the intermediate SPV then typically is 
separated into two classes--a senior ABS interest that is acquired by 
the ABCP conduit and a residual ABS interest that absorbs first losses 
on the loans or receivables and that is retained by the originator-
seller. The residual ABS interest retained by the originator-seller 
typically is sized with the intention that it be sufficiently large to 
absorb all losses on the securitized assets.
    In this structure, the ABCP conduit, in turn, issues short-term 
ABCP that is collateralized by the senior ABS interests purchased from 
one or more intermediate SPVs (which are supported by the subordination 
provided by the residual ABS interests retained by the originator-
sellers). The sponsor of this type of ABCP conduit, which is usually a 
bank or other regulated financial institution or an affiliate or 
subsidiary of a bank or other regulated financial institution, also 
typically provides (or arranges for another regulated financial 
institution or group of financial institution to provide) 100 percent 
liquidity coverage on the ABCP issued by the conduit. This liquidity 
coverage typically requires the support provider to provide funding to, 
or purchase assets or ABCP from, the ABCP conduit in the event that the 
conduit lacks the funds necessary to repay maturing ABCP issued by the 
conduit.
    The agencies' original proposal included an ABCP option that 
incorporated several conditions designed to ensure that the ABCP option 
would have been available only to the type of single-seller or multi-
seller ABCP conduits described above. The proposed ABCP option would 
only have been available to ABCP conduits that issued ABCP with a 
maximum maturity at the time of issuance of nine months. Under the 
original proposal, a sponsor of an ABCP conduit program would have been 
eligible for the proposed ABCP option if a ``regulated liquidity 
provider'' (defined in the rule generally to mean banks and certain 
bank affiliates) provided 100 percent liquidity support to the ABCP 
conduit and the originator-sellers retained a 5 percent horizontal 
residual interest in each intermediate special purpose vehicle 
containing the assets they finance through the ABCP conduit. Under the 
original proposal, this risk retention option would have been available 
to ABCP conduits collateralized by ABS interests that were issued or 
initially sold by intermediate SPVs that sold ABS interests exclusively 
to ABCP conduits and would not have been available to ABCP conduits 
that purchased securities in the secondary market or operated 
securities arbitrage programs.\113\
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    \113\ Such ABCP conduits purchase securities in the secondary 
market and typically either lack such liquidity facilities or have 
liquidity coverage that is more limited than those of the ABCP 
conduits eligible to rely on this option for purposes of the 
proposed rule.
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    In the reproposal, the agencies maintained an option tailored for 
ABCP securitization transactions that retained the basic structure of 
the original proposal with modifications based in part on comments. The 
modifications were intended to accommodate certain market practices 
referred to by commenters, while maintaining a meaningful risk 
retention requirement. The reproposal would have permitted the sponsor 
of an eligible ABCP conduit to satisfy its risk retention requirement 
if, for each ABS interest the ABCP conduit acquired from an 
intermediate SPV, the intermediate SPV's sponsor (the `originator-
seller' with respect to the ABCP conduit) retained an exposure to the 
assets collateralizing the intermediate SPV in the appropriate form and 
amount under the rule, provided that all other conditions to this 
option were satisfied. The agencies reaffirmed the view expressed in 
the original proposal that such an approach is appropriate in light of 
the considerations set forth in section 15G(d)(2) of the Exchange 
Act.\114\
---------------------------------------------------------------------------

    \114\ See Revised Proposal, 78 FR at 57949; Original Proposal, 
76 FR at 24107.
---------------------------------------------------------------------------

    In response to comments, the reproposal would have included 
additional flexibility not present in the original proposal to permit 
affiliated groups of originator-sellers to finance credits through a 
single intermediate SPV. Under the reproposal, both an originator-
seller and a ``majority-owned originator-seller affiliate'' (majority-
owned OS affiliate) could have sold or transferred assets that these 
entities had originated to an intermediate SPV. A majority-owned OS 
affiliate was defined as an entity that, directly or indirectly, 
majority controls, is majority controlled by, or is under common 
majority control with, an originator-seller. For purposes of this 
definition, majority control would have meant ownership of more than 50 
percent of the equity of an entity or ownership of any other 
controlling financial interest in the entity, as determined under GAAP. 
However, consistent with the original proposal, intermediate SPVs would 
not be permitted to acquire assets from non-affiliates.
    The reproposal required the ABCP conduit sponsor to: (i) Approve 
each originator-seller and majority-owned OS affiliate permitted to 
sell or transfer

[[Page 77637]]

assets, directly or indirectly, to an intermediate SPV from which an 
eligible ABCP conduit acquires ABS interests; (ii) approve each 
intermediate SPV from which an eligible ABCP conduit is permitted to 
acquire ABS interests; (iii) establish criteria governing the ABS 
interests, and the assets underlying the ABS interests, acquired by the 
ABCP conduit; (iv) administer the ABCP conduit by monitoring the ABS 
interests acquired by the ABCP conduit and the assets supporting those 
ABS interests, arranging for debt placement, compiling monthly reports, 
and ensuring compliance with the ABCP conduit documents and with the 
ABCP conduit's credit and investment policy; and (v) maintain and 
adhere to policies and procedures for ensuring that the requirements 
described above have been met.
    The reproposal also permitted there to be one or more intermediate 
SPVs between an originator-seller and/or any majority-owned OS 
affiliate and the intermediate SPV that issues ABS interests purchased 
by the ABCP conduit.\115\ The reproposal redefined ``intermediate SPV'' 
as a direct or indirect wholly-owned affiliate \116\ of the originator-
seller that is bankruptcy remote or otherwise isolated for insolvency 
purposes from the eligible ABCP conduit, the originator-seller, and any 
majority-owned OS affiliate that, directly or indirectly, sells or 
transfers assets to such intermediate SPV.\117\ Consequently, an 
intermediate SPV was permitted to acquire assets originated by the 
originator-seller or one or more of its majority-owned OS affiliates, 
or it could also have acquired assets from another intermediate SPV or 
asset-backed securities from another intermediate SPV collateralized 
solely by securitized assets originated by the originator-seller or one 
or more of its majority-owned OS affiliate and servicing assets.\118\ 
ABS interests collateralized by assets not originated by the 
originator-seller or by a majority-owned OS affiliate would have been 
ineligible as collateral for the ABCP conduit.
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    \115\ As indicated in the comments on the original proposal, 
there are instances where, for legal or other purposes, there is a 
need for multiple intermediate SPVs.
    \116\ See section 2 of the Revised Proposal (definition of 
``affiliate'').
    \117\ See section 2 of the Revised Proposal (definition of 
``Intermediate SPV'').
    \118\ The reproposal required each intermediate SPV in 
structures with one or more multiple intermediate SPVs that do not 
issue asset-backed securities collateralized solely by ABS interests 
to be a pass-through entity that either transfers assets to another 
SPV in anticipation of securitization (e.g., a depositor) or 
transfer ABS interests to the ABCP conduit or another intermediate 
SPV.
---------------------------------------------------------------------------

    The reproposal also would have relaxed activity restrictions on 
intermediate SPVs, by permitting an intermediate SPV to sell asset-
backed securities that it issues to third parties other than ABCP 
conduits.\119\
---------------------------------------------------------------------------

    \119\ As explained in the reproposal, the agencies believe that 
some originator-sellers operate a revolving master trust to finance 
extensions of credit the originator-seller creates in connection 
with its business operations. The master trust sometimes issues a 
series of asset-backed securities collateralized by an interest in 
those credits directly to investors through a private placement 
transaction or registered offering, and other times issues an 
interest to an eligible ABCP conduit. The reproposal was designed to 
accommodate such practices.
---------------------------------------------------------------------------

    The reproposal would have clarified and expanded (as compared to 
the original proposal) the types of collateral that an eligible ABCP 
conduit could acquire from an originator-seller and its majority-owned 
affiliates.\120\ Under the revised reproposal definition of ``eligible 
ABCP conduit'', an ABCP conduit could acquire any of the following 
types of assets: (1) ABS interests collateralized by securitized assets 
originated by an originator-seller or one or more majority-owned OS 
affiliates of the originator-seller and servicing assets; (2) special 
units of beneficial interest or similar interests in a trust or special 
purpose vehicle that retains legal title to leased property underlying 
leases that are transferred to an intermediate SPV in connection with a 
securitization collateralized solely by such leases originated by an 
originator-seller or one or more majority-owned OS affiliates and 
servicing assets; and (3) interests in a revolving master trust 
collateralized solely by assets originated by an originator-seller or 
one or more majority-owned OS affiliates and servicing assets.\121\ 
Under the proposal, the ABCP option would have been available only for 
ABCP conduits that were bankruptcy remote or otherwise isolated from 
insolvency of the sponsor and from any intermediate SPV. Assets other 
than the ABS interests and servicing assets, such as loans or 
receivables purchased directly by an ABCP conduit or loans or 
receivables acquired by an originator-seller, its majority-owned OS 
affiliates or an intermediate SPV in the secondary market, would have 
been expressly disqualified.
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    \120\ The purpose of this clarification was to allow originator-
sellers certain additional flexibility in structuring their 
participation in eligible ABCP conduits, while retaining the core 
principle that the assets being financed have been originated by the 
originator-seller or a majority-controlled OS affiliate, not 
purchased in the secondary market and aggregated.
    \121\ The definition of ``servicing assets'' is discussed in 
Part II.B of this Supplementary Information. The agencies are 
allowing an ABCP conduit to hold servicing assets.
---------------------------------------------------------------------------

    The reproposal also would have expanded the risk retention options 
available to an originator-seller, in its capacity as sponsor of the 
underlying ABS interests issued by the intermediate SPV, by allowing an 
eligible ABCP conduit to purchase interests for which the originator-
seller or a majority-owned OS affiliate retained risk using the 
standard risk retention or seller's interest options.
    The reproposal also would have required a regulated liquidity 
provider to enter into a legally binding commitment to provide 100 
percent liquidity coverage of all the ABCP issued by the issuing entity 
and would have clarified that 100 percent liquidity coverage means 
that, in the event that the ABCP conduit is unable for any reason to 
repay maturing ABCP issued by the issuing entity, the total amount for 
which the liquidity provider may be obligated is equal to 100 percent 
of the amount of ABCP outstanding plus accrued and unpaid interest. In 
response to commenters on the original proposal, the reproposal 
clarified that the required liquidity coverage would not be subject to 
credit performance of the ABS interests held by the ABCP conduit or 
reduced by the amount of credit support provided to the ABCP conduit 
and that liquidity coverage that only funds performing assets will not 
meet the requirements of the ABCP option.
    Consistent with the original proposal, under the reproposal the 
sponsor of an eligible ABCP conduit would have retained responsibility 
for ensuring compliance with the requirements of the ABCP option.\122\
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    \122\ In response to commenters on the original proposal who 
requested that the agencies replace the monitoring obligation with a 
contractual obligation of an originator-seller to maintain 
compliance, the agencies noted their belief that the sponsor of an 
ABCP conduit is in the best position to monitor compliance by 
originator-sellers and majority-owned OS affiliates.
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    With respect to disclosures, the reproposal did not include a 
requirement that the sponsor of the ABCP conduit disclose the names of 
the originator-sellers who sponsored the ABS interests held by the ABCP 
conduit and instead included a requirement that an ABCP conduit sponsor 
promptly notify investors, the Commission, and its appropriate Federal 
banking agency, if any, in writing of (1) the name and form of 
organization of any originator-seller that fails to maintain its risk 
retention as required and the amount of asset-backed securities issued 
by an intermediate SPV of such originator-

[[Page 77638]]

seller and held by the ABCP conduit; (2) the name and form of 
organization of any originator-seller or majority-owned OS affiliate 
that hedges, directly or indirectly through an intermediate SPV, its 
risk retention in violation of its risk retention requirements and the 
amount of asset-backed securities issued by an intermediate SPV of such 
originator-seller or majority-owned OS affiliate and held by the ABCP 
conduit; and (3) and any remedial actions taken by the ABCP conduit 
sponsor or other party with respect to such asset-backed securities. 
Consistent with the original proposal, the reproposal would have 
required the sponsor of an ABCP conduit to provide to each purchaser of 
ABCP information regarding the regulated liquidity provider, a 
description of the liquidity coverage, and notice of any failure to 
fund. The reproposal also retained the requirement that a sponsor 
provide information regarding the collateral underlying ABS interests 
held by the ABCP conduit and entities holding risk retention, as well 
as a description of the risk retention interests. The reproposal also 
retained the requirement that a sponsor provide to the appropriate 
Federal regulators, upon request, all of the information required to be 
provided to investors, as well as the name and form of organization of 
each originator-seller or majority-owned OS affiliate retaining an 
interest in the underlying securitization transactions.\123\
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    \123\ See Revised Proposal, 78 FR at 57948.
---------------------------------------------------------------------------

    Finally, under the reproposal, the sponsor of an ABCP conduit would 
have been required to take other appropriate steps upon learning of a 
violation by an originator-seller or majority-owned OS affiliate of its 
risk retention obligations, and listed, as examples of steps that may 
be taken, curing any breach of the requirements, or removing from the 
eligible ABCP conduit any asset-backed security that does not comply 
with the applicable requirements.
    Many commenters expressed general support for the revisions made to 
the ABCP option and stated that the reproposal provided significantly 
more flexibility than the original proposal. However, commenters also 
indicated that additional revisions would be necessary in order to 
ensure that the ABCP option is available to the types of ABCP programs 
predominantly available in the current market.
    Many commenters requested that the agencies permit additional forms 
of risk retention within the ABCP option. Commenters encouraged the 
agencies to recognize standby letters of credit, guarantees, liquidity 
facilities, unfunded liquidity, asset purchase agreements, repurchase 
agreements, and other similar support arrangements and credit 
enhancements to satisfy the risk retention requirement. Commenters 
expressed the view that allowing such additional forms of risk 
retention would reduce the inconsistency between the European Union 
risk retention regime and the U.S. proposal, thus improving the 
possibility of cross border offerings.\124\ Commenters asserted that 
these ABCP conduit features serve the purpose of credit risk retention 
by allocating credit risk between asset originators and ABCP conduit 
sponsors, and aligning incentives between ABCP conduit sponsors and 
investors. For example, one commenter asserted that under existing 
market practice, transferors of assets into ABCP conduits routinely 
retain credit risk in the financed assets in an amount equal to not 
less than 5 percent of the related subordinated ABCP notes, so that 
there is no need for the rule to impose duplicative risk retention 
requirements on ABCP conduit managers.
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    \124\ The European Union credit risk retention regime consists 
of Articles 405-410 of the Capital Requirements Regulation developed 
by the European Banking Authority, and is available at https://www.eba.europa.eu/regulation-and-policy/single-rulebook/interactive-single-rulebook/-/interactive-single-rulebook/toc/504.
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    Another commenter asserted that the reproposed rule would increase 
the costs of ABCP conduits and substantially reduce the market for ABCP 
financing, and that the rules were not necessary to promote high-
quality underwriting of ABCP, which the commenter asserted is already 
present in the multi-seller ABCP conduits operating in the current 
markets. This commenter proposed that sponsors of ABCP collateralized 
by originator-seller asset pools that are underwritten to high credit 
quality standards should be permitted to fund 5 percent risk retention 
either through a cash reserve or through a cash substitute (e.g., 
irrevocable unconditional letter of credit or credit facility) and 
should be permitted to rely on committed liquidity facilities that are 
limited to financing only performing assets.
    One commenter expressed the view that the risk retention 
requirement should not apply to ABCP conduits collateralized by 
repurchase agreements because the repurchase agreements provide 
liquidity. One commenter stated that some conduits do not apply asset 
collections to the payment of ABCP issued by such conduits but instead, 
in the ordinary course, pay their maturing notes directly from funds 
provided by their liquidity support providers. This commenter stated 
that, although the agencies have to date declined to recognize unfunded 
loan commitments to ABCP conduits as valid risk retention, a repurchase 
counterparty is contractually obligated from the outset to repurchase 
the assets from the ABCP conduit, and therefore retains credit risk 
throughout the term of the transaction.\125\
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    \125\ The agencies do not believe there is sufficient basis to 
distinguish an ABCP conduit collateralized by repurchase agreements 
from other issuances of ABS interests. As a result, the sponsor of 
an ABCP conduit collateralized by repurchase agreements would be 
required to satisfy the requirements of the final rule.
---------------------------------------------------------------------------

    Many commenters requested a full exemption from risk retention 
under section 15G of the Exchange Act for ABCP conduits with certain 
features or structures. For example, one commenter asserted that fully-
supported bank-sponsored conduits should be exempt from risk retention, 
regardless of whether the conduit satisfied other criteria set forth in 
the rule, because 100 percent of the credit risk is retained by the 
bank sponsor, and the only risk to investors would be the risk of the 
sponsoring institution itself.
    Some commenters asserted that arrangers and managers of ABCP 
conduits are not ``sponsors,'' and claimed that there is no valid basis 
for imposing risk retention requirements on these parties. One 
commenter asked for clarification as to who will be deemed a sponsor of 
ABCP issued by an ABCP conduit. One of these commenters disagreed with 
the agencies' position that in selecting the assets, one can be 
characterized as ``transferring'' those assets to the issuer. This 
commenter expressed the view that the word ``transfer,'' as used in 
section 15G and in the reproposal, cannot reasonably be interpreted to 
include a conduit manager's selection of the assets that its conduit 
will purchase. This commenter cited to case law that the term 
``transfer'' should be defined by reference to its ``commonly accepted 
meaning''; and a conduit manager does not itself sell, assign or 
deliver any assets to the conduit, so that it has not engaged in a 
``transfer.''
    Several commenters expressed the view that the proposed nine-month 
restriction on the maximum maturity at issuance for ABCP would be 
unnecessarily restrictive. Commenters asserted that while historical 
commercial paper maturities may have been shorter, many aspects of the 
international liquidity standards for banking organizations established 
by the Basel Committee on Banking Supervision's ``Basel liquidity

[[Page 77639]]

standards,'' including the liquidity coverage ratio and the proposed 
net stable funding ratio may combine to push average maturities out 
further. To address these concerns, commenters suggested that the 
maximum maturity for ABCP held by an eligible ABCP conduit be extended 
to 397 days, which is the maximum remaining maturity for securities 
that are eligible for purchase by money market mutual funds pursuant to 
Rule 2a-7 under the Investment Company Act of 1940, as amended.\126\
---------------------------------------------------------------------------

    \126\ See 17 CFR 270.2a7.
---------------------------------------------------------------------------

    The agencies received several comments regarding the definition of 
``eligible ABCP conduit.'' Several commenters expressed concern that 
limitations on assets that may be acquired by ABCP conduits were too 
restrictive. Commenters stated that many ABCP conduits hold assets that 
are not asset-backed securities, such as loans or receivables purchased 
directly from originators under a deferred purchase price note, which 
the commenters asserted is a customary structure by which conduits now 
finance originator-seller's assets, not the originator-seller 
securitization structure required by the reproposal. Commenters also 
expressed concern that ABCP conduits often hold asset-backed securities 
that are acquired from various sources, including other ABCP conduits 
and in the secondary market. One commenter asserted that there is no 
need to limit permitted investments of fully supported conduits, 
because investors in ABCP issued by fully-supported conduits base their 
investment decisions on the liquidity provider's financial strength and 
reputation (rather than relying on asset quality). A few commenters 
requested that the ABCP option be modified to permit originator-sellers 
to convey to intermediate SPVs, in addition to assets originated by 
them, assets acquired in business combinations and asset purchases.
    Another commenter asserted that the proposed limitation on eligible 
collateral would not permit conduits to acquire assets through an 
assignment from another ABCP conduit. One commenter requested that the 
final rules permit transfers between conduits with a common liquidity 
provider and transfers of positions between one funding agent/liquidity 
provider/conduit group and another such group.
    Several commenters expressed concern regarding the proposed 
definition of 100 percent liquidity coverage, noting that a significant 
percentage of existing conduits are partially-supported or do not have 
100 percent liquidity coverage as defined by the proposal. Most of 
these commenters suggested that the definition of 100 percent liquidity 
coverage be revised to include coverage in a structure under which the 
liquidity provider's funding obligation is reduced by non-performing or 
defaulted assets, if the conduit includes some form of credit 
enhancement equal to at least 5 percent of the outstanding ABCP. One 
commenter requested that the agencies align the 100 percent liquidity 
coverage requirement with the regulatory capital treatment applicable 
to unfunded credit enhancements under the Basel regulatory capital 
framework for banking organizations, which generally calculates a 
banking organization's exposure to an eligible ABCP liquidity facility 
based on the maximum potential amount that the banking organization 
could be required to fund given the ABCP program's current underlying 
assets (calculated without regard to the current credit quality of 
those assets).
    Several commenters interpreted the reproposal's requirement that an 
eligible ABCP conduit obtain from a regulated liquidity provider a 
legally binding commitment to provide 100 percent liquidity coverage to 
all the ABCP issued by the ABCP conduit as limiting an ABCP conduit to 
one regulated liquidity provider. Commenters opposed the requirement in 
the definition of ``eligible ABCP conduit'' that requires liquidity 
support from a single liquidity provider. One of these commenters 
suggested that, although most fully-supported multi-seller conduits 
currently have 100 percent liquidity support from an affiliate of the 
conduit manager, the final rule permit conduits to have multiple 
liquidity providers.
    Other commenters stated that syndication of backstop liquidity is 
market practice, and that there is no reason to limit the number of 
liquidity providers. One commenter recommended that the agencies revise 
the definition of ``eligible ABCP conduit'' to clarify that eligible 
liquidity facilities may include facilities entered into by an 
affiliate of a regulated liquidity provider, if the regulated liquidity 
provider unconditionally guarantees its affiliate's obligations.
    Commenters generally supported the proposed definition of majority-
owned OS affiliate. One commenter observed that the rule text in the 
reproposal only referred to the originator-seller as the risk retainer, 
but does not mention its majority-controlled affiliates. This commenter 
requested that the final rules conform to the preamble of the original 
proposal by stating that majority-controlled originator-seller 
affiliates (including an SPV) can satisfy the originator-seller's risk 
retention requirements.
    The agencies received several comments on the proposed definition 
of intermediate SPV. One commenter stated that in certain circumstances 
an intermediate SPV is not a direct or indirect wholly owned affiliate 
of the originator-seller but instead is an ``orphan'' SPV that is owned 
by a corporate service provider or a charitable trust.
    One commenter stated that it was not clear under the reproposal 
whether an ABCP conduit sponsor would no longer be able to rely on the 
option if a single asset held by its conduit does not comply with the 
rule. This commenter requested that the rule prescribe cure periods (of 
not less than 30 days) and threshold amounts (1 percent of the 
conduit's assets), so that the conduit will not be forced to unwind 
based on a single noncompliant asset.
    Commenters raised several concerns with respect to the reproposal's 
disclosure requirements for the ABCP option. One commenter indicated 
that the asset disclosures in ABCP programs are collectively negotiated 
and agreed-upon by ABCP investors and conduit arrangers, and the 
reproposal's calculation and reporting requirements would deter 
borrowers from financing assets through ABCP conduits.
    One commenter indicated that the scope of the proposed disclosure 
requirements set forth in section 4(c) of the reproposal is unclear, 
and the proposed requirement to disclose fair value calculations and 
supporting information would not be feasible. This commenter said that 
because the conduits typically treat their extensions of credit as 
loans for accounting purposes, and do not periodically revalue the 
assets, a requirement to disclose fair value would not conform to 
existing accounting practices. This commenter stated that many ABCP 
financings are revolving transactions in which the principal balance of 
the outstanding notes may change every business day. This commenter 
also asserted that, because investors in fully supported conduits do 
not rely on the market value of the assets in their investment 
decisions, there would be no need to require fully supported conduits 
to provide asset-level disclosures. The commenter also asserted that to 
the extent a conduit finances assets for many different originator-
sellers, the volume and frequency of disclosures under this requirement 
would be substantial and unreasonable. This

[[Page 77640]]

commenter expressed the view that the agencies should not impose 
unnecessarily broad disclosure requirements that would result in a 
narrowing of the short-term financing options available to businesses. 
Another commenter said that the requirement to report the fair value of 
each of the conduit's interests is unduly burdensome to a sponsor, 
given the dynamic nature of a conduit's assets. This commenter proposed 
that a sponsor be required to report only certain items.
    Some commenters stated that investors in ABCP fully supported by 
liquidity facilities do not want or need disclosure from conduit 
managers of an originator-seller's failure to comply with risk 
retention requirements. One of these commenters stated that the 
disclosure requirement would discourage originators from financing 
assets through ABCP conduits. This commenter stated that since the 
reproposal did not generally require sponsors of an ABS interests to 
notify investors of the failure to comply with risk retention 
requirements, and it was not clear why this obligation was imposed 
solely for fully-supported ABCP conduits.
    One commenter asserted that a sponsor should not be required to 
develop separate policies or procedures to actively monitor each 
originator-seller; instead a sponsor should be allowed to rely on an 
originator-seller's representations and warranties in satisfying its 
compliance and monitoring requirements. This commenter also proposed 
that a sponsor be required to notify only regulators upon the actual 
discovery or knowledge of an originator-seller's failure to comply.
    One commenter asserted that investors have generally not requested 
any significant changes to ABCP disclosure requirements in recent 
years, and that reports currently being made contain sufficient 
information for ABCP investors to monitor their investments, especially 
since the most important economic factors will continue to be the 
performance of the assets themselves, the 100 percent liquidity 
coverage, and (in the case of partially supported ABCP conduits) the 
sponsor's 5 percent or more credit enhancement--but not continued risk 
retention on the part of the originator-sellers.
    Some commenters requested a complete exemption from the credit risk 
retention requirements for conduits with underlying assets that were 
originated before the applicable effective date of the rule that may be 
securitized through an ABCP conduit. One commenter claimed that it 
would be impractical to impose credit risk retention on an originator-
seller that has already entered into a financing transaction with a 
conduit, because the conduits would not be able to timely renegotiate 
terms.
b. Overview of the Final Rule
    The final rule includes a specific option for ABCP securitization 
transactions that retains the basic structure of the reproposed ABCP 
option, with modifications intended to address issues raised by 
commenters. As with the reproposal, the final rule provides that an 
eligible ABCP conduit sponsor will satisfy the base risk retention 
requirement if, for each ABS interest the ABCP conduit acquires from an 
intermediate SPV, the intermediate SPV's originator-seller \127\ 
retains an economic interest in the credit risk of the assets 
collateralizing the ABS interest acquired by the eligible ABCP conduit 
using either standard risk retention or the revolving pool 
securitization risk retention option (as revised in the final 
rule).\128\ As noted in the reproposal, the use of the ABCP option by 
the sponsor of an eligible ABCP conduit does not relieve the 
originator-seller from its independent obligation to comply with its 
own risk retention obligations as a sponsor of an ABS interest under 
the revised proposal, if any. The originator-seller will be the sponsor 
of the asset-backed securities issued by an intermediate SPV and will 
therefore be required under the final rule to hold an economic interest 
in the credit risk of the assets collateralizing the asset-backed 
securities issued by the intermediate SPV.
---------------------------------------------------------------------------

    \127\ See infra footnote 130.
    \128\ An originator-seller will be subject to the same 
requirements and have the same benefits under the risk retention 
rule as any other sponsor that retains risk, including restrictions 
on transferring or hedging the retained interest to a third party as 
applied to sponsors. See section 5(b)(1) of the final rule 
(intermediate SPV's originator-seller to retain an economic interest 
in the credit risk of the securitized assets in the amount and 
manner required under section 4 or 5 of the rule). For example, an 
originator-seller retaining risk in its intermediate SPV in the same 
amount and manner required under section 4 of the rule, as an 
eligible horizontal residual interest, would be permitted to 
transfer that interest to a majority-owned affiliate as permitted 
under section 3 of the rule, subject to the additional restrictions 
of section 12 of the rule, but an originator-seller retaining risk 
in its intermediate SPV in the same amount and manner permitted 
under section 5 of the rule, as a revolving pool securitization 
seller's interest, could only transfer it to a wholly-owned 
affiliate, as required by section 5(e)(1) of the rule. See infra 
note 130 for a discussion of the definition of the term 
``originator-seller.''
---------------------------------------------------------------------------

    Under the final rule, a sponsor of an ABCP conduit is not limited 
to using the ABCP option to satisfy its risk retention requirements. An 
ABCP conduit sponsor may rely on any of the risk retention options 
described in section 4 of the rule, provided it meets the criteria for 
such option. Consistent with the reproposal, standby letters of credit, 
guarantees, repurchase agreements, asset purchase agreements, and other 
unfunded forms of credit enhancement cannot be used to satisfy the risk 
retention requirement.
    In response to comments questioning the application of the rule's 
requirements to an ABCP conduit arranger or manager, the agencies are 
affirming their view that an arranger or manager of an ABCP conduit is 
a sponsor or ``securitizer'' under section 15G of the Exchange Act. The 
agencies believe this is consistent with part (B) of the definition of 
securitizer which includes ``a person who organizes and initiates an 
asset-backed securities transaction by selling or transferring assets, 
either directly or indirectly, including through an affiliate, to the 
issuer.'' \129\ The arranger or manager of an ABCP conduit typically 
organizes and initiates the transaction as it selects and approves the 
originators whose loans or receivables will collateralize the ABS 
interests that support the ABCP issued by the conduit. It also 
indirectly transfers the securitized assets to the ABCP issuing entity 
by selecting and directing the ABCP issuing entity to purchase ABS 
interests collateralized by the securitized assets. The agencies 
believe that reading the definition of securitizer to include a typical 
arranger or manager of an ABCP conduit is consistent with the purposes 
of the statute and principles of statutory interpretation. Furthermore, 
the agencies believe that the narrow reading of ``securitizer'' 
supported by commenters is not consistent with Section 15G and could 
lead to results that would appear contrary to Congressional intent by 
opening the statute to easy evasion.
---------------------------------------------------------------------------

    \129\ See 15 U.S.C. 78o-11(a)(3)(B).
---------------------------------------------------------------------------

    A more detailed discussion of the agencies' interpretation of the 
term ``securitizer,'' including analysis of the statutory text and 
legislative history can be found in Part III.B.7 of this Supplementary 
Information.
    The agencies have revised the definition of ``eligible ABCP 
conduit'' in the final rule to accommodate certain business 
combinations and to clarify the requirements for the types of assets 
that can be acquired by an eligible ABCP conduit. Other elements of the 
definition, such as the requirement that an ABCP conduit must be 
bankruptcy remote or otherwise isolated for

[[Page 77641]]

insolvency purposes from the sponsor of the ABCP conduit and from any 
intermediate SPV, and that an eligible liquidity provider enter into a 
legally binding commitment to provide 100 percent liquidity coverage to 
all the ABCP issued by the ABCP conduit remain unchanged from the 
reproposal.
    The final rule definition of eligible ABCP conduit requires that 
the ABS interests acquired by the ABCP conduit are: (i) ABS interests 
collateralized solely by assets originated by an originator-seller and 
by servicing assets; (ii) special units of beneficial interest (or 
similar ABS interests) in a trust or special purpose vehicle that 
retains legal title to leased property underlying leases originated by 
an originator-seller that were transferred to an intermediate SPV in 
connection with a securitization collateralized solely by such leases 
and by servicing assets; (iii) ABS interests in a revolving pool 
securitization collateralized solely by assets originated by an 
originator-seller and by servicing assets; or (iv) ABS interests that 
are collateralized, in whole or in part, by assets acquired by an 
originator-seller in a business combination that qualifies for business 
combination accounting under GAAP, and, if collateralized in part, the 
remainder of such assets meet the criteria in items (i) through (iii). 
The ABS interests must be acquired by the ABCP conduit in an initial 
issuance by or on behalf of an intermediate SPV: (1) Directly from the 
intermediate SPV, (2) from an underwriter of the ABS interests issued 
by the intermediate SPV, or (3) from another person who acquired the 
ABS interests directly from the intermediate SPV. Finally, the rule 
requires that an eligible ABCP conduit is collateralized solely by ABS 
interests acquired from intermediate SPVs and servicing assets.
    The agencies continue to believe that a limitation on the types of 
assets that may be acquired by an eligible ABCP conduit is appropriate. 
Although some commenters suggested eligible ABCP conduits should be 
permitted to purchase assets directly from originator-sellers under 
arrangements such as deferred purchase price notes, which commenters 
argued impose continuing risk of loss on originator-sellers that would 
be comparable to risk retention, the agencies are not incorporating 
this approach. The agencies believe such an approach would add 
complexity to the rule, and that requiring originator-sellers to retain 
risk in the same way as the rule requires for other securitizers 
provides investors and regulators with better clarity and transparency 
as to the nature of the originator-seller's retention of risk in the 
transaction.
    The agencies disagree with commenter assertions that, in the 
context of ABCP conduits, loans or receivables originated before the 
applicable effective date of the rule should not be subject to risk 
retention. Section 15G of the Exchange Act applies to any issuance of 
asset-backed securities after the effective date of the rules, 
regardless of the date the assets in the securitization were 
originated. The agencies note, however, that loans or receivables 
meeting the seasoned loan exemption in section 19 of the rule would not 
be subject to risk retention requirements, and an originator-seller 
that sponsors a securitization of seasoned loans would not need to 
retain risk with respect to a securitization of such assets under the 
ABCP option.
    With respect to ABS interests, the agencies believe that in certain 
circumstances described by commenters, acquisition of ABS interests 
from sources other than an intermediate SPV or originator-seller may be 
accomplished in a manner consistent with the purposes of section 15G of 
the Exchange Act. The overview of the final rule discusses two 
revisions to collateral criteria for eligible ABCP conduits: one that 
would permit limited transfers between certain ABCP conduits, and 
another that would permit securitization of assets acquired as the 
result of certain business combinations.
    The agencies are adopting as reproposed the requirements that an 
ABCP conduit sponsor (i) approve each originator-seller permitted to 
sell or transfer assets, directly or indirectly, to an intermediate SPV 
from which an eligible ABCP conduit acquires ABS interests; (ii) 
approve each intermediate SPV from which an eligible ABCP conduit is 
permitted to acquire ABS interests; (iii) establish criteria governing 
the ABS interests, and the assets underlying the ABS interests, 
acquired by the ABCP conduit; (iv) administer the ABCP conduit by 
monitoring the ABS interests acquired by the ABCP conduit and the 
assets supporting those ABS interests, arranging for debt placement, 
compiling monthly reports, and ensuring compliance with the ABCP 
conduit documents and with the ABCP conduit's credit and investment 
policy; and (v) maintain and adhere to policies and procedures for 
ensuring that the requirements described above have been met.
    The final rule retains the concept that a majority-owned affiliate 
of an originator-seller may contribute assets it originates to the 
originator-seller's intermediate SPV. To simplify the rule text for 
most purposes, the final rule consolidates the reproposal's definition 
of ``majority-owned OS affiliate'' into the definition of originator-
seller itself.\130\ In response to comments, the agencies seek to 
clarify that the originator-seller is the sponsor of a securitization 
transaction in which an intermediate SPV of such-originator-seller 
issues ABS interests that are acquired by an eligible ABCP conduit, and 
that the originator-seller may allocate risk retention to its majority 
owned-affiliates (or wholly-owned affiliates) as permitted in 
accordance with the sections 3, 4, and 5 of the rule, as applicable. 
The sponsor of an ABCP conduit must fulfill the compliance requirements 
of the ABCP option with respect to the originator-seller that is the 
sponsor of the intermediate SPV.
---------------------------------------------------------------------------

    \130\ In order to provide clarity in maintaining the distinction 
between originator-sellers and majority-owned originator-seller 
affiliates, the agencies have included a provision in the definition 
of ``originator-seller'' indicating that the majority-owned 
originator-seller affiliate may not be a sponsor of the originator-
seller's intermediate SPV.
---------------------------------------------------------------------------

    The agencies have carefully considered commenters' recommendations 
regarding the definition of 100 percent liquidity coverage and are 
adopting the rule as proposed. The agencies understand the concern 
raised by commenters that a significant number of existing partially-
supported conduits will likely not be able to use the ABCP option to 
satisfy the risk retention requirement, because they are covered by a 
liquidity facility that adjusts the funding obligation of the liquidity 
provider according to the performance of the assets collateralizing the 
ABS interests held by the ABCP conduit.\131\ However, the agencies 
observe that a liquidity facility of the type described by commenters, 
that reduces the obligation of the liquidity provider to provide 
funding based on a formula that takes into consideration the amount of 
non-performing assets could serve to insulate the liquidity provider 
from the credit risk of non-performing assets in the securitization 
transaction. The ABCP option is designed to accommodate conduits that 
expose the liquidity provider to the full credit risk of the assets in 
the securitization, with the expectation that exposure to the credit 
risk of such assets will provide the liquidity providers with incentive 
to undertake robust credit underwriting and monitoring.
---------------------------------------------------------------------------

    \131\ In response to commenters on the reproposal, the agencies 
acknowledge that liquidity coverage that does not require the 
regulated liquidity provider to pay in the event of a bankruptcy of 
the ABCP conduit would meet the requirements of the ABCP option 
adopted in the final rule.
---------------------------------------------------------------------------

    The final rule adopts as proposed the requirement that a regulated 
liquidity

[[Page 77642]]

provider enter into a legally binding commitment to provide 100 percent 
liquidity coverage (in the form of a lending facility, an asset 
purchase agreement, a repurchase agreement, or other similar 
arrangement) to all the ABCP issued by the ABCP conduit by lending to, 
purchasing ABCP issued by, or purchasing assets from, the ABCP conduit 
in the event that funds are required to repay maturing ABCP issued by 
the ABCP conduit.
    While the final rule continues to require that there be only one 
registered liquidity provider with responsibility to make payment in 
respect of the commercial paper notes, the regulated liquidity provider 
is not prohibited from hedging its liquidity obligation or from 
backstopping the obligation by entering into sub-participations or 
other arrangements in respect of this commitment, so long as one 
regulated liquidity provider remains directly responsible to all 
holders of ABCP issued by the conduit. To the extent that the regulated 
liquidity provider that provides liquidity support to the ABCP conduit 
is exposed to the credit risk of the assets covered by such liquidity 
support, the agencies believe the incentives that encourage robust 
underwriting remain appropriately aligned.
    The agencies continue to believe that unfunded risk retention is 
not consistent with the regulatory goal of meaningful risk retention. 
As such, the requirement in the ABCP credit risk retention option for 
100 percent non-asset tested liquidity is not a substitute for risk 
retention by the ABCP sponsor, but rather a recognition of an integral 
part of the overall ABCP conduit securitization structure. As the 
liquidity support is not an ABS interest retained to satisfy a risk 
retention requirement under the rule, the liquidity provider is not 
subject to the prohibitions on transfer and hedging in section 12 of 
the rule with respect to the liquidity support.
    The agencies were persuaded by commenters views regarding the 
likelihood that many conduits will need to issue ABCP with a longer 
maturity in the future in order to accommodate the needs of regulated 
institutions that are subject to new liquidity requirements under the 
Basel liquidity standards. Accordingly, the final rule extends the nine 
month maximum maturity and defines ABCP as asset-backed commercial 
paper that has a maturity at the time of issuance not exceeding 397 
days, exclusive of grace periods, or any renewal thereof the maturity 
of which is likewise limited.
    The agencies did not receive any comments regarding the 
reproposal's definition of ABCP conduit. Accordingly, as with the 
reproposal, the final rule defines an ABCP conduit as an issuing entity 
with respect to ABCP.
    In response to comments, the final rule permits eligible ABCP 
conduits to acquire ABS interests from other eligible ABCP conduits 
with the same regulated liquidity provider. Under the final rule, an 
eligible ABCP conduit may acquire an ABS interest from another eligible 
ABCP conduit if: (i) The sponsors of both eligible ABCP conduits are in 
compliance with section 6 of the rule; and (ii) the same regulated 
liquidity provider has entered into one or more legally binding 
commitments to provide 100 percent liquidity coverage to all of the 
ABCP issued by both eligible ABCP conduits.
    However, because the agencies continue to be concerned about asset 
aggregators that acquire loans and receivables from multiple sources in 
the market, place them in an intermediate SPV, and issue interests to 
ABCP conduits the agencies have declined to extend the ABCP option to 
ABCP conduits that purchase ABS interests other than in an initial 
issuance by or on behalf of an originator-seller's intermediate SPV.
    In order to accommodate certain market practices, as referred to in 
the comments to the reproposal, the agencies are revising the 
definition of ``intermediate SPV'' in the final rule. The final rule 
revises this provision to include a special purpose vehicle, often 
referred to as an ``orphan SPV,'' that has nominal equity owned by a 
trust or corporate service provider that specializes in providing 
independent ownership of special purpose vehicles, and such trust or 
corporate service provider is not affiliated with any other transaction 
parties. For purposes of the final rule, ``owned by a trust'' includes 
``held by a trustee in trust'' and ``issued to a trustee.'' In 
addition, the corporate service provider will not be affiliated solely 
because it provides professional directors or administrative services 
to the orphan SPV or the trust. Finally, the nominal equity in the 
orphan SPV will not be entitled to a share of the profits and losses or 
any other economic indicia of ownership.
    Consistent with the reproposal, the final rule allows an 
intermediate SPV to sell ABS interests that it issues to third parties 
other than ABCP conduits. However, the agencies emphasize that, except 
as otherwise provided for loans or receivables acquired as part of 
certain business combinations, the ABS interests acquired by the 
conduit cannot not be collateralized by securitized assets otherwise 
purchased or acquired by the intermediate SPV's originator-seller, the 
originator-seller's majority-owned affiliates, or by the intermediate 
SPV from unaffiliated originators or sellers. Commenters requested the 
addition of a cure period, expressing concern as to whether a conduit 
would be considered to be in violation of the rule any time one of its 
originator-sellers failed to comply, and the agencies have addressed 
this issue. The final rule includes the reproposal's provisions 
obligating the sponsor to monitor originator-sellers' compliance, 
notify investors of any failure of compliance by an originator-seller, 
and take appropriate steps to cure the breach. A sponsor of an eligible 
ABCP conduit that notifies investors and takes appropriate steps in 
accordance with the terms of the rule will be in compliance with its 
obligations under the rule, and, accordingly, no ``cure period'' is 
necessary. Although commenters objected to the requirement to identify 
originator-sellers by name in these circumstances, the agencies believe 
it is an important part of incentivizing the originator-seller and ABCP 
conduit sponsor to comply with the requirements of the ABCP option.
    The final rule requires an ABCP conduit sponsor to provide, or 
cause to be provided, certain disclosures to ABCP investors. In 
response to commenters' concerns, the disclosure requirement requires 
that the information about the underlying ABS interests be updated at 
least monthly, rather than updated in connection with each issuance of 
ABCP. The final rule requires that disclosures be provided before or 
contemporaneously with the first sale of ABCP to the investor and must 
be provided on at least a monthly basis to all conduit investors. In 
order to implement this requirement, the agencies have required that 
the disclosures to investors must be based on information as of a date 
not more than 60 days prior to the date of first use with investors in 
order to accommodate variations in reporting timelines and 
incorporation of information received from originator-sellers.
    The agencies are persuaded by commenters who expressed concern that 
the reproposal's disclosure requirements for the details of each 
originator-seller's risk retention interest, together with the same 
information as the originator-seller would be required to provide 
direct investors pursuant to the rule, provides more information than 
necessary. Accordingly, the final rule revises this disclosure to 
simplify it significantly. The disclosure must

[[Page 77643]]

contain the following information as of a date not more than 60 days 
prior to the date of first use with investors:
    (i) The name and form of organization of the regulated liquidity 
provider that provides liquidity coverage to the eligible ABCP conduit, 
including a description of the material terms of such liquidity 
coverage, and notice of any failure to fund;
    (ii) The asset class or brief description of the underlying 
securitized assets;
    (iii) The standard industrial category code (SIC Code) for the 
originator-seller that will retain (or has retained) pursuant to this 
section an interest in the securitization transaction; and
    (iv) A description of the percentage amount of risk retention by 
the originator-seller, and whether it is in the form of an eligible 
horizontal residual interest, vertical interest, or revolving pool 
securitization seller's interest, as applicable, pursuant to the rule.
    The final rule also requires that an ABCP sponsor provide, or cause 
to be provided, upon request, to the Commission and its appropriate 
Federal banking agency, if any, in writing, all of the information 
required to be provided to investors, and the name and form of 
organization of each originator-seller that will retain (or has 
retained) a rule-compliant interest in the securitization transaction. 
As investors in ABCP initially will have significantly less information 
about the risk retention held by the originator-sellers that sponsor 
ABS interests collateralizing the ABCP than investors in other forms of 
ABS interests, the requirement that sponsors disclose a breach by an 
originator-seller will provide them with relevant information about the 
originator-seller upon the occurrence of a breach.
5. Commercial Mortgage-Backed Securities
a. Overview of the Reproposal and Public Comments
    Section 15G(c)(1)(E) of the Exchange Act \132\ provides that, with 
respect to CMBS, the regulations prescribed by the agencies may provide 
for retention of the first-loss position by a third-party purchaser 
that specifically negotiates for the purchase of such first-loss 
position, holds adequate financial resources to back losses, provides 
due diligence on all individual assets in the pool before the issuance 
of the asset-backed securities, and meets the same standards for risk 
retention as the Federal banking agencies and the Commission require of 
the securitizer. In light of this provision and the historical market 
practice of third-party purchasers acquiring first-loss positions in 
CMBS transactions, the agencies proposed to permit a sponsor of ABS 
interests that is collateralized by commercial real estate loans to 
meet its risk retention requirements if third-party purchasers acquired 
eligible horizontal residual interests in the issuing entity.\133\ The 
reproposal would have permitted one or two third-party purchasers to 
satisfy the risk retention requirement, so long as their eligible 
horizontal residual interests were pari passu with each other, so that 
neither third-party purchaser's losses were subordinate to the other's 
losses. The eligible horizontal residual interest held by the third-
party purchasers would have been permitted to be used to satisfy the 
risk retention requirements either by itself as the sole credit risk 
retained, or in combination with a vertical interest held by the 
sponsor.
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    \132\ 15 U.S.C. 78o-11(c)(1)(E).
    \133\ Such third-party purchasers are commonly referred to in 
the CMBS market as ``B-piece buyers'' and the eligible horizontal 
residual interest is commonly referred to as the ``B-piece.''
---------------------------------------------------------------------------

    The CMBS risk retention option in the reproposal would have been 
available only for securitization transactions collateralized solely by 
commercial real estate loans and servicing assets. In addition, the 
following eight requirements would have been required to be met:
    (1) Each third-party purchaser retains an eligible horizontal 
residual interest in the securitization in the same form, amount, and 
manner as would have been required of the sponsor under the horizontal 
risk retention option;
    (2) Each third-party purchaser pays for the first-loss subordinated 
interest in cash at the closing of the securitization;
    (3) No third-party purchaser obtains financing, directly or 
indirectly, from any other person party to the securitization 
transaction (including, but not limited to, the sponsor, depositor, or 
an unaffiliated servicer), other than a person that is a party solely 
by reason of being an investor;
    (4) Each third-party purchaser performs a review of the credit risk 
of each asset in the pool prior to the sale of the asset-backed 
securities;
    (5) Except for an affiliation with the special servicer in the 
securitization transaction or an originator of less than 10 percent of 
the unpaid principal balance of the securitized assets, no third-party 
purchaser can be affiliated with any other party to the securitization 
transaction (other than investors);
    (6) The transaction documents provide for the appointment of an 
operating advisor (Operating Advisor), subject to certain terms and 
conditions;
    (7) The sponsor provides, or causes to be provided, to potential 
purchasers certain information concerning the third-party purchasers 
and other information concerning the transaction; and
    (8) Any third-party purchaser acquiring an eligible horizontal 
residual interest under the CMBS option complies with the hedging, 
transfer and other restrictions applicable to such interest under the 
reproposed rule as if such third-party purchaser was a sponsor who had 
acquired the interest under the horizontal risk retention option.
    Generally, commenters supported the CMBS risk retention option 
described in the reproposal. One commenter cautioned against further 
modifications to the proposed CMBS option, expressing its view that 
CMBS underwriting standards were beginning to deteriorate.
    Another commenter, however, pointed out that risk retention is 
better implemented where the sponsor retains some ``skin in the game.'' 
This commenter suggested that the rule require the sharing of risk 
retention between the sponsor and the third-party purchasers. This 
commenter suggested that third-party purchasers not be allowed to hold 
more than 2.5 percent of the risk retention requirements, and that they 
be required to hold the first-loss position for more than 5 years 
before being allowed to transfer the position even to another qualified 
third-party purchaser (barring an earlier sunset). Another commenter 
requested clarification as to whether multiple sponsors can divide a 
vertical interest among themselves, on a pro rata basis, based on their 
contribution to the transaction, with no minimum retention for any one 
sponsor. Another commenter requested clarification as to whether a 
sponsor holding an eligible vertical interest in a CMBS transaction 
would need to retain a portion of the eligible horizontal residual 
interest as part of that vertical interest, expressing the preference 
of its CMBS sponsor members that the eligible horizontal residual 
interest not be included as part of the eligible vertical interest.
    After considering these comments, the agencies do not believe it is 
necessary to require that the sponsor retain or share with third-party 
purchasers the credit risk in CMBS transactions because third-party 
purchasers, under the framework of the final rule, must hold the risk 
and independently review each securitized asset. The agencies observe 
that under the final rule, the

[[Page 77644]]

sponsor remains responsible for compliance with the CMBS option and 
risk retention and must monitor a third-party purchaser's compliance 
with the CMBS option.\134\ The agencies also do not believe it is 
necessary to limit the amount of risk retention held by the third-party 
purchaser in an L-shaped structure. This approach provides parties to 
CMBS transactions with flexibility to choose how to structure their 
retention of credit risk in a manner compatible with the practices of 
the CMBS market. Further, consistent with the reproposal, the agencies 
continue to believe that the interests of the third-party purchaser and 
other investors are aligned through other provisions of the proposed 
CMBS option, such as the Operating Advisor provisions and the sponsor's 
disclosure requirements discussed below. The agencies also do not 
believe it is necessary to extend the five-year holding period after 
which the third-party purchaser may transfer the eligible horizontal 
residual interest to another third-party purchaser. As stated in the 
reproposal, the agencies selected five years as a holding period that 
was sufficiently long to enable underwriting defects to manifest 
themselves. The agencies did not receive sufficient data or information 
demonstrating that a longer holding period was warranted.
---------------------------------------------------------------------------

    \134\ See section 7(c) of the final rule.
---------------------------------------------------------------------------

    Additionally, the agencies have determined that it would unduly 
dilute the credit risk being retained in the CMBS transaction if 
multiple sponsors were allowed to divide the vertical interest. 
Consistent with the standard risk retention option generally where 
multiple sponsors are not permitted to divide the requisite 5 percent 
credit retention among themselves, in a CMBS transaction with multiple 
sponsors, if any portion of the required 5 percent retention is to be 
held by a sponsor (i.e., if any portion of the eligible horizontal 
residual interest is not sold to a qualified third-party purchaser or 
an eligible vertical interest is being used to meet the 5 percent 
retention requirement), that portion of the 5 percent required 
retention must be held by a single sponsor (and its majority-owned 
affiliates).
    As the agencies stated in the reproposal, the eligible horizontal 
residual interest held by the third-party purchasers can be used to 
satisfy the risk retention requirements in combination with a vertical 
interest held by a sponsor. Consistent with this approach, where the 
eligible horizontal residual interest is held by a third-party 
purchaser, and the sponsor holds a vertical interest, the sponsor must, 
as part of that vertical interest, also retain a portion of the 
eligible horizontal residual interest, as the vertical interest must 
constitute 5 percent of the cash flows of each tranche, including the 
eligible horizontal residual interest.\135\
---------------------------------------------------------------------------

    \135\ If there is no third-party purchaser and the sponsor holds 
all of the required retention in the form of a vertical interest, 
the sponsor must hold 5 percent of each tranche including the most 
subordinated tranche in the structure.
---------------------------------------------------------------------------

    The agencies also received many comments with respect to the more 
specific aspects of the CMBS option in the reproposal. These comments 
and the final rule for these aspects of the CMBS option are discussed 
below.
b. Third-Party Purchasers
i. Number of Third-Party Purchasers and Retention of Eligible 
Horizontal Residual Interest
    While commenters generally supported allowing up to two third-party 
purchasers to hold risk retention, one commenter recommended expanding 
the number of third-party purchasers to allow participation by more 
than two B-piece investors.
    Several commenters recommended allowing the third-party purchasers 
to hold the interests in a senior-subordinated structure, rather than 
pari passu, provided that the holder of the subordinated interest 
retains at least half of the requisite eligible horizontal residual 
interest, and that both third-party purchasers independently satisfy 
all of the requirements and obligations imposed on third-party 
purchasers. These commenters suggested that a senior-subordinated 
structure would better allow the market to appropriately and 
efficiently price the interests in a manner that is commensurate with 
the risk of loss of each interest, and to address the different risk 
tolerance levels of each third-party purchaser. One of these commenters 
asserted that the pari passu requirement would reduce the capacity of 
third-party purchasers to invest in the eligible horizontal residual 
interest. However, two commenters strongly opposed allowing third-party 
purchasers to satisfy the risk retention requirements through a senior-
subordinated structure, commenting that such a change would 
significantly dilute and render ineffective the risk retention 
requirements.
    As stated in the reproposal, the agencies provided additional 
flexibility for the CMBS option by allowing up to two third-party 
purchasers to satisfy the risk retention requirement. The agencies do 
not believe it would be appropriate to allow more than two third-party 
purchasers in a single transaction, because it could dilute the 
incentives generated by the risk retention requirement to monitor the 
credit quality of the commercial mortgages in the pool. Similarly, the 
agencies agree that allowing the third-party purchasers to satisfy the 
risk retention requirement through a senior-subordinated structure 
would significantly dilute the effectiveness of the risk retention 
requirements. Accordingly, the agencies therefore are adopting as 
proposed the pari passu requirement with respect to the retained 
interests held by third-party purchasers in a CMBS transaction.
ii. Third-Party Purchaser Qualifying Criteria
    The agencies did not propose any qualifying criteria for third-
party purchasers in the original proposal or the reproposal.
    In response, one commenter requested that third-party purchasers be 
``qualified'' based on predetermined criteria of experience, financial 
analysis capability, capability to direct the special servicer, and 
capability to sustain losses. Another commenter requested that if a 
third-party purchaser's affiliate contributes more than 10 percent of 
the securitized assets to a CMBS transaction, that third-party 
purchaser should be precluded from holding the eligible horizontal 
residual interest.
    Another commenter stated its belief that it is common for several 
funds within a fund complex that are managed by the same or affiliated 
investment adviser to purchase eligible horizontal residual interests 
in the same CMBS transaction and, to be consistent with practice, the 
definition of third-party purchaser should be expanded to include 
multiple funds that are managed by the same or affiliated investment 
advisers.
    Consistent with the reproposal, the agencies are not adopting 
specific qualifying criteria for third-party purchasers. The agencies 
believe that investors in the business of purchasing first-loss 
positions or ``B-piece'' interests in CMBS transactions have the 
requisite experience and capabilities to make an informed decision 
regarding their purchases. B-piece interests are not offered or sold 
through registered offerings--typically a B-piece interest will be sold 
in reliance on Securities Act Rule 144A, which requires purchasers to 
be qualified institutional buyers. The agencies observed that B-piece 
CMBS investors are typically real estate specialists who use their 
knowledge about the underlying assets and mortgages in the pools to 
conduct

[[Page 77645]]

extensive due diligence on new deals. The agencies also observed that 
the B-piece market has very few participants. According to Commercial 
Mortgage Alert data, in 2009-2013, there were 38 different B-piece 
buyers with nine of them participating in 70 percent of CMBS deals. 
Furthermore, as discussed below, the agencies believe that the 
reproposed rule's disclosure requirements with respect to the identity 
and CMBS investment experience of third-party purchasers are sufficient 
to allow investors in a CMBS transaction to assess the investment 
experience and other qualifications of third-party purchasers and other 
material information necessary to make an informed investment decision. 
If, in the future, the agencies observe adverse changes in the 
experience and capabilities of third-party purchasers in CMBS 
transactions, the agencies may consider whether modifications to the 
rule should be made to address these issues.
    Also consistent with the reproposal, the final rule retains the 
requirement that third-party purchasers be independent from originators 
of more than 10 percent of the securitized assets. The agencies believe 
that the independence requirement will help ensure a new review by the 
third-party purchaser of the underwriting of the securitized loans and 
do not believe that the requirement will adversely affect the number of 
third-party purchasers willing to assume the risk retention obligations 
in CMBS transactions. Last, the agencies are not expanding the 
definition of third-party purchaser to include multiple funds that are 
managed by the same or affiliated investment adviser. The agencies 
introduced the concept of a ``majority-owned affiliate'' in the 
reproposal, which would permit risk retention to be retained by a 
third-party purchaser or its majority-owned affiliate. The final rule 
retains the reproposal's provisions allowing sponsors and third-party 
purchasers to transfer retained risk to their majority-owned 
affiliates. The final rule does not allow sponsors or third-party 
purchasers to transfer retained risk to parties other than majority-
owned affiliates, as the agencies believe the rule being adopted today 
already includes flexibility with respect to risk retention held by an 
entity that is a majority-owned affiliate of a third-party purchaser, 
and that further expansion of the definition of third-party purchaser 
is not necessary and would dilute the risk required to be retained by a 
sponsor or third-party purchaser.
c. Operating Advisor
i. Applicability of the Operating Advisor Requirement
    The reproposal included a requirement that all CMBS transactions 
that use the third-party purchaser option to satisfy the risk retention 
requirement must appoint an Operating Advisor that is not affiliated 
with other parties to the securitization transaction. The reproposal 
would have prohibited the Operating Advisor from having, directly or 
indirectly, any financial interest in the securitization transaction, 
other than fees from its role as Operating Advisor, and would have 
required the Operating Advisor to act in the best interest of, and for 
the benefit of, investors as a collective whole.
    Multiple commenters expressed support for the Operating Advisor 
requirement, noting that it was a helpful governance mechanism and 
reflective of current market practice. One of these commenters 
advocated expanding the Operating Advisor requirement to all CMBS 
transactions, and not simply those relying on the CMBS option. Another 
commenter recommended that the Operating Advisor be prohibited from 
having any direct or indirect financial interest in, or financial 
relationship with, the special servicer.
    After considering the comments received, the agencies have decided 
not to expand the Operating Advisor requirement to CMBS transactions 
that do not rely on the third-party purchaser CMBS option. As stated in 
the reproposal, the agencies believe that there is generally a strong 
connection between third-party purchasers and the special exercise of 
the servicing rights in CMBS transactions. In CMBS transactions where 
credit risk is being retained by a third-party purchaser, the agencies 
believe there is a particular need to provide a check on third-party 
purchasers by limiting their ability to manipulate cash flows through 
the exercise of the special servicing rights. The agencies are 
providing this check by requiring an Operating Advisor in CMBS 
transaction where the third-party purchaser is holding the risk 
retention. The agencies note that the requirement that there be an 
Operating Advisor for any transaction relying on the CMBS option means 
that the Operating Advisor must be in place at any time that a third-
party purchaser holds any portion of the required risk retention. 
Accordingly, whether the B-piece is initially sold to a third-party 
purchaser or sold to a third-party purchaser after the initial five 
year holding period expires, the transaction must have an Operating 
Advisor in place at all times that a third-party purchaser holds any 
portion of the required risk retention.
    Consistent with the reproposal, the agencies are adopting the 
requirement that the Operating Advisor be a party that is not 
affiliated with other parties to the securitization transaction, and 
does not have, directly or indirectly, any financial interest in the 
securitization transaction other than fees from its role as Operating 
Advisor. The agencies continue to believe that this requirement 
sufficiently establishes the independence of the Operating Advisor and 
protects investors' interests.
ii. Qualifications of the Operating Advisor
    The agencies included in the reproposal certain general 
qualifications for the Operating Advisor. The reproposal would have 
required underlying transaction documents in a CMBS transaction to 
provide standards with respect to the Operating Advisor's experience, 
expertise and financial strength to fulfill its duties and obligations 
under the applicable transaction documents over the life of the 
securitization transaction.
    One commenter cautioned against the requirement that qualification 
standards for the Operating Advisor be specified in the transaction 
documents. This commenter asserted that the requirements must ensure 
that a sufficient number of qualified and independent Operating 
Advisors will be available to fill the role. Additionally, this 
commenter encouraged the agencies to clarify the mechanism by which the 
acceptability of the Operating Advisor may be determined.
    The agencies do not believe that the rule should mandate the 
mechanism by which the acceptability of the Operating Advisor is 
determined, but that the CMBS transaction parties should have the 
flexibility to establish the appropriate standards for the Operating 
Advisor in each transaction. As a result, the agencies are adopting the 
qualification requirements as proposed.
iii. Role of the Operating Advisor
    Under the reproposal, once the eligible horizontal residual 
interest held by third-party purchasers reaches a principal balance of 
25 percent or less of its initial principal balance, the special 
servicers would have been required to consult with the independent 
Operating Advisor in connection with, and prior to, any major investing 
decisions related to the servicing of the securitized assets. The 
reproposal would have required that the Operating Advisor be provided 
with adequate and timely access to

[[Page 77646]]

information and reports necessary to fulfill its duties under the 
transaction documents. It also would have required that the Operating 
Advisor be responsible for reviewing the actions of the special 
servicer, reviewing all reports made by the special servicer to the 
issuing entity, reviewing for accuracy and consistency in calculations 
made by the special servicer in accordance with the transaction 
documents, and issuing a report to investors and the issuing entity on 
the special servicer's performance.
    One commenter supported this requirement, but requested that the 
agencies clarify the scope of the decisions on which the special 
servicer was to consult with the Operating Advisor's review, and the 
scope of the reports to be provided to the Operating Advisor. Several 
commenters requested that the agencies clarify that the calculation of 
the principal balance could take into account appraisal reductions and 
realized losses, in order to be consistent with current market 
practice. Another commenter questioned the usefulness of the 
consultation requirement, noting that there is no meaningful connection 
between the 25 percent threshold and the goal of risk retention. This 
commenter proposed either eliminating this requirement or limiting the 
consultation right to the period from the closing of the transaction 
until the holder of risk retention loses control over the special 
servicing rights. Another commenter believed that the 25 percent 
threshold should be reduced to 10 percent.
    After considering the comments received, the agencies are adopting 
the proposed consultation requirement, with some modifications in 
response to comments. For purposes of determining the principal 
balance, the agencies are clarifying in the final rule that the 
calculation should be performed in a manner that is consistent with the 
calculation as permitted under the transaction documents, and take into 
account any realized losses and appraisal reduction amounts to the 
extent permitted under the terms and conditions of the transaction 
documents. In terms of the scope of reports made by the special 
servicer to the issuing entity that the Operating Advisor must review, 
the agencies are clarifying in the final rule that the Operating 
Advisor shall have adequate and timely access to all reports delivered 
to all classes of bondholders as well as the holders of the eligible 
horizontal residual interest. Finally, the agencies believe that 
section 7(b)(6)(iv) of the final rule sufficiently describes the types 
of decisions that are subject to consultation--specifically, any 
material decision in connection with the servicing of the securitized 
assets which includes, without limitation, any material modification or 
waiver of any provision of a loan agreement, any foreclosure or similar 
conversion of the ownership of a property, or any acquisition of a 
property.
iv. Special Servicer Removal Provisions
    The reproposal would have required that the Operating Advisor have 
the authority to recommend the removal and replacement of the special 
servicer. Under the reproposal, the removal of the special servicer 
would have required the affirmative vote of a majority of the 
outstanding principal balance of all ABS interests voting on the 
matter, and required a quorum of 5 percent of the outstanding principal 
balance of all ABS interests.
    The agencies received many comments with respect to the Operating 
Advisor's ability to remove the special servicer. Commenters generally 
supported retaining the Operating Advisor's ability to recommend the 
replacement of the special servicer, especially when the special 
servicer had not acted in the best interest of all investors. However, 
commenters differed on their views of the appropriate voting quorum 
requirements.
    One commenter believed that the special servicer removal provisions 
should mirror current CMBS transactions, which typically provide that 
(i) the Operating Advisor may recommend to remove the special servicer 
only after the most senior tranche of the B-piece has been reduced to 
less than 25 percent of its initial principal balance, and (ii) removal 
can only take place if more than 50 percent of the aggregate 
outstanding principal balance of all classes affirmatively vote for 
such removal.
    One commenter recommended providing Operating Advisors with a safe 
harbor from liability, except in the case of gross negligence, fraud or 
willful misconduct, for recommending replacement of the special 
servicer. This commenter also recommended requiring the maintenance of 
an investor registry, so that investors can be easily contacted if the 
Operating Advisor makes a replacement recommendation that requires a 
vote.
    Commenters submitted a wide range of comments on the quorum 
requirement for removal of the special servicer. Two commenters 
asserted that the quorum requirement would be more appropriately 
specified by the underlying transaction documents, rather than in the 
final rule, in order to accommodate any future changes in the market. 
One commenter favored a requirement that in order to reach a quorum, no 
fewer than three unaffiliated investors participate in the vote. 
Another commenter recommended two options: (i) Increasing the quorum to 
15 percent and requiring the participation of three unaffiliated 
investors, or (ii) increasing the quorum to 20 percent with no minimum 
unaffiliated investor-voting requirement. This commenter opposed a more 
substantive increase to the quorum requirement, asserting that it would 
be nearly impossible for interest holders to remove the special 
servicer. Both of these commenters recommended adding a provision that 
specified that the third-party purchaser may not unilaterally re-
appoint the original special servicer or its affiliate following a 
removal and replacement process.
    One commenter highlighted a split in views among those parties who 
contributed to its comments. Some favored increasing the voting quorum 
requirement to two-thirds of all investors eligible to vote (before the 
eligible horizontal residual interest has been reduced below 25 
percent), and to one-third of all investors eligible to vote (after the 
eligible horizontal residual interest has been reduced below 25 
percent). Others supported a quorum requirement of at least 20 percent, 
with at least three independent investors participating in the vote.
    After considering the comments received, the agencies have decided 
to permit CMBS transaction parties to specify in the underlying 
transaction documents the quorum required for a vote to remove the 
special servicer. However, the transaction documents may not specify a 
quorum of more than the holders of 20 percent of the outstanding 
principal balance of all ABS interests in the issuing entity, with such 
quorum including at least three ABS interest holders that are not 
affiliated with each other. The agencies believe that this balanced 
approach provides CMBS transaction parties with the flexibility to 
establish the quorum required to remove the special servicer in the 
applicable transaction documents, as is commonly done, while addressing 
commenter concerns that a quorum requirement of more than 20 percent 
may make is difficult for interest holders to remove the special 
servicer.
    The agencies do not believe that it would be appropriate to include 
a safe harbor for the Operating Advisor or a requirement that there be 
an investor

[[Page 77647]]

registry requirement in the final rule since the agencies believe the 
Operating Advisor's indemnification rights and the trustee's investor 
communication provisions should be set forth in, and governed by, the 
transaction documents.
    Finally, the agencies agree with comments requesting that the 
third-party purchaser should not have the unilateral ability to 
reappoint the original special servicer or its affiliate. The rule 
requires the replacement of the special servicer following the 
recommendation of the Operating Advisor and an affirmative vote of the 
requisite number of ABS holders. The agencies believe that the 
independence of the Operating Advisor as otherwise required by the 
final rule sufficiently ensures that the recommendation of the 
replacement special servicer will be made independent of third-party 
purchasers, and that the voting and enhanced quorum requirements being 
adopted today provide additional assurance in this regard. The quorum 
and voting requirements effectively require that the third-party 
purchasers not have the unilateral ability to re-appoint the original 
special servicer or its affiliate.
d. Disclosures
    The reproposal would have required the sponsor to provide, or cause 
to be provided, to potential purchasers and federal regulators certain 
information concerning the third-party purchasers and other information 
concerning the CMBS transaction, such as each third-party purchaser's 
name and form of organization, experience investing in CMBS, and any 
other information about the third-party purchaser deemed material to 
investors in light of the particular securitization transaction.
    Additionally, it would have required a sponsor to disclose to 
investors the amount of the eligible horizontal residual interest that 
each third-party purchaser will retain (or has retained) in the 
transaction (expressed as a percentage of the fair value of all ABS 
interests issued in the securitization transaction and the dollar 
amount of the fair value of such ABS interests); the purchase price 
paid for such interest; the material terms of such interest; the amount 
of the interest that the sponsor would have been required to retain if 
the sponsor had retained an interest in the transaction; the material 
assumptions and methodology used in determining the aggregate amount of 
ABS interests of the issuing entity; the representations and warranties 
concerning the securitized assets; a schedule of exceptions to these 
representations and warranties; and information about the factors that 
were used to make the determination that such exceptions should be 
included in the pool even though they did not meet the representations 
and warranties.
    In addition, the reproposal would have required that certain 
material information with respect to the Operating Advisor be disclosed 
in the applicable transaction documents, including, without limitation, 
the name and form of organization of the Operating Advisor, the 
qualification standards applicable to the Operating Advisor, how the 
Operating Advisor satisfies these qualification standards, and the 
terms of the Operating Advisor's compensation.
    The reproposal also would have required the sponsor to maintain and 
adhere to policies and procedures to actively monitor the third-party 
purchaser's compliance with the CMBS option, and to notify investors if 
the sponsor learns that a third-party purchaser no longer complies with 
such requirements.
    The agencies received a few comments regarding the disclosure 
requirements under the CMBS risk retention option. Two commenters 
opposed the disclosure of the purchase price paid by third-party 
purchasers for the eligible horizontal residual interest. These 
commenters pointed out that such information has traditionally been 
viewed by all market participants as highly confidential and 
proprietary, and that the disclosure requirement would deter B-piece 
buyers from retaining risk. One of these commenters suggested that the 
issuer or third-party purchaser could instead provide the purchase 
price to the appropriate regulatory agency on a confidential basis, or 
disclose only that it has fulfilled the risk retention requirement.
    The investment grade investor members of an industry association 
requested that two additional disclosures be required with respect to 
the Operating Advisor: (1) Any material conflict of interest or 
potential conflict of interest of the Operating Advisor; and (2) 
additional information regarding the formula for calculating the 
Operating Advisor's compensation.
    The agencies are adopting the disclosure requirements for the CMBS 
option, with some modifications in response to comments. As stated in 
the reproposal, the agencies believe that the importance of the 
disclosures to investors with respect to third-party purchasers 
outweighs potential issues associated with the sponsor or third-party 
purchaser making such information available. The agencies believe that 
the disclosure requirements with respect to the identity and experience 
of third-party purchasers in the CMBS transaction that are being 
adopted today will alert investors in the transaction as to the 
experience of third-party purchasers and other material information 
necessary to make an informed investment decision. In this regard, the 
rule retains the requirement that the price at which the B-piece is 
sold be disclosed. Disclosure of the price of the B-piece is consistent 
with other fair value disclosures. The agencies believe these 
disclosures are necessary to allow other investors to assess the risk 
being retained, and that the ability of investors to assess the value 
of the retained risk outweighs the preferences of some B-piece buyers 
to keep the price confidential.
    With respect to requests that the rule require the disclosure of 
the method of calculating the Operating Advisor's compensation, the 
agencies believe the requirement to disclose the terms of the Operating 
Advisor's compensation already encompasses disclosure as to how such 
compensation is calculated. Therefore, the agencies believe that no 
change to the reproposed rule is required in this respect.
    With respect to the request that the rule require disclosure of any 
material conflicts of interest involving the Operating Advisor, the 
agencies agree that disclosure of any material or potential material 
conflicts of interest of the Operating Advisor with respect to the 
securitization transaction should be disclosed. Such disclosure will 
allow transaction parties to better ensure that the Operating Advisor 
will act independently. Accordingly, the agencies have added this 
disclosure requirement to the final rule.
e. Transfer of B-Piece
    As discussed above, consistent with the reproposal, the rule allows 
a sponsor of a CMBS transaction to meet its risk retention requirement 
where a third-party purchaser acquires the B-piece, and all other 
criteria and conditions for this CMBS option as described are met.
    The reproposal would have permitted, as an exception to the 
transfer and hedging restrictions in that reproposed rule and section 
15G of the Exchange Act, the transfer of the retained interest by any 
initial third-party purchaser to another third-party purchaser at any 
time after five years after the date of the closing of the 
securitization transaction, provided that the transferee satisfies each 
of the conditions applicable to the initial third-party purchaser under 
the CMBS option in connection with such purchase. Conditions that an 
initial third-party purchaser was required to

[[Page 77648]]

satisfy at or prior to the closing of the securitization transaction 
would be required to be satisfied by the transferee at or prior to the 
time of the transfer to the transferee. The reproposed rule also would 
have permitted transfers by any such subsequent third-party purchaser 
to any other purchaser satisfying the criteria applicable to initial 
third-party purchasers. In addition, if the sponsor retained the B-
piece at closing, the reproposed rule would have permitted the sponsor 
to transfer such interest to a purchaser satisfying the criteria 
applicable to subsequent third-party purchasers after a five-year 
period following the closing of the securitization transaction has 
expired. The reproposed rule also would have required that any 
transferring third-party purchaser provide the sponsor with complete 
identifying information as to the transferee third-party purchaser.
    Comments on the proposed rule included objections that the five-
year holding period was too long and that a sponsor that retained the 
B-piece at closing should not be required to hold the position for five 
years before transfer to a qualifying third-party purchaser. Concern 
was also expressed that imposing the five-year holding period, in 
tandem with the limitation that there can be no more than two third 
parties sharing the B-piece on a pari passu basis only, could decrease 
the liquidity of the B-piece and, therefore, disrupt the CMBS market.
    Many commenters stated that the five-year transfer restriction 
period should be reduced, because it would significantly impair the 
liquidity of CMBS and render the B-piece interests much less desirable. 
However, these commenters differed on their suggested alternative 
approaches. One commenter recommended a tiered approach by requiring a 
third-party purchaser to retain its interest for one year, allowing 
such third-party purchaser to transfer its interest to a ``qualified 
transferee'' who meets the same criteria as the third-party purchaser 
for the following four years, and having no transfer or hedging 
restrictions after that time. Another commenter asserted that there 
should be no minimum holding requirement as long as the third-party 
purchaser transfers the interest to a subsequent third-party purchaser 
meeting the same qualification requirements as the initial third-party 
purchaser. Another commenter recommended reducing the transfer 
restriction period to three years because performance and other pool 
data are readily available from multiple sources, and investors would 
have the opportunity to determine loan performance and to identify 
loans that are not performing as expected.
    One commenter suggested reducing the 5 percent risk retention 
requirement if a five-year holding period is imposed, or allowing the 
third-party purchaser to transfer to a qualified transferee who meets 
the same criteria as the third-party purchaser, a qualified 
institutional buyer under Rule 144A under the Securities Act, or an 
institutional accredited investor under Rule 501 under the Securities 
Act. Another commenter recommended allowing sponsors to transfer the 
retained interest to a qualified third-party purchaser within 90 days 
after the date of closing of the transaction. One commenter also 
pointed out the five-year period applicable to holders of eligible 
horizontal residual interests and contained in section 7 of the 
reproposal is inconsistent with, and suggested that it be harmonized 
with, the general transfer restriction period that is contained in 
section 12 of the reproposal \136\ and that it should apply to vertical 
risk retention in a CMBS transaction, and that both holding periods 
should be reduced to three years. Several commenters suggested that, if 
a sponsor holds the B-piece, it should not be subject to the five-year 
holding period or should be allowed to transfer the B-piece within some 
short period after the transaction closing. One commenter requested 
that the final rule state that a sponsor's risk retention obligation be 
terminated with respect to a CMBS transaction once all of the loans 
have been defeased.
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    \136\ Section 12(f)(1) of the reproposal sets forth the hedging 
and transfer restriction period that would be generally applicable 
to risk retention, which is the latest of (i) the date on which the 
total unpaid principal balance of the securitized assets that 
collateralize the securitization transaction has been reduced to 33 
percent of the total unpaid principal balance of the securitized 
assets as of the closing of the securitization transaction; (ii) the 
date on which the total unpaid principal obligations under the ABS 
interests issued in the securitization transaction has been reduced 
to 33 percent of the total unpaid principal obligations of the ABS 
interests at closing of the securitization transaction; or (iii) two 
years after the date of the closing of the securitization 
transaction.
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    The final rule, as it relates to the rights to transfer the B-
piece, is substantially the same as the reproposal, in which the 
agencies attempted to balance two overriding goals: (1) Not disrupting 
the existing CMBS third-party purchaser structure and (2) ensuring that 
risk retention promotes good underwriting. In formulating the 
reproposal, the agencies reasoned that, after a five-year period, the 
quality of the underwriting would be sufficiently evident that the 
initial third-party purchaser or, if there was no initial third-party 
purchaser, the sponsor, would suffer the consequences of poor 
underwriting in the form of a reduced sales price for such interest. 
The agencies also believe that the initial holder of the B-piece, 
whether a third-party purchaser or the sponsor, would need to assume 
that holding the B-piece for a five-year period would result in such 
holder bearing the consequences of poor underwriting. Thus, by 
permitting transfer after the five year-period, the agencies do not 
believe that they are creating a structure which would result in the 
initial holder being less demanding of the underwriting than if it was 
required to retain the B-piece until expiration of the full sunset 
period applicable to CMBS securitizations. In connection with this, the 
agencies view the requirement (among other conditions) that a 
subsequent purchaser, like the initial third-party purchaser, conduct 
an independent review of the credit risk of each securitized asset to 
be important, as this requirement will emphasize to the initial B-piece 
holder that the performance of the securitized assets will be 
scrutinized by any potential purchaser, thus exposing the initial 
purchaser to the full risks of poor underwriting.
    The only change in the final rule from the reproposal is that it 
allows the risk retention obligation to terminate once all of the loans 
in a CMBS transaction are fully defeased. A loan is deemed to be 
defeased if cash or cash equivalents have been pledged to the issuing 
entity as collateral for the loan and are in such amounts and payable 
at such times as necessary to timely generate cash sufficient to make 
all remaining debt service payments due on such loan and the issuing 
entity has an obligation to release its lien on the loan. Once the 
collateral securing a loan is replaced with cash or cash equivalent 
instruments in the full amount remaining due on the loan, thereby 
defeasing the loan, any risk associated with poor underwriting is 
eliminated and there is no need to require risk retention to continue 
to be held.
    The standards for the agencies to provide exemptions to the risk 
requirements and prohibition on hedging are outlined in section 15G. 
The exemption allowing for a transfer of the B-piece by one qualified 
third-party purchaser to another qualified third-party purchaser after 
five years meets these requirements. The agencies decided that unless 
there was a holding period that was sufficiently long enough to enable 
underwriting defects to manifest themselves, the original third-party 
purchaser might not be incentivized to insist on effective

[[Page 77649]]

underwriting of the securitized assets. The agencies believe that under 
15 U.S.C. 78o-11(e)(2), a five-year retention duration helps ensure 
high-quality underwriting standards for the securitizers and 
originators of assets that are securitized or available for 
securitization by forcing sponsors or initial third-party purchasers to 
bear the risk of losses related to underwriting deficiencies. 
Furthermore, the agencies believe that this exemption meets the 
statute's requirement that the exemption encourage appropriate risk 
management practices by the securitizers and originators of assets, 
improve the access of consumers and businesses to credit on reasonable 
terms, or otherwise is in the public interest and for the protection of 
investors. The approach of requiring the third-party purchaser to hold 
for at least five years accommodates continuing participation of B-
piece buyers in the market, in a way that requires meaningful risk 
retention as an incentive to good risk management practices by 
securitizers in selecting assets and addresses specific concerns about 
maintaining consumers' and businesses' access to commercial mortgage 
credit.\137\
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    \137\ While more than one commenter suggested that a sponsor who 
retains the B-piece be allowed to transfer the B-piece within the 
five year-period, the agencies do not agree that the sponsor should 
be treated differently from a third-party purchaser in this regard. 
The obligation to hold the B-piece for the five year-period is 
designed to, and will help, ensure high quality underwriting 
regardless of whether it is held by the sponsor or a third party.
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6. Government-Sponsored Enterprises
a. Overview of the Reproposal and Public Comment
    The reproposal provided in section 8 that the full guarantee (for 
timely payment of principal and interest) by the Enterprises while they 
operate under the conservatorship or receivership of FHFA with capital 
support from the United States would have satisfied the risk retention 
requirements of section 15G of the Exchange Act with respect to the 
mortgage-backed securities issued by the Enterprises. Similarly, an 
equivalent guarantee provided by a limited-life regulated entity that 
succeeds to the charter of an Enterprise, and that is operating under 
the authority and oversight of FHFA under section 1367(i) of the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 
would have satisfied the risk retention requirements, provided that the 
entity is operating with capital support from the United States. The 
reproposal also provided that the hedging and finance provisions would 
not have applied to an Enterprise while operating under conservatorship 
or receivership with capital support from the United States, or to a 
limited-life regulated entity that succeeded to the charter of an 
Enterprise and is operating under the authority and oversight of FHFA 
with capital support from the United States. Under the reproposal, a 
sponsor (that is, an Enterprise) utilizing this option would have been 
required to provide to investors, in written form under the caption 
``Credit Risk Retention'' and, upon request, to FHFA and the 
Commission, a description of the manner in which it met the credit risk 
retention requirements.
    As the agencies emphasized, if either an Enterprise or a successor 
limited-life regulated entity began to operate other than as described, 
the Enterprise or successor entity would no longer be able to avail 
itself of the credit risk retention option provided by section 8 of the 
reproposal and would have become subject to the related requirements 
and prohibitions set forth elsewhere in the reproposal. The reproposal 
did not alter the approach to the risk retention requirements for the 
Enterprises in the original proposal.
    In explaining their reasons for this approach, the agencies 
observed that because the Enterprises fully guarantee the timely 
payment of principal and interest on the mortgage-backed securities 
they issue, the Enterprises were exposed to the entire credit risk of 
the mortgages that collateralize those securities.\138\ The agencies 
also highlighted that the Enterprises had been operating under the 
conservatorship of FHFA since September 6, 2008, and that as 
conservator, FHFA had assumed all powers formerly held by each 
Enterprise's officers, directors, and shareholders and was directing 
its efforts as conservator toward minimizing losses, limiting risk 
exposure, and ensuring that the Enterprises priced their services to 
adequately address their costs and risk. Finally, the agencies 
described how each Enterprise, concurrent with being placed in 
conservatorship, entered into a Senior Preferred Stock Purchase 
Agreement (PSPA) with the United States Department of the Treasury 
(Treasury) and that the PSPAs provided capital support to the relevant 
Enterprise if the Enterprise's liabilities exceeded its assets under 
GAAP.\139\
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    \138\ See Original Proposal, 76 FR at 24111-24112; Revised 
Proposal, 78 FR at 57959-57961.
    \139\ Under each PSPA as amended, Treasury purchased senior 
preferred stock of each Enterprise. In exchange for this cash 
contribution, the liquidation preference of the senior preferred 
stock that Treasury purchased from the Enterprise under the 
respective PSPA increases in an equivalent amount. The senior 
preferred stock of each Enterprise purchased by Treasury is senior 
to all other preferred stock, common stock or other capital stock 
issued by the Enterprise.
    Treasury's commitment to each Enterprise is the greater of: (1) 
$200 billion; or (2) $200 billion plus the cumulative amount of the 
Enterprise's net worth deficit as of the end of any calendar quarter 
in 2010, 2011 and 2012, less any positive net worth as of December 
31, 2012. Under amendments to each PSPA signed in August 2012, the 
fixed-rate quarterly dividend that each Enterprise had been required 
to pay to Treasury was replaced, beginning on January 1, 2013, with 
a variable dividend based on each Enterprise's net worth, helping to 
ensure the continued adequacy of the financial commitment made under 
the PSPA and eliminating the need for an Enterprise to borrow 
additional amounts to pay quarterly dividends to Treasury. The PSPAs 
also require the Enterprises to reduce their retained mortgage 
portfolios over time.
---------------------------------------------------------------------------

    The agencies received only a few comments on proposed section 8, 
and those commenters generally supported allowing the Enterprises' 
guarantee to be an acceptable form of risk retention in accordance with 
the conditions proposed. As a consequence the agencies have decided to 
adopt section 8 without any change.
    While the agencies understand the issues involved with the 
Enterprises' participation in the mortgage market, the agencies 
continue to believe that it is appropriate, from a public policy 
perspective, to recognize the guarantee of the Enterprises as 
fulfilling their risk retention requirement under section 15G of the 
Exchange Act, while in conservatorship or receivership with the capital 
support of the United States.\140\ The authority and oversight of the 
FHFA over the operations of the Enterprises or any successor limited-
life regulated entity during a conservatorship or receivership, the 
full guarantee provided by these entities on the timely payment of 
principal and interest on the mortgage-backed securities that they 
issue, and the capital support provided by Treasury under the PSPAs 
\141\ provide a reasonable basis consistent with the goals and intent 
of section 15G for recognizing the Enterprise guarantee as meeting the 
Enterprises' risk retention requirement.
---------------------------------------------------------------------------

    \140\ See Revised Proposal, 78 FR at 57960.
    \141\ By its terms, a PSPA with an Enterprise may not be 
assigned, transferred, inure to the benefit of, any limited-life, 
regulated entity established with respect to the Enterprise without 
the prior written consent of Treasury.
---------------------------------------------------------------------------

    For similar reasons, the agencies believe that final rule's 
restrictions and prohibitions on hedging and transfers of retained 
interests should not apply to an Enterprise or any successor limited-
life regulated entity, as long as the Enterprise (or limited-life 
successor

[[Page 77650]]

entity) is operating consistent with the conditions set out in the 
rule. In the past, the Enterprises have sometimes acquired pool 
insurance to cover a percentage of losses on the mortgage loans 
comprising the pool.\142\ FHFA also has made risk-sharing through a 
variety of alternative mechanisms a major goal of its Strategic Plan 
for the Enterprise Conservatorships.\143\ Because each Enterprise, 
while in conservatorship or receivership and operating with capital 
support from the United States, will need to fully guarantee, and hold 
the credit risk on, the mortgage-backed securities that it issues for 
the provisions of section 8 of the rule to apply, the prohibition on 
hedging the credit risk that a retaining sponsor is otherwise required 
to retain would have limited the ability of the Enterprises to acquire 
such pool insurance in the future or take other reasonable actions to 
limit losses that would otherwise arise from the Enterprises' full 
exposure to the credit risk of the securities that they issue.
---------------------------------------------------------------------------

    \142\ Typically, insurers would pay the first losses on a pool 
of loans, up to 1 or 2 percent of the aggregate unpaid principal 
balance of the pool.
    \143\ See, e.g., FHFA 2012 Report at 7-11; FHFA 2013 Report at 
7-11.
---------------------------------------------------------------------------

    If any of the conditions in the rule cease to apply, an Enterprise 
or any successor organization will no longer be able to rely on its 
guarantee to meet the risk retention requirement under section 15G of 
the Exchange Act and will need to retain risk in accordance with one of 
the other applicable sections of this risk retention rule. Because 
section 8 of the rule applies only so long as the relevant Enterprise 
operates under the authority and control of FHFA and with capital 
support from the United States, the agencies continue to believe that 
the rule's approach with regard to the Enterprises' compliance with the 
risk retention requirement of section 15G of the Exchange Act is 
consistent with the maintenance of quality underwriting standards, in 
the public interest, and consistent with the protection of 
investors.\144\
---------------------------------------------------------------------------

    \144\ See Original Proposal, 76 FR at 24112; Revised Proposal 78 
FR at 57961.
---------------------------------------------------------------------------

    The agencies recognize ongoing activity related to reform of the 
Enterprises, and expect to revisit and, if appropriate, modify this and 
other provisions after the future of the Enterprises and of the 
statutory and regulatory framework for the Enterprises becomes clearer. 
The agencies will continue to consider the impact of potential 
arbitrage between various markets and market participants, and in 
particular between the Enterprises and the private securitization 
markets, and whether adjustments should be made to enhance investor 
protection and financial stability.
7. Open Market Collateralized Loan Obligations
a. Background
    A CLO is an asset-backed security that is typically collateralized 
by portions of tranches of senior, secured commercial loans or similar 
obligations of borrowers who are of lower credit quality or that do not 
have a third-party evaluation of the likelihood of timely payment of 
interest and repayment of principal. As discussed in the reproposal, 
commenters distinguished between two general types of CLOs: open market 
CLOs and balance sheet CLOs. As described by commenters, a balance 
sheet CLO securitizes loans already held by a single institution or its 
affiliates in portfolio (including assets originated by the institution 
or its affiliate) and an open market CLO securitizes assets purchased 
on the secondary market, in accordance with investment guidelines.
    CLOs are organized and initiated by a CLO manager usually when the 
CLO manager partners with a structuring bank that assists in financing 
asset purchases that occur before the legal formation of the CLO.\145\ 
After the terms of a CLO transaction, including investment guidelines, 
are agreed upon with key investors, the CLO manager will usually have 
sole discretion under the governing documents to select portions of 
tranches of syndicated commercial loans on the primary or secondary 
market to be acquired by the CLO in compliance with the investment 
guidelines. An SPV (issuing entity) is formed to issue the asset-backed 
securities collateralized by commercial loans that the CLO manager has 
selected and directed the CLO issuing entity to purchase. The CLO 
manager retains the obligation to actively manage the asset portfolio, 
in accordance with the investment guidelines, and earns management fees 
and performance fees \146\ for management services provided.
---------------------------------------------------------------------------

    \145\ Board of Governors of the Federal Reserve System, Report 
to the Congress on Risk Retention 22 (Oct. 2010).
    \146\ In many cases, a portion of the manager's fees are 
subordinated or contingent upon asset performance.
---------------------------------------------------------------------------

    CLOs are a type of CDO. Both are organized and initiated by an 
asset manager that also actively manages the assets for a period of 
time after closing in compliance with investment guidelines. Typically, 
both CLOs and CDOs are characterized by relatively simple sequential 
pay capital structures and significant participation by key investors 
in the negotiation of investment guidelines.
    As discussed in the reproposal and below, the agencies believe that 
the risk retention rules apply to CLOs because CLO managers clearly 
fall within the statutory definition of ``securitizer'' set forth in 
Exchange Act section 15G. Moreover, the agencies believe it is 
consistent with the purpose of section 15G of the Exchange Act and 
principles of statutory interpretation to apply the risk retention 
rules to CLOs. There is no indication that Congress sought to exclude 
any specific type of securitization structure from the requirements of 
section 15G. Other than mandating specific types of exemptions based on 
underwriting quality and for securitizations involving certain public 
entities,\147\ Congress directed the agencies to apply risk retention 
generally with respect to all asset-backed securities. Subject only to 
specific limitations, authority to determine other exemptions was left 
to the implementing agencies.
---------------------------------------------------------------------------

    \147\ 15 U.S.C. 78o-11(e).
---------------------------------------------------------------------------

    Moreover, contrary to commenters' suggestions, as discussed below, 
developments in the CLO and leveraged loan market suggest that CLOs 
present many of the same incentive alignment and systemic risk concerns 
that the risk retention requirements of section 15G were intended to 
address. CLO issuance has been increasing in recent years.\148\ 
Paralleling this increase has been rapid growth in the issuance of 
leveraged loans,\149\ which are the primary assets purchased by most 
CLOs. Heightened activity in the leveraged loan market has been driven 
by search for yield and a corresponding increase in risk appetite by 
investors.\150\ The agencies note that there is evidence that this 
increased activity in the leveraged loan market has coincided with 
widespread loosening of underwriting standards.\151\ In fact, a recent 
review of a sample of leveraged loans by the Federal banking agencies 
found that forty-two percent of leveraged loans examined were 
criticized by examiners.\152\ The agencies

[[Page 77651]]

believe that increases in the origination and pooling of poorly 
underwritten leveraged loans could expose the financial system to 
risks.\153\ The Federal banking agencies have been monitoring this 
market closely and have responded to concerns by issuing updated 
leveraged lending supervisory guidance, which outlines principles 
related to safe and sound leveraged lending activities, including 
expectations that banks and thrifts exercise prudent underwriting 
standards when originating leveraged loans, regardless of intent to 
hold or distribute them.\154\ As discussed in more detail below, these 
developments in the leveraged loan and CLO market represent similar 
dynamics to issues in the originate-to-distribute model that were a 
major factor in the recent financial crisis and that section 15G was 
intended to address.
---------------------------------------------------------------------------

    \148\ Monetary Policy Report, Board of Governors of the Federal 
Reserve System, at 23 (July 2014).
    \149\ Id. at 22; Semiannual Risk Perspective: Spring 2014, 
Office of the Comptroller of the Currency, at 29 (June 2014).
    \150\ Monetary Policy Report, at 1-2, 22.
    \151\ Id.; Semiannual Risk Perspective: Spring 2014, at 5.
    \152\ Shared National Credits Program: 2013 Review, Board of 
Governors of the Federal Reserve System, Federal Deposit Insurance 
Corporation, Office of the Comptroller of the Currency, at 3 
(September 2013) (``A focused review of leveraged loans found 
material widespread weakness in underwriting practices, including 
excessive leverage, inability to amortize debt over a reasonable 
period, and lack of meaningful financial covenants.'').
    \153\ See, e.g., Semiannual Risk Perspective: Spring 2014, at 8.
    \154\ See ``Interagency Guidance on Leveraged Lending,'' Final 
Supervisory Guidance, 78 FR 17766 (March 22, 2013), at http://www.gpo.gov/fdsys/pkg/FR-2013-03-22/pdf/2013-06567.pdf (Leveraged 
Lending Guidance).
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    For these reasons, and others discussed below, the agencies believe 
it is appropriate to apply risk retention rules to open market CLOs as 
well as balance sheet CLOs.
b. Overview of Original Proposal and Reproposal
    In the original proposal, the agencies observed that a CLO manager 
generally acts as the sponsor by selecting the commercial loans to be 
purchased by the CLO issuing entity and managing the securitized assets 
once deposited in the CLO structure.\155\ Accordingly, the original 
proposal would have required the CLO manager to satisfy the minimum 
risk retention requirement for each CLO securitization transaction that 
it managed by holding a sufficient amount of standard risk retention. 
The original proposal did not include a form of risk retention designed 
specifically for CLO securitizations.
---------------------------------------------------------------------------

    \155\ See Original Proposal, 76 FR at 24098 n. 42.
---------------------------------------------------------------------------

    As discussed in the reproposal, many commenters on the original 
proposal raised concerns regarding the impact of the proposal on open 
market CLOs. Some commenters asserted that most asset management firms 
currently serving as open market CLO managers do not have the balance 
sheet capacity to fund 5 percent horizontal or vertical slices of the 
CLO. They asserted that imposing standard risk retention requirements 
on these managers could cause independent CLO managers to exit the 
market or be acquired by larger firms. According to these commenters, 
the resulting erosion in market competition could increase the cost of 
credit for large companies that are of lower credit quality or that do 
not have a third-party evaluation of the likelihood of timely payment 
of interest and repayment of principal and that are represented in CLO 
portfolios above the level that otherwise would be consistent with the 
credit quality of these companies.
    Certain commenters also asserted that open market CLO managers are 
not ``securitizers'' under section 15G of the Exchange Act and, 
therefore, the agencies do not have the statutory authority to subject 
them to risk retention requirements. These commenters asserted that CLO 
managers are not ``securitizers'' as defined in section 15G of the 
Exchange Act because they do not own, sell, or transfer the loans that 
comprised the CLO's collateral pool, but only direct which assets would 
be purchased by the CLO issuing entity.
    In the reproposal, the agencies discussed these comments and 
explained that the definition of ``securitizer'' under section 15G of 
the Exchange Act applied to open market CLO managers.\156\ To help 
address concerns raised by commenters to the initial proposal, the 
agencies proposed an alternative method for risk retention compliance 
for CLOs that the agencies believed would be consistent with the 
purposes of risk retention. This alternate approach would be available 
under the reproposal to an open market CLO, the assets of which consist 
primarily of portions of senior, secured syndicated loans acquired by 
the issuing entity directly from sellers in open market transactions 
and servicing assets, and that holds less than 50 percent of its assets 
by aggregate outstanding principal amount in loans syndicated by lead 
arrangers that are affiliates of the CLO or CLO manager or originated 
by originators that are affiliates of the CLO or CLO manager (lead 
arranger option).
---------------------------------------------------------------------------

    \156\ See 2013 Reproposal, 78 FR at 57962.
---------------------------------------------------------------------------

    Under the reproposal, as an alternative to the standard options for 
vertical or horizontal risk retention, the sponsor of an open market 
CLO could avail itself of the lead arranger option only if, among other 
requirements: (1) The CLO did not hold or acquire any assets other than 
CLO-eligible loan tranches (discussed below) and servicing assets (as 
defined in the reproposed rule); (2) the CLO did not invest in ABS 
interests or credit derivatives (other than permitted hedges of 
interest rate or currency risk); and (3) all purchases of assets by the 
CLO issuing entity (directly or through a warehouse facility used to 
accumulate the loans prior to the issuance of the CLO's liabilities) 
were made in open market transactions on an arm's length basis. In 
addition, to be eligible for the option, the governing documents of the 
open market CLO would have to require, at all times, that the assets of 
the open market CLO consist only of CLO-eligible loan tranches and 
servicing assets.
    Under the reproposal's lead arranger option, a term loan of a 
syndicated credit facility to a commercial borrower would have 
qualified as a CLO-eligible loan tranche if the firm serving as lead 
arranger for the term loan tranche were to retain at least 5 percent of 
the face amount of the term loan tranche. The lead arranger would have 
been required to retain this portion of the loan tranche until the 
repayment, maturity, involuntary and unscheduled acceleration, payment 
default, or bankruptcy default of the loan tranche. This requirement 
would have applied regardless of whether the loan tranche was purchased 
on the primary or secondary market, or was held at any particular time 
by an open market CLO, and was designed to allow meaningful risk 
retention to be held by a party that has significant control over the 
underwriting of assets that are typically securitized in CLOs, without 
causing significant disruption to the CLO market.
    In order to ensure that a lead arranger retaining risk had a 
meaningful level of influence on loan underwriting terms, the 
reproposal would have required that the lead arranger be identified in 
the legal documents governing the origination, participation or 
syndication of the syndicated loan or credit facility and that such 
documents include covenants by the lead arranger that it will fulfill 
the requirement to retain a minimum of 5 percent of the face amount of 
the CLO-eligible loan tranche. The lead arranger also would be required 
to take on an initial allocation of at least 20 percent of the face 
amount of the broader syndicated loan or credit facility, with no other 
member of the syndicate assuming a larger allocation or commitment. 
Additionally, a retaining lead arranger would have been required to 
comply with the same sales and hedging restrictions as sponsors of 
other securitizations until the repayment, maturity, involuntary and 
unscheduled acceleration, payment default, or bankruptcy default of the 
loan tranche. Voting rights within the broader

[[Page 77652]]

syndicated loan or credit facility would also have to be defined in 
such a way that holders of the ``CLO-eligible'' loan tranche had, at a 
minimum, consent rights with respect to any material waivers and 
amendments of the legal documents governing the underlying CLO-eligible 
loan tranche. Additionally, the pro rata provisions, voting provisions, 
and security associated with the CLO-eligible loan tranche could not be 
materially less advantageous to the holders of that tranche than the 
terms of other tranches of comparable seniority in the broader 
syndicated credit facility.
    Under the reproposal's lead arranger option for open market CLOs, 
the sponsor would have been required to disclose a complete list of 
every asset held by an open market CLO (or before the CLO's closing, in 
a warehouse facility in anticipation of transfer into the CLO at 
closing). This list would have been required to include the following 
information: (i) The full legal name and Standard Industrial 
Classification category code of the obligor of the loan or asset; (ii) 
the full name of the specific CLO-eligible loan tranche held by the 
CLO; (iii) the face amount of the CLO-eligible loan tranche held by the 
CLO; (iv) the price at which the CLO-eligible loan tranche was acquired 
by the CLO; and (v) for each loan tranche, the full legal name of the 
lead arranger subject to the sales and hedging restrictions. Second, 
the sponsor would have been required to disclose the full legal name 
and form of organization of the CLO manager. This information would 
have been required to be disclosed a reasonable period of time prior to 
the sale of the asset-backed securities in the securitization 
transaction (and at least annually with respect to information 
regarding the assets held by the CLO) and, upon request, to the 
Commission and the sponsor's appropriate Federal banking agency, if 
any. Further, the lead arranger and CLO manager would be required to 
certify or represent as to the adequacy of the collateral and the 
attributes of the borrowers of the senior, secured syndicated loans 
acquired by the CLO and certain other matters.
c. Overview of Public Comments
    The agencies received many comments asserting that the proposed 
options for open market CLOs would be unworkable under existing CLO 
practices and would lead to a significant reduction in CLO offerings 
and a corresponding reduction in credit to commercial borrowers. These 
commenters asserted that the likelihood of a significant number of lead 
arrangers retaining 5 percent risk retention (in any of the forms 
permitted by the rule) would be remote and only the largest CLO 
managers would be able to finance the proposed risk retention 
requirement through the standard risk retention option. While larger 
managers might have sufficient financing, several commented that the 
risk retention requirements would make the management of CLOs less 
profitable and might cause many managers to decrease their activity in 
the market. One commenter highlighted a recently issued paper by the 
Bank of England and the European Central Bank to suggest that risk 
retention rules in Europe that apply to CLO managers have contributed 
to a reduction in European CLO issuance.\157\ Several commenters 
asserted that if the risk retention requirement causes a reduction in 
participation by open market CLOs in the leveraged loan market, some of 
the resulting reduced credit availability would be replaced by non-CLO 
credit providers, but cost of capital and instability in the market 
would increase.
---------------------------------------------------------------------------

    \157\ The Case for a Better Functioning Securitisation Market in 
the European Union, Bank of England and the European Central Bank 
(May 2014), available at https://www.ecb.europa.eu/pub/pdf/other/ecb-boe_case_better_functioning_securitisation_marketen.pdf.
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    Some commenters expressed specific concerns about the proposed lead 
arranger option. These commenters stated that having lead arrangers 
hold a portion of the loan would increase the costs of arranging loans, 
thus restricting the availability of credit to borrowers or increasing 
the cost of credit to borrowers. In addition, commenters expressed 
concern that few loans would satisfy the definition of ``CLO-eligible 
loan tranche.'' Furthermore, they asserted that the additional voting 
rights required by the reproposal would be administratively unworkable 
and commercially unacceptable. Several commenters also raised concerns 
that the proposed option would expose the arranger to potential 
liability and litigation risks that arrangers should not be expected, 
and would not be willing, to assume. Commenters raised particular 
concern about the requirement that a lead arranger represent that the 
loans and collateral meet specified criteria. They asserted that such a 
representation would require the lead arranger to make subjective and 
difficult determinations regarding the adequacy of collateral, and the 
sufficiency of the security interest in the collateral and certain 
other matters, and could expose the lead arranger to potential 
liability.
    Another concern raised by several commenters was that the proposed 
lead arranger option would prevent prudent risk management practices 
and thus invite criticism from lead arrangers' bank regulators because 
the hedging restriction would prohibit arrangers from actively managing 
the risks and disposing of loan assets in response to market 
conditions, and would limit lead arrangers' capacities to provide other 
forms of credit to borrowers. Further, commenters stated that use of 
the option would increase the capital and FDIC assessment charges for 
lead arranger banks and cause corresponding increases in the pricing of 
CLO-eligible tranches. In addition, some commenters raised concerns 
that the proposed option's creation of both CLO-eligible loans and non-
eligible loans with otherwise comparable characteristics would distort 
and restrict the initial syndication process and the secondary loan 
market, as the secondary loan market would place a premium on CLO-
eligible loans and liquidity related to non-eligible loans would be 
reduced. Relative to a ``normal'' market, both types of loans would be 
less liquid because they would each reflect a smaller, divided market.
    As discussed in Part B.1 of this Supplementary Information, a 
number of commenters expressed concern that the proposed restriction on 
cash flow distributions to eligible horizontal residual interests would 
make the eligible horizontal residual interest an unworkable option for 
CLOs. They suggested that the cash flow distribution restriction would 
significantly reduce returns to equity investors, making CLOs 
unattractive investments and cause dramatically reduced CLO issuances. 
Further, a few commenters supported a phase-in period while markets 
adjust to the final rule or a grandfathering for certain legacy CLOs. 
Two commenters also recommended that the risk retention rules follow 
the European risk retention rules with respect to CLOs.\158\ One such 
commenter expressed concerns that inconsistent regulations would cause 
bifurcation of the CLO market and substantially reduce market 
liquidity. Further, a few commenters asserted that the costs of 
imposing risk retention on CLO managers exceeds the benefits and that 
the agencies have not performed an adequate economic analysis in 
connection with the CLO option.
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    \158\ The agencies note that Articles 404-410 of the EU Capital 
Requirements Regulation significantly amended Article 122a of the 
European Union's Capital Markets Directive with respect to the use 
of third parties to retain risk.

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[[Page 77653]]

    Some commenters continued to assert that open market CLO managers 
are not ``securitizers'' and are, therefore, not subject to section 
15G. These commenters asserted that under the plain language of the 
statute, CLO managers cannot ``sell'' or ``transfer'' the assets 
securitized through the CLO because they do not own, possess, or 
control the assets. Additionally, commenters asserted that the CLO 
manager acts as an agent to the CLO issuing entity in directing the 
purchase of assets, so it could not sell or transfer the assets to a 
third party to meet the definition, because it would be equivalent to 
selling or transferring the assets to itself. They asserted that the 
use of ``indirectly'' in the definition of securitizer was intended to 
prevent the party that originates a loan from avoiding risk retention 
obligations by passing the loan through an associated intermediary that 
organized and initiated the securitization.
    The commenters also asserted that the interpretation is not 
supported by the legislative history or statutory purpose of the Dodd-
Frank Act. They suggested that Congress primarily intended to address 
problems with the originate-to-distribute model and transparency issues 
in securitization transactions, but open market CLOs differ from the 
originate-to-distribute model and are more transparent than the 
products Congress sought to regulate. The commenters stated that in the 
originate-to-distribute model originators receive significant up-front 
fees for originating loans, which they transfer into securitization 
pools to promote the business of creating additional loans. They 
asserted that CLOs differ from this model because the primary purpose 
of CLOs is to provide investors with the ability to gain exposure to 
commercial loans on a diversified basis, not to finance the creation of 
financial assets. They also asserted that, unlike originators in the 
originate-to-distribute model, who receive their compensation by 
originating and transferring the assets to securitization pools, the 
bulk of CLO managers' compensation is based on performance of the 
securitized assets in the CLO. Regarding the transparency issues that 
Congress sought to address, the commenters suggested that the primary 
concern of Congress was to apply risk retention to highly opaque and 
complex products like re-securitizations of asset-backed securities. 
These commenters asserted that CLOs are more transparent than such 
products because they contain fewer, larger, loans and the obligors of 
such loans are typically known corporations on which investors can 
perform extensive due diligence, and the loans are traded in a liquid 
market that assesses risks and underwriting quality.
    In addition to the above comments, some commenters requested 
alternative options for meeting risk retention or that the agencies 
provide an exemption from risk retention for managers of open market 
CLOs where certain criteria would be met because of the nature and 
characteristics of open market CLOs. In this regard, commenters 
asserted that open market CLOs operate independently of originators and 
are not part of, and do not pose the same risks as, the originate-to-
distribute model. They also suggested that CLO managers' interests are 
fully aligned with CLO investors' interests because CLO managers bear 
significant risk through their deferred, contingent compensation 
structure, which they asserted is based heavily on performance of the 
securitized assets. Further, commenters stated that most CLO managers 
are registered investment advisors with associated fiduciary duties to 
their investors. One commenter also referred to other regulations and 
guidance, asserting that they already provide meaningful protections 
against imprudent or inferior underwriting, including the leveraged 
lending guidance released by the Federal banking agencies in 2013.\159\ 
Several commenters also supported their arguments by indicating that 
the assets selected by CLO managers are evaluated through multiple 
layers of underwriting and market decisions and CLO loan portfolios are 
actively managed for much of the life of a CLO. Commenters further 
asserted that CLO managers select senior secured commercial loans with 
investor protection features. Some commenters asserted that, unlike 
many other securitizations, CLOs are securitizations of liquid assets 
and they are structurally transparent. They also stated that CLOs have 
historically performed well and that this strong performance is 
evidence that further regulation is unnecessary and that customary 
features of CLOs, including overcollateralization and interests 
coverage tests, protect investors. The alternative options and 
exemption requests are discussed in further detail below.
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    \159\ See Leveraged Lending Guidance.
---------------------------------------------------------------------------

d. Response to Comments
i. Definition of ``Securitizer'' and Legislative History of Section 15G
    The agencies have considered the concerns raised by commenters with 
respect to the reproposal, including with respect to open market CLOs. 
As discussed above, commenters asserted that CLO managers could not be 
``securitizers'' within the definition thereof in section 15G of the 
Exchange Act, including the contention that they do not legally own, 
possess, or control the assets.
    As explained in the reproposal, the agencies believe that CLO 
managers are clearly included within the statutory definition of 
``securitizer'' set forth in section 15G of the Exchange Act. Subpart 
(a)(3)(B) of section 15G begins the definition of a ``securitizer'' by 
describing a securitizer as a ``person who organizes and initiates an 
asset-backed securities transaction.'' CLOs clearly meet the definition 
of ``asset-backed security'' set forth in section 3 of the Exchange 
Act, which defines ``asset-backed security'' as ``a fixed income or 
other security collateralized by any type of self-liquidating financial 
asset (including a loan, a lease, a mortgage, or a secured or unsecured 
receivable) that allows the holder of the security to receive payments 
that depend primarily on the cash flow from the asset.'' \160\ As 
discussed above, a CLO is a fixed income or other security that is 
typically collateralized by portions of tranches of senior, secured 
commercial loans or similar obligations. The holder of a CLO is 
dependent upon the cash flow from the assets collateralizing the CLO in 
order to receive payments. Accordingly, a CLO is an asset-backed 
securities transaction for purposes of the risk retention rules.\161\
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    \160\ See 15 U.S.C. 78c(a)(79).
    \161\ Furthermore, CDOs are specifically mentioned as examples 
both in the definition of ``asset-backed security'' and elsewhere in 
section 941 of the Dodd-Frank Act. See 15 U.S.C. 78c(a)(79)(A)(ii) 
and 78o-11(c)(1)(F). As discussed above, CLOs are a type of CDO and 
CLOs and CDOs have the same general structure.
---------------------------------------------------------------------------

    A CLO manager typically negotiates the primary deal terms of the 
transaction and the primary rights of the issuing entity and uniformly 
directs such entity to acquire the commercial loans that comprise its 
collateral pool. Under the plain language of the statute, therefore, a 
CLO manager organizes and initiates an asset-backed securities 
transaction.\162\
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    \162\ The definition of ``sponsor'' is discussed in Part II of 
this Supplementary Information.
---------------------------------------------------------------------------

    The definition continues that the organizer and initiator of a CLO 
does so

[[Page 77654]]

``by selling or transferring assets, either directly or indirectly, 
including through an affiliate, to the issuer.'' A CLO manager 
indirectly transfers the assets to the CLO issuing entity because the 
CLO manager has sole authority to select the commercial loans to be 
purchased by the CLO issuing entity for inclusion in the CLO collateral 
pool, directs the issuing entity to purchase such assets in accordance 
with investment guidelines, and manages the securitized assets once 
deposited in the CLO structure. Most importantly, an asset is not 
transferred to the CLO issuing entity unless the CLO manager has 
selected the asset for inclusion in the CLO collateral pool and 
instructed the CLO issuing entity to acquire it.
    Although some commenters have narrowly interpreted the term 
``transferring'' to specifically require legal ownership or possession 
of the object being transferred, the agencies observe that the plain 
meaning of ``transfer'' does not first require ownership or possession 
and otherwise is not as narrow as these commenters assert.\163\ 
``Transfer'' is commonly defined as ``to cause to pass from one to 
another,'' which is precisely what the CLO manager does.\164\ The CLO 
manager causes assets to be passed from the seller to the issuing 
entity because the CLO manager selects the assets for the collateral 
pool and directs the issuing entity to purchase such assets. Therefore, 
the CLO manager ``transfers'' the assets according to a commonly 
accepted definition of the word. There is no indication in the statute 
that Congress intended to interpret the word ``transfer'' as narrowly 
as commenters have advocated. If Congress had desired such an 
interpretation that would be narrower than how the term is commonly 
defined, the agencies believe that additional limiting language would 
have been included in the statute. CLO managers, therefore, fall 
clearly within the statutory definition of ``securitizer'' as set forth 
in Exchange Act section 15G.
---------------------------------------------------------------------------

    \163\ See, e.g., Babbitt v. Sweet Home Chapter of Communities 
for a Great Or., 515 U.S. 687, 697-98 (1995) (rejecting the argument 
that the word ``harm,'' defined ``to cause hurt or damage to: 
injure,'' should be read so narrowly as to require a showing of 
direct injury to something).
    \164\ Merriam-Webster's Collegiate Dictionary 1253 (10th ed. 
1995); See also Random House Webster's College Dictionary 1366 (2nd 
ed. 1997); The New Oxford American Dictionary 1797 (Elizabeth J. 
Jewell & Frank Abate eds., 2001).
---------------------------------------------------------------------------

    Even if there were ambiguity as to whether CLO managers are covered 
by the definition of ``securitizer,'' the agencies believe that the 
interpretation of ``securitizer'' to include CLO managers is 
reasonable. In addition to being consistent with commonly used 
definitions of ``transfer,'' as discussed above, the interpretation is 
consistent with the context, purposes and legislative history of the 
statute. Further, the alternative interpretation argued by commenters 
would lead to results that would be contrary to the purposes of section 
941 and Congressional intent.
    The text surrounding the word ``transfer'' supports the agencies' 
interpretation of the word. To read ``transfer'' narrowly to require 
ownership or possession would make the preceding word ``sell'' 
superfluous because the act of selling necessarily involves the legal 
transfer of the asset.\165\ In addition, the agencies do not believe 
that the phrase ``including through an affiliate'' bolsters the 
commenters' claim that ``transfer'' was intended to be interpreted in 
this limited manner because the use of the word ``include'' in a 
statute can signal that what follows is meant to be illustrative rather 
than exclusive.\166\ As stated earlier, the agencies believe that a CLO 
manager generally acts as the sponsor by selecting the commercial loans 
to be purchased by the CLO issuing entity and managing the securitized 
assets once deposited in the CLO structure, which the agencies believe 
is a transfer or indirect transfer of the assets.
---------------------------------------------------------------------------

    \165\ Cf. Hibbs v. Winn, 542 U.S. 88, 101 (2004) (stating that 
it is one of the most basic interpretive canons, that `` `[a] 
statute should be construed so that effect is given to all its 
provisions, so that no part will be inoperative or superfluous, void 
or insignificant. . . .' '') (quoting 2A N. Singer, Statutes and 
Statutory Construction Sec.  46.06, pp.181-186 (rev. 6th ed. 2000)).
    \166\ See Samantar v. Yousuf, 560 U.S. 305, 316-17 (2010). While 
Congress referred to transferring through affiliates as an example 
of indirect transfer, it did not preclude other forms of indirect 
transfer in the definition of ``securitizer,'' nor did it 
specifically limit the definition to parties in the chain of title.
---------------------------------------------------------------------------

    The agencies also disagree with the commenters' assertion that the 
CLO manager does not transfer or sell assets because, as an agent of 
the CLO, it is on the same side of the transaction as the purchaser 
(the special purpose issuing entity). Under the same reasoning, one 
could claim that an originator of assets that creates a special purpose 
vehicle to issue asset-backed securities and transfers assets to that 
special purpose vehicle could never be a securitizer, because the 
originator also essentially would be transferring the assets to itself. 
If that were the case, then many types of securitizations would not 
have an entity that would be subject to risk retention.
    Moreover, the agencies disagree with commenters' assertions that 
Congress intended section 15G to apply primarily to securitizations 
within the originate-to-distribute model. Congress did not specify that 
the requirements of the statute apply only to certain types of 
securitization models or structures. Indeed, section 15G specifies that 
risk retention applies to all securitizers,\167\ unless they have a 
specific exemption under the statute or the agencies provide a specific 
exemption in accordance with criteria set forth in the statutory 
text.\168\ Congress did not specifically exclude securitizations that 
are not part of an originate-to-distribute model--or any other 
particular market model or structure of securitization--from risk 
retention. Although the legislative history indicates that Congress was 
concerned about securitizations within the originate-to-distribute 
model, nowhere in the text or legislative history did Congress indicate 
that it intended for risk retention not to apply to transactions that 
some may assert are not ``originate-to-distribute'' securitizations.
---------------------------------------------------------------------------

    \167\ See 15 U.S.C. 78o-11(b)(1) (``[T]he Federal banking 
agencies and the Commission shall jointly prescribe regulations to 
require any securitizer to retain an economic interest in a portion 
of the credit risk for any asset that the securitizer, through the 
issuance of an asset-backed security, transfers, sells, or conveys 
to a third party.'').
    \168\ See 15 U.S.C. 78o-11(c)(1)(G)(i) and 15 U.S.C. 78o-11(e).
---------------------------------------------------------------------------

    Furthermore, the leveraged loan market shares characteristics with 
the ``originate-to-distribute'' model that led to the deterioration in 
underwriting standards that were a major factor in the recent financial 
crisis. Originators of leveraged loans often retain little or no 
interest in the assets they originate, and originate and underwrite 
with the intention of distributing the entire loan. In this regard, 
leveraged loans purchased by CLOs are often originated as a fee-
generating, rather than a lending business, and originators do not have 
the same incentive to underwrite carefully as they would for loans they 
intend to keep in portfolio. These characteristics of the leveraged 
loan market pose potential systemic risks similar to those observed in 
the residential mortgage market during the crisis, whether the loans 
are placed with CLOs or other types of institutional investors.
    Additionally, there is no evidence to support the notion that 
Congress expected ``securitizer'' to be read narrowly so that risk 
retention requirements would apply only to sponsors of securitizations 
which have a specific type of structure or only to sponsors that 
fulfill a narrow and specific structural role in a

[[Page 77655]]

securitization transaction. Furthermore, the agencies believe that the 
narrow reading of ``securitizer'' supported by commenters could lead to 
results that would appear contrary to Congressional intent by opening 
the statute to easy evasion. Under such an interpretation, it would be 
feasible for many sponsors to evade risk retention by hiring a third-
party manager to ``select'' assets for purchase by the issuing entity 
that have been pre-approved by the sponsor. This could result in a 
situation in which no party to a securitization can be found to be a 
``securitizer'' because the party that organizes the transaction and 
has the most influence over the quality of the securitized assets could 
avoid legally owning or possessing the assets.\169\ Interpreting the 
term ``securitizer'' to produce such an easily evaded rule would be an 
unreasonable result that cannot comport with the intent of Congress in 
enacting section 15G of the Exchange Act.
---------------------------------------------------------------------------

    \169\ As discussed, Congress clearly expected this rule to apply 
to sponsors of CDOs, but the commenters' claims, if credited, would 
also exclude sponsors of CDOs from the requirements of risk 
retention.
---------------------------------------------------------------------------

    With respect to the issuance of asset-backed securities, there is 
always a sponsor responsible for the organization and initiation of the 
issuance of asset-backed securities.\170\ The issuing entity for a CLO 
transaction is a special purpose vehicle formed by some other party 
solely for the express purpose of issuing asset-backed securities. 
However, some person or other entity--namely, the sponsor--``organized 
and initiated'' this special purpose vehicle with the intent that this 
special purpose vehicle would issue asset-backed securities. The 
agencies do not believe that the special purpose vehicle formed to 
issue asset-backed securities in a CLO transaction does so independent 
of the actions of a sponsor. The agencies also note that the commenters 
did not identify another party to an open market CLO transaction other 
than the CLO manager that should be considered the sponsor.
---------------------------------------------------------------------------

    \170\ Similar to the agencies interpretation of ``securitizer'' 
to include CLO managers, the definitions of ``issuer'' in both the 
Securities Exchange Act of 1934 and Securities Act of 1933 include, 
with respect to certain kinds of vehicles, ``the person or persons 
performing the acts and assuming the duties of depositor or manager 
pursuant to the provisions of the trust or other agreement or 
instrument under which the securities are issued.''
---------------------------------------------------------------------------

    As indicated in the legislative history of the Dodd-Frank Act, the 
broad purpose of the statute was to ``create incentives that will 
prevent a recurrence of the excesses and abuses that preceded the 
crisis, restore investor confidence in asset-backed finance, and permit 
securitization markets to resume their important role as sources of 
credit for households and businesses.'' \171\ In drafting section 941, 
Congress recognized that it would be impractical for many investors to 
adequately assess and monitor the risks of assets underlying complex 
securitization products.\172\ As a result, Congress sought to encourage 
monitoring and assessment of such assets by the parties better suited 
to do so, namely those who organize and initiate the 
securitizations.\173\ Like other securitization sponsors, a CLO manager 
is the party best positioned to adequately monitor and assess the risk 
of the securitized assets. For the reasons discussed above, the 
agencies continue to find that a CLO manager is a ``securitizer'' under 
section 15G of the Exchange Act.\174\
---------------------------------------------------------------------------

    \171\ S. Rep. No. 111-176, at 128.
    \172\ Id.
    \173\ Id. at 129 (``When securitizers retain . . . risk, they 
have `skin in the game,' aligning their economic interests with 
those of investors. . . . Securitizers who retain risk have a strong 
incentive to monitor the quality of the assets they purchase from 
originators, package into securities, and sell. . . . Originators . 
. . will come under increasing market discipline because 
securitizers who retain risk will be unwilling to purchase poor-
quality assets.'').
    \174\ Furthermore, the agencies believe that this applies to 
other issuances of asset-backed securities in which the securitized 
assets are selected by a manager and no other transaction party 
meets the definition of ``sponsor.'' See Parts III.B.4 and III.B.8 
of this Supplementary Information.
---------------------------------------------------------------------------

ii. Exemption Requests and Alternative Proposals
    Many commenters suggested that the risk retention rules should not 
be applied to open market CLOs because, as described above, they 
believe the structural and other characteristics of open market CLOs 
make risk retention unnecessary. Among the primary characteristics 
highlighted to justify an exemption, commenters asserted that CLO 
managers' subordinated compensation structure aligns their interests 
with those of investors, CLOs differ from the originate-to-distribute 
model, and the underwriting of CLOs' assets is subject to multiple 
levels of scrutiny. As an alternative to an exemption based solely on 
such characteristics, several commenters supported exemptions for open 
market CLOs meeting certain qualifications. One commenter proposed an 
exemption from risk retention for open market CLOs that met the 
following conditions: (i) The asset manager must be a registered 
investment adviser under the Investment Advisers Act of 1940;\175\ (ii) 
all U.S. investors must be qualified purchasers or knowledgeable 
employees, consistent with reliance on the section 3(c)(7) exemption 
from investment company status under the Investment Company Act; \176\ 
(iii) the pool of assets are permitted and expected to be traded by the 
asset manager on behalf of the issuer in accordance with contractually 
agreed restrictions; (iv) the asset management agreement establishes a 
standard of care that requires the asset manager to employ a degree of 
skill and care no less than it uses for its own investments and 
consistent with industry standards for asset managers that are acting 
on behalf of comparable clients; and (v) the investment adviser effects 
agency cross trades on behalf of its advisory client only in accordance 
with section 275.206(3)-2 of the Commission's rules under the 
Investment Advisers Act.\177\
---------------------------------------------------------------------------

    \175\ 15 U.S.C. 80b-3(b).
    \176\ 15 U.S.C. 80a-3(c)(7).
    \177\ 17 CFR 275.206(3)-2.
---------------------------------------------------------------------------

    The agencies also received several comments in continued support of 
an option that was suggested with respect to the original proposal that 
the agencies did not include in the revised proposal. This suggestion 
would allow an open market CLO manager to satisfy its risk retention 
requirement by holding a combination of notes issued by the CLO, 
modeled to reflect the risks assumed by CLO managers through their 
subordinated compensation structure, and equity securities issued by 
the CLO and purchased by the CLO manager.
    Several commenters supported an option that would expand the above 
proposal by allowing managers of ``Qualified CLOs'' to satisfy the risk 
retention requirement by purchasing 5 percent of the CLO's equity and 
maintaining a subordinated compensation structure. Commenters proposed 
that, in order to be deemed a Qualified CLO, the CLO's governing 
transaction documents would have to include specific requirements in 
the following areas: Asset quality; portfolio composition; structural 
features; alignment of the interests of the CLO manager and investors 
in the CLO's securities; regulatory oversight; and transparency and 
disclosure. Commenters suggested requirements under each of these 
categories that they asserted would ensure high quality underwriting 
and investor protection. They also suggested that this proposal should 
be adopted along with the third-party option and pro rata risk 
retention reduction proposals described below, as they do not feel that 
the option alone would sufficiently address the projected

[[Page 77656]]

effects that the rule will have on open market CLOs.
    Several commenters suggested that the agencies could adopt the 
commenters' exemption proposals under the agencies' exemptive authority 
provided by section 15G(e).\178\ Alternatively, commenters supporting 
the Qualified CLO proposal suggested the proposal could be adopted as a 
construction of the statutory requirement that a securitizer retain not 
less than 5 percent of the ``credit risk'' of any asset. In this 
regard, the commenters asserted that by acquiring 5 percent of the 
equity interest in the CLO, and by bearing the subordinated risk of 
non-payment embedded in the compensation structure demanded by 
investors, the CLO manager would be retaining far more than 5 percent 
of the credit risk associated with the CLO's assets. As support for 
this suggestion, the commenters cited research concluding that the 
majority of likely losses for a typical CLO are borne by the bottom 20 
percent of the CLO capital structure.
---------------------------------------------------------------------------

    \178\ One commenter suggested that the Qualified CLO proposal 
could also be exempted based on the agencies' authority under 
section 15G(c)(1)(G)(i).
---------------------------------------------------------------------------

    The agencies do not believe that it would be appropriate to exempt 
open market CLOs from the risk retention requirement under section 
15G(e). The statute permits the agencies to adopt or issue exemptions, 
if the exemption would: (A) help ensure high quality underwriting 
standards for the securitizers and originators of assets that are 
securitized or available for securitization; and (B) encourage 
appropriate risk management practices by the securitizers and 
originators of assets, improve the access of consumers and businesses 
to credit on reasonable terms, or otherwise be in the public interest 
and for the protection of investors.\179\ While the agencies recognize 
that certain structural features of CLOs contribute to aligning the 
interests of CLO managers with investors, the agencies do not believe 
these structural features would support a finding that the exemption 
would help ensure high quality underwriting standards and there are 
reasons why such an exemption may run counter to the public interest 
and protection of investors.\180\
---------------------------------------------------------------------------

    \179\ 15 U.S.C. 78o-11(e)(2).
    \180\ For similar reasons, the agencies do not believe an 
exemption would be appropriate under section 15G(c)(1)(G)(i).
---------------------------------------------------------------------------

    As discussed above, many of the structural features that commenters 
cited as mitigating risk factors for CLOs were shared by other types of 
CDOs, such as CDOs of asset-backed securities, that performed poorly 
during the financial crisis. Although the structural features can offer 
protection to investors in senior tranches, such protections are 
exhausted when a portfolio's default rate significantly exceeds 
anticipated losses, as was the case for CDOs of asset-backed securities 
during the financial crisis. In such a situation, the manager may be 
incented to engage in even more risky behavior to maintain cash flow 
and ensure the payment of its subordinated compensation. Although CLOs 
performed better than other CDOs during the financial crisis, the 
better performance of leveraged loans after the financial crisis in CLO 
portfolios could be partially attributed to lowered interest rates and 
other government interventions. Some commenters claimed that CLOs are 
composed of higher quality assets that undergo significant underwriting 
scrutiny and that include investor protection features, but the 
significant recent credit deterioration in the leveraged loan market, 
as described above, demonstrates increasing risks in the types of 
assets held by CLOs. The agencies also note that while the final rule 
does not include an exemption for open market CLOs, the removal of the 
proposed restriction on cash flow distributions to the eligible 
horizontal residual interest, as described in Part B.1 of this 
Supplementary Information, will provide greater flexibility for CLO 
managers to satisfy the standard risk retention option, which may 
reduce the cost of the standard risk retention option.
    The agencies recognize that management fees incorporate credit risk 
sensitivity and may contribute to some degree to aligning the interests 
of the CLO manager and investors with respect to the quality of the 
securitized loans. On the other hand, as discussed above, this 
subordinated compensation structure could also lead to a misalignment 
of interests between the CLO manager and investors in certain 
circumstances. Moreover, as discussed in the reproposal, these fees do 
not appear to provide an adequate substitute for risk retention because 
they typically have small expected value, especially given that CLOs 
securitize leveraged loans, which carry higher risk than many other 
securitized assets. Even combining the expected value of the manager's 
compensation with a 5 percent interest in the equity of the CLO would 
be inadequate because, as described by a commenter, such an equity 
interest would also likely amount to under one percent of the fair 
value of the ABS interests issued to third parties (which is less than 
the 5 percent required for an eligible horizontal residual interest). 
Further, management fees are not funded in cash at closing and 
therefore may not be available to absorb losses as expected. Generally, 
the agencies have declined to recognize such unfunded forms of risk 
retention and the agencies are not persuaded that an exception should 
be made for open market CLOs.
    Some commenters supported an alternative approach that would reduce 
the risk retention requirement for open market CLOs, on a pro rata 
basis, to the extent that the commercial loans backing the issued CLO 
securities met certain underwriting criteria. In order to qualify for 
reduced risk retention, the commercial loans would have to be senior 
secured first lien loans that either (i) have a ratio of first lien 
debt to total capitalization of less than or equal to 50 percent; or 
(ii) have a total leverage ratio of less than or equal to 4.5 
times.\181\ Further, this approach would reduce the risk retention 
requirement to the extent that the CLO holds a subset of loans 
requiring certain specialized treatment. This approach would require 
determination of whether a loan qualifies for reduced risk retention 
treatment to be made at the time of origination. Further, this approach 
provided that loans originated before the applicable effective date of 
the rule should not require risk retention when securitized after such 
date.
---------------------------------------------------------------------------

    \181\ In this context, leverage ratio refers to the borrower's 
total debt divided by earnings before interest, taxes, depreciation 
and amortization (EBITDA).
---------------------------------------------------------------------------

    The agencies are not persuaded that the risk retention requirement 
should be reduced to the extent commercial loans backing the issued CLO 
securities meet the criteria proposed by the commenters. As discussed 
in Part V.A of this Supplementary Information, the final rule already 
provides exemptions from the risk retention requirement for qualifying 
commercial loans that meet specific underwriting standards. The 
agencies developed these standards to be reflective of very high 
quality loans. The commenters' approach relies on significantly weaker 
standards, and the agencies do not believe that these criteria, which 
would permit securitization with no risk retention for loans to 
borrowers who are of lower credit quality or that do not have a third-
party evaluation of the likelihood of timely payment of interest and 
repayment of principal, would satisfy the statutory requirements for an 
exception to help ensure high quality underwriting standards.

[[Page 77657]]

    The agencies also disagree with the proposition that, in the 
context of CLOs, loans originated before the applicable effective date 
of the rule should not be subject to risk retention. Section 15G of the 
Exchange Act applies to any issuance of asset-backed securities after 
the applicable effective date of the rule, regardless of the date the 
assets in the securitization were originated. The agencies note, 
however, that securitizations of loans meeting the seasoned loan 
exemption in section 19(b)(7) of the rule would not be subject to risk 
retention requirements.
    The agencies also received a number of comments in support of 
approaches to allow a third party, rather than the CLO manager, to 
retain some or all of the required credit risk in certain 
circumstances. To be eligible under these approaches, the third party 
would be required to have a role in setting the selection criteria for 
the assets held by a CLO and the power to veto any change to asset 
selection criteria. Specifically, the commenters' proposal would 
require: (i) Prior to the CLO's acquisition of the initial CLO assets, 
the third party to review and assent to key transaction portfolio 
terms, including the asset eligibility criteria, concentration limits, 
collateral quality tests, and reinvestment criteria of the CLO's asset 
pool; and (ii) any material change to the above parameters to receive 
prior written consent by the third party retaining the CLO credit risk. 
Further, to enable the third party retaining credit risk to evaluate, 
before the CLO closes, whether the CLO manager is able to meet the 
asset selection criteria, the commenters proposed that at least 50 
percent of the initial asset pool would have to be acquired (or be 
under a commitment to be acquired) by the closing date. One of the 
approaches would also require that the CLO manager be a registered 
investment adviser and would permit multiple parties to jointly satisfy 
the CLO's risk retention requirement.
    Another commenter proposed a different third-party retention 
option, under which a sponsor's risk retention requirement would be 
satisfied if one or more third parties agreed to hold the required 
minimum risk retention. The commenter's suggested option would only 
apply to CLOs that are securitizations of corporate debt and servicing 
assets; inclusion of other ABS interests would be prohibited. The third 
party or a party appointed by the third party would be required to 
perform an independent review of the credit risk of each securitized 
asset. Further, the proposal would require the CLO manager to provide 
information to investors about the investment experience of each third-
party purchaser.
    While the agencies considered the third-party retention proposals 
carefully, they have concluded that the proposals would not provide an 
appropriate method of risk retention. The proposed third-party 
retention options would result in retention of the credit risk by a 
third party that would have less control over the CLO portfolio than 
the CLO manager. These alternatives would result in weaker means of 
influencing the underwriting quality in CLO portfolios and are 
therefore inadequate substitutes for risk retention.
    While, as discussed in Part III.B.5 of this Supplementary 
Information, the final rule allows third-party purchasers to retain 
credit risk in CMBS transactions, CLO and CMBS transactions vary in 
several significant ways that make such an option more challenging in 
the CLO context. For example, differences between CMBS and CLO 
transactions would make it more challenging for third-party investors 
to perform thorough independent reviews of loans in CLO portfolios, 
including the dynamic nature of CLO portfolios and the larger number of 
loans in typical CLO portfolios. In CMBS transactions, the loan pool is 
chosen and is static before issuance, which permits loan-level due 
diligence by the third-party investor. In CLOs, the loan pool is 
typically not complete before issuance, and the pool is dynamic, 
limiting the ability of a third-party investor to conduct loan-level 
due diligence before issuance. Under proposals submitted by commenters, 
the third-party purchaser would be limited to evaluating investment 
criteria for the CLO and would not conduct loan-level due diligence. In 
this regard, the third-party purchaser would not be conducting loan-
level re-underwriting, and consequently is not a reasonable substitute 
for the original effort of the sponsor in underwriting the loan pool. 
Furthermore, the third-party retention proposals would provide the 
third-party purchaser with minimal power or influence over the 
composition or quality of the CLO's collateral pool after closing. In 
contrast to CMBS transactions that generally give the third-party 
purchaser the right to reject loans from the pool, no similar authority 
would be granted to CLO third-party purchasers under commenters' 
proposals.
    Given the weakening of underwriting and increase in risk in the 
leveraged loan market, the agencies do not believe that existing market 
practice is sufficiently robust to substitute for risk retention. 
Furthermore, the agencies do not believe the alternative approaches 
suggested by commenters would significantly add protection to 
investors, as investors in CLOs would presumably already have the 
opportunity to review and assent to key portfolio transaction 
terms.\182\ For these reasons, the agencies have decided against 
adopting the third-party risk retention option. While the agencies 
considered whether further parameters around a third-party risk 
retention option for CLO sponsors would be appropriate, the agencies 
were not able to identify parameters that would function well for CLOs 
or that would further the regulatory purposes of the risk retention 
rules.
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    \182\ The risk retention approaches for CLOs suggested by 
commenters also reflect standard market practices for certain other 
types of CDOs (e.g., CDOs of asset-backed securities) that performed 
poorly during the financial crisis in which key investors negotiated 
asset selection criteria and reinvestment criteria and changes to 
those criteria required investor consent.
---------------------------------------------------------------------------

    The agencies have also carefully considered commenters' views about 
the impact the proposed rules would have on CLO issuance and the 
commercial loan markets in general. As discussed in the reproposal, the 
agencies acknowledge that requiring open market CLO managers to satisfy 
the risk retention requirement could result in fewer CLO issuances and 
less competition in this market. However, the agencies note that other 
entities, such as hedge funds and loan mutual funds, also purchase 
commercial loans and believe that the market will adjust to the rule 
and that lending to creditworthy commercial borrowers, on appropriate 
terms, will continue at a healthy rate. The agencies also note that 
commenters' concerns about the impact of European risk retention 
requirements on European CLO issuance may be misplaced, as economic 
conditions have constrained the available supply of potential 
collateral for European CLOs.
    Furthermore, the agencies believe projected impacts on the CLO 
market are justified by the benefits that will be produced by 
subjecting open market CLOs to the risk retention rules. As discussed, 
the agencies have significant concerns about recent activity in the 
leveraged loan market. The search for yield in the low interest rate 
environment has led investors to take on more risk in this market by 
investing in lower quality commercial loans that contain fewer lender 
protections.\183\ The agencies believe that valuations on lower-rated 
corporate bonds and

[[Page 77658]]

leveraged loans are stretched and excesses in these markets could lead 
to higher levels of future defaults and losses.\184\ The origination 
and securitization of such poorly underwritten loans could generate 
systemic financial risks.\185\
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    \183\ See, e.g., Monetary Policy Report, at 1-2, 22; Semiannual 
Risk Perspective: Spring 2014, at 5.
    \184\ See, e.g., Monetary Policy Report, at 1-2.
    \185\ See, e.g., Leveraged Lending Guidance at 17771 (``[A] 
poorly underwritten leveraged loan that is pooled with other loans 
or is participated with other institutions may generate risk for the 
financial system.''); Shared National Credits Program: 2013 Review 
at 8 (``Poorly underwritten or low quality leveraged loans, 
including those that are pooled with other loans or participated 
with other institutions, may generate risks for the financial 
system.'').
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    Increased appetite from investors for higher yielding and higher 
risk assets in the leveraged loan market creates an environment 
susceptible to some of the abuses and excesses that occurred in the 
residential and commercial mortgage markets that contributed to the 
financial crisis. In particular, the agencies are concerned that this 
environment could create incentives to originate an increased volume of 
loans, without regard for quality or underwriting standards, for the 
purpose of distribution through securitization. The agencies therefore 
have concluded that requiring open market CLO managers or lead 
arrangers to retain economic exposure in the securitized assets will 
help ensure the quality of assets purchased by CLOs, promote discipline 
in the underwriting standards for such loans, and reduce the risk that 
such loans pose to financial stability.
    For the reasons discussed above, the final rule requires open 
market CLO managers to satisfy the minimum risk retention requirement 
for each CLO securitization transaction that it manages by holding a 
sufficient amount of standard risk retention or meet the requirements 
of the alternative lead arranger option. After considering all 
comments, the agencies are adopting, largely as proposed, the lead 
arranger option for open market CLOs, under which an open market CLO 
could satisfy the risk retention requirement if the firm serving as 
lead arranger for each loan purchased by the CLO retains at the 
origination of the syndicated loan at least 5 percent of the face 
amount of the term loan tranche purchased by the CLO. The lead arranger 
is required to retain this portion of the loan tranche until the 
repayment, maturity, involuntary and unscheduled acceleration, payment 
default, or bankruptcy default of the loan. This requirement applies 
regardless of whether the loan tranche was purchased on the primary or 
secondary market, or was held at any particular time by an open market 
CLO issuing entity.
    Under the final rule's lead arranger option, the sponsor is 
required to disclose a complete list of every asset held by an open 
market CLO (or before the CLO's closing, in a warehouse facility in 
anticipation of transfer into the CLO at closing). This list requires 
the following information (i) the full legal name, Standard Industrial 
Classification category code and legal entity identifier (LEI) issued 
by a utility endorsed or otherwise governed by the Global LEI 
Regulatory Oversight Committee or the Global LEI Foundation (if an LEI 
has been obtained by the obligor) of the obligor of the loan or asset; 
(ii) the full name of the specific CLO-eligible loan tranche held by 
the CLO; (iii) the face amount of the CLO-eligible loan tranche held by 
the CLO; (iv) the price at which the CLO-eligible loan tranche was 
acquired by the CLO; and (v) for each loan tranche, the full legal name 
of the lead arranger subject to the sales and hedging restrictions. 
Also, the final rule requires the sponsor to disclose the full legal 
name and form of organization of the CLO manager. The sponsor is 
required to provide these disclosures a reasonable period of time prior 
to the sale of the asset-backed securities in the securitization 
transaction (and at least annually with respect to information 
regarding the assets held by the CLO) and, upon request, to the 
Commission and the sponsor's appropriate Federal banking agency, if 
any. Further, the CLO manager is required to certify or represent as to 
the adequacy of the collateral and certain attributes of the borrowers 
of the senior, secured syndicated loans acquired by the CLO and certain 
other matters.
    The agencies have added to the disclosure requirement the 
disclosure of an obligor's LEI issued by a utility endorsed or 
otherwise governed by the Global LEI Regulatory Oversight Committee or 
the Global LEI Foundation, if an LEI has been obtained by the obligor. 
The agencies believe that the LEI requirement allows investors in open-
market CLOs to better track the performance of assets originated by 
specific originators. The effort to standardize a universal LEI has 
progressed significantly over the last few years.\186\ As LEI use 
becomes more mandated and widespread pursuant to other rules, the 
agencies anticipate that LEI disclosure by obligors under the lead 
arranger option will become the standard.
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    \186\ The Commission has prescribed the disclosure of LEI in 
other rulemakings. See, e. g., Nationally Recognized Statistical 
Rating Organizations; Final Rule, 79 FR 55078 (Sept. 15, 2014) and 
Reporting by Investment Advisers to Private Funds and Certain 
Commodity Pool Operators and Commodity Trading Advisors on Form PF; 
Final Rule, 76 FR 71128 (Nov. 16, 2011).
---------------------------------------------------------------------------

    In response to commenter concerns, the agencies have removed from 
the lead arranger option for open market CLOs the requirement that lead 
arrangers and CLO managers certify as to the adequacy of the collateral 
and the attributes of the borrowers of the senior, secured syndicated 
loans that they purchase and certain other matters and make certain 
covenants. Instead, a lead arranger will be required to certify that it 
has evaluated the effectiveness of its internal supervisory controls 
with respect to the process for ensuring that loans included in a CLO-
eligible tranche meet all of the requirements set forth in section 9 of 
the rule applicable to CLO-eligible loan tranches and has concluded 
that its internal supervisory controls are effective. CLO managers will 
be required to certify that they have policies and procedures to 
evaluate the likelihood of repayment and that they have followed such 
policies and procedures when determining the adequacy of the collateral 
and attributes of the borrowers of the loans that they purchase. These 
certifications are similar to those required of depositors with respect 
to QRMs and other qualifying asset classes. The agencies believe these 
modifications will reduce concerns about risks and challenges that 
commenters asserted would be faced in connection with the requirement 
that there be representations that the loans meet the rule's criteria. 
The agencies also note that the reference to ``ensuring'' that loans 
are CLO-eligible loans should be interpreted in a manner similar to 
such reference in this Supplementary Information with respect to QRMs 
and other qualifying asset classes.
    As the agencies noted in the reproposal, the lead arranger option 
for open market CLOs is intended to allocate risk retention to the 
parties that originate the underlying loans and that likely exert the 
greatest influence on how the loans are underwritten, which is an 
integral component of ensuring the quality of assets that are 
securitized. Subject to considering certain factors, section 15G 
permits the agencies to allow an originator (rather than a sponsor) to 
retain the required amount of credit risk and to reduce the amount of 
credit risk required of the sponsor by the amount retained by the 
originator.\187\ In developing the

[[Page 77659]]

proposed lead arranger option, the agencies considered the factors set 
forth in section 15G(d)(2) and concluded that it is consistent with the 
purposes of the statute to allow lead arrangers of open market CLOs to 
satisfy the risk retention requirement.\188\
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    \187\ 15 U.S.C. 78o-11(c)(G)(iv), (d) (permitting the Commission 
and Federal banking agencies to allow the allocation of risk 
retention from a sponsor to an originator).
    \188\ 15 U.S.C. 78o-11(d)(2). These factors are whether the 
assets sold to the securitizer have terms, conditions, and 
characteristics that reflect low credit risk; whether the form or 
volume of transactions in securitization markets creates incentives 
for imprudent origination of the type of loan or asset to be sold to 
the securitizer; and the potential impact of risk retention 
obligations on the access of consumers and business to credit on 
reasonable terms, which may not include the transfer of credit risk 
to a third party.
---------------------------------------------------------------------------

    The agencies considered the commenters' views that the option will 
not be widely adopted by lead arranger banks, but the agencies believe 
the option provides additional flexibility for lead arranger banks and 
non-banks and therefore may reduce disruption to the market. The 
agencies also believe that this option for open market CLOs will 
meaningfully align the incentives of the party most involved with the 
credit quality of these loans--the lead arranger--with the interests of 
investors. Commenters raised concerns that banks would likely not want 
to retain risk without being allowed to hedge or transfer that risk due 
to concern about criticism from regulators. However, the agencies note 
that these concerns were not raised for balance sheet CLOs where banks 
would be required similarly to retain a portion of the loans' risk 
without selling or transferring that retained risk. In addition, to the 
extent the comments referred to supervisory standards, the Federal 
banking agencies note that supervisors take into account many 
considerations when reviewing loan portfolios, including applicable 
regulations and guidance regarding underwriting and risk management. 
Alternatively, incentives would be placed on the CLO manager to monitor 
the credit quality of loans it securitizes, if it retains risk under 
the standard risk retention option.
    For the reasons discussed above, open market CLO managers clearly 
fall within the statutory definition of ``securitizer'' in Section 15G 
and therefore are subject to the risk retention requirement. The 
agencies also believe that subjecting open market CLOs and their 
managers to the risk retention requirement is within their authority 
and consistent with the purposes of section 15G. The agencies believe 
the final rule places risk retention responsibility on the parties most 
capable of ensuring and monitoring the credit quality of the assets 
collateralizing open market CLOs--the CLO manager or the lead arranger. 
Further, the agencies believe these two options provide sufficient 
flexibility to avoid significant disruptions to the CLO and credit 
markets.
8. Municipal Bond ``Repackaging'' Securitizations
a. Overview of the Reproposal and Public Comments
    Several commenters on the original proposal requested that the 
agencies exempt municipal bond repackaging securitizations from risk 
retention requirements, the most common form of which are often 
referred to as ``tender option bonds.'' \189\ In order to reflect and 
incorporate the risk retention mechanisms currently implemented by the 
market, the reproposal included two additional risk retention options 
for certain municipal bond repackagings. The proposed rule closely 
tracked certain requirements for these repackagings, outlined in IRS 
Revenue Procedure 2003-84, that are relevant to risk retention.\190\ 
Specifically, in the revised proposal, the agencies proposed additional 
risk retention options for municipal bond repackagings issued by a 
``qualified tender option bond entity,'' which would be defined as an 
issuing entity of tender option bonds in which:
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    \189\ As described by one commenter, a typical tender option 
bond transaction consists of the deposit of a single issue of highly 
rated, long-term municipal bonds in a trust and the issuance by the 
trust of two classes of securities: floating rate, puttable 
securities (the ``floaters''), and an inverse floating rate security 
(the ``residual''). The holders of floaters have the right, 
generally on a daily or weekly basis, to put the floaters for 
purchase at par, which put right is supported by a liquidity 
facility delivered by a highly rated provider and causes the 
floaters to be a short-term security. The floaters are in large part 
purchased and held by money market mutual funds. The residual is 
held by a longer term investor (bank, insurance company, mutual 
fund, hedge fund, etc.). The residual investor takes all of the 
market and structural risk related to the tender option bond 
structure, with the floaters investors only taking limited, well-
defined insolvency and default risks associated with the underlying 
municipal bonds, which risks are equivalent to those associated with 
investing in such municipal bonds directly.
    \190\ Revenue Procedure 2003-84, 2003-48 I.R.B. 1159.
---------------------------------------------------------------------------

     Only two classes of securities are issued: a tender option 
bond and a residual interest;
     The tender option bond qualifies for purchase by money 
market funds under Rule 2a-7 under the Investment Company Act of 1940; 
\191\
---------------------------------------------------------------------------

    \191\ This requirement is in section 10 of the final rule 
(definition of ``tender option bond'').
---------------------------------------------------------------------------

     The holder of a tender option bond has the right to tender 
such bonds to the issuing entity for purchase at any time upon no more 
than 30 days' notice; \192\
---------------------------------------------------------------------------

    \192\ This requirement is in section 10 of the final rule 
(definition of ``tender option bond'').
---------------------------------------------------------------------------

     The collateral consists solely of municipal securities as 
defined in section 3(a)(29) of the Securities Exchange Act of 1934 and 
servicing assets, and all the municipal securities have the same 
municipal issuer and the same underlying obligor or source of payment;
     Each of the tender option bond, the residual interest and 
the underlying municipal security are issued in compliance with the 
Internal Revenue Code of 1986, as amended (the ``IRS Code''), such that 
the interest payments made on those securities are excludable from the 
gross income of the owners;
     The issuing entity has a legally binding commitment from a 
regulated liquidity provider to provide 100 percent guarantee or 
liquidity coverage with respect to all of the issuing entity's 
outstanding tender option bonds; \193\ and
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    \193\ The final rule defines a regulated liquidity provider as a 
depository institution (as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813)); a bank holding company (as 
defined in 12 U.S.C. 1841) or a subsidiary thereof; a savings and 
loan holding company (as defined in 12 U.S.C. 1467a) provided all or 
substantially all of the holding company's activities are 
permissible for a financial holding company under 12 U.S.C. 1843(k) 
or a subsidiary thereof; or a foreign bank (or a subsidiary thereof) 
whose home country supervisor (as defined in section 211.21 of the 
Board's Regulation K (12 CFR 211.21)) has adopted capital standards 
consistent with the Capital Accord of the Basel Committee on Banking 
Supervision, as amended, provided the foreign bank is subject to 
such standards.
---------------------------------------------------------------------------

     The issuing entity qualifies for monthly closing elections 
pursuant to IRS Revenue Procedure 2003-84, as amended or supplemented 
from time to time.
    Under the reproposal, the sponsor of a qualified tender option bond 
entity could satisfy its risk retention requirements by retaining an 
interest that, upon issuance, would meet the requirements of an 
eligible horizontal residual interest but that, upon the occurrence of 
a ``tender option termination event'' as defined in section 4.01(5) of 
IRS Revenue Procedure 2003-84, as amended or supplemented from time to 
time, would meet requirements of an eligible vertical interest.\194\
---------------------------------------------------------------------------

    \194\ Section 4.01(5) of IRS Revenue Procedure 2003-84 defines a 
tender option termination event as: (1) a bankruptcy filing by or 
against a tax-exempt bond issuer; (2) a downgrade in the credit-
rating of a tax-exempt bond and a downgrade in the credit rating of 
any guarantor of the tax-exempt bond, if applicable, below 
investment grade; (3) a payment default on a tax-exempt bond; (4) a 
final judicial determination or a final IRS administrative 
determination of taxability of a tax-exempt bond for Federal default 
on the underlying municipal securities and credit enhancement, where 
applicable; (5) a credit rating downgrade below investment grade; 
(6) the bankruptcy of the issuer and, when applicable, the credit 
enhancer; or (7) the determination that the municipal securities are 
taxable.

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[[Page 77660]]

    Under the reproposal, the sponsor of a qualified tender option bond 
entity could also satisfy its risk retention requirements by holding 
municipal securities from the same issuance of municipal securities 
deposited in the qualified tender option bond entity, the face value of 
which retained municipal securities would be equal to 5 percent of the 
face value of the municipal securities deposited in the qualified 
tender option bond entity.
    The proposed prohibitions on transfer and hedging set forth in 
section 12 of the reproposal applied to the holder of a residual 
interest in, as well as any municipal securities retained by the 
sponsor of, a qualified tender option bond entity, if those interests 
were held in satisfaction of the sponsor's risk retention requirements 
under section 10 of the reproposal.
    The reproposal also would have allowed the sponsor of a qualified 
tender option bond entity to satisfy its risk retention requirements 
under subpart B of the proposed rule using any other risk retention 
option in the reproposal, provided the sponsor meets the requirements 
of that option.
    The agencies received many comments regarding the proposed tender 
option bond options. Most of the comments requested an exemption from 
risk retention for tender option bonds and, in the absence of an 
exemption, recommended either technical clarifications or adjustments 
to the proposed options for tender option bonds to cover a broader 
range of transaction structures.
    Several commenters recommended that the final rule exclude issuance 
of tender option bonds from the risk retention requirements for a 
variety of reasons, including:
     The originate-to-distribute model that poses moral hazard 
risks in certain securitization transactions is not present in a tender 
option bond program;
     The tender option bond structure does not create 
information gaps for investors because tender option bond programs do 
not involve pooling large numbers of unrelated assets;
     The underlying bonds in a tender option bond structure 
generally are from one original issuance with the same issuer and 
borrower/obligor;
     The fund that selects the municipal bond to be deposited 
into a tender option bond structure retains virtually all of the risk 
related to such municipal bonds, and the tender option bond structure 
provides liquidity that is not found with typical asset-backed security 
products; and
     The industry generally does not define tender option bonds 
as structured finance products or asset-backed securities.
    Commenters urging exclusion of tender option bonds from the risk 
retention requirements also stated that the current tender option bond 
market provides municipal issuers with access to a diverse investor 
base and a more liquid market, and subjecting tender option bonds to 
the risk retention requirements would significantly increase the costs 
of tender option bond programs and adversely affect the state and local 
governments that indirectly receive funding through these programs. 
They also commented that applying the risk retention rules to these 
structures would decrease the availability of tax-exempt investments in 
the market for money market funds, which are continuing to face limited 
investment options due to constraints imposed by Rule 2a-7 under the 
Investment Company Act.
    A few commenters proposed that a sponsor of tender option bonds 
could satisfy its risk retention requirements if the residual interest 
holder provides, either directly or indirectly through an affiliate (i) 
100 percent liquidity coverage on the floaters, (ii) a binding 
reimbursement obligation to the provider of the 100 percent liquidity 
coverage, or (iii) 100 percent credit enhancement on the underlying 
municipal securities. A few commenters took the position that any 
residual interest in any tender option bond structure should qualify as 
a risk retention option under the rule if the residual interest is held 
by an unaffiliated entity that agrees to subordinate its right to 
payment to the floater holders and the liquidity provider until the 
occurrence of a tender option termination event.
    One commenter recommended broadening the exemption relating to 
asset-backed securities issued or guaranteed by a state or municipal 
entity to include securities collateralized by such exempt securities. 
Several commenters proposed that only municipal bond repackaging 
transactions with initial closing dates after the applicable effective 
date of the rule be subject to the risk retention requirements.
    Other commenters advocated for a broader tender option bond risk 
retention option that would include most or all currently existing 
tender option bond programs, including those that issue tender option 
bonds with a notice period for tender of up to 397 days, tender option 
bond programs that hold assets other than tax-exempt municipal 
securities and servicing assets,\195\ tender option bond programs that 
hold securities issued by more than one issuer,\196\ and tender option 
bond programs in which the required retained interest is held by 
multiple beneficial owners, so long as all such owners are managed by a 
common regulated entity.\197\
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    \195\ One commenter explained that other qualifying assets 
should include taxable municipal securities, preferred stock of 
registered closed-end investment companies that primarily invest in 
municipal securities, tender option bonds or tender option bond 
residual interests that are already issued and outstanding, and 
custodial receipts representing beneficial interests in any of the 
foregoing. A second commenter's alternative proposal includes tender 
option bond programs that hold taxable municipal securities and 
``securities evidencing a beneficial ownership interest in municipal 
securities.'' A third commenter's alternative proposal included 
tender option bond programs for which the ``underlying collateral 
consists solely of tax-exempt assets or beneficial interests in such 
assets.''
    \196\ One commenter explained, in limited instances, assets held 
by tender option bond trusts consist of municipal securities from 
different issues from the same issuer or of more than one issuer.
    \197\ One commenter explained that this allocation is common 
practice in large fund complexes, and broadening this definition 
would not change the alignment of interests of the trust holders. 
Another commenter requested that the agencies allow multiple 
investment companies to satisfy the sponsor risk retention 
requirements.
---------------------------------------------------------------------------

    Several commenters suggested technical clarifications, adjustments 
and corrections, including: The definition of qualified tender option 
bond entity should clarify the requirements with respect to the 
liquidity guarantee; \198\ the requirement that tender option bonds be 
eligible securities under Rule 2a-7 under the Investment Company Act 
should be removed because it is unnecessary in the risk retention 
context; the definition of tender option bond should be revised so that 
the purchase price is par or face value plus accrued interest; the 
definition of qualified tender option bond entity should require that 
the tender right be supported by a liquidity facility or guarantee, 
except upon the occurrence of specified tender option termination 
events, and that such liquidity facility or guarantee be enforceable 
against the entity obligated to support or guarantee the purchase of 
the bonds upon tender; and the agencies should provide more specific 
guidance on how the disclosure

[[Page 77661]]

requirements would apply to tender option bonds.\199\
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    \198\ One commenter explained that the liquidity facility in a 
tender option bond program is typically structured as a credit 
enhancement of the underlying assets and not of the floaters 
themselves.
    \199\ One commenter asked that the agencies clarify that the 
disclosure requirements applicable to the sponsor of a qualified 
municipal repackaging entity be limited to: (i) the name and form of 
organization of the qualified municipal repackaging entity, (ii) a 
description of the form and material terms of the retained interest, 
(iii) whether the qualified municipal residual interest is held by 
the sponsor or a qualified residual holder, and (iv) a description 
of the face value or fair value of the qualified municipal residual 
interest or the municipal securities that are separately retained.
---------------------------------------------------------------------------

    A few commenters expressed concern that the option to retain the 
residual interest only if it otherwise qualified as an eligible 
horizontal residual interest before, and an eligible vertical interest 
after, the occurrence of a tender option termination event was 
inconsistent with the partnership tax analysis used to pass through the 
tax-exempt interest on the bonds because the residual interest in a 
tender option bond structure is not legally subordinated at any time. 
However, another commenter stated that a residual interest is 
substantially equivalent to an eligible horizontal residual interest 
prior to the occurrence of a tender option termination event and an 
eligible vertical interest after a tender option termination event 
because (i) prior to the occurrence of a tender option termination 
event, the residual holder bears all the market risk, and (ii) after a 
tender option termination event, any credit losses are shared pro rata 
between the floaters and the residuals.
    As part of a broader alternative definition for a qualified tender 
option bond entity, it was suggested that the retained risk in a 
qualified municipal repackaging entity should be either a residual or 
legally subordinate ABS interest equal to at least 5 percent of the 
face value (or fair market value, if no face value is available) of the 
assets of the entity at closing.
    A group of commenters suggested that, if the agencies do not 
provide a full exemption for tender option bonds, the rule should state 
that retaining a residual interest in a qualified tender option bond 
entity equal to 5 percent of the fair value (determined as of the date 
of deposit) of the deposited assets should satisfy the risk retention 
requirements, without regard to the requirements applicable to eligible 
horizontal residual interest or eligible vertical interest 
requirements.
    Other commenters recommended that the agencies permit the sponsor 
or the residual holder to purchase and retain a residual interest with 
an upfront cash investment value equal to 5 percent of the initial 
market value of the municipal securities in the tender option bond 
program. In addition, commenters asked that the rule allow a sponsor to 
aggregate the amount of a tender option bond residual interest it 
holds, with the municipal securities it directly holds, as of the date 
of deposit, in determining its risk retention requirement.
    It was also suggested that the value of the collateral posted by a 
residual holder for a liquidity facility should be recognized, and that 
the residual holder's interest should be calculated as the sum of (a) 
the face amount of the residual certificate and (b) the market value of 
the collateral posted by the residual to secure the liquidity facility.
    In terms of valuing the residual interest, one commenter suggested 
that the 5 percent market value retention amount be calculated at the 
time of the purchase of the municipal bond or the issuance of 
securities, to better conform to common industry practice and the 
realities of the tender option bond program, if the agencies decide not 
to exempt tender option bonds. This commenter explained that it would 
be impractical and costly to constantly monitor any fluctuation in the 
market value of the municipal bonds, and that no adjustments should 
have to be made if, during the life of the tender option bond trust, 
the market value of those bonds fluctuates above or below the market 
value that is initially calculated.
    Several commenters requested that the agencies permit a party other 
than the sponsor of the issuing entity with respect to tender option 
bonds to be the risk retainer. Commenters stated that such a party may 
include a third-party investor that selects the underlying asset for 
the transaction and obtains the primary financing benefit of the 
structure, the funds or other investors that purchase residuals in the 
tender option bond trust to satisfy the sponsor's risk retention 
obligations as third-party purchasers, and a third-party investor with 
respect to tender option bond programs that are made available by 
sponsors and used by such third-party investors.
    A few commenters requested that the final rule confirm that the 
``sponsor'' is the bank that creates the tender option bond program. 
Commenters explained that the residual holders do not perform any of 
the traditional functions of a sponsor. One commenter claimed that 
deeming the funds that purchase residuals to be the ``sponsors'' for 
purposes of risk retention would have implications under other rules 
that use the term ``sponsor,'' including Rule 2a-7 under the Investment 
Company Act and proposed Securities Act Rule 127B.
    In connection with the prohibition on hedging in the reproposal, 
which prohibits hedges that are ``materially related to the credit 
risk'' of the tender option bond residual interests and securitized 
assets, a group of commenters requested that the agencies clarify the 
meaning of that restriction to ensure that sponsors can manage the 
risks associated with up to 95 percent of the assets held by a tender 
option bond program. It was also requested that the agencies exclude 
from the hedging prohibition: (i) risk reducing and other transactions 
with regard to the underlying municipal security that are entered into 
by the sponsor prior to the establishment of the municipal bond 
repackaging structure, and (ii) transactions between the sponsor or its 
affiliates and an unrelated third party where the purpose of such 
transaction is to provide financing to such unrelated third party for 
such municipal securities on connection with a municipal bond 
repackaging structure.
b. Final Rule
    After considering carefully the comments received on the reproposal 
as well as the purpose and language of section 15G of the Exchange Act, 
the agencies have adopted in the final rule the proposed tender option 
bond options with some modifications. In response to specific commenter 
concerns, the final rule incorporates certain technical clarifications 
and adjustments.
    The final rule does not provide an exemption from risk retention 
requirements for sponsors of issuing entities with respect to tender 
option bonds. The agencies continue to believe that tender options 
bonds are asset-backed securities under the definition in section 15G 
because they are securities collateralized by self-liquidating 
financial assets and the holders of the securities receive payments 
that depend primarily on cash flow from the securitized assets.\200\ 
Therefore, the sponsors of the issuing entities with respect to tender 
option bonds are subject to section 15G and the credit risk retention 
rules.
---------------------------------------------------------------------------

    \200\ 15 U.S.C. 78o-11(a).
---------------------------------------------------------------------------

    Consistent with the treatment of sponsors of other asset-backed 
securities, the holder of risk retention in connection with the 
issuance of tender option bonds may divide the ABS interests or tax-
exempt municipal securities required to be retained under the final 
rule among its majority-owned affiliates, but may not do so among 
unrelated entities that are managed by the sponsor or managed by an 
affiliate of the sponsor. Accordingly, the sponsor of a tender option 
bond issuance under the rule may not sell the ABS interests

[[Page 77662]]

required to be retained under the rule to a fund it manages unless such 
fund is a majority-owned affiliate of the sponsor. Otherwise, the 
credit risk associated with holding the ABS interest will be 
transferred to the investors in the fund that purchased those ABS 
interests, which would undermine the purpose and intent of the statute.
    The agencies believe that, with respect to some issuances of asset-
backed securities, it is possible that more than one party could meet 
the definition of sponsor in the rule.\201\ With respect to those 
issuances, it is the responsibility of the transaction parties to 
designate which party is the sponsor and that party is then subject to 
the requirements of the risk retention rules.\202\ The agencies note 
that various commenters requested that the agencies designate the bank 
that arranges and organizes the issuance of tender option bonds or the 
party that owns the residual interest as the sponsor. Regarding such 
requests, the agencies note that the party required to comply with the 
risk retention rules with respect to a tender option bond issuance is 
the party or parties that meet the definition of ``sponsor'' in the 
rule \203\ and, depending on the specific facts and circumstances of 
the issuance and how the parties structure the transaction, either the 
arranging bank or the residual holder could be designated as the 
sponsor in accordance with the final rule.\204\
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    \201\ The designation of a party as a sponsor of an issuance of 
asset-backed securities for purposes of the final rule is not 
related to whether or not such party is the sponsor for purposes of 
other rules and regulations, including for example Rule 2a-7 under 
the Investment Company Act (including the discussion of sponsor in 
the Money Market Fund Reform, 79 FR at 47876) or section 13G of the 
Bank Holding Company Act (Volcker Rule). Whether or not a party is 
the sponsor under a particular rule or regulation is determined by 
reference to that rule or regulation and the related legal 
authority.
    \202\ While this concern was specifically raised by commenters 
in the context of tender option bonds, the agencies note that it is 
possible that any issuance of asset-backed securities could have 
more than one party that meets the definition of sponsor, and the 
analysis in this section would apply regardless of the 
securitization structure or securitized assets.
    \203\ As noted in the discussion of the definition of 
``securitizer'' with respect to CLOs in Part III.B.7 of this 
Supplementary Information, the agencies do not believe that a 
sponsor is required to have had legal ownership or possession of the 
assets that collateralize an issuance of asset-backed securities.
    \204\ Nothing in the final rule prohibits the use by a sponsor 
of agents in order to meet the sponsor's obligations under the final 
rule, including the use of third-party service providers, such as an 
underwriter or remarketing agent to distribute required disclosures 
to investors in a timely manner. However, the sponsor remains liable 
for compliance with its obligations under the final rule.
---------------------------------------------------------------------------

    The purpose of the tender option bond risk retention options was to 
address existing market practice for traditional tender option bond 
issuances that are specifically structured such that the interest 
payments made on those securities are excludable from the gross income 
of the owners in the same way that the interest on the underlying 
municipal securities is excludable. Certain commenters suggested that 
the requirement that a residual interest in a tender option bond 
structure meet the requirements of an eligible horizontal residual 
interest before, and an eligible vertical interest after, the 
occurrence of a tender option termination event was inconsistent with 
the partnership tax analysis required to be used to ensure the pass-
through treatment of the tax-exempt interest on the tender option bonds 
and tender option bond residuals. The agencies acknowledge that some 
asset-backed securities are not legally structured as debt and, in 
order to address this, the reproposal included and the final rule 
adopts a definition of ``collateral'' which explicitly applies 
``irrespective of the legal structure of issuance'' and includes 
``fractional undivided property interests in the assets or other 
property of the issuing entity, or any other property interest in such 
assets or other property.'' The agencies believe that a residual 
interest in a qualified tender option bond entity would meet the 
requirements of an eligible horizontal residual interest before, and an 
eligible vertical interest after, the occurrence of a tender option 
termination event if: (i) prior to the occurrence of a tender option 
termination event, the residual holder bears all the market risk 
associated with the underlying tax-exempt municipal security; and (ii) 
after the occurrence of a tender option termination event, any credit 
losses are shared pro rata between the tender option bonds and the 
residual interest.
    The agencies do not agree with comments suggesting that tender 
option bond structures with an initial closing date prior to the date 
on which rule becomes effective should be exempt from the rule or 
``grandfathered.'' Consistent with the statute, the agencies believe 
that the sponsor of issuances of asset-backed securities after the 
applicable effective date should be subject to risk retention 
requirements regardless of when the structure that issues those 
securities was formed. A tender option bond structure may issue 
additional asset-backed securities on multiple dates and may often 
substitute collateral. These features, and the broad exemptive relief 
requested by commenters, would allow for potentially limitless 
issuances of asset-backed securities which would not be subject to any 
risk retention requirements. Requiring tender option bond structures to 
meet the credit risk retention requirements regardless of their closing 
date is consistent with treatment of other securitization structures 
that exist prior to and continue to issue ABS interests after the 
applicable effective date of the rule, such as ABCP conduits and 
revolving pool securitizations.
    The agencies have determined not to revise the definition of 
qualified tender option bond entity to expand the types of assets such 
structures can hold.\205\ The tender option bond option in section 10 
of the final rule is narrowly drawn to address risk retention practices 
in existing market structures and limit potential for abuse that could 
result from a broad exemption based entirely on structural features. 
Accordingly, under the final rule, sponsors of issuances of asset-
backed securities that are subject to risk retention and that are 
collateralized by assets other than tax-exempt municipal securities 
\206\ with the same municipal issuer and the same underlying obligor or 
source of payment will need to comply with the requirements of one of 
the other credit risk retention options. As a result, the final rule 
does not permit a qualified tender option bond entity to hold a 
residual interest in another tender option bond program or preferred 
stock in a closed-end investment company that invests in municipal 
securities.
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    \205\ As proposed, the final rule requires that the collateral 
for a qualified tender option bond entity to consist only of 
servicing assets and tax exempt municipal securities.
    \206\ The agencies believe that a beneficial interest in a tax-
exempt municipal security may be held by a qualified tender option 
bond entity, but only if such beneficial interest is a pass-through 
and pro rata interest in the underlying tax-exempt municipal 
security. Therefore, a qualified tender option bond entity will be 
permitted to hold an asset-backed security collateralized by a tax-
exempt municipal security only if such asset-backed security is a 
pass-through and pro rata interest in the underlying tax-exempt 
municipal security and the cash flows supporting such asset-backed 
security are not tranched. A qualified tender option bond entity 
will not be permitted to hold credit default swaps referencing 
municipal obligations or tranched asset-backed securities, such as 
tender option bonds.
---------------------------------------------------------------------------

    The agencies have adopted the definition of tender option bond with 
one change and a clarification. After considering comments, the 
agencies are permitting tender option bonds with a notice period of up 
to 397 days to qualify for the specialized option. The agencies note 
that this time frame corresponds to the maximum remaining

[[Page 77663]]

maturity of securities allowed to be purchased by money market funds 
under Rule 2a-7 under the Investment Company Act. Consistent with the 
reproposal, the final rule requires that the tender option bond have 
features which entitle the holder to tender the bond for a purchase 
price equal to the approximate amortized cost of the security, plus 
accrued interest, if any. The agencies believe that, in the context of 
a tender option bond, ``amortized cost plus accrued interest'' 
typically equals face value or par value plus accrued interest.
    In response to commenters' suggestions for valuation methodologies 
to determine the fair value of a residual interest in a tender option 
bond issuance, to the extent that a particular valuation methodology is 
appropriate in the fair value measurement framework under GAAP to 
determine the fair value of a residual interest in a tender option bond 
issuance, then such valuation methodology would be permitted under the 
final rule to determine the fair value of a retained residual interest 
in a tender option bond issuance. After careful consideration of 
commenters' suggestions for alternative valuation methodologies, the 
agencies do not believe there is a compelling reason to treat tender 
option bond residual interests differently from any other eligible 
horizontal residual interest, and the final rule requires that the 
sponsor of a tender option bond calculate the fair value of the 
residual interest.
    Consistent with the reproposal, the final rule requires the amount 
of tax-exempt municipal securities held by the sponsor or a majority-
owned affiliate of the sponsor outside of the qualified tender option 
bond entity to be determined by reference to the face value of the 
municipal securities deposited in the qualified tender option bond 
entity. For instance, if the face value of the tax-exempt municipal 
securities deposited into a qualified tender option bond entity is $100 
million, the sponsor or a majority-owned affiliate of the sponsor will 
be required to hold tax-exempt municipal securities, identical to those 
deposited in the tender option bond entity with respect to legal 
maturity and coupon, with a face value of $5 million in order to 
satisfy its requirements under the final rule. The agencies continue to 
believe that this approach is an accurate and easily verifiable means 
of calculating 5 percent risk retention because the retained municipal 
securities are identical to and fungible with the deposited municipal 
securities. This approach should help to minimize operational costs, 
administrative burdens and additional costs.
    Regarding commenters' requests that the agencies give a sponsor of 
a tender option bond credit for cash held as collateral for the 
liquidity agreement, the final rule does not allow such cash collateral 
credit to be credited toward satisfaction of the risk retention 
requirements unless the cash is held in an account that meets the 
requirements for an eligible horizontal cash reserve account. This 
result is consistent with the approach regarding cash reserves 
connected to issuances of asset-backed securities under other options 
in the final rule.
    Regarding commenters' requests for certain adjustments to, and 
clarification of, the hedging prohibitions with respect to the tender 
option bond risk retention options and with respect to tender option 
bond issuances generally, the agencies believe there is no reason to 
treat sponsors of tender option bond structures any differently from 
sponsors of other asset-backed securities issuances. Therefore, subject 
to provisions of the rule regarding permitted hedges and the agencies' 
interpretation of the hedging restrictions discussed elsewhere in this 
preamble, the agencies believe that a hedging transaction entered into 
prior to the establishment of the tender option bond trust should be 
subject to the hedging prohibition. Permitting such hedges would allow 
the sponsor of a tender option bond issuance to hedge its credit risk 
exposure to the tender option bond issuance simply by hedging its 
expected exposure to the underlying assets prior to the initial 
issuance of the tender option bonds, effectively eliminating the 
hedging prohibition. Similarly, regarding commenters' requests for an 
exclusion for hedging transactions entered into between the sponsor of 
a tender option bond issuance or its affiliates and an unrelated party 
where the purpose of such transaction is to provide financing to such 
third party for the municipal securities to be deposited into a tender 
option bond structure, the agencies believe that the holder of retained 
credit risk should not be permitted to hedge its exposure to the 
retained credit risk. This approach is consistent with the treatment of 
all other credit risk retention options in the final rule. The agencies 
further believe that consideration of the purpose and intent of 
transactions that effectively hedge or reduce the risks associated with 
credit risk retention would undermine the hedging prohibition and the 
purpose and intent of section 15G.
    Regarding commenters' requests to clarify the phrase ``materially 
related to the credit risk'' in the hedging prohibition, the agencies 
expect the sponsor of a tender option bond issuance to make that 
determination based on the relevant facts and circumstances. To the 
extent that the sponsor of a tender option bond issuance holds ABS 
interests or tax exempt municipal securities in excess of the minimum 
requirement under the final rule, then such sponsor would be permitted 
to hedge such excess interests, but must hold ABS interests or tax 
exempt municipal securities unhedged in an amount that satisfies the 
minimum risk retention requirements applicable to such retained risk.
    The final rule does not include the requirement that the tender 
option bonds issued by a qualified tender option entity be eligible 
assets under Rule 2a-7 under the Investment Company Act. The agencies 
were persuaded by commenters that analyzing compliance with such a 
requirement would involve an assessment of information that might not 
be available to sponsors and was unnecessary given the other conditions 
to the sponsors' ability to rely on the risk retention options specific 
to tender option bonds.
    The agencies are adopting the proposed disclosure requirements for 
qualified tender option bonds with some clarification and a minor 
addition. Based on comments, the agencies have added specific 
disclosure requirements for sponsors that retain municipal securities 
outside of the qualified tender option bond entity that are limited to 
the name and form of organization of the qualified tender option bond 
entity, the identity of the issuer of the municipal securities, the 
face value of the municipal securities deposited into the qualified 
tender option bond entity, and the face value of the municipal 
securities retained by the sponsor or its majority-owned affiliates and 
subject to the hedging prohibition.
    Also, in response to commenters' requests for clarification of the 
disclosure obligations of a sponsor of a tender option bond issuance, 
the agencies believe that the sponsor of a tender option bond that 
holds a residual interest that meets the requirements of section 10(c) 
of the final rule should provide the disclosures required in section 
4(c) of the final rule for both an eligible horizontal residual 
interest and an eligible vertical interest.
    Under the final rule, the issuing entity of a qualified tender 
option bond must have a legally binding commitment from a regulated 
liquidity provider to provide 100 percent liquidity coverage with 
respect to all of the issuing entity's

[[Page 77664]]

outstanding tender option bonds.\207\ In response to commenters' 
requests for certain clarifications with respect to the required 
liquidity coverage, the agencies recognize that the liquidity coverage 
may not be enforceable against the regulated liquidity provider upon 
the occurrence of a tender option termination event. Liquidity coverage 
subject to this condition would nevertheless satisfy the liquidity 
coverage requirement in the final rule.
---------------------------------------------------------------------------

    \207\ The final rule does not require any specific form of 
liquidity coverage. Provided that the liquidity coverage will cover 
an amount sufficient to pay 100 percent of the principal outstanding 
and interest payable on the tender option bonds, the final rule 
permits liquidity coverage structured as a guarantee, credit 
enhancement or credit support with respect to the underlying 
securities or the floaters or an irrevocable put option.
---------------------------------------------------------------------------

    As commenters requested, the final rule also permits the sponsor of 
a qualified tender option bond entity to combine the tender option bond 
risk retention options with each other and the other risk retention 
options under subpart B of the final rule. In any such case, the sum of 
the percentages of risk retention held under each option and measured 
in accordance with that option must total at least five. For example, 
if a sponsor securitizes $100 million face value of bonds in a 
qualified tender option bond entity and holds bonds outside the tender 
option structure whose face value is $3 million or 3 percent of the 
face value of the bonds in the qualified tender option bond entity, it 
must hold a residual interest in the structure that has a fair value of 
at least 2 percent of the fair value of all ABS interests issued by the 
structure (the 3 percent plus the 2 percent when aggregated equal 5 
percent of the fair value). The final rule does not require a minimum 
amount of risk retention in any specific risk retention option, only 
that the sum of the percentages of risk retention totals at least 5 
percent of the fair value. The agencies believe that permitting this 
flexibility better enables sponsors of tender option bonds to use the 
options afforded under the final rule.
    The final rule requires the sponsor to calculate the fair value of 
all ABS interests issued upon an issuance of tender option bonds that 
increases the face amount of tender option bonds then outstanding. The 
agencies believe that this approach appropriately balances the costs of 
determining the fair value of the tender option bond residual interest 
with the statutory requirement for risk retention. This means that a 
sponsor of an issuance of tender option bonds that would like to 
receive credit under the final rule for retaining a residual interest 
in the qualifying tender option bond entity would calculate the fair 
value of the residual interest in the qualifying tender option bond 
entity in connection with the initial issuance of tender option bonds 
in accordance with section 10 of the final rule and would not be 
required to recalculate the fair value of such residual interest unless 
either the face value of tender option bonds outstanding exceeds the 
face value of bonds initially issued.

C. Allocation to the Originator

1. Overview of Proposal and Public Comment
    As a general matter, the original proposal and reproposal were 
structured so that the sponsor of a securitization transaction would be 
solely responsible for complying with the risk retention requirements 
established under section 15G of the Exchange Act and the implementing 
regulations, consistent with that statutory provision. However, subject 
to a number of considerations, section 15G authorizes the agencies to 
allow a sponsor to allocate at least a portion of the credit risk it is 
required to retain to the originator(s) of securitized assets.\208\ 
Accordingly, subject to conditions and restrictions, the reproposal 
(like the original proposal) would have permitted a sponsor to reduce 
its required risk retention obligations in a securitization transaction 
by the portion of risk retention obligations assumed by one or more of 
the originators of the securitized assets.
---------------------------------------------------------------------------

    \208\ As discussed above, 15 U.S.C. 78o-11(a)(4) defines the 
term ``originator'' as a person who, through the extension of credit 
or otherwise, creates a financial asset that collateralizes an 
asset-backed security; and who sells an asset directly or indirectly 
to a securitizer (i.e., a sponsor or depositor).
---------------------------------------------------------------------------

    When determining how to allocate the risk retention requirements, 
the agencies are directed to consider whether the assets sold to the 
sponsor have terms, conditions, and characteristics that reflect low 
credit risk; whether the form or volume of the transactions in 
securitization markets creates incentives for imprudent origination of 
the type of loan or asset to be sold to the sponsor; and the potential 
impact of the risk retention obligations on the access of consumers and 
businesses to credit on reasonable terms, which may not include the 
transfer of credit risk to a third party.\209\
---------------------------------------------------------------------------

    \209\ 15 U.S.C. 78o-11(d)(2). The agencies note that section 
15G(d) appears to contain an erroneous cross-reference. 
Specifically, the reference at the beginning of section 15G(d) to 
``paragraph (c)(1)(E)(iv)'' is read to mean ``paragraph 
(c)(1)(G)(iv)'', as the former paragraph does not pertain to 
allocation, while the latter is the paragraph that permits the 
agencies to provide for the allocation of risk retention obligations 
between a securitizer and an originator in the case of a securitizer 
that purchases assets from an originator.
---------------------------------------------------------------------------

    In the reproposal, the agencies proposed a framework that would 
have permitted a sponsor of a securitization to allocate a portion of 
its risk retention obligation to an originator that contributed a 
significant amount of assets to the underlying asset pool. The agencies 
endeavored to create appropriate incentives for both the securitization 
sponsor and the originator(s) to maintain and monitor appropriate 
underwriting standards without creating undue complexity, which 
potentially could mislead investors and confound supervisory efforts to 
monitor compliance. Importantly, the reproposal would not have required 
allocation to an originator. Therefore, it did not raise the types of 
concerns about allocation of burden and credit availability that might 
arise if certain originators, such as mortgage brokers or small 
community banks (that may experience difficulty obtaining funding to 
retain risk positions), were required to fulfill a sponsor's risk 
retention requirement.
    The allocation to originator option in the reproposal was designed 
to work in tandem with the standard risk retention option. 
Additionally, the reproposal would have permitted a securitization 
sponsor to allocate a portion of its risk retention obligation to any 
originator of the underlying assets that originated at least 20 percent 
of the underlying assets in the pool. The amount of the retention 
interest held by each originator that was allocated credit risk in 
accordance with the reproposal was required to be at least 20 percent, 
but not in excess of the percentage of the securitized assets it 
originated. The originator would have been required to hold its 
allocated share of the risk retention obligation in the same manner as 
would have been required of the sponsor, and subject to the same 
restrictions on transferring, hedging, and financing the retained 
interest. Thus, for example, if the sponsor satisfied its risk 
retention requirements by acquiring an eligible horizontal residual 
interest, an originator allocated risk would have been required to 
acquire a portion of that interest, in an amount not exceeding the 
percentage of securitized assets created by the originator. The 
sponsor's risk retention requirements would have been reduced by the 
amount allocated to the originator. The sponsor would have had to 
provide, or cause to be provided, to potential investors (and the 
appropriate regulators

[[Page 77665]]

upon request) the name and form of organization of any originator that 
will acquire and retain (or has acquired and retained) an interest in 
the transaction, including a description of the form, amount, and 
nature of the interest (e.g., senior or subordinated), as well as the 
method of payment for such interest. Finally, the reproposal would have 
made the sponsor responsible for any failure of an originator to abide 
by the transfer, hedging, and financing restrictions included in the 
proposed rule.
    Comments on the allocation to originator proposal focused on the 20 
percent threshold for allocation, the requirement that an originator to 
which risk retention was allocated share pro rata in all of the losses 
allocated to the type of interest (i.e., horizontal or vertical) it 
holds rather than only the losses on assets that it originated, and the 
definition of originator. Some of the commenters requested that the 20 
percent minimum should be deleted and that it would hurt smaller 
originators while one commenter supported the limit and asserted that 
it protected smaller originators. Comments as to the required pro rata 
sharing by the originator included an analysis that because 
securitization tranches are developed so that tranche holders share 
pari passu in losses, it would cause unnecessary complexity to limit an 
originator's interests to the loans that it had originated. Finally, a 
commenter asserted that the definition of ``originator'' ought to 
include parties that purchase assets from entities that create the 
assets.
2. Final Rule
    The agencies have carefully considered the concerns raised by 
commenters with respect to the reproposal on allocation to originators. 
For the reasons discussed below, the agencies have concluded that the 
changes to the reproposal suggested by the commenters are not necessary 
or appropriate. Therefore, the agencies are adopting the proposed 
allocation to originator provision with minor drafting corrections and 
changes, as discussed below.
    The only modifications to this option from that proposed in the 
reproposal are a drafting correction and changes to the formulation in 
section 11(a)(1)(ii) of the rule of the limit on how much of its risk 
retention obligation a sponsor may allocate to an originator. These 
changes to section 11(a)(1)(ii) of the rule reflect that no fair value 
computation is required for a vertical interest (discussed above in 
Part III.B.1 of this Supplementary Information) and, consequently, that 
in certain circumstances the fair value of the retained interest as a 
percentage of all ABS interests issued in the securitization 
transaction may not be determined. This change to the text of section 
11(a)(1)(ii) of the rule does not result in any substantive change to 
the allocation to originator provisions contained in the reproposal.
    While section 11(a)(1)(iv) is unchanged from the reproposal, it 
should be noted that the amount that is required to be paid by the 
originator might need to be calculated differently from how this amount 
would have been calculated under the reproposal. In the event that the 
fair value of all ABS interests issued in a securitization transaction 
is not calculated, which would be the case if the sponsor opted for all 
of its required risk retention to be held as eligible vertical 
interests and one or more classes of ABS interests were not sold to 
investors, the amount by which the sponsor's risk retention is reduced 
by the sale of a portion thereof to an originator will not be 
determinable from the calculations required by section 4 of the rule. 
In this circumstance, the agencies would expect that the value of the 
retained portion of any unsold tranches for purposes of section 11 of 
the rule will be determined on a reasonable basis by the sponsor and 
the originator.
    The agencies note that the reference in section 11(a)(1)(ii) of the 
rule to the interest retained by the sponsor refers to the amount of 
the interest required to be retained by the sponsor before giving 
effect to any sale to an originator. Similarly, the provision in 
section 11(a)(2) of the rule that a sponsor disclose the percentage of 
the interest sold to an originator is intended to require calculation 
of such percentage based on the sponsor's risk retention amount before 
any sale to an originator.
    The rule, like the proposal, requires that an originator to which a 
portion of the sponsor's risk retention obligation is allocated acquire 
and retain eligible vertical interests or eligible horizontal residual 
interests in the same manner as would have been retained by the 
sponsor. As under the reproposed rule, this condition will require an 
originator to acquire horizontal and vertical interests in the 
securitization transaction in the same proportion as the interests 
originally to be retained by the sponsor. This requirement helps to 
align the interests of originators and sponsors, as both will face the 
same likelihood and degree of losses if the securitized assets begin to 
default. In addition, if originators were permitted to retain their 
share of the sponsor's risk retention obligation in a proportion that 
is different from the sponsor's mix of the vertical and horizontal 
interests, investor and regulatory monitoring of risk retention 
compliance could become very complex.
    As under the reproposal, the rule requires a sponsor that uses an 
eligible horizontal cash reserve account and desires to allocate a 
portion of its risk retention obligations to an originator to allocate 
a portion of the interest the sponsor holds in such account to the 
originator. Such allocation may be effected by any method that results 
in the sponsor and each originator to which any retention is allocated 
sharing, directly or indirectly, on a pari passu basis in one or more 
eligible horizontal residual accounts. For example, (1) the originator 
may deposit into the sponsor-established account funds in the amount of 
the originator's share of the sponsor's risk retention obligations, in 
replacement of a like amount of the funds originally deposited by the 
sponsor, or (2) the originator may create a separate horizontal reserve 
account in the amount of its share of the sponsor's risk retention 
obligations, in substitution for a like amount of funds in the 
sponsor's reserve account. If an originator establishes a separate 
account, such account must share pari passu with the sponsor's eligible 
horizontal reserve account (and any other originator's eligible 
horizontal reserve account) in amounts released to satisfy amounts due 
on ABS interests.
    The rule does not modify the requirement that an originator to 
which a sponsor may sell a portion of its required risk retention must 
have originated at least 20 percent of the asset pool. As explained in 
the reproposal, by limiting this option to originators that originate 
at least 20 percent of the asset pool, the agencies seek to ensure that 
the originator retains risk in an amount significant enough to function 
as an actual incentive for the originator to monitor the quality of all 
the securitized assets (and to which it would retain some credit risk 
exposure). In addition, the 20 percent threshold serves to make the 
allocation option available only for entities whose assets form a 
significant portion of a pool and who, thus, ordinarily could be 
expected to have some bargaining power with a sponsor.
    By restricting originators to holding no more than their 
proportional share of the risk retention obligation, the rule seeks to 
prevent sponsors from circumventing the purpose of the risk retention 
obligation by transferring an outsized portion of the obligation to an 
originator that may have been seeking to

[[Page 77666]]

acquire a speculative investment. These requirements are also intended 
to reduce the rule's potential complexity and facilitate investor and 
regulatory monitoring.
    The rule does not incorporate the commenter suggestion that an 
originator be allocated retention in only the loans that it originated. 
The operational burden on both securitization sponsors and federal 
supervisors to ensure that retention is held by originators on the 
correct individual loans would, for many different asset classes, be 
exceedingly high. Therefore, the rule requires that originators 
allocated a portion of the risk retention requirement be allocated a 
share of the entire securitization pool.
    The rule does not modify the definition of originator from that set 
forth in the reproposal and does not include persons that acquire loans 
and transfer them to a sponsor. The agencies continue to believe that 
the definition of the term originator in section 15G \210\ should not 
be interpreted to include such persons. Section 15G defines an 
originator to a person that ``through the extension of credit or 
otherwise, creates a financial asset.'' A person that acquires an asset 
created by another person would not be the ``creator'' of such asset.
---------------------------------------------------------------------------

    \210\ 15 U.S.C. 78o-11(a)(4).
---------------------------------------------------------------------------

    Finally, while the final rule omits the proposed requirement that a 
sponsor disclose the dollar amount of the interests sold to originators 
because such amount may not always be calculated, the disclosure 
requirements of the sponsor under section 4 of the final rule remain 
applicable to the sponsor and should be construed to refer to the 
required interest originally retained by the sponsor, even where the 
sponsor sells some or all of its required retained interests to 
originators.

D. Hedging, Transfer, and Financing Restrictions

1. Overview of the Reproposal and Public Comment
    Section 15G(c)(1)(A) provides that the risk retention regulations 
shall prohibit a securitizer from directly or indirectly hedging or 
otherwise transferring the credit risk that the securitizer is required 
to retain with respect to an asset. Consistent with this statutory 
directive, the reproposal would have prohibited a sponsor from (i) 
transferring any interest or assets that it was required to retain 
under the rule to any person other than a majority-owned affiliate of 
the sponsor, (ii) hedging the credit risk the sponsor is required to 
retain under the rule, unless the hedge positions are expressly 
permitted or not materially related to the credit risk of the 
particular ABS interests or exposures required to be retained by the 
sponsor, or (iii) pledging as collateral for any obligation any 
interest or asset that the sponsor is required to retain, unless the 
pledge collateralizes an obligation with full recourse to the sponsor 
or a consolidated affiliate.
    The agencies did not receive any comments directly addressing the 
financing restrictions in the reproposal. Several commenters addressed 
the hedging and transfer provisions.
    While some commenters supported the proposed restrictions on 
hedging, others opposed the provisions as being overly restrictive, and 
certain commenters requested clarification as to the scope of the 
proposed restrictions. One commenter advocated a blanket exception from 
the hedging restriction for pool and asset level credit insurance 
reasoning that such insurance reduces credit risk for the benefit of 
all holders of ABS interests, and does not eliminate the retaining 
sponsor's exposure to credit risk or change the ``relative distribution 
of risk among interest holders.'' Another commenter expressed the view 
that issuers of securities collateralized by ``qualifying assets'' 
should be able to hold hedges, insurance policies and other forms of 
credit enhancement as discussed in Items 1114 and 1115 of the 
Commission's Regulation AB, and asserted that ``interest rate hedges, 
bond insurance policies, pool insurance policies and other forms of 
credit enhancement form an important component of many securitization 
structures and provide clear benefits to investors.''
    Several commenters requested that the agencies clarify that the 
term ``servicing assets'' (which are generally permitted to be held by 
issuers) includes hedge instruments. One of these commenters asserted 
that the preamble to the reproposal indicated that the term was 
intended to be defined broadly and included ``interest rate and foreign 
currency risk'' hedges, but the definition of the term in the proposed 
regulation did not reflect that breadth. The commenter expressed 
concern that, without clarification, issuers that used other types of 
hedges would not be able to avail themselves of exemptions from risk 
retention, with the result that costs would be borne by investors (in 
the form of less credit enhancement) and borrowers (in the form of 
higher interest rates). Another commenter requested that permitted 
hedging activities include ``purchasing or selling a security or other 
financial instrument to protect or mitigate credit risk in servicing 
assets for the protection of all investors.'' This commenter requested 
that hedges to mitigate risk with respect to amounts due for services 
that are not financed as well as vehicle leases be allowed.
    One commenter suggested that the agencies consider whether the 
restriction prohibiting the sponsor from transferring, selling, or 
otherwise encumbering its interest for a period of time after 
establishing the securitization entity may have the unintended 
consequence of creating a de facto agency relationship between the 
sponsor and the other investors in the securitization entity under 
GAAP. The commenter asserted that a de facto agency relationship 
between the sponsor and the other investors in a securitization entity 
results in a higher likelihood that the sponsor would be required to 
consolidate the securitization entity.
2. Final Rule
    The agencies have carefully considered the comments received with 
respect to the reproposal's hedging, transfer, and financing 
restrictions, and for the reasons discussed below, do not believe that 
any significant changes to the reproposal's restrictions are necessary 
or appropriate. Accordingly, the final rule contains hedging, transfer, 
and financing restrictions that are substantially the same as those 
contained in the reproposal.\211\
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    \211\ The sunset on hedging and transfer restrictions is 
discussed in Part III.F of this Supplementary Information.
---------------------------------------------------------------------------

    The final rule prohibits a sponsor or any affiliate from hedging 
the credit risk the sponsor is required to retain under the rule or 
from purchasing or selling a security or other financial instrument, or 
entering into an agreement (including an insurance contract), 
derivative or other position, with any other person if: (i) Payments on 
the security or other financial instrument or under the agreement, 
derivative, or position are materially related to the credit risk of 
one or more particular ABS interests that the retaining sponsor is 
required to retain, or one or more of the particular securitized assets 
that collateralize the asset-backed securities; and (ii) the security, 
instrument, agreement, derivative, or position in any way reduces or 
limits the financial exposure of the sponsor to the credit risk of one 
or more of the particular ABS interests or one or more of the 
particular

[[Page 77667]]

securitized assets that collateralize the asset-backed securities.\212\
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    \212\ The two-part test requires that a position be both 
``materially related to the credit risk'' and actually offset credit 
risk. These concepts are often interrelated and, if significant 
amounts of credit risk are offset, this may indicate a material 
relationship to the retained ABS interests.
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    As in the reproposal, because the agencies believe it would not be 
``materially related'' to the particular interests or assets that the 
sponsor is required to retain, holding a security tied to the return of 
an index (such as the subprime ABX.HE index) is not a prohibited hedge 
so long as: (1) any class of ABS interests in the issuing entity that 
were issued in connection with the securitization transaction and that 
are included in the index represent no more than 10 percent of the 
dollar-weighted average of all instruments included in the index, and 
(2) all classes of ABS interests in all issuing entities that were 
issued in connection with any securitization transaction in which the 
sponsor was required to retain an interest pursuant to the rule and 
that are included in the index represent, in the aggregate, no more 
than 20 percent of the dollar weighted average of all instruments 
included in the index. Such permitted positions include hedges related 
to overall market movements, such as movements of market interest rates 
(but not the specific interest rate risk, also known as spread risk, 
associated with the ABS interest that is otherwise considered part of 
the credit risk), currency exchange rates, home prices, or the overall 
value of a particular broad category of asset-backed securities.
    In response to comments, the agencies also note that they do not 
believe that the rule prohibits the retaining sponsor from benefiting 
from credit enhancements or risk mitigation products that are designed 
to benefit all investors in the securitization in which the sponsor is 
required to retain risk. For example, the retaining sponsor may benefit 
from private mortgage insurance provided that the proceeds of such 
insurance are subject to the priority of payments for all investors.
    The agencies caution that a sponsor would not be in compliance with 
the rule if it were to engage in, direct or control a series of 
transactions designed to add credit enhancement to assets ultimately 
securitized by it in a manner that indirectly achieved what the sponsor 
is prohibited from doing directly. The agencies believe that the 
hedging and transfer prohibitions in the statute are intended to ensure 
that the sponsor retains meaningful credit exposure to the securitized 
assets rather than credit exposure to a third party. As a result, the 
agencies believe that the hedging prohibition would impose limits on a 
sponsor benefitting from asset-level or pool-level insurance that 
covered 100 percent of the credit risk of the securitized assets, 
unless the sponsor's right to recover insurance proceeds from such 
hedges is subordinated to the payment in full of all other investors.
    A different approach is applicable when risk reducing transactions 
or instruments cover either the ABS interests required to be retained 
by the sponsor, such as bond insurance, or 100 percent of the credit 
risk of the securitized assets, such as municipal bond insurance. Under 
this approach, the retaining sponsor would be precluded from receiving 
distributions that, but for the proceeds from the insurance, would not 
be available for distribution to that retaining sponsor unless, at the 
time of distribution, all other amounts due at that time to be paid to 
all other holders of outstanding ABS interests have been paid in full. 
Accordingly, until all other holders of obligations issued as part of 
the securitization transaction are paid all amounts then due to them, a 
holder of an eligible vertical interest would not be permitted to 
benefit from bond insurance on a senior class or tranche and, thus, 
would be required to subordinate its interest in any bond insurance 
proceeds to the payment of all amounts due to all other ABS interests. 
Similarly, a sponsor would not be entitled to benefit from a pool 
insurance policy that references amounts payable to a specific tranche 
or class of ABS interest unless, at the time of distribution, all other 
ABS interests had been paid all amounts due to them at the time.
    The agencies are clarifying that the liquidity support provided by 
a regulated liquidity provider in satisfaction of the requirements set 
forth in the tender option bond risk retention option described in 
section 10 of the final rule or in satisfaction of the requirements set 
forth in the ABCP risk retention option described in section 6 of the 
final rule is not subject to the prohibition on hedging and 
transfer.\213\ In both cases, the liquidity support is an important 
aspect of the existing market practice and alignment of interests in 
these transactions. The agencies note that, to the extent that a 
sponsor of an ABCP conduit or tender option bond program is also the 
liquidity provider, a liquidity agreement or credit guarantee would not 
violate the prohibition on hedging because such an agreement would not 
hedge the sponsor's credit risk retention. Additionally, with respect 
to an eligible ABCP conduit, the originator-seller in its capacity as 
sponsor of the intermediate SPV is subject to the hedging prohibition 
and would remain exposed to the credit risk of the collateral 
supporting the ABS interests issued by the intermediate SPV.
---------------------------------------------------------------------------

    \213\ Because a liquidity facility is required for the ABCP 
option and the qualified tender option bond entity options, but does 
not itself constitute required risk retention, it is not subject to 
the transfer or hedging restrictions.
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    As under the reproposal, because the agencies believe that they 
would not be ``materially related'' to the particular interests or 
assets that the sponsor is required to retain, hedges tied to 
securities that are collateralized by similar assets originated and 
securitized by other sponsors would not be prohibited. On the other 
hand, a security, instrument, derivative or contract generally would be 
``materially related'' to the particular interests or assets that the 
sponsor is required to retain if the security, instrument, derivative 
or contract refers to those particular interests or assets or requires 
payment in circumstances where there is or could reasonably be expected 
to be a loss due to the credit risk of such interests or assets (e.g., 
a credit default swap for which the particular interest or asset is the 
reference asset).
    In response to comments requesting clarification as to whether 
servicing assets could be hedged, the agencies are of the view that 
cash equivalents that are servicing assets should be specifically 
limited so that they do not create additional risk for a securitization 
transaction and they should not require hedging.\214\ As for whether 
servicing assets may include hedge instruments, the agencies note that 
interest rate and foreign currency hedges are not prohibited hedges 
under section 12 of the final rule. As noted earlier, the term 
``servicing assets'' is similar to the definition of the term 
``eligible assets'' under Rule 3a-7 of the Investment Company Act.
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    \214\ One notable exception might arise for cash held in a 
currency different than the currency of obligation for the 
securitization, where the amount of currency and time to payment 
obligation are material from the standpoint of the securitization; 
however this foreign exchange risk is more commonly hedged at the 
securitized asset level.
---------------------------------------------------------------------------

    Regarding commenters' concerns that the rule's transfer and hedging 
restrictions may create a de facto agency relationship between the 
sponsor and the other investors in the securitization entity under 
GAAP, the Commission notes, and the other agencies concur, that a de 
facto agency relationship

[[Page 77668]]

under GAAP will not be created by the transfer, hedging, or financing 
restrictions in the final rule, and note that the definition of a de 
facto agency relationship in GAAP relates to an agreement between 
variable interest holders in an entity that restricts one variable 
interest holder from selling, transferring, or encumbering its interest 
in the entity without the prior approval of other variable interest 
holders. A de facto agency relationship does not exist solely as a 
result of a regulatory restriction imposed on an investor that 
prohibits its ability to transfer, sell, or otherwise encumber its 
interest in an entity. As such, the Commission confirms, and the other 
agencies concur, that the restriction in the final rule prohibiting the 
sponsor from transferring, selling, or otherwise encumbering its 
interest for a period of time after establishing the securitization 
entity does not create under GAAP a de facto agency relationship 
between the sponsor and the other investors in the securitization 
entity.

E. Safe Harbor for Certain Foreign-Related Securitizations

    Like the original proposal, the reproposal included a ``safe 
harbor'' provision for certain securitization transactions with limited 
connections to the United States and U.S. investors.\215\ The safe 
harbor was intended to exclude from the risk retention requirements 
transactions in which the effects on U.S. interests are sufficiently 
remote so as not to significantly impact underwriting standards and 
risk management practices in the United States or the interests of U.S. 
investors. Accordingly, reliance on the safe harbor is conditioned upon 
limited involvement by persons in the United States with respect to 
both securitized assets and the ABS interests sold in connection with 
the transaction. The safe harbor would not have been available for any 
transaction or series of transactions that, although in technical 
compliance with the conditions of the safe harbor, is part of a plan or 
scheme to evade the requirements of section 15G of the Exchange Act and 
these rules.
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    \215\ As the agencies noted in the original proposal, the safe 
harbor is intended solely to provide clarity that the agencies will 
not apply the requirements of the final rule to transactions that 
meet all of the conditions of the safe harbor. The safe harbor 
should not be interpreted as reflecting the views of any agency as 
to the potential scope of transactions or persons subject to section 
15G or the final rule.
---------------------------------------------------------------------------

    Under the reproposal, the risk retention requirement would not have 
applied to a securitization transaction if: (1) the securitization 
transaction is not required to be and is not registered under the 
Securities Act; (2) no more than 10 percent of the dollar value (or 
equivalent if denominated in a foreign currency) of all classes of ABS 
interests in the securitization transaction are sold or transferred to 
U.S. persons or for the account or benefit of U.S. persons; \216\ (3) 
neither the sponsor of the securitization transaction nor the issuing 
entity is (i) chartered, incorporated, or organized under the laws of 
the United States, or a U.S. state, the District of Columbia, Puerto 
Rico, the Virgin Islands or any other possession of the United States 
(any such state, other jurisdiction or possession, a ``U.S. state''), 
(ii) an unincorporated branch or office (wherever located) of an entity 
chartered, incorporated or organized under the laws of the United 
States or any U.S. state, or (iii) an unincorporated branch or office 
located in the United States or any U.S. state (an ``unincorporated 
U.S.-located entity'') of an entity not chartered, incorporated, or 
organized under the laws of the United States, or a U.S. state; and (4) 
no more than 25 percent of the assets collateralizing the ABS interests 
sold in the securitization transaction were acquired by the sponsor or 
issuing entity, directly or indirectly, from (i) a majority-owned 
affiliate of the sponsor or issuing entity that is chartered, 
incorporated or organized under the laws of the United States or a U.S. 
state, or (ii) an unincorporated U.S.-located entity of the sponsor or 
issuing entity.
---------------------------------------------------------------------------

    \216\ The agencies note that the value of an ABS interest for 
this purpose would be its fair value on the date of sale, determined 
using the fair value measurement framework under GAAP.
---------------------------------------------------------------------------

    Commenters on the reproposal generally supported the existence of a 
safe harbor for certain foreign securitizations. A few commenters 
suggested increasing the 10 percent limit on the value of ABS interests 
permitted to be sold to or for the account of U.S. persons. These 
commenters also requested that the agencies clarify that the 10 percent 
limit applies only at the time of initial issuance and does not include 
secondary market transfers. Commenters also proposed to exclude from 
the 10 percent limitation (A) securitization transactions with a 
sponsor or issuing entity that is a U.S. person which makes no offers 
to U.S. persons and (B) issuances of asset-backed securities that 
comply with Regulation S of the Securities Act.
    Several commenters requested that the rule provide for coordination 
of the rule's risk retention requirement with foreign risk retention 
requirements, including by permitting a foreign issuer to comply with 
home country or other applicable foreign risk retention rules. In this 
regard, comment was made that U.S. risk retention rules may be 
incompatible with foreign risk retention requirements, such as the 
European Union risk retention requirements and, accordingly, that 
sponsors required to comply with U.S. as well as foreign risk retention 
regulations could be subject to conflicting rules. Commenters also 
requested that the agencies clarify how the dollar value of ABS 
interests should be determined and that satisfaction of conditions to 
the safe harbor be tested as of the date of issuance only and not on an 
ongoing basis.
    The final rule sets forth a foreign safe harbor that is 
substantially similar to that included in the reproposal. The agencies 
have retained the 10 percent limit on the value of ABS interests sold 
to U.S. persons for safe harbor eligibility. The agencies continue to 
believe that the 10 percent limit appropriately aligns the safe harbor 
with the objective of the rule, which is to exclude only those 
transactions with limited effect on U.S. interests, underwriting 
standards, risk management practices, or U.S. investors.
    The agencies wish to make clear that, in general, the rule is 
intended to include in the calculation of the 10 percent limit only ABS 
interests sold in the initial distribution of ABS interests. Secondary 
sales to U.S. persons would not normally be included in the 
calculation. However, secondary sales into the U.S. under circumstances 
that indicate that such sales were contemplated at the time of the 
issuance (and not included for purposes of calculating the 10 percent 
limit) might be viewed as part of a plan or scheme to evade the 
requirements of the rule.
    The 10 percent limit as applied to the sale or transfer of any ABS 
interest would need to be computed only on the date of initial 
distribution of that ABS interest, not an ongoing basis following such 
initial distribution. If different classes or portions of the same 
class of ABS interests are distributed by or on behalf of the issuing 
entity or a sponsor on different dates, the 10 percent limit would need 
to be calculated on each such distribution date.
    Under the rule, interests retained by the sponsor may be included, 
as part of the aggregate ABS interests in the securitization 
transaction, in calculating the percentage of those ABS interests sold 
to U.S. persons or for the account or benefit of U.S. persons.
    The agencies considered the comments requesting a mutual 
recognition framework and observe that

[[Page 77669]]

such a framework has not been generally adopted in non-U.S. 
jurisdictions with risk retention requirements. As explained in the 
preamble to the proposed rule, given the many differences between 
jurisdictions, such as securitization frameworks that place the 
obligation to comply with risk retention requirements upon different 
parties in the securitization transaction, different requirements for 
hedging, risk transfer, or unfunded risk retention, and other material 
differences, the agencies believe that it would likely not be 
practicable to construct such a ``mutual recognition'' system that 
would meet all the requirements of section 15G of the Exchange Act. 
Moreover, in several such jurisdictions, the risk retention framework 
recognizes unfunded forms of risk retention, such as standby letters of 
credit, which the agencies do not believe provide sufficient alignment 
of incentives and have rejected as eligible forms of risk retention 
under the U.S. framework. Finally, the agencies believe that the rule 
incorporates sufficient flexibility for sponsors with respect to forms 
of eligible risk retention to permit foreign sponsors seeking a 
significant U.S. investor base to retain risk in a format that 
satisfies applicable foreign and U.S. regulatory requirements, even 
though such dual compliance requirements might cause a sponsor to 
structure a transaction differently than it would have chosen had it 
not been subject to such multiple requirements.
    The agencies do not agree that securitizations with U.S. persons, 
sponsors or issuing entities with no U.S. offerees, or that conduct all 
sales pursuant to Regulation S of the Securities Act, should be exempt 
from the 10 percent limit. If the rule excluded such securitizations or 
sales from the 10 percent limit, a market for poorly underwritten 
assets could evolve and negatively impact U.S. underwriting standards 
and risk management practices.
    Improving underwriting standards is one of the goals of risk 
retention and, for the rule to be effective, the rule should be applied 
in a manner that maintains underwriting standards and risk management 
practices in the United States. The agencies' adoption of the foreign 
safe harbor incorporates the agencies' understanding of current 
securitization markets and market trends, including the importance of 
U.S. investors in global securitization markets. As securitization 
markets evolve, the agencies will be alert to ensuring any such changes 
do not undermine the effectiveness of the rule in achieving the 
purposes of section 15G. Accordingly, the agencies will monitor 
compliance with the safe harbor and the contexts in which the safe 
harbor is relied upon. Should it become apparent that reliance on the 
safe harbor has resulted in market shifts that are detrimental to 
investors or securitization markets, for example where significant 
amounts of securitizations collateralized by U.S. assets are conducted 
in reliance on the safe harbor and such reliance undermines 
underwriting standards and risk management practices in the United 
States, the agencies will consider the applicability of the anti-
evasion provisions of the safe harbor or will consider modifications to 
the safe harbor.

F. Sunset on Hedging and Transfer Restrictions

    As discussed in Part III.D of this Supplementary Information, 
section 15G(c)(1)(A) of the Exchange Act provides that sponsors may not 
hedge or transfer the risk retention interest they are required to 
hold.\217\ However, the statute also provides that the agencies shall 
specify the minimum duration of risk retention. As explained in the 
reproposal, the agencies believe that the primary purpose of risk 
retention--sound underwriting--is less likely to be effectively 
promoted by risk retention requirements after a certain period of time 
has passed and a peak number of delinquencies for an asset class has 
occurred. Therefore, the agencies proposed two categories of duration 
for the transfer and hedging restrictions--one for RMBS and one for 
other types of ABS interests.
---------------------------------------------------------------------------

    \217\ 15 U.S.C. 78o-11(c)(1)(A). As with other provisions of 
risk retention, the agencies could provide an exemption under 
section 15G(e) of the Exchange Act if certain findings were met. See 
id. at section 78o-11(e).
---------------------------------------------------------------------------

    For RMBS, the transfer and hedging restrictions under the proposed 
rule would expire on or after the date that is (1) the later of (a) 
five years after the date of the closing of the securitization or (b) 
the date on which the total unpaid principal balance of the securitized 
assets is reduced to 25 percent of the original unpaid principal 
balance as of the date of the closing of the securitization, but (2) in 
any event no later than seven years after the date of the closing of 
the securitization.
    For all ABS interests other than RMBS, the transfer and hedging 
restrictions under the reproposed rule would expire on or after the 
date that is the latest of (1) the date on which the total unpaid 
principal balance of the securitized assets that collateralize the 
securitization is reduced to 33 percent of the original unpaid 
principal balance as of the date of the closing of the securitization, 
(2) the date on which the total unpaid principal obligations under the 
ABS interests issued in the securitization is reduced to 33 percent of 
the original unpaid principal obligations at the closing of the 
securitization transaction, or (3) two years after the date of the 
closing of the securitization transaction.\218\
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    \218\ As described in Part III.B.5 of this Supplementary 
Information, the agencies also included in the reproposal, as an 
exception to the transfer and hedging restrictions, the ability to 
transfer the retained B-piece interest in a CMBS transaction 
(whether held by the sponsor or a third-party purchaser) to a third-
party purchaser five years after the date of the closing of the 
securitization transaction, provided that the transferee satisfies 
each of the conditions applicable to an initial third-party 
purchaser under the CMBS option.
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    The reproposal also included a provision that the proposed rule's 
restrictions on transfer and hedging would end if a conservator or 
receiver of a sponsor or other holder of risk retention is appointed 
pursuant to federal or state law.
    The agencies invited comment on the sunset provisions and asked 
whether they were appropriately calibrated for RMBS and all other asset 
classes, and whether it was appropriate to provide a sunset provision 
for all RMBS. Several commenters expressed general support for the 
sunset provisions but others requested shorter time period 
restrictions. One commenter suggested longer time period restrictions 
on certain asset classes, while others proposed shortening the time 
periods and adding more flexibility. One commenter suggested that there 
should be an outside time limit of no more than five years for asset 
classes other than RMBS and CMBS, including student loans, aircraft 
leases, shipping container leases, railcar leases, and structured 
settlements of personal injury awards, lottery winnings, and other 
assets. A few commenters requested clarification for transactions that 
do not typically have a nominal ``principal balance'' and one commenter 
requested that the test use the cut-off date instead of the closing 
date for measurement.
    For RMBS, a few commenters requested that sunset occur three to 
four years after closing, while another commenter requested a sunset of 
two years after the security is issued. One commenter recommended that 
the agencies adopt a flat five-year sunset for RMBS and eliminate the 
25 percent remaining unpaid balance test. In support of a three-year 
sunset after closing, some commenters requested that the RMBS sunset 
provision be analogous to the FHFA framework for

[[Page 77670]]

representations and warranties whereby lenders are relieved of certain 
repurchase obligations for loans after 36 months of on-time payments. 
One commenter requested that the sunset provisions be calibrated 
differently depending on the risk associated with the underlying RMBS.
    A few commenters recommended a two-year sunset provision for open 
market CLOs, noting that anything longer would provide no relief given 
the fact that these pools allow for reinvestment. Two commenters 
requested alternative sunset provisions for student, vehicle, and 
equipment loans where sunset would occur on the earlier of (i) two 
years after the closing date, and (ii) the later of (A) the reduction 
of the unpaid principal balance of the securitized assets to 33 percent 
or less of the cut-of date balance and (B) the reduction of the unpaid 
principal balance of the ABS interests sold to third parties to 33 
percent or less of the closing date balance.
    The agencies have carefully considered the comments and are 
adopting the sunset provisions as proposed. In reviewing the reproposal 
and the comments, the agencies considered the duration for which the 
rule should maintain the sponsor's exposure to the performance of the 
assets, balancing the time it might take for weaker underwriting to 
manifest itself against the competing consideration that, as that time 
period extends, other factors may be more influential triggers of asset 
default. Although the time periods proposed by the agencies are longer 
than commenters generally asserted were necessary in striking this 
balance, the agencies seek to establish a conservative approach. It is 
expected that this approach will cause sponsors to focus on 
underwriting criteria on the front end, at the time of securitization, 
and the agencies believe that requiring them to be mindful of their 
exposure for the periods the agencies proposed will improve the 
sponsor's alignment of incentives and reinforce their focus on the 
performance of their assets beyond their initial creation. Accordingly, 
with respect to the proposed risk retention duration requirements for 
RMBS and for non-residential mortgage ABS interests, the agencies are 
concerned that reducing the risk retention periods further would weaken 
the incentive for sponsors to ensure sound underwriting.
    With respect to the proposed risk retention duration requirement 
for RMBS, as the agencies discussed in the reproposal, because 
residential mortgages typically have a longer duration than other 
assets, weaknesses in underwriting may manifest themselves later than 
in other asset classes and can be masked by strong housing markets. 
Moreover, residential mortgage pools are uniquely sensitive to adverse 
selection through prepayments: if market interest rates fall, borrowers 
refinance their mortgages and prepay their existing mortgages, but 
refinancing is not available to borrowers whose credit has 
deteriorated, so mortgages to less creditworthy borrowers become 
concentrated in the RMBS pool in later years. Accordingly, the agencies 
are maintaining a different sunset provision for RMBS collateralized by 
residential mortgages that are subject to risk retention.
    In response to commenters who, in the context of assets other than 
residential mortgage loans, asked for clarification as to how the 
sunset provisions apply if the securitized assets do not have a 
principal balance, the agencies have revised the rule to clarify that 
the sunset criterion relating to principal balance would not apply to 
securitized assets that do not have a principal balance, if applicable. 
Thus, for such securitized assets, the rule provides that the transfer 
and hedging restrictions may terminate upon the later of two years 
after the date of the closing of the securitization transaction or the 
date on which the total unpaid principal balance of the issued ABS 
interests is reduced to 33 percent of their original balance.
    In addition, the agencies continue to believe the exemptions to the 
prohibitions on transfer for CMBS eligible horizontal residual 
interests proposed in the reproposal would help ensure high quality 
underwriting standards for the securitizers and originators of non-
residential mortgage ABS interests and CMBS, would improve the access 
of consumers and businesses to credit on reasonable terms, and are in 
the public interest and for the protection of investors.\219\
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    \219\ 15 U.S.C. 78o-11(e)(2).
---------------------------------------------------------------------------

IV. General Exemptions

    Sections 15G(c)(1)(G) and 15G(e) of the Exchange Act require the 
agencies to provide a total or partial exemption from the risk 
retention requirements for certain types of asset-backed securities or 
securitization transactions.\220\
---------------------------------------------------------------------------

    \220\ See 15 U.S.C. 78o-11(c)(1)(G) and (e).
---------------------------------------------------------------------------

    In addition, section 15G(e)(1) permits the agencies jointly to 
adopt or issue additional exemptions, exceptions, or adjustments to the 
risk retention requirements of the rule, including exemptions, 
exceptions, or adjustments for classes of institutions or assets, if 
the exemption, exception, or adjustment would: (A) help ensure high 
quality underwriting standards for the securitizers and originators of 
assets that are securitized or available for securitization; and (B) 
encourage appropriate risk management practices by the securitizers and 
originators of assets, improve the access of consumers and businesses 
to credit on reasonable terms, or otherwise be in the public interest 
and for the protection of investors.
    Consistent with these provisions, the reproposal would have 
exempted certain types of asset-backed securities or securitization 
transactions from the credit risk retention requirements of the rule. 
Each of these exemptions, along with the comments and the final rule 
that the agencies are adopting, are discussed below. The agencies have 
determined that each of the exemptions adopted pursuant to section 
15G(e)(1), including for the reasons described below and in the 
reproposal, satisfy the requirements described in the preceding 
paragraph.

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

    Section 15G(e)(3)(B) of the Exchange Act provides that the 
agencies, in implementing risk retention regulations, shall not apply 
risk retention to any residential, multifamily, or health care facility 
mortgage loan asset, or securitization based directly or indirectly on 
such an asset, that is insured or guaranteed by the United States or an 
agency of the United States.\221\ To implement this provision, the 
reproposal would have exempted from the risk retention requirements any 
securitization transaction collateralized solely by residential, 
multifamily, or health care facility mortgage loan assets if the assets 
are insured or guaranteed as to the payment of principal and interest 
by the United States or an agency of the United States.\222\
---------------------------------------------------------------------------

    \221\ See id. at section 78o-11(e)(3)(B).
    \222\ See id. at section 78o-11(e)(3)(B).
---------------------------------------------------------------------------

    Several commenters expressed support for the exemption for 
securitization transactions collateralized solely by assets that are 
insured or guaranteed as to the payment of principal and interest by 
the United States or its agencies. One commenter urged the agencies to 
extend the government-backed exemptions to asset-backed securities 
backed by foreign governments. Another commenter requested that the 
agencies clarify that Enterprise securitizations of multifamily

[[Page 77671]]

loans are exempt from the risk retention requirements.
    After considering the comments received, the agencies are adopting 
as proposed the exemption from the risk retention requirements for any 
securitization transaction that is collateralized solely by 
residential, multifamily, or health care facility mortgage loan assets 
if the assets are insured or guaranteed in whole or in part as to the 
payment of principal and interest by the United States or an agency of 
the United States.
    The agencies are not adopting an exemption from risk retention for 
securitizations of assets issued, guaranteed or insured by foreign 
government entities. As the agencies noted in the reproposal, the 
agencies continue to believe that it would not be appropriate to exempt 
such transactions from risk retention if they were offered in the 
United States to U.S. investors. Nor are the agencies expanding this 
(or any other exemption) to include all securitizations of multifamily 
loans by the Enterprises. Such securitizations require risk retention 
under the rule unless they meet the requirements of section 8 of the 
rule.

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

    Section 15G(c)(1)(G)(ii) of the Exchange Act requires that the 
agencies, in implementing risk retention regulations, provide for a 
total or partial exemption from risk retention for securitizations of 
assets that are issued or guaranteed by the United States or an agency 
of the United States, as the agencies jointly determine appropriate in 
the public interest and the protection of investors.\223\ The 
reproposal would have provided full exemption from risk retention for 
any securitization transaction in which the ABS interests issued in the 
transaction were (1) collateralized solely by obligations issued by the 
United States or an agency of the United States and servicing assets; 
(2) collateralized solely by assets that are fully insured or 
guaranteed as to the payment of principal and interest by the United 
States or an agency of the United States (other than residential, 
multifamily, or health care facility mortgage loan securitizations 
discussed above) and servicing assets; or (3) fully guaranteed as to 
the timely payment of principal and interest by the United States or 
any agency of the United States.
---------------------------------------------------------------------------

    \223\ See id. at section 78o-11(c)(1)(G).
---------------------------------------------------------------------------

    Consistent with section 15G(e)(3)(A) of the Exchange Act, the 
reproposal also would have provided an exemption from risk retention 
for any securitization transaction collateralized solely by loans or 
other assets made, insured, guaranteed, or purchased by any institution 
that is subject to the supervision of the Farm Credit Administration, 
including the Federal Agricultural Mortgage Corporation, and servicing 
assets.\224\ Additionally, the reproposal would have provided an 
exemption from risk retention, consistent with section 
15G(c)(1)(G)(iii) of the Exchange Act,\225\ for securities (1) issued 
or guaranteed by any state \226\ of the United States, or by any 
political subdivision of a state, or by any public instrumentality of a 
state that is exempt from the registration requirements of the 
Securities Act by reason of section 3(a)(2) of the Securities Act, or 
(2) defined as a qualified scholarship funding bond in section 
150(d)(2) of the IRS Code.
---------------------------------------------------------------------------

    \224\ See 15 U.S.C. 78o-11(e)(3)(A).
    \225\ See id. at section 78o-11(c)(1)(G)(iii).
    \226\ Section 2 of the rule defines ``state'' as having the same 
meaning as in section 3(a)(16) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)(16)), which includes a state of the United 
States, the District of Columbia, Puerto Rico, the Virgin Islands, 
or any other possession of the United States.
---------------------------------------------------------------------------

    One commenter requested that the final rule retain the full 
exemption for securities issued by a state (including a political 
subdivision or public instrumentality of a state), and for securities 
that meet the definition of a qualified scholarship funding bond. This 
commenter requested clarification that the exemption for state and 
municipal securitizations would apply to both securities issued on a 
federally taxable basis and securities issued on a federal tax-exempt 
basis. A few commenters urged that the agencies clarify that all 
securities issued by housing finance agencies and other state 
government agencies and collateralized by loans financed by housing 
finance agencies are exempted.
    After considering the comments received, the agencies are adopting 
as proposed the exemption from the risk retention requirements for any 
securitization transaction that is (1) collateralized solely by 
obligations issued by the United States or an agency of the United 
States and servicing assets; (2) collateralized solely by assets that 
are fully insured or guaranteed as to the payment of principal and 
interest by the United States or an agency of the United States (other 
than residential, multifamily, or health care facility mortgage loan 
securitizations discussed above) and servicing assets; (3) insured or 
guaranteed as to the payment of principal and interest by the United 
States or an agency of the United States; (4) collateralized solely by 
loans or other assets made, insured, guaranteed, or purchased by any 
institution that is subject to the supervision of the Farm Credit 
Administration, including the Federal Agricultural Mortgage 
Corporation, and servicing assets; (5) issued or guaranteed by any 
state of the United States, or by any political subdivision of a state, 
or by any public instrumentality of a state that is exempt from the 
registration requirements of the Securities Act by reason of section 
3(a)(2) of the Securities Act; or (6) defined as a qualified 
scholarship funding bond in section 150(d)(2) of the IRS Code.
    Regarding whether the exemption for state and municipal 
securitizations would apply to both securities issued on a federally 
taxable basis and securities issued on a federal tax-exempt basis, the 
agencies note that the text of the exemption does not specifically make 
a distinction between taxable and tax-exempt securities. To the extent 
that a security otherwise satisfies the requirements of the state and 
municipal securitizations exemption, such security is exempt from the 
risk retention rule.
    The agencies are exempting loans that are exempt from the ability-
to-repay requirements (such as loans made through state housing finance 
agency programs and certain community lending programs) that were not 
separately included in the definition for QRM (which under the statute 
cannot be broader than QM) and would only be QRMs if they otherwise met 
the qualifying criteria for QMs. This exemption is discussed more fully 
below.

C. Federal Family Education Loan Program and Other Student Loan 
Securitizations

    The reproposal would have exempted any securitization transaction 
that is collateralized solely (excluding servicing assets) by student 
loans made under the Federal Family Education Loan Program (``FFELP'') 
that are guaranteed as to 100 percent of defaulted principal and 
accrued interest (i.e., FFELP loans with first disbursement prior to 
October 1993, or pursuant to certain limited circumstances where a full 
guarantee was required). A securitization transaction that is 
collateralized solely (excluding servicing assets) by FFELP loans that 
are guaranteed as to at least 98 percent (but less than 100 percent) of 
defaulted principal and accrued interest

[[Page 77672]]

would have its risk retention requirement reduced to 2 percent. Any 
other securitization transaction that is collateralized solely 
(excluding servicing assets) by FFELP loans would have its risk 
retention requirement reduced to 3 percent.
    Several commenters urged the agencies to expand the proposed 
exemption for securitization transactions collateralized by FFELP loans 
to a full exemption from risk retention requirements. These commenters 
asserted that a risk retention requirement ranging from zero percent to 
3 percent for FFELP loan securitizations that are subject to a guaranty 
ranging from 97 percent to 100 percent means risk retention is required 
in an amount greater than the loss exposure on the loans. These 
commenters stated that other securitization products would receive a 
full exemption under the reproposal even if they are only partially 
insured or guaranteed. A few of these commenters also asserted that 
risk retention would have no effect on the underwriting standards since 
these loans have already been funded and the program is no longer 
underwriting new loans. One of these commenters urged the agencies to 
apply the risk retention requirement only to the portion of the FFELP 
loans that are not guaranteed.\227\
---------------------------------------------------------------------------

    \227\ This commenter suggested, as an example, that if only 3 
percent of a FFELP loan is uninsured, the 5 percent risk retention 
requirement should only apply to the 3 percent uninsured portion, 
resulting in a 0.15 percent risk retention requirement with respect 
to such loan.
---------------------------------------------------------------------------

    Commenters also recommended that the agencies accept alternative 
forms of risk retention for FFELP loan securitizations. The suggested 
alternative forms of risk retention include a simplified representative 
sample method, an exemption for on-balance sheet transactions where the 
structure clearly demonstrates at least 5 percent risk retention, 
initial equity contribution, overcollateralization, and unfunded forms 
of risk retention. One of these commenters cited the European Union 
risk retention regime which recognizes certain unfunded forms of risk 
retention.
    One commenter asked that the agencies extend the FFELP loan 
securitization exemption to include student loan-backed securities 
issued by entities exempt from registration under section 3(a)(4) of 
the Securities Act and by entities that have received tax-exempt 
designations under section 501(c)(3) of the IRS Code. This commenter 
asserted that these issuers are constrained in their ability to raise 
sufficient capital to meet the risk retention requirements. One other 
commenter requested that student loan revenue bonds issued by nonprofit 
issuers that are supported by third-party credit enhancement be 
exempted. This commenter asserted that investors in these bonds are not 
making their investment decisions based on the credit risk and 
performance of the asset pool, and that these bonds are assessed based 
on the creditworthiness and structure of the third-party credit 
enhancement. Another commenter requested that all nonprofit public 
purpose student loan providers be fully exempted from risk retention 
requirements. This commenter asserted that the structure of the 
securitizations issued by these entities, and the history of investor 
interest in security issuances by nonprofit organizations, reflect the 
strong alignment of interests between the investors and sponsors of 
these types of securitization transactions.
    Another commenter requested clarification that the exemption for 
qualified scholarship funding bonds apply to both securities issued on 
a federally taxable basis and securities issued on a federal tax-exempt 
basis.
    After considering the comments received, the agencies are adopting 
the reductions in the amount of required risk retention for FFELP loan 
securitization as reproposed. The agencies do not believe that 
providing a full exemption to partially insured or guaranteed FFELP 
loans is warranted. The agencies believe that the reductions in risk 
retention for FFELP loan securitizations described in the reproposal 
reflect the appropriate level of ``skin in the game'' for these 
transactions, encouraging high quality underwriting generally in the 
selection of assets for securitization and appropriate risk management 
practices in post-default servicing. The agencies also reiterate that 
they have generally declined to recognize unfunded forms of risk 
retention and continue to do so for purposes of the final rule.
    Consistent with the reproposal, the agencies are not expanding the 
proposed exemptions to cover student loans other than FFELP student 
loans, including student loan-backed securities issued by entities 
exempt from registration under section 3(a)(4) of the Securities Act or 
entities that have received tax exempt designations under section 
501(c)(3) of the IRS Code, because comments received on the reproposal 
did not provide a basis to allow the agencies to conclude that the 
structures or underwriting practices of these securitizations align the 
interests of securitizers with the interests of investors such that an 
exemption would be appropriate under section 15G(c)(1)(G) or section 
15G(e) of the Exchange Act. The agencies are concerned that an 
exemption for sponsors of student loan-backed securities issued by 
entities exempt from registration under section 3(a)(4) of the 
Securities Act or entities that receive tax exempt designations under 
section 501(c)(3) of the IRS Code would permit evasion of the rule 
through the use of an entity that meets the requirements of such 
exemption, but whose sole purpose is the issuance of ABS interests. 
Regarding whether the exemption for qualified scholarship funding bonds 
would apply to both securities issued on a federally taxable basis and 
securities issued on a federal tax-exempt basis, the agencies note that 
the text of the exemption does not specifically make a distinction 
between taxable and tax-exempt securities. To the extent a security 
satisfies the requirements of the qualified scholarship funding bond 
exemption in the rule, such security is exempt from the risk retention 
rule. The agencies believe that there is not sufficient justification 
to provide an exemption for bonds that may have some similarities to a 
qualified scholarship funding bond, but do not meet the statutory 
definition.

D. Certain Public Utility Securitizations

    The reproposal would have provided an exemption from risk retention 
for utility legislative securitizations. Specifically, the reproposal 
would have exempted any securitization transaction where the ABS 
interests are issued by an entity that is wholly owned, directly or 
indirectly, by an investor-owned utility company that is subject to the 
regulatory authority of a state public utility commission or other 
appropriate state agency. Additionally, ABS interests issued in an 
exempted utility legislative securitization transaction would have been 
required to be secured by the intangible property right to collect 
charges for the recovery of specified costs and such other assets of 
the issuing entity. The reproposal would have defined ``specified 
cost'' to mean any cost identified by a state legislature as 
appropriate for recovery through securitization pursuant to ``specified 
cost recovery legislation,'' which is legislation enacted by a state 
that:
     Authorizes the investor-owned utility company to apply 
for, and authorizes the public utility commission or other appropriate 
state agency to issue, a financing order determining the amount of 
specified costs the utility will be allowed to recover;
     Provides that pursuant to a financing order, the utility 
acquires an

[[Page 77673]]

intangible property right to charge, collect, and receive amounts 
necessary to provide for the full recovery of the specified costs 
determined to be recoverable, and assures that the charges are non-
bypassable and will be paid by customers within the utility's historic 
service territory who receive utility goods or services through the 
utility's transmission and distribution system, even if those customers 
elect to purchase these goods or services from a third party; and
     Guarantees that neither the state nor any of its agencies 
has the authority to rescind or amend the financing order, to revise 
the amount of specified costs, or in any way to reduce or impair the 
value of the intangible property right, except as may be contemplated 
by periodic adjustments authorized by the specified cost recovery 
legislation.\228\
---------------------------------------------------------------------------

    \228\ The eligibility standards for the exemption are similar to 
certain requirements for these securitizations outlined in IRS 
Revenue Procedure 2005-62, 2005-2 C.B. 507, that are relevant to 
risk retention. This Revenue Procedure outlines the Internal Revenue 
Service's requirements in order to treat the securities issued in 
these securitizations as debt for tax purposes, which is the primary 
motivation for states and public utilities to engage in such 
securitizations.
---------------------------------------------------------------------------

    The agencies received no comments on the utility legislative 
securitization exemption, and are adopting the exemption as reproposed.

E. Seasoned Loan Securitizations

    In the reproposal, the agencies proposed to exempt from risk 
retention any securitization transaction that is collateralized solely 
by servicing assets and seasoned loans that (1) have not been modified 
since origination and (2) have never been delinquent for 30 days or 
more. With respect to residential mortgages, the reproposal would have 
defined ``seasoned loan'' to mean a residential mortgage loan that 
either (1) has been outstanding and performing for the longer of (i) 
five years or (ii) the period until the outstanding principal balance 
of the loan has been reduced to 25 percent of the original principal 
balance; or (2) has been outstanding and performing for at least seven 
years. For all other asset classes, the reproposal would have defined 
``seasoned loan'' to mean a loan that has been outstanding and 
performing for the longer of (1) two years, or (2) the period until the 
outstanding principal balance of the loan has been reduced to 33 
percent of the original principal balance.
    The agencies received a number of comments on the seasoned loan 
exemption from financial entities and financial trade organizations. 
Commenters generally favored expanding the seasoned loan exemption, 
although they differed in how to expand the exemption. One commenter 
proposed that ``seasoned loans'' be redefined to accommodate auto loans 
that have been outstanding and performing for the shorter of (1) two 
years, or (2) the period until the outstanding principal balance of the 
loan has been reduced to 33 percent of the original principal balance. 
Other commenters proposed that the exemption be expanded to accommodate 
certain previously modified residential mortgage loans that have not 
had past delinquency events.
    One commenter requested that loans with delinquencies up to 60 days 
qualify, and another suggested that loans that have been delinquent and 
then brought current qualify if they perform for 36 months after the 
delinquency. Another commenter asked that the exception include loans 
that had no more than three 30-day delinquencies if the loan is 
otherwise performing for five years and not delinquent at the time of 
securitization.
    Other commenters asked that the agencies permit blended 
securitizations of seasoned loans with other loans that require risk 
retention, with the amount of risk retention reduced accordingly. These 
commenters expressed concern of potentially fragmenting the market for 
these loans. However, the investor members of one commenter questioned 
the need to blend pools of seasoned and ``non-seasoned'' loans because 
ABS interests collateralized by these types of assets are unlikely to 
appeal to the same types of investors.
    After considering the comments received, the agencies are adopting 
the seasoned loan exemption as reproposed. The agencies believe that 
there is insufficient data to justify expanding the seasoned loan 
exemption and that the alignment of the seasoned loan exemption with 
the sunset provisions on hedging and transfer enhances consistency 
across the provisions of the rule and better aligns the incentives of 
sponsors and investors. The agencies do not believe that the period of 
time during which a loan is required to have been outstanding to 
qualify as a seasoned loan should be different from the period after 
which the transfer and hedging restrictions sunset. Nor do they believe 
that loans that have at any time been more than 30 days delinquent 
should qualify. And, while modifications of loans for reasons other 
than loss mitigation might be well-underwritten loans, it would be 
difficult if not impossible to verify the underlying reasons for a 
modification. Commenters did not provide examples of securitization 
transactions collateralized by newly originated and seasoned loans or 
data or reasoned analysis to support the assertion that such 
transactions would fill existing needs for financing. Because the 
agencies are not persuaded that market fragmentation would result, the 
agencies are not permitting blended pools of seasoned loans and loans 
that would not satisfy the seasoned loan exemption.

F. Federal Deposit Insurance Corporation Securitizations

    In the reproposal, the agencies proposed an exemption from risk 
retention for securitization transactions that are sponsored by the 
FDIC, acting as conservator or receiver under any provision of the 
Federal Deposit Insurance Act or Title II of the Dodd-Frank Act. For 
the reasons discussed in the reproposal,\229\ the agencies continue to 
believe that this exemption would help ensure high quality 
underwriting, and is in the public interest and for the protection of 
investors.\230\ These receivers and conservators perform a function 
that benefits creditors in liquidating and maximizing the value of 
assets of failed financial institutions for the benefit of creditors. 
Accordingly, their actions are guided by sound underwriting practices, 
and the quality of the assets will be carefully monitored in accordance 
with the relevant statutory authority.
---------------------------------------------------------------------------

    \229\ See Revised Proposal, 78 FR at 57978.
    \230\ See 15 U.S.C. 78o-11(e).
---------------------------------------------------------------------------

    One commenter expressly supported this exemption, noting, among 
other things, that it would help the FDIC maximize the value of assets 
in conservatorship and receivership. For the reasons noted above, the 
agencies are adopting the FDIC securitization exemption as reproposed.

G. Exemption for Certain Resecuritization Transactions

    In the reproposal, the agencies proposed two different exemptions 
from risk retention for certain ABS interests issued in 
resecuritization transactions (resecuritization ABS interests).\231\ 
The first of these exemptions would have applied to resecuritizations 
of asset backed securities that met certain specific conditions set 
forth in proposed section 19(b)(5) (pass-through resecuritizations). 
The second one would have applied only to resecuritizations of certain 
first pay classes of mortgage backed securities that met the 
requirements in proposed

[[Page 77674]]

section 19(b)(6) (first-pay-class resecuritization). Under the 
reproposal, sponsors of resecuritizations that were not structured to 
meet the terms of one of these two exemptions would have been required 
to meet the credit risk retention requirements with respect to the 
resecuritization transaction unless another exemption for the 
transaction was available.
---------------------------------------------------------------------------

    \231\ See Revised Proposal, 78 FR at 57972-57974. In a 
resecuritization transaction, the asset pool collateralizing the ABS 
interests issued in the transaction comprises one or more asset-
backed securities.
---------------------------------------------------------------------------

    Under the section 19(b)(5) of the reproposal, the resecuritization 
ABS interests would have to be collateralized solely by servicing 
assets and existing ABS interests issued in a securitization 
transaction for which credit risk was retained as required under the 
original proposal, or which was otherwise exempted from credit risk 
retention requirements (compliant ABS interests). Second, the 
transaction would have to be structured so that it involved the 
issuance of only a single class of ABS interests and provided for a 
pass through of all principal and interest payments received on the 
underlying asset-backed securities (net of expenses of the issuing 
entity) to the holders of such class of ABS interests. The agencies 
explained that because the holder of a resecuritization ABS interest 
structured as a single-class pass-through security would have had a 
fractional undivided interest in the pool of underlying asset-backed 
securities and in the distributions of principal and interest 
(including prepayments) from these underlying asset-backed securities, 
a resecuritization ABS interest meeting these requirements would not 
alter the level or allocation of credit and interest rate risk on the 
underlying asset-backed securities. The agencies had proposed this 
exemption in the original proposal and did not substantively alter it 
in the reproposal.
    The agencies proposed to adopt this exemption under the general 
exemption provisions of section 15G(e)(1) of the Exchange Act. The 
agencies noted that a resecuritization transaction that created a 
single-class pass-through would neither increase nor reallocate the 
credit risk inherent in the underlying compliant ABS interests, and 
that the transaction could allow for the combination of asset-backed 
securities collateralized by smaller pools, and the creation of asset-
backed securities that may be collateralized by more geographically 
diverse pools than those that can be achieved by the pooling of 
individual assets.
    Under the first-pay-class resecuritization exemption in proposed 
section 19(b)(6), the agencies proposed a limited resecuritization 
exemption that would apply to certain resecuritizations of residential 
mortgage-backed securities structured to address prepayment risk, but 
that would not apply to a structure that re-allocated credit risk by 
tranching and subordination. To qualify for this proposed exemption, 
the transaction would have to have been a resecuritization of first-pay 
classes of ABS interests, which were themselves collateralized by 
first-lien residential mortgages on property located in a state,\232\ 
and which were issued in transactions that complied with the risk 
retention rules or were exempt from the rule.\233\ The reproposal also 
would have allowed a pool collateralizing the exempted first-pay-class 
resecuritization to contain servicing assets.
---------------------------------------------------------------------------

    \232\ Section 2 of the reproposed rule defined ``state'' as 
having the same meaning as in section 3(a)(16) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(16)). Thus, the ABS interests 
that would be resecuritized in a transaction exempted under this 
provision would have been required to be collateralized by mortgages 
on properties located in a state of the United States, the District 
of Columbia, Puerto Rico, the Virgin Islands, or any other 
possession of the United States. See Revised Proposal, 78 FR at 
57973.
    \233\ The reproposal defined ``first-pay class'' as a class of 
ABS interests for which all interests in the class were entitled to 
the same priority of principal payments and that, at the time of 
closing of the transaction, were entitled to repayments of principal 
and payments of interest prior to or pro-rata, except for principal-
only and interest only tranches that are prior in payment, with all 
other classes of securities collateralized by the same pool of 
first-lien residential mortgages until such class has no principal 
or notional balance remaining. A single class of pass-through ABS 
interests under which an investor would have a fractional, undivided 
interest in the pool of mortgages collateralizing the ABS interests 
would have qualified as a ``first pay class'' under this definition.
---------------------------------------------------------------------------

    In addition, to qualify for the exemption, any ABS interest issued 
in the resecuritization would have had to share pro rata in any 
realized principal losses with all other ABS interests issued in the 
resecuritization based on the unpaid principal balance of such interest 
at the time the loss was realized. The transaction would have had to be 
structured to reallocate prepayment risk, and the proposed exemption 
specifically would have prohibited any structure which re-allocated 
credit risk (other than credit risk reallocated only as a consequence 
of reallocating prepayment risk). The reproposal also would have 
prohibited the issuance of an inverse floater or any similarly 
structured class of ABS interest as part of the exempt resecuritization 
transaction.\234\
---------------------------------------------------------------------------

    \234\ The reproposal defined ``inverse floater'' as an ABS 
interest issued as part of a securitization transaction for which 
interest or other income is payable to the holder based on a rate or 
formula that varies inversely to a reference rate of interest. The 
exclusion from the proposed exemption of transactions involving the 
issuance of an inverse floater class addressed concerns with the 
high risk of loss that has been associated with these instruments. 
See Id. at 57974.
---------------------------------------------------------------------------

    The agencies proposed the first-pay-class resecuritization 
exemption in response to comments on the original proposal about 
liquidity in underlying markets and access to credit on reasonable 
terms.\235\ The agencies noted that residential mortgage-backed 
securities tend to have longer maturities than other types of asset-
backed securities and to have high prepayment risk. The agencies 
reasoned that the exemption would help provide investors with 
protection against prepayment risk and greater certainty as to expected 
life. The proposed exemption, however, did not divide the credit risk 
of the underlying asset-backed securities and therefore did not give 
rise to the same concerns as CDOs and other resecuritizations that 
involved tranching of credit risk.\236\
---------------------------------------------------------------------------

    \235\ Id. at 57973.
    \236\ Id.
---------------------------------------------------------------------------

    The agencies proposed the first-pay-class resecuritization 
exemption under the general exemption provisions of section 15G(e)(1) 
of the Exchange Act. The agencies determined that the provision was 
consistent with the requirements of this section, given the conditions 
established for the exemption. In particular, the agencies noted that 
the provision limited the exemption to resecuritizations of first-pay 
classes of residential mortgage-backed securities, and that it applied 
specific prohibitions on structures that re-allocate credit risk, so it 
minimized credit risk associated with the resecuritized residential 
mortgage-backed securities and prevented the transaction from 
reallocating existing credit risk while addressing some of the 
commenters' concerns with regard to liquidity and access to 
credit.\237\
---------------------------------------------------------------------------

    \237\ Id.
---------------------------------------------------------------------------

    The agencies received a number of comments on the proposed 
resecuritization exemptions. The comments did not raise specific 
objections or concerns with either of the two proposed exemptions, but 
generally urged regulators to expand the exemptions to other types of 
structures including those that re-tranche credit risk. Commenters 
asserted that applying risk retention to resecuritization of asset-
backed securities that are already in the market, especially where the 
interests are compliant ABS interests, cannot alter the incentives for 
the original sponsor of asset-backed securities to ensure high-quality 
assets. Other commenters stated that the lack of a broad 
resecuritization exemption would negatively affect markets by

[[Page 77675]]

making it harder for investors to re-structure and sell existing asset-
backed securities. A number of commenters stated that the agencies 
should provide an exemption for resecuritizations of asset-backed 
securities that were issued prior to the applicable effective date of 
the rule. Still others expressed the view that the agencies could 
develop an exemption that would allow credit tranching in resecuritized 
asset-backed securities while limiting the scope of such exemption, 
such as by excluding actively managed pools, to address agencies' 
concerns regarding CDOs and similar structures. The comments were 
generally similar to comments received on the original proposal.
    The agencies have carefully considered the comments received in 
conjunction with the purposes and requirements of the statute. As the 
agencies noted in the reproposal, sponsors of resecuritization 
transactions have considerable flexibility in choosing what ABS 
interests to include in the underlying pool of securitized assets as 
well as in creating the specific structures. This choice of securities 
is a type of underwriting choice with respect to those securities for 
inclusion in the underlying pool of securitized assets. The agencies 
continue to consider it appropriate, therefore, to adopt rules that 
will provide sponsors with sufficient incentive to choose ABS interests 
that have lower levels of credit risk and to not use a resecuritization 
to obscure what might have been sub-par credit performance of certain 
ABS interests. The agencies also continue to consider it appropriate to 
apply the risk retention requirements to resecuritization transactions 
generally because resecuritization transactions can result in a re-
allocation of the credit risk of the underlying ABS interest. Such 
considerations are present whether or not the original underlying 
asset-backed securities were issued prior to the applicable effective 
date of these risk retention rules or are compliant with the rule.\238\ 
The agencies also note that section 15G of the Exchange Act 
specifically contemplates applying risk retention to 
resecuritizations.\239\
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    \238\ Section 15G of the Exchange Act would not apply to asset-
backed securities issued before the applicable effective date of the 
agencies' final rule, and that as a practical matter, private-label 
asset-backed securities issued before the applicable effective date 
of the final rule would typically not be compliant ABS interests. 
Asset-backed securities issued before the applicable effective date 
that meet the terms of an exemption from the rule or that are 
guaranteed by the Enterprises, however, could qualify as compliant 
ABS interests.
    \239\ See 15 U.S.C. 78o-11(a).
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    Taking into account these considerations, the agencies continue to 
believe that requiring additional risk retention as the standard for 
most resecuritization transactions is consistent with the intent of 
section 15G of the Exchange Act, both in light of recent history and 
the specific statutory requirement that the agencies adopt risk 
retention standards for CDOs, and similar instruments collateralized by 
asset-backed securities.\240\ The comments received in response to the 
reproposal did not raise any issues to cause the agencies to expand the 
scope of the exemptions for resecuritizations. In particular, the 
agencies do not believe that suggestions for distinguishing ``typical'' 
resecuritizations from CDOs or other higher risk transactions could be 
applied consistently across transactions.
---------------------------------------------------------------------------

    \240\ See 15 U.S.C. 78o-11(c)(1)(F).
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    As a consequence, the agencies are adopting the pass-through 
resecuritization exemption in section 19(b)(5), as proposed in the 
reproposal. This exemption will apply only if the resulting 
resecuritization ABS interests consist of only a single class of 
interests and provides for a pass through of all principal and interest 
payments received on the underlying ABS interests (net of expenses of 
the issuing entity). The new ABS interests have to be collateralized 
solely by servicing assets and existing ABS interests issued in a 
securitization transaction for which credit risk was retained as 
required under the rule, or which are otherwise exempted from credit 
risk retention requirements in the rule.
    The agencies are also adopting as proposed the exemption in section 
19(b)(6). Thus, to qualify for this exemption, the ABS interests issued 
in the resecuritization must share pro rata in any realized principal 
losses with all other holders of ABS interests issued in the 
resecuritization based on the unpaid principal balance of such interest 
at the time the loss is realized. The transaction must be structured to 
reallocate prepayment risk, and cannot re-allocate credit risk (other 
than credit risk reallocated as a collateral consequence of 
reallocating prepayment risk). While the agencies specifically invited 
comment on whether the issuance of an inverse floater as part of a 
first-pay class resecuritization exemption would be necessary to 
provide adequate prepayment protection for investors, the agencies 
received no specific response to this question or comments on the 
prohibition proposed on the issuance of an inverse floater or any 
similarly structured class of ABS interests as part of an exempt 
transaction under section 19(b)(6), and are adopting this prohibition 
as part of the final rule.

H. Other Exemptions From Risk Retention Requirements

1. Legacy Loan Securitizations
    Some commenters on the original proposal recommended an exemption 
from risk retention for securitizations and resecuritizations of loans 
made before the applicable effective date of the final rule, or 
``legacy loans,'' asserting that risk retention would not affect the 
underwriting standards used to create those loans. After considering 
the comments received on the original proposal, the agencies did not 
propose to provide an exemption from risk retention for legacy loan 
securitizations in the reproposal. The agencies did not believe that 
such securitizations should be exempt from risk retention, because risk 
retention requirements are designed to incentivize securitizers to 
select well-underwritten loans, regardless of when those loans were 
underwritten. Furthermore, the agencies did not believe that exempting 
securitizations of legacy loans from risk retention would satisfy the 
statutory criteria for an exemption under section 15G(e) of the 
Exchange Act.\241\
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    \241\ See 15 U.S.C. 78o-11(e).
---------------------------------------------------------------------------

    On the reproposal, the agencies received comments from one 
financial trade organization that again recommended exempting 
securitizations of legacy loans. This commenter requested that the 
agencies provide a legacy loan exemption, because in the case of loans 
that were originated prior to the adoption of the final risk retention 
rules, it would not have been possible to create those assets in 
compliance with a regulatory scheme whose precise terms were unknown at 
the time of origination.
    As the agencies stated in the reproposal, the agencies do not 
believe it is appropriate to exempt legacy loans because the risk 
retention requirements affect the quality of loans that are selected 
for a securitization transaction. Therefore, the agencies are not 
adopting an exemption from risk retention for legacy loan 
securitizations in the final rule.
2. Corporate Debt Repackagings
    Some commenters on the reproposal urged the agencies to adopt an 
exemption from risk retention for ``corporate debt repackagings.'' 
\242\ One

[[Page 77676]]

of these commenters recommended that, as an alternative, the agencies 
create a limited exemption for corporate debt repackaging transactions 
that repackage securities that could be sold directly to investors 
without risk retention, and that do not involve credit tranching. This 
commenter also proposed additional means of satisfying the risk 
retention requirements in corporate debt repackaging transactions, 
including the retention of 5 percent of the underlying securities in 
the repackaging transaction, or the retention of 5 percent of any class 
of securities issued in the repackaging that is pari passu with the 
securities being issued to the investors in the transaction.
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    \242\ According to commenters, corporate debt repackagings are 
created by the deposit of corporate debt securities purchased by the 
sponsoring institution in the secondary market into a trust which 
issues certificates collateralized by cash flows on the underlying 
corporate debt securities.
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    Consistent with the reproposal and for the reasons discussed 
therein,\243\ the agencies are not adopting an exemption for corporate 
debt repackagings. As stated in the reproposal, the agencies do not 
believe an exemption is warranted because the underlying assets (the 
corporate bonds) are not asset-backed securities. As the agencies 
stated in the reproposal, regardless of the level of credit risk a 
corporate debt issuer believes it holds on its underlying corporate 
bonds, the risk retention requirement would apply at the securitization 
level, and the sponsor of the securitization should be required to hold 
5 percent of the credit risk of the securitization transaction. The 
agencies continue to believe that risk retention at the securitization 
level for corporate debt repackagings is necessary in order to align 
the interest of the sponsor in selecting the bonds in the pool and 
structuring the terms of the ABS interests with the interests of the 
investors in the securitization.
---------------------------------------------------------------------------

    \243\ See Revised Proposal, 78 FR at 57975.
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    One commenter requested a general exemption for securitization 
transactions in which collateral consists primarily of unsecured direct 
obligations of the sponsor or its affiliates. The agencies are not 
adopting any such exemption as this commenter did not provide 
sufficient detail on which to base such exemption.
3. Securitizations of Servicer Advance Receivables
    Some commenters requested that the agencies provide an exemption 
for servicer advance receivables.\244\ According to these commenters, 
the servicer advance facilities (``SAFs'') pursuant to which these 
servicer advance receivables are securitized create the requisite 
levels of credit enhancement through over-collateralization in the form 
of an equity interest in the issuing entity, that is subordinated to 
all other classes of ABS interests issued by the issuing entity. These 
commenters indicated that securitizations of servicer advance 
receivables should be exempted from the risk retention requirements 
because servicer advances are payments that a servicer is required to 
make under the terms of the servicing agreements, and are not 
originated for purposes of distribution in a securitization 
transaction. These commenters also said that the fundamental goal of 
risk retention--the alignment of interests in order to produce higher 
quality underwriting standards--is not relevant in these servicer 
advance receivable securitizations, because these servicer advance 
receivables do not represent an extension of credit by a lender to a 
borrower, and that there is no underwriting criteria.
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    \244\ According to this commenter, servicer advance receivables 
are contractual rights that entitle a servicer to reimbursement for 
advances that it is required, under the terms of the servicing 
agreements, to make for purposes of liquidity enhancement.
---------------------------------------------------------------------------

    If the agencies declined to provide an exemption, these commenters 
requested that the agencies allow the equity interests held by 
servicer-sponsors of the SAFs to satisfy the risk retention 
requirement, and to allow the equity interest (in an SAF structured as 
a revolving master trust) that supports all series of ABS interests to 
qualify as a risk retention option for revolving master trusts.
    The agencies are not adopting an exemption from risk retention for 
SAFs. The agencies believe that there is insufficient data to justify 
granting this specific exemption. Furthermore, the agencies do not 
believe that there are particular features of this type of 
securitization that would warrant an exemption under the factors that 
the agencies must consider in section 15G(e) of the Exchange Act. 
However, as discussed in Part III.B.2 of this Supplementary 
Information, an SAF that meets the final rule's eligibility 
requirements for the seller's interest option for revolving pool 
securitizations may avail itself of that option. Alternately, the 
sponsor of an SAF may structure its equity interest in the trust as an 
eligible horizontal residual interest.

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

    As contemplated by section 15G of the Exchange Act, the reproposal 
included a zero risk retention requirement, or exemption, for 
securitizations consisting solely of commercial loans, commercial real 
estate (CRE) loans, and automobile loans that met specific proposed 
underwriting standards (qualifying assets). The reproposal also would 
have allowed sponsors to commingle qualifying and non-qualifying assets 
of a similar type to receive up to a 50 percent reduction in the 
minimum required risk retention amount.
    While many commenters supported the ability to blend pools of 
qualifying and non-qualifying assets to obtain a reduced risk retention 
amount, commenters also requested that the agencies reduce or remove 
the 50 percent limit on the reduction for blended pools of commercial, 
CRE, or automobile loans. Some commenters claimed that the limit would 
be a disincentive for sponsors to include more qualifying assets in 
blended pools (and thereby improve the overall quality of the pool) 
once the 50 percent threshold had been reached. In addition, a comment 
was made that, because the agencies would be imposing a risk retention 
requirement on qualifying assets if they exceeded 50 percent of the 
pool, this would be contrary to the overall proposed exemption for 
qualifying assets. Other commenters supported the limit on blended 
pools or generally opposed allowing blended pools of qualifying and 
non-qualifying assets because of the concern that a blended pool could 
facilitate the ability of sponsors to obscure the credit quality of the 
non-qualifying assets.
    Under the reproposal, a sponsor of a transaction with a blended 
pool would have to provide disclosures to investors, its primary 
Federal regulator, and the Commission the manner in which the sponsor 
determined the aggregate risk retention requirement for the pool after 
including qualifying assets, a description of the qualifying and non-
qualifying assets, and material difference between them. Furthermore, 
the reproposal would have required a sponsor to either repurchase out 
of the pool any qualifying asset found not to meet the proposed 
underwriting criteria after securitization or to cure the defects to 
bring the loan into conformity with the criteria. A few commenters

[[Page 77677]]

expressed concerns about the repurchase and certification requirements 
in the reproposal with respect to pools containing qualifying assets. A 
few commenters suggested that, because of liability concerns, sponsors 
should not be required to make the proposed disclosures about 
qualifying assets to investors. One of these commenters also claimed 
that the statutory language was drafted such that such certifications 
should only be applied to residential mortgages. The commenter further 
asserted that investors already receive sufficient information about 
underlying collateral in the other asset classes, such that the 
proposed disclosures and certifications would be an unnecessary burden, 
and that investors were additionally protected by the proposed buy back 
or cure requirement for assets found to be non-qualifying post 
securitization. The commenter also asked for clarification about how 
long a sponsor must maintain records related to the proposed disclosure 
and certification requirements. A commenter also requested that with 
respect to automobile loan securitizations that the proposed internal 
control certification requirements be allowed to be performed less 
frequently to reduce burden.
    The final rule retains the 50 percent limit for blended pools for 
these three asset classes. The agencies are concerned that reducing the 
minimum risk retention for blended pools to less than 2.5 percent of 
the value of the ABS interests would significantly weaken the economic 
incentive for the sponsor to ensure that the non-qualifying loans in 
the pool are appropriately underwritten. However, the agencies are 
allowing a limited amount of blending, as proposed, to increase the 
liquidity of both qualifying and non-qualifying assets by allowing 
these assets to be securitized in the same pool.
    The agencies are also adopting the disclosure and certification 
requirements with regard to securitizations including qualifying assets 
as proposed in the revised proposal. As discussed in the revised 
proposal,\245\ the agencies believe that the disclosure and 
certification requirements are important to facilitating investors' 
ability to evaluate and monitor the overall credit quality of 
securitized collateral, especially where qualifying and non-qualifying 
assets are combined. The agencies believe that these transparency goals 
are essential to the integrity of the exemption from risk retention for 
qualifying assets. The agencies note that the record retention 
requirement for certification and disclosure in other parts of the rule 
is three years after all ABS interests are no longer outstanding.\246\ 
The agencies are adopting the same standard for certification and 
disclosures with respect to the qualifying commercial, CRE, and 
automobile loan exemptions to remain consistent throughout the rule. 
The agencies believe this timeframe will allow for a sufficient period 
for review by the Commission or the sponsor's Federal banking agency, 
as appropriate.
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    \245\ Revised Proposal, 78 FR at 57986.
    \246\ Sections 4(d) and 5(j) of the final rule.
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    The agencies note the concern expressed by some commenters with 
respect to all three of these asset classes that, for the residential 
mortgage asset class and QRM, a significant portion of the existing 
market would qualify for an exemption from risk retention, whereas in 
proposing the underwriting standards for qualifying commercial loans, 
commercial real estate loans, and automobile loans, the agencies 
proposed conservative underwriting criteria that would not capture an 
equivalent portion of the respective markets. The agencies observe that 
there is a homogeneity in the securitized residential mortgage loan 
market that does not exist for commercial loan or commercial real 
estate loan asset classes. Commercial loans and commercial real estate 
loans typically focus on a common set of borrower and collateral 
metrics, but they are individually underwritten and tailored to a 
specific borrower or property, and often contain terms developed in 
view not only of the borrower's financial position but also the general 
business cycle, industry business cycle, and standards for appropriate 
leverage in that industry sub-sector. The agencies believe the 
additional complexity needed to create underwriting standards for every 
major type of business in every economic cycle would be so great that 
originators would almost certainly be dissuaded from attempting to 
implement them or attempting to stay abreast of the numerous regulatory 
revisions the agencies would need to issue from time to time to keep up 
with the changing economic cycles or industries.
    The reproposed underwriting standards established a single set of 
requirements, which are necessary to enable originators, sponsors, and 
investors to be certain as to whether any particular loan meets the 
rule's requirements for an exemption. For the agencies to expand the 
underwriting criteria in the fashion suggested by some commenters, the 
rule would need to accommodate numerous relative standards. The 
resulting uncertainty of market participants as to whether any 
particular loan was qualified for an exemption could undermine the 
market's willingness to rely on the exemption.
    While there may be more homogeneity in the securitized automobile 
loan class, the agencies are concerned that attempting to accommodate a 
significantly large share of the current automobile loan securitization 
market would require weakening the underwriting standards to the point 
where the agencies are concerned that they would permit the inclusion 
of low quality loans. For example, the agencies note that current 
automobile lending practices often involves no or small down payments, 
financing in excess of the value of the automobile (which is itself an 
asset of quickly declining value) to accommodate taxes and fees, and a 
credit score in lieu of an analysis of the borrower's ability to repay. 
These concerns as to credit quality are evidenced by the high levels of 
credit support automobile securitization sponsors build into their 
securitization transactions, even for so-called ``prime'' automobile 
loans. Moreover, securitizers from the automobile sector who commented 
on the original proposal and reproposal expressed no interest in using 
any underwriting-based exemptive approach that did not incorporate the 
industry's current model, which relies almost exclusively on matrices 
of consumer credit scores, loan-to-value (LTV) ratios, and ``on the 
spot'' borrower approval. One commenter stated that the entire 
underwriting process must occur while the customer is at the 
dealership. As was discussed in the reproposal, the agencies are not 
persuaded that it would be appropriate for the underwriting-based 
exemptions under the rule to incorporate a credit score metric.\247\
---------------------------------------------------------------------------

    \247\ Revised Proposal, 78 FR 57985.
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    Finally, commenters requested that the agencies clarify that the 
requirement that a depositor certify as to the effectiveness of its 
internal supervisory controls with respect to the process for ensuring 
that assets that collateralize the asset-backed securities are eligible 
for an exemption does not impose an obligation on sponsors to guarantee 
that all assets meet all of the requirements to be eligible for 0 
percent risk retention. As is indicated by the final rule's provision 
of a buyback option for non-compliant assets, the agencies do not view 
the requirement as requiring that the controls guarantee compliance.

[[Page 77678]]

Rather, the process must be robust and sufficient to enable the sponsor 
to carefully evaluate eligibility.

A. Qualifying Commercial Loans

    The reproposal included definitions and underwriting standards for 
qualifying commercial loans (QCLs), that, when securitized, would be 
exempt from the risk retention requirements. The proposed definition of 
commercial loan generally would have included any loan for business 
purposes that was not a commercial real estate loan or one-to-four 
family residential real estate loan.
    The proposed criteria for a QCL included determining compliance 
with the following financial tests based on two years of past data and 
two years of projections: a total liabilities ratio less than or equal 
to 50 percent; a leverage ratio \248\ of less than or equal to 3.0x; a 
debt service coverage (DSC) ratio of greater than or equal to 1.5x. A 
QCL would need to base loan payments on a straight-line amortization 
schedule over no more than a 5-year term. Additional standards were 
proposed for QCLs that are collateralized, including lien perfection 
and collateral inspection standards.\249\
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    \248\ Under the reproposal, the leverage ratio would have been 
defined as the borrower's total debt divided by the borrower's 
annual income of a business before expenses for interest, taxes, 
depreciation and amortization are deducted, as determined in 
accordance with GAAP. See section 14 of the revised proposal 
(definition of ``leverage ratio'').
    \249\ See Revised Proposal, 78 FR at 57979.
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    Commenters generally asserted the proposed criteria were too strict 
in one or more areas. One commenter claimed that the QCL exemption 
would have no relevance for securitizations of commercial loans because 
loans that would satisfy the proposed QCL criteria typically would not 
be securitized and that the agencies did not seriously attempt to 
consider the historical performance of the asset class. Some commenters 
also supported the submission by other commenters to allow syndicated 
loans meeting certain criteria, when held by CLOs meeting certain other 
structural criteria, to be exempt from risk retention, as discussed 
above in Part III.B.7 of this Supplementary Information.
    Some commenters requested that the agencies create multiple types 
of QCL underwriting criteria to address different industries or 
different types of commercial loans, for example, establishing separate 
criteria for vehicle fleet loans or equipment loans in order to exempt 
loans meeting such criteria from risk retention. These commenters 
asserted that the securitizations of equipment loans have performed 
well before, during, and after the financial crisis and that such loans 
should therefore have their own asset class and underwriting criteria 
to qualify for an exemption.
    Commenters also suggested that the agencies relax the proposed QCL 
standards in various ways, including by: Removing the straight-line 
amortization criterion; increasing the maximum amortization period 
beyond 5 years (up to 15 or 20 years); allowing payment-in-kind loans; 
reducing retention for debtor-in-possession situations and loans 
resulting from Chapter 11 exit financings; increasing the leverage 
ratio to 4.5 or less; and replacing the leverage ratio with a 60 
percent or 50 percent debt-to-capitalization ratio. One commenter also 
urged the agencies to require a valuation such as a qualified appraisal 
for all collateralized QCLs, noting that other proposed criteria--such 
as requiring a perfected security interest for secured commercial 
loans--would be of limited utility without a valuation requirement.
    For the subsequently discussed reasons, the agencies are adopting 
the QCL standards as proposed. While the agencies recognize that there 
are many types of commercial loans to serve many types of industries 
and companies, it would be impracticable to accommodate each category 
of loan and industry with a unique set of underwriting criteria. Even 
applying a different set of criteria to a broader category within 
commercial loans, such as equipment loans, would be under- and over-
inclusive and could have unintended consequences for the alignment of 
interests of sponsors and investors. Furthermore, as the different 
industries and economic conditions in which they operate change over 
time, such regulatory underwriting criteria could influence 
originations in unintended ways. In developing the underwriting 
standards for the reproposal, the agencies intended for the standards 
to be reflective of very high quality loan characteristics for most 
commercial borrowers. To the extent that a commercial loan is 
securitized, the agencies believe that risk retention provides an 
appropriate incentive to sponsors to carefully consider the 
underwriting quality of the loans being securitized; therefore, only 
those commercial loans that are of very high quality should be exempt 
from risk retention. The agencies have concluded that the proposed high 
quality underwriting standards are appropriate for QCLs generally, even 
if the standards do not correspond to the profile of loans generally 
securitized in CLOs. While some commercial loans are structured as 
bullet or interest-only loans, the agencies determined that such loans 
are not appropriate for QCL given the deferral of principal repayment 
until maturity, which can overstate the borrower's repayment capacity 
as measured by the DSC ratio (due to a lack of principal payments) and 
increase default risk related to having to refinance a larger principal 
amount at maturity.
    While commercial loans do exist with longer terms than the maximum 
permitted under the underwriting criteria, the agencies do not believe 
such long-term commercial loans are common, and they involve more 
uncertainty about continued repayment ability, particularly when loans 
are made without collateral. With respect to payment-in-kind loans, the 
agencies observe that these loans are generally riskier loans, as 
borrowers may not be paying any interest in cash over part or all of 
the loan term. Therefore, the agencies do not believe it is appropriate 
to incorporate the changes requested by commenters with respect to term 
and payment-in-kind in the QCL underwriting criteria.
    The agencies also continue to favor the reproposed earnings-based 
leverage ratio, as opposed to a capitalization ratio, to measure the 
ability of a borrower to service the debt and thus help determine the 
consequent riskiness of a loan. Finally, while a commercial lender 
should consider the accuracy of valuation of collateral to the extent 
it is a factor in the repayment of the obligation, the agencies are 
declining to impose a requirement of a qualifying appraisal or other 
particular valuation for collateral securing a QCL. The agencies 
observe that many types of collateral could be pledged to secure a 
commercial loan and, therefore, mandating particular valuation methods 
could be very complex and unintentionally exclusive, thereby 
discouraging secured loans, which are frequently safer as credits than 
unsecured loans and therefore provide additional avenues for funding 
for many borrowers. Additionally, a valuation requirement would 
increase the burden associated with underwriting a QCL.
    In addition to the underwriting criteria discussed above, in the 
reproposal, the agencies proposed that all QCLs must be funded prior to 
the securitization and that the securitization not allow for any 
reinvestment periods. In addition, if a loan was subsequently found not 
to have met the QCL criteria, the sponsor would have been required to 
effect a cure or buyback of the loan.

[[Page 77679]]

    One commenter requested that the agencies allow QCL loans to be 
funded up to six months after the issuance of the securitization. Some 
commenters also requested that the agencies allow QCL securitizations 
to have reinvestment periods, so long as the new loans added to the 
pool would either be QCLs or not reduce the QCL/non-QCL blended pool 
ratio below 50 percent. Finally, some commenters opposed the buyback 
provision, noting that open market CLO managers designated as sponsors 
under the rule are thinly capitalized and generally would not have 
significant financial resources available to buy back loans in the 
pools they manage.
    The agencies are not adopting these commenter suggestions in the 
final rule. The agencies believe that only funded loans should be 
recognized as QCLs for purposes of exemption from risk retention, as 
there could be an adverse change in circumstances between the closing 
date of the securitization and a subsequent funding date for the loan 
that could disadvantage investors. Furthermore, changes in 
circumstances could mean the loan may not meet the quantitative QCL 
requirements upon funding. The agencies also decline to allow 
reinvestment periods for securitizations including QCLs. As discussed 
herein and in the revised proposal, there are increased concerns about 
transparency when qualifying and non-qualifying assets are mixed in a 
pool and an exemption from risk retention applies to the qualifying 
assets. Allowing reinvestment in addition to allowing blending of 
qualified and non-qualified assets could exacerbate these concerns and 
could allow sponsors to increase the risk of an initial pool that had a 
significant portion of QCLs in ways that would be difficult for 
investors to discern post-closing. Finally, the agencies are not 
removing the buyback requirement where QCLs are subsequently found not 
to have met the underwriting criteria at origination. The agencies do 
not believe that lack of financial resources of the sponsor should 
excuse the sponsor from meeting its obligations to ensure a loan 
labelled a QCL at origination met the QCL requirements. In addition, 
the rule allows certain underwriting errors to be addressed through 
cure, which would not require repurchase of the entire loan out of the 
pool and thus could be less financially burdensome for the sponsor.

B. Qualifying Commercial Real Estate Loans

    Both the original and the revised proposals included underwriting 
standards for CRE loans that would be exempt from risk retention if the 
loans met those standards (qualifying CRE loans, or QCRE loans). As 
discussed in the revised proposal, the agencies made a number of 
changes to the QCRE standard in the reproposal to address concerns 
raised by commenters with respect to the original proposal. The 
proposed standards focused predominantly on the following criteria: The 
borrower's capacity to repay the loan; the value of, and the 
originator's security interest in, the collateral; the LTV ratio; and, 
whether the loan documentation includes the appropriate covenants to 
protect the value of the collateral.
1. Definition of Commercial Real Estate Loan
    In the reproposal, a CRE loan would have been defined as any loan 
secured by a property of five or more residential units or by non-
residential real property, where the primary source of repayment would 
come from the proceeds of sale or refinancing of the property or 
underlying rental income from entities not affiliated with the 
borrower. The definition would have specifically excluded land loans.
    Some commenters questioned the exclusion of certain land loans from 
the definition of CRE in the original and revised proposals. 
Specifically, these commenters stated that numerous CMBS 
securitizations include loans to owners of a fee interest in land that 
is ground leased to a third party who owns the improvements and whose 
ground lease payments are a source of income for debt service payments 
on the loan. These commenters suggested that the agencies clarify that 
the exclusion did not apply to such loans, because these loans are 
included in many existing CMBS securitizations and the entire 
securitization would be unable to use CMBS risk retention option due to 
these loans being excluded from the CRE definition.
    As explained in the revised proposal, the agencies did not take 
commenters suggestion to include some land loans in the definition of 
commercial real estate because of concerns, among other things, that 
separation of ownership between land and buildings could complicate 
servicing and foreclosure.\250\ However, having carefully considered 
comments on this point following the reproposal, the agencies have 
decided to modify the definition of commercial real estate in the final 
rule to address commenters' concerns about these land loans. The 
agencies have concluded that excluding these ground-leased land loans 
on improved property from the definition is not warranted and so have 
explicitly included them in the definition of commercial real estate so 
that these loans may qualify as QCRE loans if they otherwise meet the 
qualifying criteria, or alternatively, may be included with pools of 
other CRE loans to allow the sponsor to use the third-party purchaser 
form of risk retention discussed in Part III.B.5 of this Supplementary 
Information.
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    \250\ See Revised Proposal, 78 FR at 57980.
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2. Single Borrower Underwriting Standard
    Commenters generally supported the reproposed exemption from risk 
retention for QCRE loans. However, as discussed further below, many 
commenters stated that the proposed underwriting criteria were too 
strict and requested that the agencies modify the QCRE loan criteria to 
allow more loans to qualify for the exemption. In addition, some 
commenters requested that the agencies expand the QCRE loan criteria 
for, or provide an additional QCRE loan exemption for, single-borrower 
or single-credit (SBSC) transactions involving a securitization of 
cross-collateralized loans provided to one or more related borrowers. 
Commenters stated that these transactions warranted an exemption 
because they typically have had stronger historical performance than 
non-SBSC CMBS transactions and due to market practice, few or none 
would qualify as a QCRE loan. In addition, commenters asserted that B-
piece buyers have not historically been involved in these transactions 
because of the limited number of loans involved. Commenters also 
asserted that these transactions are particularly transparent to 
investors because they involved only a few, large loans (as compared to 
other CMBS transactions) and investors typically receive granular 
information with respect to the loans. Commenters asserted that risk 
retention for these structures would cause costs to increase and 
possibly reduce access to credit for some companies without a 
commensurate increase in investor protection, given the nature of the 
loans involved and transparency to investors. One commenter proposed 
that the SBSC exemption rely exclusively on extensive disclosure about 
the securitization structure and loans in the structure rather than 
quantitative underwriting criteria. Commenters also proposed that only 
larger SBSC deals (over $200 million in ABS interests issued) be 
exempted from risk retention to reduce the possibility that the 
exemption would be used to effectively exempt a significant section of 
the market.

[[Page 77680]]

    The agencies have carefully considered the commenters' requests for 
separate QCRE loan criteria for SBSC transactions. Having reviewed 
information provided by commenters as well as other information related 
to this market, the agencies have concluded that it would not be 
appropriate to adopt separate QCRE loan underwriting criteria for SBSC 
transactions. An SBSC transaction may qualify for an exemption from 
risk retention, like other CMBS transactions, to the extent the 
securitized loans qualify as QCRE loans, and the regulators do not 
believe there is sufficient support to justify establishing separate 
underwriting criteria for SBSC transactions. The agencies have not 
concluded that SBSC transactions as a category are of sufficiently low 
risk to warrant a special exemption from risk retention. While most 
CMBS transactions involve diversifying risk across types of properties, 
SBSC transactions generally focus on one specific type of property (for 
example, loans on properties related to one brand of hotel), which 
potentially concentrates and increases credit risk as compared with a 
diversified CMBS securitization. In addition, because of the cross-
collateralization or cross-default provisions in these deals and the 
reliance on a single borrower, the failure of one loan in a deal could 
cause a default of the entire securitization.
    Furthermore, the agencies are concerned that it would be difficult 
to construct a definition that captures an SBSC transaction in a way 
that would address the commenters' concerns while also being 
sufficiently limited in scope to prevent widespread use of the option 
in a manner that would undermine consistent application of the rule for 
CMBS transactions. The agencies are further concerned that using a deal 
size threshold to reduce inappropriate use of the option could be 
unnecessarily arbitrary and restrictive for smaller borrowers without 
providing sufficient regulatory benefit. Additionally, the agencies are 
concerned that such a definition would inadvertently lead to exempting 
from risk retention CMBS transactions with lower quality underwriting 
than intended by the exemption and less stringent cross-
collateralization or cross-default features, as well as other criteria 
historically associated with SBSC transactions.
    In addition, the agencies have concerns that the commenters' 
suggested conditions for which transactions would qualify as a single-
borrower transaction or as a single-credit transaction would allow for 
widespread structural evasion of the rule. A sponsor could easily 
structure a CMBS transaction in which the single asset is a mortgage 
loan secured by multiple properties or in which the single borrower is 
an SPV formed by an entity that wants to finance a portfolio of 
unrelated properties.
    Finally, the agencies note, as discussed further below, that the 
criteria for QCRE loans has been modified in the final rule to provide 
some additional flexibility.
3. Proposed QCRE Loan Criteria
    As discussed above, the agencies adjusted some of the QCRE loan 
underwriting criteria as set forth in the original proposal in response 
to commenter concerns. The agencies generally reproposed the original 
structure of the qualifying criteria, divided into four categories: 
ability to repay, loan-to-value requirement, valuation of the 
collateral, and risk management and monitoring. These sections and 
their associated comments are discussed below.
    The agencies received some comments that were generally supportive 
of the QCRE loan criteria in the reproposal and that requested that the 
agencies not loosen the criteria further because of concerns of the 
effect that could have on lender behavior, to the detriment of 
investors in CMBS transactions. One commenter in particular supported 
the collateral valuation requirements with respect to appraisers.
    A number of commenters said the QCRE loan criteria were generally 
too conservative, noting that only a small number of commercial real 
estate loans would meet the criteria and that the exemption from risk 
retention for QCRE loans would be rendered impractical for most 
sponsors, thereby eliminating incentives to originate QCRE loans and 
possibly causing funding problems, including for multifamily loans if 
the Enterprises were to stop providing funding. One commenter claimed 
that because the QCRE loan criteria is narrow and many CMBS 
transactions would be subject to risk retention, this could cause rents 
to rise in the multifamily sector and slow down job creation.
    Some commenters asserted that a much lower percentage of commercial 
real estate loans would qualify as QCRE loans than residential 
mortgages would qualify as QRMs under the reproposal, and generally 
recommended that the QCRE loan criteria be crafted to capture a portion 
of the market similar to that portion of the residential mortgage 
market captured by the QRM definition. Another commenter suggested that 
the agencies modify the QCRE loan criteria to follow metrics ``more 
typical'' of balance sheet lenders such as insurance companies and 
commercial banks. Another commenter asserted that the proposed QCRE 
loan criteria would introduce interest rate sensitivity into the CMBS 
market where it does not currently exist. A few commenters requested 
that the agencies consider distinct QCRE loan underwriting standards 
for different commercial real estate sectors. For example, a commenter 
urged the agencies to allow for a higher loan-to-value ratio for 
multifamily loans than allowed under the reproposed QCRE loan criteria.
    Many of the commenters who generally opposed the proposed QCRE loan 
definition had specific critiques or suggestions related to each of the 
categories of QCRE loan criteria, as discussed below.
4. Ability To Repay Criteria and Term
    Like the original proposal, the reproposal included a number of 
criteria that would relate to the borrower's ability to repay in order 
for a loan to qualify as a QCRE loan. The borrower would have been 
required to have a DSC ratio of at least 1.25x for qualifying multi-
family property loans,\251\ 1.5x for qualifying leased QCRE loans,\252\ 
and 1.7x for all other commercial real estate loans. The reproposed 
standards also would have required reviewing two years of historical 
financial data and two years of prospective financial data of the 
borrower. The loan would have been required to have either a fixed 
interest rate or a floating rate that was effectively fixed under a 
related swap agreement. The loan documents also would have had to 
prohibit any deferral of principal or interest payments and any 
interest reserve fund, resulting in excluding interest-only loans from 
qualifying as QCRE loans.
---------------------------------------------------------------------------

    \251\ Under the reproposal, a ``qualifying multi-family loan'' 
would be, generally, a commercial real estate loan secured a 
residential property with five or more residential dwellings and 
where at least 75 percent of the net operating income is derived 
from residential units and tenant amenities, but not other uses. See 
Revised Proposal, 78 FR at 58038.
    \252\ Under the reproposal, a qualifying leased commercial real 
estate loan generally means a commercial real estate loan secured by 
nonfarm real property (other than multi-family and hotel properties) 
that is occupied by tenants meeting certain criteria. See Revised 
Proposal, 78 FR at 58038.
---------------------------------------------------------------------------

    The reproposal included a maximum amortization period of 25 years 
for most commercial real estate loans, and 30 years for qualifying 
multi-family loans, with payments made at least monthly for at least 10 
years of the loan's term. Furthermore, payments made under the

[[Page 77681]]

loan agreement would be required to be based on a straight-line 
amortization of principal and interest over the amortization period (up 
to the maximum allowed amortization period, noted above). The minimum 
loan term could be no less than 10 years and no deferral of repayment 
of principal or interest could be permitted.
    A number of commenters objected to the agencies' reproposed DSC 
ratios as too conservative, or suggested eliminating or changing the 
DSC ratio criteria. Some commenters suggested lowering qualifying DSC 
ratios to a range between 1.25x and 1.5x, or establishing criteria 
similar to those used by Fannie Mae or Freddie Mac to fund multifamily 
real estate loans. However, a commenter expressed concern that the 
reproposed QCRE loan criteria unduly loosened the standard and 
supported increasing the DSC ratio to 2.4x. A commenter claimed that 
the DSC and LTV criteria, without taking into consideration other 
characteristics of a property, would lead to an inappropriate 
assessment of risk, and that each commercial real estate property has a 
unique risk profile.
    Some commenters supported removing the proposed requirement to 
examine two years of past borrower data or replacing it with two years 
of property data, as they stated that many new CRE loans involve 
stabilized properties purchased by new SPVs and the SPVs would not have 
two years of historical data. In addition, as these loans are generally 
non-recourse (or are made to SPVs whose only asset is the subject real 
estate), only the property and income stream from the property are 
available to satisfy the loan obligation.
    Many commenters supported the requirement for fixed interest rate 
loans for QCRE loans. However, some commenters suggested expanding the 
types of derivatives allowed to convert a floating rate into a fixed 
rate through a rate cap derivative. Some commenters also supported the 
restrictions on deferrals of principal and interest. However, other 
commenters supported allowing interest-only loans if those loans had a 
lower LTV ratio (such at 50 percent).
    Many commenters objected to the minimum length and amortization of 
QCRE loans. These commenters said that 3, 5, and 7-year CRE loans have 
become common in the industry, and therefore asserted that the proposed 
minimum 10-year term criterion would inappropriately disqualify 
numerous loans without much regulatory benefit. A commenter asserted, 
for example, that default and delinquency data demonstrates that loan 
term does not materially factor into or increase the likelihood of loss 
for CMBS investors. Another commenter asserted that the loss rate for 
shorter term loans is better than for 10-year loans. For similar 
reasons, these commenters also supported a longer amortization period 
for QCRE loans, up to 30 years. Other commenters, however, requested 
that the agencies continue to disqualify interest-only loans from QCRE 
loans and also to maintain the minimum term at 10 years.
    After carefully considering the comments on the underwriting 
criteria for QCRE loans, the agencies are adopting in the final rule 
QCRE loan criteria similar to those in the reproposal, with some 
modifications to address some commenter concerns. The agencies are not 
changing the DSC ratios from the reproposal, because the agencies 
believe reducing these requirements would inappropriately allow riskier 
loans to qualify for a complete exemption from risk retention. As noted 
in the reproposal, these criteria are consistent with the Federal 
banking agencies' historical standards for conservative CRE 
lending.\253\
---------------------------------------------------------------------------

    \253\ These standards include the ``Interagency Guidelines for 
Real Estate Lending.'' 12 CFR part 34, subpart D, Appendix A (OCC); 
12 CFR part 208, subpart C, Appendix A (FRB); 12 CFR part 365, 
Appendix A (FDIC).
---------------------------------------------------------------------------

    The agencies are also retaining the requirement not to include 
interest-only loans or loans with interest-only periods as QCRE loans. 
The agencies believe that interest-only loans or interest-only periods 
distort assessment of repayment ability, increase risk at maturity due 
to lack of principal reduction, and may present increased credit risk, 
even with a lower LTV ratio and, accordingly, would be inappropriate 
for qualifying CRE loan treatment.
    With respect to maximum amortization periods, the agencies are 
aware that there are many non-multifamily CRE loans with amortization 
periods in excess of 25 years. However, allowing a longer amortization 
period for these loans reduces the amount of principal paid each month 
on the loan before maturity, which can increase risks related to having 
to refinance a larger principal amount than would be the case for a 
loan with a shorter amortization period. Because the agencies believe 
that loans with a maximum 25-year maturity reflect more stringent 
underwriting, and believe that exemptions from risk retention should be 
available only for the most prudently underwritten CRE loans, the 
agencies are adopting an amortization period of 30 years for 
multifamily residential QCRE loans and 25 years for all other QCRE 
loans. The agencies are also making a technical change from requiring 
straight-line amortizing payments to level payments of principal and 
interest.
    The agencies are also adopting a 10-year minimum maturity for QCRE 
loans. The agencies believe that loans with terms shorter than 10 
years, such as three, five, or seven years, may create underwriting 
incentives not commensurate with the high credit quality and low risk 
necessary for a loan to qualify as a QCRE loan. For example, when 
making a shorter term loan, an originator may focus only on a short 
timeframe in evaluating the stability of the real estate underlying the 
loan in an industry that might be at or near the peak of its business 
cycle. In contrast, a 10-year maturity CRE loan requires underwriting 
through a longer business cycle for the property, including downturns 
that may not be captured appropriately when underwriting to a shorter 
time horizon.
    In response to comments on lack of data availability for new loans 
to SPVs that recently purchased property, the agencies are making 
modest adjustments to the QCRE loan criteria to facilitate loans to 
such borrowers. Therefore, the final rule allows originators to use two 
years of historical data from the property, when the property has two 
years of operating history.\254\ Under this revised standard, 
properties with less than two years of operating history would still be 
excluded from the QCRE loan standards because new properties present 
significant additional risks and loans on those properties generally 
should not be exempt from risk retention.
---------------------------------------------------------------------------

    \254\ In the CRE lending context, a sponsor is the party that 
ultimately controls the property, such as by owning an SPV, which in 
turn owns the CRE.
---------------------------------------------------------------------------

    Similar to the reproposal, the final rule requires that the 
interest rate on a QCRE loan be fixed or convertible into a fixed rate 
using a derivative product. However, in the final rule, the agencies 
have expanded the allowable derivatives to include interest rate cap 
derivatives, provided that the loan is underwritten based on the 
maximum interest rate allowable under the cap, even if the loan is 
originated at a lower rate. The agencies are not proposing to allow 
other types of derivatives because they have concluded they are 
insufficiently transparent for a QCRE loan standard.
5. Loan-to-Value Requirement
    The revised proposal would have required that the combined loan-to-

[[Page 77682]]

value (CLTV) ratio for first and junior loans for QCRE loans be less 
than or equal to 70 percent and the LTV ratio for the first-lien loan 
be less than or equal to 65 percent; or that the CLTV and LTV ratios be 
less than or equal to 65 and 60 percent, respectively, for loans with 
valuation using a capitalization rate below a certain threshold, as set 
forth in the reproposal.\255\ As discussed in the reproposal, the 
agencies concluded that these criteria would be appropriate for high 
quality commercial real estate loans and to help protect securitization 
investors against losses from declining property values and potential 
defaults on the CRE loans.\256\
---------------------------------------------------------------------------

    \255\ Revised Proposal, 78 FR at 58041.
    \256\ Revised Proposal, 78 FR at 57982.
---------------------------------------------------------------------------

    Many commenters recognized that LTV standards are important to 
ensuring high quality CRE loan underwriting. While some commenters 
supported the agencies' proposed ratios, others asserted that they were 
too conservative. Some commenters suggested that higher LTV ratios 
(generally up to 70 percent) should be allowed in the QCRE loan 
standards, that the CLTV ratio cap be removed, and that the reduction 
in LTV and CLTV ratios for loans with certain valuation assumptions be 
removed. Others, however, suggested more conservative maximum LTV ratio 
criteria, including a 50 percent LTV ratio suggestion for interest-only 
loans, if they were to be permitted in the QCRE loan criteria by the 
agencies. One commenter indicated that the highest quality loans 
secured in CMBS tended to have lower LTV ratios than would be permitted 
for the QCRE loan standard, and expressed concern that the agencies may 
not have been conservative enough in the reproposal.
    The agencies have considered the comments on LTV and CLTV ratio 
requirements for QCRE loans and are adopting the standards as 
reproposed. The agencies agree with those commenters who generally 
supported a 65 percent LTV ratio requirement. While the agencies are 
not adopting a 70 percent LTV ratio requirement, the 65 percent LTV 
ratio requirement still allows for 70 percent debt financing with up to 
5 percent subordinated financing. As discussed in the reproposal, the 
agencies observe that the more equity a borrower has in a CRE project, 
the lower the lender or investor's exposure to credit risk and the 
greater the incentive for the borrower to perform on the loan. 
Overreliance on excessive subordinated financing instead of equity 
financing for a CRE property (which increases CLTV ratios) can 
significantly reduce the cash flow available to the property, as 
investors in subordinated finance often require high rates of return to 
offset the increased risk of their subordinate position. The agencies 
have concluded that a 70 percent CLTV ratio cap is generally 
appropriate for a low risk QCRE loan standard, which would require the 
borrower to have at least 30 percent equity in the project to help 
protect securitization investors against losses from declining property 
values and potential defaults.
    The agencies decline the commenters' suggestion to reduce the 
maximum LTV ratio requirement for all QCRE loans, as 65 percent is 
sufficiently conservative for a QCRE loan standard given the other 
conservative underwriting requirements in the rule. The agencies also 
decline to adopt a 50 or 55 percent LTV ratio requirement for interest-
only loans. As discussed above, the agencies believe interest-only 
loans, even at lower LTV ratios, present significant risks that would 
not meet an appropriately conservative QCRE loan underwriting standard.
    The agencies are also retaining the requirement that the maximum 
LTV and CLTV ratios be lowered by 5 percent under certain appraisal 
conditions, as in the reproposal, with minor technical modifications to 
address commenter concerns. The ratios are only reduced if the 
appraisal used to qualify the CRE loan as a QCRE loan used an income 
approach with a direct capitalization rate, and that rate was lower 
than the rate permitted by the final rule. The final rule text 
clarifies that the appraisal used to qualify the CRE loan is not 
required to use a direct capitalization rate. Generally, as direct 
capitalization rates decline, values increase. In a lower cap rate 
environment there is an increase in the amount that can be borrowed 
given a fixed LTV or CLTV ratio, which is why the lower LTV and CLTV 
ratios would apply. In addition, to address concerns about appraisals 
using excessively high cap rates, the agencies are requiring that if a 
direct capitalization rate was used in an appraisal to qualify the loan 
as a QCRE loan, the rate must be disclosed to investors in the 
securitizations.
6. Collateral
    The agencies proposed to require an appraisal and environmental 
risk assessment for every property serving as collateral for a QCRE 
loan. Commenters strongly supported both the appraisal and 
environmental risk assessment for all QCRE loan properties. Many 
commenters indicated this is already standard industry practice. A few 
commenters expressed the view that the agencies were too strict in 
requiring specific types of appraisals, such as an income-based 
appraisal using a discounted cash flow and an appraisal using a direct 
capitalization rate, rather than allowing a certified appraiser to 
determine the appropriate valuation method. As noted above, the 
agencies have made clarifications in the final rule to provide 
originators and appraisers with more flexibility in determining the 
appropriate appraisal approaches for a specific property that would be 
used to meet the QCRE loan standards, while not restricting appraisers 
from using other valuation methods that they believe are appropriate 
for the property. The agencies also made a technical change in the 
final rule to reflect the common appraisal terminology and Uniform 
Standards of Professional Appraisal Practice terminology for the income 
approach that is required to be in the written appraisal.
7. Risk Management and Monitoring
    The reproposal would have required lenders to obtain a first lien 
in the property and limited the ability to pledge the property as 
collateral for other loans. While many commenters supported the first-
lien requirement, one commenter supported allowing unlimited junior 
liens to finance energy-efficient improvements on the CRE property 
subject to the loan. A commenter requested that the agencies modify the 
proposed QCRE loan criteria to take into account pari passu and junior 
lien loans, noting that such modifications would not increase the risk 
of QCRE loans. Some commenters supported the requirement that a 
borrower obtain insurance on the property up to the property value, 
while other commenters requested that the requirement be changed to 
require insurance up to the lesser of the replacement cost of the 
property improvements or the loan balance.
    The agencies are adopting the lien requirements as proposed. While 
energy-efficient improvements may reduce utility expenses associated 
with the property, the agencies do not wish the rule to facilitate 
structures whereby additional financing, even if subordinate, is 
obtained and thus increases leverage on the property. Regarding the 
insurance amount, the agencies have concluded that a strong QCRE loan 
standard would be maintained if the insurance limit in the criteria was 
changed to no less than the replacement cost of property improvements, 
in accordance with more customary market practice. After reviewing the 
related comment, the

[[Page 77683]]

agencies determined that loan balance was not an appropriate 
measurement as, in some jurisdictions, a lender may be required to make 
insurance proceeds available to a borrower and, in those circumstances, 
a prudent lender would wish to make sure that the proceeds are 
sufficient to fully repair or replace the insured property.

C. Qualifying Automobile Loans

    Similar to the original proposal, the revised proposal included 
underwriting standards for automobile loans that would be individually 
exempt from risk retention (qualifying automobile loans, or QALs) if 
securitized. As in the original proposal, the definition of automobile 
loan in the reproposal generally would have included only first-lien 
loans on light passenger vehicles employed for personal use. It 
specifically excluded loans for vehicles for business use, medium or 
heavy vehicles (such as commercial trucks and vans), lease financing, 
fleet sales, and recreational vehicles including motorcycles. As 
explained in the reproposal, the agencies did not follow 
recommendations to propose including loans on vehicles more frequently 
used for recreational purposes, such as motorcycles or business 
purposes, because the risks and underwriting of those loans would be 
different than that for vehicles used for personal use. In addition, 
the reproposed definition did not include automobile leases because, as 
the agencies explained, leases represent a different set of risks to 
securitization investors than purchase loans. For example, automobile 
resale price at the end of the lease period can affect the 
securitization cash flow, which is not the case for purchase loan 
securitizations.\257\
---------------------------------------------------------------------------

    \257\ See Revised Proposal, 78 FR at 57983.
---------------------------------------------------------------------------

    While some commenters supported the reproposed definition of 
automobile loan, others asserted that it continued to be too narrow. 
Several commenters suggested expanding the definition to include 
motorcycles, because often they are not used solely as recreational 
vehicles but as primary transportation and because, as these commenters 
asserted, motorcycle loans perform as well as auto loans. The 
commenters asserted that there would be no reason to categorically 
exclude motorcycles from the QAL definition, even if they could 
otherwise meet the QAL criteria, by excluding motorcycles from the 
definition of automobile loan. They also contended that the fact some 
motorcycles are used for recreational use does not lead to adverse 
motorcycle loan performance.
    Other commenters supported allowing automobile leases to qualify as 
QALs and recommended certain technical changes to the proposed QAL 
criteria. In particular, one commenter supported expanding the 
definition to include fleet purchases or fleet leasing, on the basis 
that these leases or sales are generally with corporations or 
government entities with strong repayment histories.
    Another comment on the definition of automobile loan raised 
concerns that it would be difficult for an originator to determine 
whether an automobile purchase was for consumer or non-consumer use.
    The agencies have carefully considered these comments and are 
adopting the definition of automobile loans for QAL underwriting 
standards as reproposed. The agencies believe it continues to be 
appropriate to restrict the definition of automobile loan to light 
passenger vehicles employed for personal use, not including motorcycles 
and other vehicles that are commonly used for recreational purposes, as 
well as everyday personal transportation. While the agencies 
acknowledge some motorcycle loans may have strong underwriting and risk 
characteristics similar to those of automobile loans, the agencies have 
concluded that overall risk profile of motorcycles as a class remains 
distinct from that of automobiles and, like other recreational 
vehicles, exhibit overall a higher risk profile. Certain recreational 
vehicles may also be highly customized before or after purchase, which 
may reduce resale or recovery value in case of borrower default.
    The agencies also have decided not to expand the definition of 
automobile loan to include vehicles used for business purposes through 
fleet loans, as the risks and underwriting of such loans differ from 
those of vehicles used for personal transportation. For example, a car 
or truck used in a business may endure significantly more wear and 
depreciate much faster than a vehicle used only for normal household 
use.
    Similarly, for the reasons discussed in the reproposal, the 
agencies are not expanding the definition of automobile loan to include 
automobile leases. The agencies remain concerned that the credit risks 
posed by leases are different than automobile purchase loans, in part 
(as discussed above) due to resale price risk associated with returned 
vehicles.
    Regarding the comment on difficulties determining consumer purpose, 
the agencies believe originators or dealers will be able to 
differentiate between types of customers based on the existing process 
dealers and lenders must use to comply with TILA, which requires 
disclosures be provided to borrowers purchasing vehicles for personal 
use.
    The QAL underwriting criteria in the reproposal included 
requirements regarding a borrower's ability to repay an automobile 
loan, including with respect to verification of borrower income and a 
borrower debt-to-income (DTI) ratio of no more than 36 percent. The 
loan term criteria included a first lien security interest on the 
vehicle, maximum maturity date, fixed rate interest, and level monthly 
payments with full amortization of the loan, as well as strict limits 
on deferral of payments and deferral of initiation of payments. The 
credit history criteria included verification and minimum credit 
history standards (such as no bankruptcy or repossession within the 
previous 3 years). The LTV criteria impose a borrower down payment 
requirement equal to fees, warranties and 10 percent of the purchase 
price.\258\
---------------------------------------------------------------------------

    \258\ See Revised Proposal, 78 FR at 57984-57985.
---------------------------------------------------------------------------

    The agencies received a number of comments on the proposed QAL 
underwriting criteria. Generally the comments expressed concern that 
very few automobile loans would meet the QAL criteria because they 
would not fit existing market practices. Some commenters asserted that 
because the QAL criteria would not be met in existing market practice, 
the resulting risk retention requirements on automobile securitizations 
could discourage new issuances and impede liquidity and consumer 
credit. Others asserted this result would be unduly punitive to 
automobile securitizations as strong performers during the crisis, 
especially as compared to the proposed definition of QRM, which would 
exempt most residential mortgages from risk retention. Some commenters 
also offered particular suggestions to change the criteria, as 
discussed further below with respect to each category of criteria. 
Additionally, some commenters requested that the agencies apply the 
quantitative portions of the underwriting standards on a pool basis 
(which would assess underwriting standards on a pool-wide, rather than 
loan by loan, basis) rather than to individual loans, noting that the 
homogeneity of securitized automobile loans and their typical 
characteristics (not subject to interest rate fluctuations or 
refinancings) would make an exemption from risk retention based on pool 
level criteria appropriate. The agencies are not adopting this 
suggestion in the final rule and the final rule only permits the 
exemption to

[[Page 77684]]

apply to individual loans that meet the QAL criteria. The agencies 
observe that section 15G of the Exchange Act indicates that the 
reduction from risk retention for a qualifying asset is limited to the 
asset itself that is securitized, and does not suggest an exemption for 
a pool of assets that meets pool-wide underwriting criteria.\259\ 
Accordingly, the final rule provides that the underwriting standards 
for QAL must be met by each loan for that loan to be exempt from risk 
retention. Furthermore, the agencies do not believe providing risk 
retention on a pool basis would further the goals of risk retention and 
could lead to some of the transparency concerns discussed with respect 
to unlimited blending of non-qualifying assets with qualifying assets. 
For example, an exemption based on pool-level underwriting criteria 
could obscure the true credit quality of the pool in a way that would 
be difficult for investors to discern because of the potential for wide 
variation (and varying degrees of document verification) of the 
underwriting quality of those assets in a pool that did not meet a QAL 
standard on an individual basis.
---------------------------------------------------------------------------

    \259\ See 15 U.S.C. 78o-11(c)(1)(B)(ii).
---------------------------------------------------------------------------

1. Ability To Repay Criteria
    As noted above, the ability-to-repay criteria for QALs in the 
reproposal included a DTI ratio not in excess of 36 percent of a 
borrower's monthly gross income. Under the proposed QAL criteria, 
originators would also have been required to verify a borrower's income 
and debt payments using standard methods.
    Commenters generally disagreed with the proposed ability-to-repay 
criteria and requested a higher maximum DTI ratio or elimination of the 
ratio criterion, on the basis that it is not typically used in current 
automobile loan underwriting and not using it has not adversely 
affected automobile loan performance because (commenters claimed) 
borrowers often prioritize payment of their automobile loans over other 
debt obligations. Some commenters offered a number of suggested 
adjustments to the proposed DTI and verification requirements. Other 
commenters suggested using a payment-to-income (PTI) ratio instead of a 
DTI ratio because, they claimed, a PTI ratio is a stronger predictor of 
vehicle loan performance than a DTI ratio and does not involve as many 
operational burdens as a DTI ratio in providing quick approval of 
automobile loans, a practice expected by automobile consumers. A 
commenter also asserted that the proposed DTI requirements would put 
lenders that rely on the securitization markets for funding at a 
disadvantage to lenders that do not. Regarding the verification 
requirements, commenters suggested that if verification of debt and 
income would be retained as a criterion, originators should only be 
required to verify those debts listed on a borrower's credit report and 
rely on borrower stated income without verification.
    The agencies have carefully considered these comments, but have 
concluded that the reproposed DTI criteria, including verification 
requirements, is essential to determining a borrower's ability to 
repay, which in turn is essential to a strong consumer underwriting 
standard. As discussed in the original and revised proposals, the 
agencies believe that a total exemption from risk retention should be 
applied only to those loans that meet underwriting criteria associated 
with strong credit performance. A DTI ratio is a meaningful and 
comprehensive method for calculating a borrower's ability to repay a 
loan, while a PTI ratio does not include other potentially significant 
debts that may reduce a borrower's ability to repay the automobile 
loan. The agencies have continued to find a 36 percent DTI ratio to be 
an appropriately conservative measure of ability to repay commensurate 
with a high quality automobile loan with low credit risk. Regarding 
verification, the agencies are concerned that not all of a borrower's 
liabilities may be listed on a credit report and therefore are adopting 
the verification standards as proposed. In addition, relying on 
borrower stated income in assessing ability to repay could lead to 
overstatement of income by the borrower to obtain the loan or by the 
originator to qualify the loan as a QAL. For these reasons, as well as 
those discussed in the reproposal, the agencies are adopting the DTI 
and verification requirements as reproposed.
2. Loan Terms
    As noted above, the reproposal included a number of criteria 
relating to the automobile loan, including that the loan term be 
calculated based on the origination date and loan payments could not be 
contractually deferred.
    A commenter requested that the loan term be calculated from the 
date of first payment rather than the origination date. Commenters also 
requested that loan deferrals be allowed to assist borrowers with 
hardship events.
    The agencies observe that the loan origination date and date of 
first payment should usually be within a few weeks of each other, which 
would not materially affect the loan term. The agencies do not view a 
long period prior to the first payment date as consistent with a strong 
QAL standard, as it could extend the total loan term for months beyond 
the limits for maturity the agencies have identified as appropriate for 
a QAL. While the agencies are retaining the requirement that the 
contract not allow borrower-initiated payment deferrals, this 
requirement would not affect subsequent servicer-initiated deferrals 
that may be triggered by borrower hardships described by the 
commenters. For these reasons and those discussed in the revised 
proposal, the agencies are finalizing the loan term criteria as 
proposed.
3. Reviewing Credit History
    In the reproposal, the QAL criteria included an originator 
verification, within 30 days of originating a QAL, that the borrower 
was not 30 days or more past due on any obligation; was not more than 
60 days past due over the past two years on any obligation; and was not 
a judgment debtor or in bankruptcy in the past three years. The 
agencies also proposed a safe harbor enabling the originator to rely on 
a borrower's credit report showing the borrower complies with the 
standards. Also, the agencies proposed a requirement that all QALs be 
contractually current at the closing of the securitization.
    Several commenters opposed the proposed credit history criteria and 
requested that the agencies use instead a credit scoring system based 
on FICO or a similar system of rating potential borrowers based on 
credit history, generally using proprietary models. Commenters pointed 
out that the automobile lending industry has used credit scoring as a 
primary underwriting tool and would be unable under the QAL criteria to 
continue to rely on that method for qualifying its best borrowers, and 
therefore would not be able to use the criteria in order not to lose 
those borrowers as customers.
    Commenters further asserted that the proposed credit history 
verification criteria would be more burdensome than credit scoring 
systems, thereby increasing costs for lenders and consumers. A 
commenter suggested that the criteria would result in conclusions 
possibly less objective than credit scoring systems. In addition, a few 
commenters claimed that the QAL credit history standards would exclude 
many consumers of good credit quality while failing to identify risky 
consumers, whereas credit scoring models used in the industry would 
more accurately discriminate between

[[Page 77685]]

high and low-credit quality borrowers. These commenters asserted that 
this result would occur because the proposed criteria do not capture 
many aspects of credit history that are captured by credit scoring 
models. The commenters also recommended that the agencies adopt a 
``vendor-neutral'' approach to incorporating the use of credit scores 
in the QAL criteria to ensure that there would be no undue reliance on 
a particular vendor and that credit models are already subject to 
regulatory oversight (including being the subject of the banking 
agencies' guidance on model validation) and are rigorously validated. A 
commenter pointed to the FDIC's large bank assessment rule \260\ as an 
example of how the agencies could adopt a vendor-neutral credit score 
criterion into the QAL criteria. Some commenters also requested that 
the agencies define ``contractually current'' and base compliance on 
the securitization cut-off date rather than the closing date.
---------------------------------------------------------------------------

    \260\ 12 CFR part 327.
---------------------------------------------------------------------------

    The agencies have carefully considered the comments regarding the 
proposed QAL criteria and the requests to use credit scoring in the 
criteria. The agencies recognize that much of the current automobile 
lending industry relies heavily or solely on an internally or 
externally developed credit scoring system to approve automobile loans. 
However, the agencies do not believe that a credit score alone is 
sufficient underwriting for a conservative automobile loan with a low 
risk of default. Furthermore, the agencies do not believe it is 
appropriate for purposes of risk retention to establish regulatory 
requirements that rely on a credit scoring system or combination of 
proprietary credit scoring systems. The agencies are concerned that, 
over time, market pressures around meeting QAL criteria or other 
factors could lead to distortions in the scoring systems that do not 
appropriately reflect credit risk. Additionally, the agencies have 
broad policy concerns with linking regulatory underwriting criteria for 
risk retention purposes to proprietary credit analyses using privately 
developed models.
    Additionally, the agencies believe that a borrower must be 
contractually current on the loan obligation prior to securitization in 
order to have a robust underwriting requirement. However, the agencies 
do not believe it is necessary to establish a definition of 
contractually current, instead leaving this decision to the contract 
between the originator and borrower. While the agencies believe a 
securitization exempt from risk retention should contain only current 
automobile loans, the agencies will adopt the commenters' suggestion to 
require evaluation of a loan's status based on the cut-off date or 
similar date for establishing the composition of the asset pool 
collateralizing asset-backed securities issued pursuant to a 
securitization transaction rather than the closing date of the 
securitization.
    For these reasons, the agencies are adopting the credit history 
criteria as set forth in the revised proposal.
4. Down Payment Requirement
    As noted above, the proposed QAL criteria included a down payment 
requirement whereby automobile loan borrowers would have been required 
to pay 100 percent of the taxes, fees, and extended warranties in 
addition to 10 percent of the net purchase price (negotiated price less 
manufacturer rebates and incentive payments) of the car.
    Most comments on the QAL criteria opposed the proposed down payment 
requirements. The commenters proposed eliminating the down payment 
entirely, eliminating the down payment requirement for the taxes, fees, 
and extended warranties, or reducing the down payment requirement on 
the net purchase price. One of these commenters asserted that prime 
automobile loans do not require down payments generally because 
vehicles depreciate rapidly and therefore, lenders generally do not 
rely significantly on the value of the collateral when underwriting. 
Furthermore, the commenter asserted that depreciation makes strategic 
defaults highly unlikely and the short term of most automobile loans 
makes down payments unnecessary. As with the verification requirements 
discussed above, the commenter claimed that the down payment 
requirement in the QAL criteria could put automobile lenders that use 
securitization financing at a disadvantage as compared to others 
because of increased burden on consumers in meeting the QAL criteria or 
having more costs due to risk retention. The commenter also asserted 
that down payments have far less relevance to the credit risk of 
automobile loans than they do to residential loans, and that having 
such a requirement in the QAL criteria would not be consistent with the 
agencies' position on the QRM definition.
    As discussed in the reproposal, the agencies do not believe that an 
automobile loan with an LTV ratio over 90 percent would be low-risk, 
and that a customer should put some of the customer's own cash or 
trade-in value into the deal to reduce risks for strategic default and 
incent repayment of the loan. The agencies recognize that down payment 
requirements for prime borrowers are not common in automobile lending, 
but note that down payments provide an additional level of protection 
to lenders and investors in automobile securitizations that ensures a 
low level of credit risk over time as market conditions change.
    For the reasons discussed above, the agencies are adopting the QAL 
criteria as set forth in the reproposal. As explained above, the 
criteria ensure that QAL loans (that are fully exempt from risk 
retention) are of very high quality and low credit risk, as required by 
section 15G of the Exchange Act.\261\ The agencies recognize that the 
QAL standards are in some respects more conservative than those of the 
QRM definition. The agencies observe, however, that the statutory 
standards for establishing QAL criteria and the QRM definition are 
different.\262\ Furthermore, as discussed in the reproposal and Part VI 
of this Supplementary Information, the agencies' decisions with regard 
to the QRM definition take into consideration the particular dynamics 
in the residential mortgage market and the effect of that market on the 
economy. The dynamics in the automobile market are different, as are 
the effects of the automobile market on the broader financial system 
and economy, and the agencies have therefore considered the automobile 
and residential markets separately, together with the differences in 
the relevant statutory requirements, in establishing the QRM and QAL 
standards.
---------------------------------------------------------------------------

    \261\ See 15 U.S.C. 78o-11(c)(2)(B).
    \262\ See id. at sections 78o-11(c)(2)(B) and 78-11(e)(4)(B).
---------------------------------------------------------------------------

VI. Qualified Residential Mortgages

    After carefully considering comments received on the reproposed 
definition of QRM, as well as comments received on the alternative 
approach to defining QRM, the agencies are adopting, as reproposed, the 
definition of QRM that aligns with the definition of QM, as defined in 
section 129C of TILA \263\ and the regulations thereunder. The agencies 
are also providing an exemption from risk retention requirements for 
certain mortgage loans secured by three-to-four unit residential 
properties that meet the criteria for QM other than being a consumer 
credit, as well as an exemption to permit sponsors to blend these 
exempted mortgage loans with QRMs.
---------------------------------------------------------------------------

    \263\ 15 U.S.C. 1639c.
---------------------------------------------------------------------------

    The final rule also includes a separate exemption from risk 
retention

[[Page 77686]]

requirements for certain types of community-focused residential 
mortgages that are not eligible for QRM status under the rule, similar 
to the exemptions provided from Regulation Z's ability-to-repay 
requirement.\264\
---------------------------------------------------------------------------

    \264\ See Part VII of this Supplementary Information.
---------------------------------------------------------------------------

    The agencies are also including a provision in the final rule that 
will require the agencies to periodically review the definition of QRM 
and its effect on the mortgage securitization market, as well as the 
exemptions provided for the three-to-four unit residential properties 
and the community-focused residential mortgages. Each of these aspects 
of the final rule is discussed more fully below.

A. Background

    Section 15G of the Exchange Act exempts sponsors of securitizations 
from the risk retention requirements if all the assets that 
collateralize the securities issued in the transaction are QRMs.\265\ 
In defining QRM, the statute requires that the agencies take into 
consideration underwriting and product features that historical loan 
performance data indicate result in a lower risk of default. In 
addition, the statute requires that the definition of QRM be ``no 
broader than'' the definition of QM.\266\
---------------------------------------------------------------------------

    \265\ See 15 U.S.C. 78o-11(c)(1)(C)(iii).
    \266\ See id. at section 78o-11(e)(4).
---------------------------------------------------------------------------

    In the original proposal, the agencies proposed to define QRM to 
mean a covered closed-end credit transaction that meets the statutory 
QM standards \267\ as well as additional underwriting criteria. These 
additional underwriting criteria included minimum LTV and down payment 
requirements, DTI requirements, and credit history criteria.\268\ These 
additional criteria were developed after the agencies examined 
extensive data on loan performance from several sources,\269\ and were 
based on several goals and principles the agencies articulated in the 
original proposal.\270\ The agencies also sought to implement the 
statutory requirement that the definition of QRM be no broader than the 
definition of a QM, as mandated by the Dodd-Frank Act. \271\ At the 
time of the original proposal, the definition of QM had not been 
adopted in a final rule.
---------------------------------------------------------------------------

    \267\ Under the original proposal, QRM was limited to a closed-
end first-lien mortgage to purchase or refinance a one-to-four 
family property, at least one unit of which is the principal 
dwelling of a borrower. In addition, consistent with the QM 
requirement under section 129C(b)(2) of TILA, the maturity date of a 
QRM could not exceed 30 years and QRMs would have been prohibited 
from having, among other features, payment terms that allow 
interest-only payments, negative amortization, ``balloon payments,'' 
or prepayment penalties. See Original Proposal, 76 FR at 24122.
    \268\ See Original Proposal, 76 FR at 24117.
    \269\ The agencies reviewed data supplied by McDash Analytics, 
LLC, a wholly owned subsidiary of Lender Processing Services, Inc., 
on prime fixed-rate loans originated from 2005 to 2008, which 
included underwriting and performance information on approximately 
8.9 million mortgages; data from the 1992 to 2007 waves of the 
triennial Survey of Consumer Finances, which focused on respondents 
who had purchased their homes either in the survey year or the 
previous year, and included information on approximately 1,500 
families; and data regarding loans purchased or securitized by the 
Enterprises from 1997 to 2009, which consisted of more than 78 
million mortgages, and included data on loan products and terms, 
borrower characteristics (e.g., income and credit score), and 
performance data through the third quarter of 2010. See Original 
Proposal, 76 FR at 24152.
    \270\ First, the agencies stated that QRMs should be of very 
high credit quality, given that Congress exempted QRMs completely 
from the credit risk retention requirements. Second, the agencies 
recognized that setting fixed underwriting rules to define a QRM 
could exclude many mortgages to creditworthy borrowers. Third, the 
agencies sought to preserve a sufficiently large population of non-
QRMs to help enable the market for securities collateralized by non-
QRM mortgages to be relatively liquid. Fourth, the agencies sought 
to implement standards that would be transparent and verifiable to 
participants in the market. See Original Proposal, 76 FR at 24117.
    \271\ See 15 U.S.C. 78o-11(e)(4)(C). At the time of issuance of 
the original proposal on April 29, 2011, the Board had sole 
rulemaking authority for defining QM, which authority transferred to 
CFPB on July 21, 2011, the designated transfer date under the Dodd-
Frank Act.
---------------------------------------------------------------------------

    The majority of commenters opposed the QRM definition in the 
original proposal, expressing concerns over the 20 percent down payment 
requirement in particular. These commenters stated that the proposed 
definition of QRM was too narrow and would constrain credit 
availability, especially for low- and moderate-income (LMI) borrowers 
or first-time homebuyers. Many of these commenters urged the agencies 
to postpone finalizing the QRM definition until after the QM definition 
was finalized by the CFPB.\272\
---------------------------------------------------------------------------

    \272\ See Final QM Rule.
---------------------------------------------------------------------------

    As discussed in the reproposal, in deciding to propose a broader 
QRM definition, the agencies carefully considered the concerns raised 
by commenters with respect to the original proposed definition, the 
cost of risk retention, current and historical data on mortgage lending 
and performance, and the provisions of the final QM definition. The 
agencies examined updated loan performance information and considered 
the historical performance of residential mortgage loans with respect 
to the QM criteria.\273\ Further, the agencies considered the potential 
effects of a QRM definition on credit pricing and access under 
prevailing market conditions, as well as direct and indirect costs of 
lending that could be passed on to borrowers and restrict credit 
availability.\274\
---------------------------------------------------------------------------

    \273\ See Revised Proposal, 78 FR at 57989-57990.
    \274\ See id. at 57991.
---------------------------------------------------------------------------

    The agencies decided in the reproposal to align the QRM definition 
with the QM definition for several key reasons, which include meeting 
the statutory goals and directive under section 15G of the Exchange Act 
to limit credit risk, preserving access to affordable credit, and 
reducing compliance burden. Among other factors related to credit risk, 
the agencies discussed in the reproposal observations that loans that 
meet the QM criteria have a lower probability of default than mortgages 
that do not, most notably for loans originated near the peak of the 
housing bubble that preceded the financial crisis.\275\ In addition, 
the agencies observed that a QRM definition aligned with QM should 
limit the scope of information asymmetry between sponsors and investors 
because the QM definition requires, among other things, documentation 
and verification of income and debt.\276\ In addition, the agencies 
expressed concern about imposing further constraints on mortgage credit 
availability under the prevailing tight mortgage lending conditions, 
including through additional criteria that could reduce the credit risk 
of QRMs further, such as LTV and credit history-related criteria. The 
agencies also observed that the indirect costs of the interaction of 
QRM with existing regulations and market conditions is difficult to 
quantify and has the potential to be large, and that aligning the QRM 
definition with the QM definition should minimize these costs.\277\ 
Finally, the agencies noted with concern that a QRM definition not 
aligned with the QM definition could compound the segmentation in the 
securitization market that may already occur between QMs and non-QMs. 
It was acknowledged that, while the agencies recognized that the 
alignment of QRM with QM could also further solidify the non-QM/QM 
segmentation in the market, the consequences of segmentation due to 
non-alignment were judged to be more severe.\278\
---------------------------------------------------------------------------

    \275\ See id. at 57989.
    \276\ See id. at 57990.
    \277\ See id. at 57991.
    \278\ See id.
---------------------------------------------------------------------------

    In reproposing to align the QRM definition with QM, the agencies 
expressed an intention to review the advantages and disadvantages of 
this decision as the market evolves, to ensure the risk retention rule 
best meets

[[Page 77687]]

the statutory objectives of section 15G of the Exchange Act.\279\
---------------------------------------------------------------------------

    \279\ See id.
---------------------------------------------------------------------------

B. Overview of the Reproposed Rule

    The reproposal would have implemented the statutory exemption for 
QRMs by defining ``qualified residential mortgage'' to mean ``qualified 
mortgage'' as defined in section 129C of TILA \280\ and the regulations 
issued thereunder.\281\ The agencies proposed to align the definition 
of QRM with QM to minimize potential conflicts between the two 
definitions and minimize burden in meeting both QM and QRM criteria. 
Therefore, under the reproposal, a QRM would have been a loan that
---------------------------------------------------------------------------

    \280\ 15 U.S.C. 1639c.
    \281\ See Final QM Rule.
---------------------------------------------------------------------------

    (i) Met the general criteria for a QM under section 1026.43(e)(2);
    (ii) Met the special criteria of the temporary QM definition under 
section 1026.43(e)(4);
    (iii) Met the criteria for small creditor portfolio loans under 
section 1026.43(e)(5) or (e)(6); or
    (iv) Met the criteria for rural or underserved creditor balloon 
loans under section 1026.43(f).
    This reproposed definition of QRM included any closed-end loan 
secured by any dwelling (e.g., home purchase, refinances, home equity 
loans, second or vacation homes), whether a first or subordinate lien. 
However, the reproposed definition of QRM would not have included any 
loan exempt from the ability-to-repay requirements and not eligible to 
be a QM, such as home-equity lines of credit (HELOCs) or reverse 
mortgages.\282\ In addition, loans exempt from the ability-to-repay 
requirements (such as loans made through state housing finance agency 
programs and certain community lending programs) were not separately 
included in the definition of QRM, which under the statute cannot be 
broader than QM.
---------------------------------------------------------------------------

    \282\ See 12 CFR 1026.43(a) and 1026.43(c).
---------------------------------------------------------------------------

    The agencies invited comment on all aspects of the reproposed 
definition of QRM. In particular, the agencies asked whether the 
reproposed definition would reasonably balance the goals of helping to 
ensure high quality underwriting and appropriate risk management with 
the public interest in continuing access to credit for creditworthy 
borrowers. The agencies also asked whether the definition of QRM should 
be limited to certain QM loans, such as loans that qualify for the QM 
safe harbor under 12 CFR 1026.43(e)(1), and if the reproposed 
definition of QRM should include loans secured by subordinate liens. In 
addition, the agencies invited comment on an alternative approach to 
defining QRM (QM-plus approach). Consistent with the statutory 
requirement that QRM be no broader than QM, the QM-plus approach would 
have taken the CFPB's definition of QM as a starting point, including 
the requirements for product type, loan term, points and fees, 
underwriting, income, and debt verification, and DTI,\283\ and added 
four additional factors: the loan would have had to be a first-lien 
mortgage loan, be secured by a one-to-four family principal dwelling, 
and have an LTV ratio of 70 percent or less, and the borrower would 
have had to meet specific credit history criteria.\284\ Under this 
approach, significantly fewer loans likely would have qualified as 
QRMs. The agencies asked a number of questions about the QM-plus 
approach, including whether the benefits of the QM-plus approach would 
exceed the benefits of the reproposed approach to align the QRM 
definition to QM, taking into consideration financial stability, credit 
access, and regulatory burden.\285\
---------------------------------------------------------------------------

    \283\ See Revised Proposal, 78 FR at 57993-57996.
    \284\ See Revised Proposal, 78 FR at 57993.
    \285\ See id. at 57995.
---------------------------------------------------------------------------

C. Overview of Public Comments

1. Comments Received on the Reproposed QRM Definition
    The agencies received a significant number of comments with respect 
to the reproposed QRM definition, with most commenters expressing 
support for the reproposal that would align the QRM definition with the 
QM definition. Generally, these commenters stated that aligning the two 
definitions would comply with statutory requirements, minimize negative 
impact on the availability and cost of credit to borrowers (especially 
LMI borrowers, minority borrowers, and first-time homebuyers), and 
reduce potential costs, regulatory uncertainty, and compliance burden. 
Some commenters specifically expressed support for retaining the 
proposed full alignment with QM so that the proposed QRM definition 
would not distinguish between loans that receive a ``safe harbor'' or a 
``rebuttable presumption'' of compliance under the QM provisions. Some 
commenters requested clarifications, expressed concerns, or suggested 
modifications to the proposed QRM definition, including with respect to 
loans exempted from the ability-to-repay rules under TILA, which are 
discussed and addressed in more detail in Part VII of this 
Supplementary Information.
    Several commenters opposed aligning the QRM definition with the QM 
definition, asserting that such an approach would be contrary to 
statutory intent. These commenters asserted that the definitions of QRM 
and QM have distinct and different purposes, with the former addressing 
risk posed to investors and the latter addressing consumer protection. 
These commenters further stated that broadening the QRM definition 
would reduce the effect of the risk retention rule with respect to 
residential mortgages, which comprised one of the main securitization 
markets that led to the financial crisis. These commenters also 
expressed concern that the proposed QRM definition would be 
insufficient to support the credit quality on which a stable mortgage 
market depends.
    Most commenters that opposed the revised definition of QRM 
supported most, if not all, aspects of the QRM definition in the 
original proposal and recommended that the agencies adopt that QRM 
definition instead. These commenters asserted that LTV and credit 
history requirements are key criteria to ensure that QRMs represent a 
lower risk of default and the risk retention rules offer some 
protection to RMBS investors. One commenter asserted that the 
reproposed QRM definition is based on the same credit reporting 
requirements used prior to the financial crisis and continues to lack 
credit reporting verification safeguards to ensure completeness and 
accuracy. Another commenter suggested that the agencies require a loan-
level credit enhancement when QM loans exceed a stated LTV ratio.
    A few commenters expressed concern about the potential effects the 
reproposed QRM definition might have on the market, in that QMs and 
QRMs could become the only type of mortgage loans made and accepted on 
the secondary market, or that the market may shift more towards 
federally insured or guaranteed mortgages.
    Finally, commenters requested that the agencies clarify that the 
requirement that a depositor certify as to the effectiveness of its 
internal supervisory controls with respect to the process for ensuring 
that mortgages included in a pool of QRM assets qualify as QRMs does 
not impose an obligation on sponsors to guarantee that all assets are, 
in fact, QRMs. As is indicated by the final rule's provision of a 
buyback option for non-compliant assets, the agencies do not view the 
certification as requiring that the controls guarantee compliance. 
Rather, the process must be

[[Page 77688]]

robust and sufficient to enable the sponsor to carefully evaluate 
eligibility.
2. Comments Received on the Alternative Approach to QRM
    The agencies also received numerous comments on the alternative QM-
plus approach. Commenters generally opposed the QM-plus approach, 
asserting that it would be too restrictive, impose additional 
compliance costs, and have a negative effect on the availability of 
affordable credit, especially to LMI borrowers, minority borrowers, and 
first-time homebuyers. In addition, many commenters expressed concern 
that a QM-plus approach would slow the return of private capital in the 
mortgage market because it would increase government and agency 
involvement in the mortgage market and would make it more difficult for 
sponsors to assemble a critical mass of QRMs necessary for a 
securitization. Commenters also expressed concern that mortgages 
meeting the QM-plus standard would effectively become the primary 
mortgage product available, thus pushing out other mortgage loans that 
would qualify as QMs from the mortgage market. Some commenters 
supported a narrow definition of QRM as reflected in the QM-plus 
approach, but generally recommended that the agencies adopt the 
original proposed QRM definition rather than the QM-plus approach.
    One commenter specifically expressed concern about the exclusion of 
secondary liens from the QM-plus approach, asserting that secondary 
liens facilitate credit to borrowers and benefit the economy. Another 
commenter asserted that because the QM-plus approach was described only 
in the preamble, there was insufficient information to determine how 
the QM-plus approach would be implemented. Some commenters requested 
specific changes if the agencies were to go forward with the QM-plus 
approach, including a lower down payment requirement, the exclusion of 
piggyback loans, and the inclusion of credit scores.

D. Summary and Analysis of Final QRM Definition

1. Alignment of QRM With QM
    After carefully considering the comments received, the agencies are 
adopting a definition of QRM that is aligned with the definition of QM, 
with some modifications. Accordingly, the final rule defines a QRM to 
mean a QM, as defined under section 129C of TILA and the regulations 
issued thereunder, as may be amended from time to time. The agencies 
also believe it is necessary to periodically review the QRM definition 
to take into account developments in the residential mortgage market, 
as well as the results of the CFPB's five-year review of the ability-
to-repay rules and the QM definition, which is required under section 
1022(d) of the Dodd-Frank Act.\286\ Therefore, the final rule also 
includes a provision that requires the agencies to conduct a periodic 
review of the definition of QRM, which is discussed more fully below.
---------------------------------------------------------------------------

    \286\ See 12 U.S.C. 5512.
---------------------------------------------------------------------------

    The agencies have declined to adopt the QM-plus approach or the 
approach from the original proposal. While the additional requirements 
in those two approaches may include useful factors in determining the 
probability of mortgage default, these additional credit overlays may 
have ramifications for the availability of credit that many commenters 
asserted were not outweighed by the corresponding reductions in the 
likelihood of default from including these determinants in the QRM 
definition. The agencies are concerned about the prospect of imposing 
potential additional constraints on mortgage credit availability at 
this time, especially as such constraints might disproportionately 
affect LMI, minority, or first-time homebuyers.
    The agencies continue to believe that a QRM definition aligned with 
the definition of QM meets the statutory goals and directive of section 
15G of the Exchange Act to limit credit risk and promote sound 
underwriting. At the same time, the agencies believe this definition 
will also meet the important goals of preserving access to affordable 
credit for various types of borrowers and facilitating the return of 
private capital to the mortgage market. Furthermore, the agencies 
believe this definition appropriately minimizes regulatory compliance 
burdens in the origination of residential mortgage loans. The final 
definition of QRM does not incorporate either an LTV ratio requirement 
or standards related to a borrower's credit history, such as those in 
the alternative QM-plus approach discussed in the reproposal. As the 
agencies explained in the reproposal, although credit history and LTV 
ratio are significant factors in determining the probability of 
mortgage default and are important aspects of prudent underwriting, on 
balance, the agencies believe policy considerations weigh in favor of 
aligning QRM with QM at this time.
    Consistent with the discussion in the reproposal, the agencies 
believe that a QRM definition that is aligned with the QM definition 
meets the statutory requirement to take into consideration underwriting 
and product features that historical loan performance data indicate 
result in a lower risk of default.\287\ The criteria of the QM 
definition support this determination. The QM criteria are structured 
to help ensure that borrowers are offered and receive residential 
mortgage loans that borrowers can afford. For example, the QM 
definition requires full documentation and verification of consumers' 
debt and income, and generally requires borrowers to meet a DTI 
threshold of 43 percent or less, which helps to address certain 
underwriting deficiencies, such as the existence of subordinate liens, 
and may help to reduce incidents of mortgage fraud. The QM definition 
also restricts the use of certain product features, such as negative 
amortization, interest-only and balloon payments (except as provided 
under special definitions available only to small portfolio creditors) 
that historical data have shown correlate to higher rates of default. 
As discussed in the reproposal, formal statistical models indicate that 
borrowers with mortgages that do not meet these aspects of the QM 
definition rule exhibit higher probabilities of default.\288\ 
Consistent with these statistical models, historical data indicate that 
borrowers with mortgages that meet the QM criteria have lower 
probabilities of default than those with mortgages that do not meet the 
criteria.\289\
---------------------------------------------------------------------------

    \287\ 15 U.S.C. 78o-11(e)(4).
    \288\ See Shane M. Sherlund, ``The Past, Present, and Future of 
Subprime Mortgages,'' Finance and Economics Discussion Series, Paper 
2008-63 available at http://www.federalreserve.gov/pubs/feds/2008/200863/200863pap.pdf; Ronel Elul, Nicholas S. Souleles, Souphala 
Chomsisengphet, Dennis Glennon, and Robert Hunt. ``What `Triggers' 
Mortgage Default?'' American Economic Review 100 (May 2010): 490-
494.
    \289\ For further detail, see Revised Proposal, 78 FR at 57989-
57990.
---------------------------------------------------------------------------

    The agencies continue to believe that aligning the QRM and QM 
definitions at this time will help promote access to affordable credit 
by minimizing additional regulatory burden and compliance cost and 
facilitating the return of private capital to the mortgage market. 
Although mortgage lending conditions appear to have been easing 
gradually for several quarters, standards overall remain tight, 
especially for borrowers with lower credit scores or fewer funds for a 
down payment. In the July 2014 Senior Loan Officer Opinion Survey of 
Bank Lending Practices, approximately a fourth of all banks surveyed 
reported that they had eased their standards for prime residential

[[Page 77689]]

mortgages in the second quarter of 2014.\290\ However, approximately 
half of the banks surveyed reported that their standards for prime 
conforming residential mortgages were tighter than the midpoint of 
their longer-term ranges. Even more lenders reported levels of 
standards that were tighter than historical averages for jumbo, 
nontraditional, and subprime mortgages. Likewise, the Mortgage Bankers 
Association's index of mortgage credit availability--designed to 
capture the credit risk profile of mortgages being offered in the 
market place--edged up over the first few months of 2014, suggesting 
that mortgage credit conditions continue to improve. Nonetheless, 
comparisons of this index to a roughly equivalent proxy for lending 
conditions in 2004 suggest that credit availability is quite 
restricted.
---------------------------------------------------------------------------

    \290\ Senior Loan Officer Opinion Survey of Bank Lending 
Practices, Board of Governors of the Federal Reserve System (July 
2014), available at http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201408/default.htm.
---------------------------------------------------------------------------

    An additional manifestation, in part, of tight credit standards is 
the subdued level of mortgage and housing activity. Mortgage 
applications in the first six months of 2014, as measured by the 
Mortgage Bankers Association application indexes, were at the lowest 
levels since the 1990s. Existing home sales rose only 3.5 percent in 
the first six months of 2014 and are still roughly 25 percent below 
their 2004 level. In addition, the private-label RMBS market remains 
extremely small and limited to mortgages of very high credit quality. 
In the second quarter of 2014, less than 1 percent of mortgage 
originations were funded through private-label RMBS.\291\ The 
securitizations that were issued were collateralized by mortgages with 
a weighted average loan-to-value ratio of around 70 percent and, in 
most cases, weighted average credit scores greater than 750.
---------------------------------------------------------------------------

    \291\ Mortgage Bankers Association, Quarterly Mortgage 
Originations Estimates as of July 2014; Intex Solutions, Inc., and 
Asset-Backed Alert, prime non-agency RMBS issued in second quarter 
of 2014.
---------------------------------------------------------------------------

    At the same time, several mortgage and securitization regulatory 
changes have been put in place that increase the amount of information 
available to investors, improve mortgage underwriting, and increase 
investors' ability to exercise their rights and obtain recoveries in 
the event of mortgage default. For example, the CFPB has implemented 
regulations governing mortgage servicing and loan originator 
compensation in addition to the ability-to-repay rule and QM standards. 
The ability-to-repay rule is particularly noteworthy for requiring loan 
originators to document income, debts, and other underwriting factors, 
which should in turn provide investors a more complete set of 
information on which to base their investment decision. The Commission 
recently adopted revisions to Regulation AB that, among other things, 
require disclosure in registered RMBS transactions of detailed loan-
level information at the time of issuance and on an ongoing basis. 
These revisions also require that securitizers provide investors with 
this information three business days prior to the first sale of 
securities so that they can analyze this information when making their 
investment decision.\292\ The Commission also has proposed rules 
required by section 621 of the Dodd-Frank Act \293\ that would prevent 
sponsors and certain other securitization participants from engaging in 
material conflicts of interest with respect to their 
securitizations.\294\ Additionally, the Board, the FDIC, the OCC, the 
FHFA and the Commission, among other federal agencies, have jointly 
proposed rules required by section 956 of the Dodd-Frank Act \295\ that 
would enhance reporting and oversight of incentive-based compensation 
practices and prohibit compensation arrangements that encourage 
inappropriate risk taking by financial institutions.\296\ These 
regulatory actions are further complemented by efforts on the part of 
the Enterprises and the industry to improve standards for due 
diligence, representations and warranties, appraisals, and loan 
information.\297\ Although additional changes may be necessary, taken 
together, these changes and the other changes to be completed provide 
additional support for aligning the definition of QRM with that of QM.
---------------------------------------------------------------------------

    \292\ See Asset-Backed Securities Disclosure and Registration; 
Final Rule, 79 FR 57184 (Sept. 24, 2014).
    \293\ 15 U.S.C. 77z-2a.
    \294\ See Prohibition Against Conflicts of Interest in Certain 
Securitizations; Proposed Rule, 76 FR 60320 (Sept. 28, 2011).
    \295\ 12 U.S.C. 5641.
    \296\ See Incentive-Based Compensation Arrangements; Proposed 
Rule, 76 FR 21170 (Apr. 14, 2011).
    \297\ See Revised Proposal, 78 FR at 57990.
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2. Periodic Review of the QRM Definition
    The agencies recognized that aligning the QRM definition with the 
QM definition could have potential problematic effects on 
securitization markets, such as increasing of bifurcation in the 
mortgage market between QM and non-QM loans. Although the agencies 
continue to believe the benefits of the alignment at this time outweigh 
these potential risks, the agencies stated in the reproposal that they 
intended to review the advantages and disadvantages of aligning the QRM 
and QM definitions as the market evolves.\298\
---------------------------------------------------------------------------

    \298\ See Revised Proposal, 78 FR at 57991.
---------------------------------------------------------------------------

    The agencies are adopting the reproposed QRM definition, but also 
recognize that mortgage and securitization market conditions and 
practices change over time, and therefore, believe it would be 
beneficial to periodically review the QRM definition. Thus, the 
agencies are committing in the final rule to review the QRM definition 
at regular intervals to consider, among other things, changes in the 
mortgage and securitization market conditions and practices (which may 
include, for example, the structures of securitizations, the 
relationship between, and roles undertaken by, the various transaction 
parties, implications for investor protection and financial stability 
arising from the relationship between Enterprise markets and private 
label markets, and trends in mortgage products in various markets and 
structures), as well as how the QRM definition is affecting residential 
mortgage underwriting and securitization of residential mortgage loans 
under evolving market conditions. The agencies also want the 
opportunity to consider the results of future reviews of, and any 
changes made to, the QM definition by the CFPB, any additional 
regulatory changes affecting securitization that are adopted by the 
agencies, as well as any changes to the structure and framework of the 
Enterprises and those markets. As a result of these reviews, the 
agencies may or may not decide to modify the definition of QRM. Any 
such modification would occur through notice and comment rulemaking. 
Otherwise, any changes the CFPB makes to the QM definition 
automatically will modify the QRM definition.
    As provided in the final rule, the agencies will commence a review 
of the definition of QRM not later than four years after the effective 
date of this rule with respect to securitizations of residential 
mortgages, five years after the completion of that initial review, and 
every five years thereafter. In addition, the agencies will commence a 
review at any time upon the request of any one of the agencies. The 
agencies will jointly publish in the Federal Register notice of the 
commencement of a review, including the reason for the review if it has 
been initiated upon the request of one of the agencies. In the

[[Page 77690]]

notice, the agencies will seek public input on the review. The agencies 
intend to complete each review no later than 6 months after initial 
notice of the review, subject to extension by the agencies as 
conditions warrant. Following the review, the agencies will jointly 
publish a notice that includes their conclusions from the review and, 
as part of such review, take whatever action is required by applicable 
law, including the Administrative Procedure Act. If, as a result of the 
review, the agencies decide to modify the definition of QRM, the 
agencies will complete such rulemaking within 12 months of publication 
in the Federal Register of the notice disclosing the determination of 
their review, unless extended by the agencies.
    The agencies intend for their initial review of the QRM definition 
to be completed after the publication of the report of the CFPB's 
assessment of the ability-to-repay rules, including the QM definition, 
which the CFPB is required to publish within five years of the 
effective date of the ability-to-repay rule (i.e., January 10, 
2019).\299\ However, as noted above, the agencies' initial review will 
start no later than four years after the effective date of this final 
rule with respect to residential mortgages. The agencies believe this 
timing helps to ensure the initial review of the QRM definition 
benefits from the CFPB's review and course of action regarding the 
definition of QM, and will help the agencies in determining whether the 
QRM definition should continue to align fully with the QM definition in 
all aspects. Furthermore, the agencies expect additional information on 
the housing and mortgage market will be available at the time the 
initial review is conducted that would be important in determining 
whether the then-current QRM definition remains appropriate under 
prevailing market conditions and continues to meet the requirements and 
policy purposes of section 15G of the Exchange Act.
---------------------------------------------------------------------------

    \299\ See 12 U.S.C. 5512.
---------------------------------------------------------------------------

3. Definition of QRM
    Under the final rule, QRM is defined by aligning it to the 
definition of QM in the CFPB regulations under section 129C of TILA. A 
QRM is a loan that is a ``covered transaction'' \300\ that meets the 
general definition of a QM. The general definition of a QM provides 
that the loan must have:
---------------------------------------------------------------------------

    \300\ See 12 CFR 1026.43(b)(1), which defines ``covered 
transaction'' as a consumer credit transaction that is secured by a 
dwelling, as defined in section 1026.2(a)(19), including any real 
property attached to a dwelling, other than a transaction exempt 
from coverage under section 1026.43(a) (i.e., HELOCs, time shares, 
reverse mortgages, temporary or ``bridge'' loans of 12 months or 
less, and certain construction loans).
---------------------------------------------------------------------------

     Regular periodic payments that are substantially equal;
     No negative amortization, interest only or balloon 
features;
     A maximum loan term of 30 years;
     Total points and fees that do not exceed 3 percent of the 
total loan amount, or the applicable amounts specified for small loans 
up to $100,000;
     Payments underwritten using the maximum interest rate that 
may apply during the first five years after the date on which the first 
regular periodic payment is due;
     Consideration and verification of the consumer's income 
and assets, including employment status if relied upon, and current 
debt obligations, mortgage-related obligations, alimony and child 
support; and
     Total DTI ratio that does not exceed 43 percent.\301\
---------------------------------------------------------------------------

    \301\ See 12 CFR 1026.4(e)(2).
---------------------------------------------------------------------------

    In addition, in the final rule, the definition of QRM includes 
loans that meet one of the special types of QMs. One special QM is a 
covered transaction that meets the CFPB's temporary government QM 
definition.\302\ A loan eligible under the temporary QM definition must 
satisfy the loan-feature limitations of the general definition of a QM: 
the loans must have substantially equal periodic payments, with no 
interest-only, negative amortization or balloon features; must have a 
maximum 30-year term; and must comply with the points and fees 
limitations.\303\ However, the loans are not subject to the 
underwriting provisions of the general QM definition, such as the total 
DTI ratio requirement of 43 percent or less. To be eligible under the 
CFPB's temporary government QM definition, loans must be eligible for 
purchase, guarantee or insurance by an Enterprise, U.S. Department of 
Agriculture (USDA), or Rural Housing Services (RHS).\304\
---------------------------------------------------------------------------

    \302\ See 12 CFR 1026.43(e)(4).
    \303\ See 12 CFR 1026.43(e)(2) and 1026.43(e)(4).
    \304\ See 12 CFR 1026.43(e)(4)(ii).
---------------------------------------------------------------------------

    As discussed in the reproposal, the temporary QM definition with 
respect to an Enterprise expires once the Enterprise exits 
conservatorship, but in any case no later than January 21, 2021.\305\ 
Additionally, the temporary QM definition with respect to USDA and RHS 
expires when USDA and RHS issue their own QM rules or, in any case, no 
later than January 21, 2021.\306\
---------------------------------------------------------------------------

    \305\ See 12 CFR 1026.43(e)(4)(iii).
    \306\ See id.
---------------------------------------------------------------------------

    Lastly, a QRM is a loan that meets the definitions of QM issued by 
HUD, the Department of Veterans Affairs (VA), USDA, and RHS under 
section 129C of TILA. HUD, VA, USDA, and RHS each have authority under 
the Dodd-Frank Act to define QM for their own loans. Specifically, 
section 129C(a)(3) of TILA authorizes these agencies to issue rules 
implementing the QM requirements under section 129C(a)(2) of TILA. USDA 
and RHS have not yet issued rules under section 129C of TILA
    On December 11, 2013, HUD adopted a final rule to define QM for the 
single family residential loans that it insures, guarantees or 
administers and which took effect on January 10, 2014.\307\ In 
addition, the VA issued an interim final rule to define QM for loans 
that it insures or guarantees, with an effective date of May 9, 
2014.\308\ Accordingly, the final definition of QRM now includes any 
loan insured, guaranteed or administered as a QM under either the HUD 
or VA definition of QM, as applicable.
---------------------------------------------------------------------------

    \307\ See Qualified Mortgage Definition for HUD Insured and 
Guaranteed Single Family Mortgages, 78 FR 75215 (Dec. 11, 2013).
    \308\ See Loan Guaranty: Ability-to-Repay Standards and 
Qualified Mortgage Definition Under the Truth in Lending Act, 79 FR 
26620 (May 9, 2014).
---------------------------------------------------------------------------

    In the final rule, the definition of QRM also includes a loan that 
meets any of the special QM definitions designed to facilitate credit 
offered by small creditors.\309\ To qualify as a ``small creditor'' 
eligible under one of these special QM definitions, however, the entity 
must meet certain asset and threshold criteria and hold the QM loans in 
portfolio for at least three years, with certain exceptions.\310\ Thus, 
loans meeting these special small creditor QM definitions would 
generally be ineligible for securitization as QRMs for three years 
following consummation.
---------------------------------------------------------------------------

    \309\ See 12 CFR 1026.43(e)(5) and (e)(6).
    \310\ See 12 CFR 1026.43(e)(5), (e)(6), and (f).
---------------------------------------------------------------------------

    A loan eligible under these special ``small creditor'' QM 
definitions must meet the general requirements of a QM,\311\ except 
that these loans receive greater underwriting flexibility (i.e., do not 
need to meet the quantitative DTI threshold of 43 percent or 
less).\312\ Additionally, a loan originated by a qualifying small 
creditor may contain a balloon feature if the loan is originated during 
the two-year transition period, which expires January 10, 2016, 
provided the loan meets certain other criteria, such as a 5-year 
minimum term.\313\ After January 10, 2016, the ability to write a 
balloon QM will be limited to small creditors that operate

[[Page 77691]]

primarily in rural or underserved areas.\314\
---------------------------------------------------------------------------

    \311\ See 12 CFR 1026.43(e)(2).
    \312\ See 12 CFR 1026.43(e)(5), (e)(6), and (f).
    \313\ See 12 CFR 1026.43(e)(6).
    \314\ See 12 CFR 1026.43(f).
---------------------------------------------------------------------------

    Consistent with the reproposed definition described above, the 
final definition of QRM includes any closed-end loan secured by any 
dwelling (e.g., home purchase, refinances, home equity loans, second or 
vacation homes, and mobile homes, and trailers used as residences), 
whether a first or subordinate lien.\315\ The final definition of QRM 
does not include any loan exempt from the ability-to-repay requirements 
under TILA and the ability-to-repay rules, such as HELOCs, reverse 
mortgages, timeshares or temporary or ``bridge'' loans of 12 months or 
less.\316\ In addition, the final definition of QRM does not include 
those loans that were provided a regulatory exemption from the ability-
to-repay rules, such as loans made through state housing finance agency 
programs and certain community lenders. If a loan is not subject to 
TILA because it is deemed to be extended for a business purpose, it is 
also not included in the definition of QM (and therefore, is not a 
QRM). The agencies believe this approach is consistent with the 
language and intent of section 15G of the Exchange Act, whereby a QRM 
can be no ``broader than'' a QM.
---------------------------------------------------------------------------

    \315\ See 12 CFR 1026.43(e)(2), which provides that QM is a 
covered transaction that meets the criteria set forth in 12 CFR 
1026.43(e)(2), (4), (5), (6) or (f). A ``covered transaction'' is 
defined to mean ``a consumer credit transaction that is secured by a 
dwelling, as defined in Sec.  1026.2(a)(19), including any real 
property attached to a dwelling, other than a transaction exempt 
from coverage under [Sec.  1026.43(a)].''
    \316\ The Dodd-Frank Act excludes from the term ``residential 
mortgage loan'' an open-end credit plan or an extension of credit 
secured by an interest in a timeshare plan. See 15 U.S.C. 
1602(cc)(5) and 1639c(i). The Dodd-Frank Act does not apply the 
ability-to-repay provisions of TILA to reverse mortgages and 
temporary or ``bridge'' loans with a term of 12 months or less. See 
15 U.S.C. 1639c(a)(8). Therefore they are also exempt from the 
ability-to-pay rules. Also excluded are most loan modifications, 
unless the transaction meets the definition of refinancing set forth 
in section 1026.20(a) of the Final QM rule. For a complete list, see 
12 CFR 1026.43(a).
---------------------------------------------------------------------------

    To provide relief from risk retention for mortgage loans that are 
collateralized by three-to-four unit residential properties and are not 
included in the QRM definition because they are deemed not to be 
covered transactions in the QM definition, but that otherwise meet all 
the criteria to be a QM, the final rule includes a separate exemption, 
as discussed further below in Part VII of this Supplementary 
Information.
    Several commenters requested that the agencies clarify that the 
incorporated QM definition include all statutory provisions, the 
regulation, the regulation's commentary and appendix, and future 
supporting guidance to prevent any difficult interpretive questions 
about whether it is possible for a loan to be a QM and not a QRM. As 
noted above, the agencies are defining QRM by cross-reference to the 
definition of QM under section 129C of TILA, and any regulations issued 
thereunder, to avoid potential conflicts between the definitions of QRM 
and QM and to facilitate compliance. By cross-referencing to the 
definition of QM, the final rule incorporates any rules issued under 
section 129C of TILA that define QM, including any Official 
Interpretation that interprets such rules.
    The rule provides that QRM means QM as amended by the CFPB from 
time to time. As such, the rule presumes that each amendment to the 
definition of QM will automatically be incorporated into the definition 
of QRM unless the agencies act to amend the definition of QRM. However, 
in exercising their responsibility under section 15G, the agencies will 
evaluate and collectively consider each amendment to QM to decide 
whether that amendment meets the requirements of section 15G, and take 
such action, if any, as is required under applicable law, including the 
Administrative Procedure Act. The agencies note that they will have 
notice of proposed CFPB changes to the definition of QM and, thus, will 
be in a position to commence consideration of possible changes to the 
QM definition before the CFPB issues a final rule. As noted above, 
section 13(d) of the rule also requires the agencies to conduct 
periodic reviews of the definition of QRM.
    One commenter requested clarification that all QM definitions would 
be included in the revised QRM definition and there would be full 
alignment of QRM and QM throughout the life cycle of a loan. As 
discussed more fully above, QRM is defined to include a loan that meets 
any of the definitions of QM issued under section 129C of TILA. The 
agencies also note that the determination of whether a loan meets the 
QM definition occurs at consummation; post-consummation events that 
cannot be reasonably anticipated are not relevant.\317\
---------------------------------------------------------------------------

    \317\ See 12 CFR 1026.43(c)(1) and corresponding official staff 
commentary.
---------------------------------------------------------------------------

    Some commenters requested revisions to provisions that are set 
forth in the QM definition, such as the cap on points and fees or the 
43 percent DTI ratio limit. The agencies are required to implement the 
statutory requirement that the definition of QRM be no broader than the 
definition of a QM, and therefore cannot expand the definition of QRM 
in this manner.
    Some commenters expressed concern with the reproposal to allow 
higher-priced QMs to be pooled and securitized with non-higher priced 
QMs. These commenters asserted that higher-priced means higher risk. 
The commenters asserted, however, that excluding higher-priced QMs from 
the definition of QRM would unduly restrict LMI access, and in that 
case, it may be appropriate to treat these loans as QRMs but that the 
agencies should prohibit their inclusion in securitizations that 
consisted of non-higher-priced QMs. The requirements for QMs are the 
same whether they are higher-priced or lower-priced, and those QM 
criteria are one of the reasons the agencies defined QRM to mean QM. A 
higher-priced QM under the CFPB's rule must generally meet the 43 
percent DTI ratio requirement, have verified income and assets, 
generally have points and fees that do not exceed the 3 percent cap, 
have regular periodic payments, and contain no negative amortization, 
interest only or balloon features (with exceptions for certain small 
creditors). Accordingly, the final rule does not distinguish between 
non-higher priced and higher-priced QMs, and both are eligible to be 
QRMs without distinction, and therefore, can be pooled together in the 
same securitization.
    A few commenters expressed concern that the reproposed QRM 
definition would still contain in its practical implementation an 
implicit bias in favor of a single credit scoring brand, FICO, to the 
exclusion of others. These commenters stated that the Enterprises 
exclusively use the credit scoring brand FICO when underwriting and 
determining eligibility of loans for purchase. These commenters claimed 
that because the QRM definition incorporates the temporary QM 
definition by reference, which permits loans that are eligible for 
purchase, guarantee or insurance by an Enterprise to be QRMs (such 
loans must also still generally meet the general definition of a QM), 
there is an implicit bias towards the FICO scoring brand. One commenter 
further asserted that the unintended bias in favor of a single credit 
scoring brand could be fixed while still ensuring the QM and QRM 
definitions are aligned by having FHFA require the Enterprises to 
revise their policies and practices to accept mortgages underwritten 
with other validated credit scoring models in addition to the single 
scoring brand currently permitted.
    The agencies note that, under the final rule, the definition of QRM 
is a loan that meets any of the definitions of QM

[[Page 77692]]

issued under section 129C of TILA. Accordingly, the agencies note that 
a loan is not required to be eligible for purchase by the Enterprises 
to meet the definition of QRM.\318\ Thus, the agencies do not believe 
the alignment of the QRM definition with the QM definition includes an 
implicit bias in favor of a single credit scoring brand as there is no 
requirement in the QM definition that a consolidated credit score be 
used or obtained.\319\ Therefore, the agencies do not believe that any 
changes to the QRM definition are needed.
---------------------------------------------------------------------------

    \318\ Some commenters also called on FHFA to require the 
Enterprises to apply prime loan criteria in the automatic 
underwriting system so that the combination of aligning the 
definitions of QRM and QM and temporary QM definition applicable to 
loans that qualify for purchase or guarantee by the Enterprises does 
not cause a decline in underwriting standards and assures high 
underwriting standards. The agencies view this issue to be outside 
the scope of this joint rulemaking.
    \319\ The underwriting requirements under the general QM 
definition and the small creditor QM definitions do not include a 
requirement for a credit score or an explicit requirement to 
consider credit history. However, credit history may be included in 
underwriting for debt and DTI.
---------------------------------------------------------------------------

    A few commenters expressed concern about the potential bifurcation 
effect on the market if the definitions of QRM to QM were to be 
aligned, asserting that a QM/QRM loan may become the only type of 
residential mortgage made and securitized. Some commenters suggested 
that the agencies provide flexibility for creditors to continue 
originating non-QM and non-QRM loans by allowing certain loans to 
qualify for a lower than 5 percent risk retention requirement. As noted 
in the reproposal, the agencies recognize that aligning the QRM and QM 
definitions has the potential to intensify any existing bifurcation in 
the mortgage market that may occur between QM and non-QM loans, as 
securitizations collateralized by non-QMs could have higher funding 
costs due to risk retention requirements in addition to potential risk 
of legal liability under the ability-to-repay rule. The agencies 
acknowledge this risk but believe that not aligning the QRM and QM 
definitions would likely result in even more segmentation in the 
securitization market and higher costs for consumers. Securitization 
typically is a more cost-effective source of funding when the 
underlying pool includes a large number of loans. However, QM and non-
QM loans are less likely to be combined in a pool because of the 
different risk profiles and legal liabilities associated with these 
loans, and QRM and non-QRM loans cannot be combined in a pool under the 
restrictions of the rule. Accordingly, if the QRM and QM definitions 
are not aligned and lenders have difficulty amassing a critical number 
of loans for an asset pool to provide cost effective funding, they may 
choose a source of funding other than securitization or charge higher 
mortgage rates to consumers.
    A few other suggestions and concerns expressed by commenters 
include: (i) a request that the agencies acknowledge that first 
mortgages secured by real property in priority lien states are 
encompassed within the QRM definition; (ii) caution that the QRM and 
credit risk retention rule not evolve into a safety and soundness 
standard in terms of evaluating an individual lender's real estate 
portfolio; (iii) a request that the QRM definition reflect the value of 
Homeownership Education and Counseling in reducing default; and (iv) a 
request to allow non-U.S. originated transactions to benefit from the 
QRM exemption. The agencies' definition of QRM is adopted as a 
component of the broader credit risk retention rule that helps address 
underwriting and incentive alignment concerns in the securitization 
market and is not a safety and soundness, standard. The agencies' 
adoption of the QRM definition does not limit or change the definition 
of QM and, thus, the application of the definition of QM in priority 
lien states and to non-U.S. originated transactions is limited by the 
applicability of the QM definition under TILA and not the adoption of 
the definition of QRM. Similarly, the agencies are not expressly 
requiring or including as criteria to meet the QRM definition 
homeownership education and counseling. The agencies also will evaluate 
a lender's mortgage portfolio on its own merits and do not expect to 
judge the safety and soundness of a loan or portfolio on whether or not 
it meets the definition of QRM.
    A few commenters also expressed concern about including subordinate 
liens in the scope of the QRM definition. These commenters were 
concerned that permitting subordinate liens to be eligible for the QRM 
exemption would introduce a layer of additional risk, especially where 
the QRM definition did not contain a LTV ratio requirement. One 
commenter specifically requested that the agencies reconsider the 
inclusion of subordinate lien loans in the definition of QRM, noting 
that second lien holders have been blamed for holding up short sales 
and complicating efforts to resolve defaulted loans.
    The agencies appreciate these commenters' concerns. However, 
similar to the reasons discussed in the reproposal, the agencies 
believe aligning the definition of QRM to the QM definition, which 
includes loans secured by any dwelling, as well as subordinate liens, 
is appropriate to minimize potential conflicts between the two 
definitions. The agencies believe allowing subordinate liens to qualify 
for the QRM exemption also will help preserve credit access. Last, as 
noted above, the QM definition requires full documentation and 
verification of consumers' debt and income on all loans, which the 
agencies believe helps to address risks that may accompany subordinate 
liens.

E. Certification and Other QRM Issues

    In order for a QRM to be exempted from the risk retention 
requirement, the rule includes evaluation and certification conditions 
related to QRM status, consistent with statutory requirements and 
similar to the reproposal. One commenter requested that the requirement 
for measuring performance data be as of the cut-off date, and not the 
closing date. In response to commenters' requests, the agencies have 
modified the performance measurement date from the closing date to the 
cut-off date or similar date.
    While some commenters supported the proposed certification 
requirements, others suggested that the certification be submitted to 
the appropriate Federal banking agency or the Commission, and not to 
the investors, which the commenters said would create additional 
liability and be functionally burdensome. One commenter suggested that 
the agencies make clear that these certifications must be retained by 
the sponsor for a period of no more than five years.
    The agencies believe that the certification by the depositor for 
the securitization is important information that should be disclosed to 
investors and therefore are not persuaded by the commenters' requests 
to require that certification be submitted only to the Commission and 
the appropriate Federal banking agency, if any.
    Several commenters expressed the belief that allowing for blended 
pools of QRMs and non-QRMs would help ensure that a greater variety of 
loans could be securitized and reduce market fragmentation between QRMs 
and non-QRMs. These commenters requested that the agencies permit the 
blending of non-QRMs and QRMs, with the QRMs being exempt from risk 
retention and the non-QRMs being subject to risk retention (unless 
otherwise exempt). Under this approach, the sponsor would be required 
to hold credit risk in proportion to the non-qualifying assets

[[Page 77693]]

in the pool. These commenters expressed the belief that the exemption 
authority under section 15G(e)(1) and (2) of the Exchange Act was 
sufficiently broad to permit the agencies to provide a partial 
exemption for securitizations collateralized by QRMs and non-QRMs. 
Another approach suggested was that the agencies permit blending exempt 
mortgage assets (e.g., seasoned loans) and QRMs, with all such 
securitized assets remaining exempt from risk retention. Under this 
approach the sponsor would not be required to hold any credit risk 
since all of the assets in the pool would qualify for an exemption.
    Except as described in Part VII of this Supplementary Information 
with respect to certain mortgage loans secured by three-to-four unit 
properties that meet the QM criteria other than being an extension of 
consumer credit, the agencies are not adopting the requested exemption 
for blended pools of QRMs and non-QRMs. The agencies believe that the 
breadth of the QRM definition in the final rule, as well as the 
additional mortgage exemptions discussed in Part VII of this 
Supplementary Information, should facilitate the return of private 
capital to the mortgage market and preserve access to affordable credit 
for various types of borrowers while the mortgage market continues to 
stabilize. Furthermore, the agencies observe that differences in 
product features, underwriting standards, and other factors associated 
with QRMs and non-QRMs generally could tend to reduce the likelihood of 
investors preferring combined pools. The agencies also note that a 
reduction in a risk retention requirement for the pool based on 
inclusion of QRMs would add complexity to the risk retention regime for 
residential mortgages without evidence of any significant benefit. 
Finally, the agencies are concerned, given the breadth of the QRM 
definition, that allowing reduced risk retention for combined pools of 
QRMs and non-QRMs will not provide sponsors with sufficient incentives 
to ensure high quality underwriting of the non-QRM mortgages.\320\
---------------------------------------------------------------------------

    \320\ The agencies are not addressing the permissibility of 
exempting pools blending QRMs and non-QRMs at this time. The 
agencies note that section15G of the Exchange Act refers to an 
exemption from risk retention requirements with respect to an asset-
backed security if all the assets that collateralize the asset-
backed security are QRMs. See 15 U.S.C. 78o-11(c)(1)(C)(iii).
---------------------------------------------------------------------------

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

    The reproposal provided that, if after the closing of a QRM 
securitization transaction, it was discovered that a mortgage did not 
meet all of the criteria to be a QRM due to inadvertent error, the 
sponsor would be obligated to repurchase the mortgage.\321\ While some 
commenters expressed support for the proposed requirement, one 
commenter asserted that investors have historically preferred 
substitution over repurchase, especially when the required repurchase 
would impact the value of the investment.
---------------------------------------------------------------------------

    \321\ Sponsors may choose to repurchase a loan from securitized 
pools even if there is no determination that the loan is not a QRM. 
The agencies would not view such repurchases as determinative of 
whether or not a loan meets the QRM standard.
---------------------------------------------------------------------------

    Similar to the reproposal, the final rule includes a buyback 
requirement for mortgages that are determined not to meet the QRM 
definition by inadvertent error after the closing of the securitization 
transaction, provided that the conditions set forth in section 13(c) of 
the rule are met. These conditions are intended to provide a sponsor 
with the opportunity to correct inadvertent errors by promptly 
repurchasing any non-qualifying mortgage loans from the pool. In 
addition, this requirement helps ensure that sponsors have a strong 
economic incentive to ensure that all mortgages collateralizing a QRM 
securitization satisfy all of the conditions applicable to QRMs prior 
to closing of the transactions. As long as the loan met the QRM 
requirements at the closing of the securitization transaction, however, 
subsequent non-performance of the loan does not trigger the proposed 
buyback requirement. For the reasons described above, the agencies are 
not allowing substitution instead of repurchase in the final rule.

VII. Additional Exemptions

    As discussed in Part VI of this Supplementary Information, under 
the final rule, a loan is eligible for the QRM exemption if it meets 
one of the QM definitions issued under section 129C of TILA, as may be 
amended from time to time. Meeting the QM criteria is also one of 
several ways that a lender can choose to satisfy the minimum 
underwriting standards for the ability-to-repay requirements under 
TILA. Because QM loans may provide greater protection from potential 
legal liability under TILA, many lenders are incentivized to make 
QMs.\322\
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    \322\ HELOCs and timeshares are also not subject to any ATR 
requirement, but not because of a statutory or regulatory exemption. 
Rather, these loans were never included in the scope of loans 
defined to be subject to the ATR requirement (i.e., residential 
mortgage loans).
---------------------------------------------------------------------------

Community-Focused Lending Exemption

    In addition to the classes of transactions exempt from the ability-
to-repay requirement under the Dodd-Frank Act, such as HELOCs, reverse 
mortgages, timeshares or temporary or ``bridge'' loans of 12 months or 
less, the CFPB exempted certain additional categories of loans made by 
certain lenders from the ability-to-repay rules, under its regulatory 
authority to exempt classes of transactions to help ensure borrowers 
continue to have access to affordable mortgage credit. The CFPB used 
its regulatory authority to exempt these lenders because they typically 
use flexible and unique underwriting standards that differ from the 
minimum underwriting standards of the ability-to-repay or QM criteria, 
and the types of loans exempted are important sources of credit for 
LMI, minority and first-time homebuyers.\323\ Loans exempt from the 
ability-to-repay requirement fall into the following categories:
---------------------------------------------------------------------------

    \323\ See 15 U.S.C. 1604(f). See also 78 FR 35430 (June 12, 
2013).
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     An extension of credit made pursuant to a program 
administered by a Housing Finance Agency, as defined under 24 CFR 266.5 
(HFA).\324\
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    \324\ Housing Finance Agency means any public body, agency, or 
instrumentality created by a specific act of a State legislature or 
local municipality empowered to finance activities designed to 
provide housing and related facilities, through land acquisition, 
construction or rehabilitation. The term State includes the several 
States, Puerto Rico, the District of Columbia, Guam, the Trust 
Territory of the Pacific Islands, American Samoa and the Virgin 
Islands.
---------------------------------------------------------------------------

     An extension of credit made by an entity creditor 
designated by the U.S. Treasury as Community Development Financial 
Institution, as defined under 12 CFR 1805.104(h) (CDFI).
     An extension of credit made by a HUD-designated 
Downpayment Assistance through Secondary Financing Provider (DAP), 
pursuant to 24 CFR 200.194(a), operating in accordance with HUD 
regulations.
     An extension of credit made by a HUD-designated Community 
Housing Development Organization, as defined under 24 CFR 92.2 (CHDO), 
provided it has entered into a commitment with a participating 
jurisdiction and is undertaking a project pursuant to HUD's HOME 
Investment Partnership Program, pursuant to 24 CFR 92.300(a).
     An extension of credit made by certain non-profit 
organizations that extend credit no more than 200 times

[[Page 77694]]

annually,\325\ provide credit only to LMI consumers, and follow their 
own written procedures to determine that consumers have a reasonable 
ability to repay their loans (Eligible Nonprofits)
---------------------------------------------------------------------------

    \325\ See 79 FR 25730 (May 6, 2014). The CFPB's proposed rule 
would exclude from the 200 originations count certain forgivable or 
deferred second lien loans.
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     An extension of credit made pursuant to a program 
authorized by sections 101 and 109 of the Emergency Economic 
Stabilization Act of 2008 (EESA).\326\
---------------------------------------------------------------------------

    \326\ 12 U.S.C. 5211; 5219.
---------------------------------------------------------------------------

    As a result, loans made by these entities do not need to comply 
with the ability-to-repay requirement, for which QM is one way to 
comply.
    The agencies received several comments regarding some of the above 
extensions of credit. One commenter requested that the agencies clarify 
that the proposed exemption from risk retention for asset-backed 
securities issued or guaranteed by states, municipalities, and public 
instrumentalities of states (state and municipal securitization 
exemption) \327\ would include asset-backed securities issued by HFAs 
and other state agencies and collateralized by loans financed by HFAs. 
This commenter also asked for clarification on whether the use of 
private servicers in those transactions would affect the availability 
of the exemption. A few commenters requested that the agencies 
automatically classify all state HFA loans as QRMs. One commenter 
observed that the CFPB granted HFA loans an exemption from the ability-
to-repay requirement because of a strong record of lending to LMI 
borrowers, so that compliance with the ability-to-repay requirement 
would be of little benefit and could impede access to credit by LMI 
borrowers. Another commenter also asserted that strong credit 
performance from HFA loans would mean that risk retention is not 
necessary to protect investors. This commenter further expressed 
concern that if any HFA loans were subject to risk retention, other 
securitization structures employed by the HFA that may not technically 
qualify for the state and municipal securitizations exemption would 
then be subject to risk retention, with negative consequences for 
access to credit for underserved borrowers.
---------------------------------------------------------------------------

    \327\ 15 U.S.C. 78o-11(c)(1)(G)(iii). See also Part IV.B of this 
Supplementary Information.
---------------------------------------------------------------------------

    Several commenters similarly observed that CDFIs and nonprofit 
lenders are an important source of mortgage credit for LMI borrowers 
and play a key role in neighborhood stabilization and community 
development. These commenters stated that loans made by these entities 
frequently would not fit the QM criteria because they use flexible 
underwriting standards that consider an individual borrower's unique 
circumstances and use homebuyer education and housing counseling to 
support homeowners throughout the mortgage process. These commenters 
raised the concern that the risk retention requirement would impose 
disproportionate compliance burdens on these entities and could be a 
significant barrier to obtaining investment in these lending programs. 
Commenters also indicated that exempting these entities from the risk 
retention requirement would be within the spirit of aligning QRM with 
QM.
    A few other commenters also requested that the agencies similarly 
consider including under the definition of QRM the other categories of 
loans exempted by the CFPB from the ability-to-repay rules, or 
otherwise provide them with an exemption from risk retention. 
Commenters observed that CDFIs and nonprofit mortgage lenders are an 
important source of mortgage credit for LMI borrowers and play a key 
role in neighborhood stabilization and community development. The loans 
made by these entities are not covered transactions under the ability-
to-repay rules (and therefore would not be classified as QMs in any 
case) but also frequently would not independently meet the type of 
underwriting standards in the CFPB's QM criteria because they use 
flexible features that consider an individual borrower's unique 
circumstances. At the same time, these lenders use homebuyer education 
and housing counseling to support homeowners throughout the mortgage 
process. These commenters raised the concern that the risk retention 
requirements would be a disproportionate compliance burden for these 
entities and could be a significant barrier to obtaining investment in 
these lending programs if an exemption was not provided.
    Under section 15G of the Securities Act, the definition of a QRM 
can be ``no broader than'' the definition of a QM. Because there are 
various and unique underwriting practices used to make the loans 
described above that are exempted from the ability-to-repay 
requirement, including significant variations in DTI ratios and other 
underwriting criteria, it is not possible for the agencies to determine 
that these loans generally are not ``broader than'' QM. Therefore, the 
agencies have concluded that they cannot include these community-
focused residential mortgages in the definition of QRM.
    As discussed previously with respect to other exemptions (or 
requests for exemptions) from risk retention, however, the agencies may 
provide an exemption from risk retention if the exemption would: (i) 
help ensure high-quality underwriting standards for the securitizers 
and originators of assets that are securitized or available for 
securitization; and (ii) encourage appropriate risk management 
practices by the securitizers and originators of assets, improve the 
access of consumers and businesses to credit on reasonable terms, or 
otherwise be in the public interest and for the protection of 
investors.\328\
---------------------------------------------------------------------------

    \328\ 15 U.S.C. 78o-11(e)(2).
---------------------------------------------------------------------------

    For the reasons discussed below, and in response to concerns raised 
by commenters, the agencies are providing an exemption from risk 
retention under section 15G(e) of the Exchange Act for the categories 
of loans described above (community-focused exempted loans), other than 
extensions of credit made pursuant to a program authorized by sections 
101 and 109 of the EESA. Generally, the agencies have concluded that 
the loans made by lenders identified above and covered by this 
exemption meet the requirements for an exemption under section 15G(e) 
because they are either government-certified, or originated by 
government-administered programs, or small non-profit programs that 
have a specific community mission. As the primary mission of these 
lenders is building and strengthening at-risk communities, or building 
wealth for LMI families, strong underwriting procedures to maximize 
affordability and borrower success in keeping their homes has been 
integral to the programs that originate the community-focused exempted 
loans. Because the stated mission is integral to the lending programs 
administered by these lenders, the agencies believe these entities have 
the incentive to maintain strong underwriting standards to help ensure 
that they offer affordable loans to the borrowers they serve. The 
stated mission also helps to protect investors because of the 
incentives to maintain high underwriting standards and ensure that 
borrowers are given appropriate and affordable loans. Additionally, 
exemptions from risk retention for loans made by the above-listed 
entities serve the public interest because these entities have stated 
public mission purposes to make safe, sustainable loans available 
primarily to LMI communities, which helps to improve access to credit 
on reasonable terms for borrowers and is in

[[Page 77695]]

the public interest. The agencies further observe that these programs 
are a significant source of credit to LMI communities. To the extent 
these loans are or will be securitized, an exemption helps to ensure 
that a risk retention requirement would not impede financing on 
reasonable terms for such borrowers.
    In addition, the agencies below respond to concerns raised by 
commenters with respect to the exemption under section 15G of the 
Exchange Act and the final rule for asset-backed securities issued or 
guaranteed by states and their instrumentalities, or by municipal 
entities.
i. Housing Finance Agency Program Loans
    State HFAs are state lending programs established to help meet the 
affordable housing needs of the residents of their states. Although 
their characteristics vary widely, such as their relationship to the 
state government, most HFAs are independent entities that operate under 
the direction of a board of directors appointed by each state's 
governor. They typically administer a wide range of affordable housing 
and community development programs, including providing first-time 
homebuyers with loans for existing and new construction and providing 
financing to build and revitalize affordable housing units, revitalize 
older neighborhoods and communities, and build shelters and 
transitional and supportive housing.
    If an HFA is a public instrumentality of a state, then an asset-
backed security issued or guaranteed by such HFA (or otherwise issued 
or guaranteed by the state that established the HFA or one of its 
public instrumentalities) is exempt from the registration requirements 
under section 3(a)(2) of the Securities Act \329\ and should be exempt 
from risk retention under the state and municipal securitization 
exemption provided in section 19(b)(3) of the final rule. Further, the 
use of a private-sector entity to service loans that collateralize such 
asset-backed securities would not, in and of itself, invalidate this 
exemption. If an HFA is not a public instrumentality of a state whose 
securities are exempt from the registration requirements under section 
3(a)(2) of the Securities Act, then securitizations issued or 
guaranteed by the HFA would not automatically be exempt from risk 
retention unless another exemption applied. Securitizations of loans 
made by HFAs through private-sector sponsors also would not have an 
exemption from risk retention. The agencies understand that it is 
unclear whether there are any HFA securitizations currently occurring 
that are not covered under that state and municipal securitizations 
exemption in section 19(b)(3) of the final rule. However, the agencies 
believe it may be possible that some future securitizations of HFA 
loans would not be covered and that an exemption under section 15G(e) 
of the Exchange Act would help ensure that HFA lending programs 
continue to have access to the financial markets, which in turn should 
help to ensure affordable access to credit for the borrowers that they 
serve.
---------------------------------------------------------------------------

    \329\ 15 U.S.C. 77c(a)(2).
---------------------------------------------------------------------------

    Many HFA underwriting standards are similarly stringent or more 
stringent than those of the Enterprises or Federal government agencies 
thorough their program analyses of a consumer's ability to repay.\330\ 
The agencies believe that an exemption under section 15G(e) would 
encourage HFAs to continue providing sound underwriting and access to 
affordable credit for their communities. In addition, as discussed 
above, the state HFA programs are established under public oversight 
under a specific state legal framework and provide a key source of 
affordable mortgage credit for LMI and first-time borrowers that is 
important to sustaining homeownership (and the public benefits that 
flow therefrom) in many communities.
---------------------------------------------------------------------------

    \330\ See 78 FR 35430, 35432-33 (June 12, 2013).
---------------------------------------------------------------------------

ii. Community Development Financial Institution Loans
    Creditors designated as CDFIs, as defined under Treasury 
regulations,\331\ include such entities as regulated banks, savings 
associations and credit unions as well as nonprofit funds and 
institutions.\332\ The Community Development Banking and Financial 
Institutions Act of 1994,\333\ defines a CDFI as an entity that (1) has 
a primary mission of promoting community development; (2) serves an 
investment area or targeted population; (3) provides development 
services in conjunction with equity investments or loans directly or 
through a subsidiary or affiliate; (4) maintains, through 
representation on its governing board accountability to residents of 
its area or target population; and (5) is a nongovernmental entity. 
Treasury's CDFI certification and application regulations incorporate 
the statutory definition requirements and contain additional 
requirements for eligibility verification, applications, matching 
funds, and other standards. These requirements include that a CDFI must 
be certified by Treasury's CDFI Fund Program.\334\ Additionally, at 
least 60 percent of the financing activities of a CDFI must be targeted 
to one or more LMI or underserved communities.
---------------------------------------------------------------------------

    \331\ 12 CFR 1805.104(h).
    \332\ There were 874 CDFIs as of June 30, 2014. CDFI Fund, CDFI 
Certification, visited August 1, 2014, available at: http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=9#certified.
    \333\ 12 U.S.C. 1401 et seq.
    \334\ 12 CFR 1805.201.
---------------------------------------------------------------------------

    Although CDFI securitization volume data is not available, at least 
one CDFI, the Community Reinvestment Fund, has issued securitizations 
in the past. Access to the securitization market for CDFIs may help to 
ensure that these entities can continue to focus on their mission of 
providing community development and helping LMI borrowers by preserving 
access to the securitization market. In determining that these entities 
warranted an exemption from the ability-to-repay rules, the CFPB found 
that, although these entities do not have standardized underwriting 
criteria, they use a variety of compensating factors and compare the 
strength of different underwriting factors, such as credit history and 
income, to determine if the LMI consumer qualified.\335\ Similar to 
state HFAs, an exemption from risk retention would assist CDFIs in 
continuing their mission of providing affordable credit to various 
communities by allowing them to access securitization markets without 
risk retention requirements if they were to seek such funding in the 
future. Furthermore CDFIs have a stated mission requirement to serve 
the community which requires them to maintain strong underwriting 
standards to protect the individual borrower and the organization, thus 
lowering risk for the public and investors.
---------------------------------------------------------------------------

    \335\ 78 FR at 35433, 35461 (June 12, 2013).
---------------------------------------------------------------------------

iii. Community Housing Development Organizations and Downpayment 
Assistance Programs
    To be a CHDO, an organization must qualify under HUD's regulations 
for such designation and re-qualify every time it receives additional 
set-asides through the HOME program. HUD's HOME Investment Partnership 
Program \336\ requires the allocation of 15 percent of funds to a CHDO 
to undergo HOME activities. A CHDO has 5 years to allocate the funds 
and its activities must be in compliance with both HUD's and the 
awarding jurisdiction's requirements for use of the HOME

[[Page 77696]]

funds.\337\ HUD's requirements for being a CHDO and eligible for an 
award include: (1) being a private nonprofit organization; (2) having 
among its purposes the provision of decent housing that is affordable 
to LMI persons, as evidenced in its charter, articles of incorporation, 
resolutions or by-laws; (3) having a demonstrated capacity for carrying 
out housing projects assisted with HOME funds; and (4) having a history 
of serving the community within which housing to be assisted with HOME 
funds is to be located. Data indicates that lending at CHDOs totaled 
$64 million in 2011 with just under 500 loans.\338\
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    \336\ There are 353 creditors certified by HUD as CHDOs. OneCPD, 
HUD Exchange, visited on August 1, 2014, available at: https://www.onecpd.info/search.
    \337\ 24 CFR 92.254.
    \338\ 78 FR at 35434, 35461 (June 12, 2013).
---------------------------------------------------------------------------

    As with CDFIs, although CHDOs do not have standardized underwriting 
criteria, CHDOs use a variety of compensating factors, including an 
ability-to-repay analysis,\339\ in underwriting mortgage loans to 
ensure that the loan is appropriate for the borrower.\340\ CHDOs use 
these factors in addition to standard underwriting factors, such as 
credit history and income, to determine if the LMI consumer 
qualifies.\341\ CHDOs' stated mission to serve LMI persons and 
requirements to qualify under the HUD program helps to ensure strong, 
but flexible underwriting of loans to sustain their mission.
---------------------------------------------------------------------------

    \339\ 24 CFR 92.254.
    \340\ Id.
    \341\ Id.
---------------------------------------------------------------------------

    For its loans to qualify for an exemption from the ability-to-repay 
rules, a Downpayment Assistance Provider must operate in accordance 
with applicable HUD regulations.\342\ Consequently, a DAP must be 
listed on HUD's nonprofit organization roster by applying every two 
years and specifying the FHA activities it proposes to carry out.\343\ 
The organization must comply with all requirements stated in the 
specific applicable provision of the single family regulations 
applicable to the FHA activity it undertakes. Similar to CHDOs, DAPs 
also use underwriting requirements that are tailored to the target LMI 
populations.\344\ The DAPs' mission requires them to tailor their 
programs to provide lending for LMI populations, but they must also 
follow HUD and program-specific requirements which encourage sound 
lending.
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    \342\ 12 CFR 1026.43(a)(3)(v)(B).
    \343\ There are currently 205 organizations certified as DAPs. 
HUD, Nonprofits, visited on August 1, 2014, available at: https://entp.hud.gov/idapp/html/f17npdata.cfm.
    \344\ See 78 FR 35430, 35464 (June 12, 2014).
---------------------------------------------------------------------------

iv. Exempt Nonprofit Organizations
    To be exempt from the ability-to-repay rules, a nonprofit 
organization must have an IRS tax-exempt ruling or determination letter 
as a 501(c)(3) organization, and meet the following additional 
criteria: \345\ (1) during the preceding calendar year, the 
organization extended a maximum of 200 dwelling-secured loans; \346\ 
(2) during the preceding calendar year, extended credit only to 
consumers with income that did not exceed the LMI household limit; (3) 
the extension of credit must be made to consumers with income that does 
not exceed the LMI household limit; and (4) the creditor has and uses 
written procedures to determine the consumer's reasonable ability to 
repay. Similar to the other categories of lenders exempted from risk 
retention because of their community-focused lending, as discussed 
above, these entities serve LMI consumers, and as non-profits, seek to 
provide borrowers with loans that will be affordable to lower risk to 
the borrower and the non-profit. Additionally, such entities must 
maintain a written policy on determining ability to repay for the LMI 
consumers it serves.
---------------------------------------------------------------------------

    \345\ 12 CFR 1026.43(a)(3)(v)(D),
    \346\ The CFPB has proposed an amendment to exclude from the 200 
originations count certain forgivable or deferred second lien loans. 
See 79 FR 25730 (May 6, 2014). Update if CFPB adopts change before 
this rule is finalized.
---------------------------------------------------------------------------

    For the reasons discussed above, under section 15G(e) of the 
Exchange Act, the agencies are exempting from risk retention loans made 
by the above entities that are also exempt from the ability-to-repay 
rules under the CFPB's Regulation Z. As discussed above, the agencies 
have concluded that the history of sound underwriting of affordable 
mortgage credit to LMI and similar communities by these entities, 
government oversight and program requirements, as well as the public 
mission of these entities generally supports findings that these 
exemptions from risk retention would help ensure high-quality 
underwriting and be in the public interest and for the protection of 
investors.
    The agencies have not concluded that an exemption is warranted for 
extensions of credit under EESA programs. Unlike the community-focused 
lending exemption, the EESA exemption covers special, temporary 
homeownership stabilization and foreclosure prevention programs that 
were specially enacted in the wake of the financial crisis to promote 
the recovery and prevent foreclosures. The EESA programs exempted from 
the ability-to-repay rule are those authorized under the ``Making Home 
Affordable'' (MHA) provision and the Hardest Hit Fund (HHF), which 
includes programs such as the Home Affordable Modification Program and 
the Home Affordable Foreclosure Alternatives Program. Currently the MHA 
programs are scheduled to expire on December 31, 2015, and the HHF 
programs are scheduled to expire on December 31, 2017. The 
rehabilitative purpose of these programs and their limited duration 
distinguish these programs from the community-focused lending programs. 
Consequently, the agencies are not exempting these programs from risk 
retention.
    Under the final rule, an exemption is provided if the asset-backed 
securities issued in the transaction are collateralized solely by 
community-focused residential mortgages and by servicing assets. 
Alternatively, if the community-focused residential mortgages are 
included in a pool with other non-QRMs, the amount of risk retention 
required under section 4(a) of the rule is reduced by a ratio of the 
unpaid principal balance of the community-focused residential mortgages 
to the total unpaid principal balance of residential mortgages that are 
included in the pool of assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction (the 
community-focused residential mortgage asset ratio). This community-
focused residential mortgage asset ratio must be measured as of the 
cut-off date or similar date for establishing the composition of the 
securitized assets collateralizing the asset-backed securities issued 
pursuant to the securitization transaction. In addition, under the 
final rule, if the community-focused residential mortgage asset ratio 
exceeds 50 percent, it is treated as 50 percent, which provides the 
same ability to pool exempt community-focused residential mortgages 
with other non-QRMs, as permitted for qualifying and non-qualifying 
commercial loans, CRE loans, and automobile loans.
    Additionally, the agencies are committing in the final rule to 
review the community-focused lending exemption at the same time the 
agencies review the QRM definition (i.e., no later than four years 
after the effective date of this rule with respect to securitizations 
of residential mortgages, five years after the completion of that 
initial review, and every five years thereafter.) In addition, the 
agencies will commence a review of the exemption at any time upon the 
request of any one of the agencies. This will allow the agencies to

[[Page 77697]]

assess the advantages and disadvantages of the exemption over time and 
as the market evolves.

Exemption for Certain Mortgage Loans Secured by Three-to-Four Unit 
Residential Properties

    Under Regulation Z, only loans that are ``covered transactions'' 
are QMs under the definitions adopted by the CFPB.\347\ A ``covered 
transaction'' under Regulation Z means a consumer credit transaction 
that is secured by a dwelling (including any real property attached to 
a dwelling) other than those consumer credit transactions exempted from 
the ability-to-repay rules by the CFPB.\348\ A ``dwelling'' is defined 
under the CFPB rules as a residential structure that contains one-to-
four units (and can include various types of properties such as mobile 
homes and condominiums).\349\ However, the Regulation Z Official 
Interpretations specify that credit extended to acquire a rental 
property that is or will be owner-occupied within the coming year and 
that has more than two housing units is deemed to be for business 
purposes.\350\ In that case, the loan is not a consumer credit 
transaction or covered transaction under Regulation Z, and therefore 
does not appear to meet the definition of QM.
---------------------------------------------------------------------------

    \347\ See 12 CFR 1026.43(e)(2), (e)(4), (e)(5), and (e)(6).
    \348\ 12 CFR 1026.43(b)(1).
    \349\ See 12 CFR 1026.2(a)(19).
    \350\ See 12 CFR part 1026 Supplement I, paragraph 3(a)-5.i.
---------------------------------------------------------------------------

    In aligning the QRM definition with QM, the agencies understood 
that covered transactions could include owner-occupied, one-to-four 
unit residential properties.\351\ The agencies also understand that 
market practice is generally to categorize residential mortgage 
securitizations as those collateralized by one-to-four unit properties, 
with mortgages of three-to-four unit properties frequently combined in 
a single collateral pool with one- or two-unit properties.\352\ 
Enterprise guidelines for residential mortgage securitizations also 
categorize residential mortgages by one-to-four family units.\353\ From 
a credit risk perspective, mortgages secured by three-to-four unit 
residential properties generally have the same characteristics as 
mortgages secured by two-unit properties, which are covered 
transactions under Regulation Z and may qualify as QMs, and therefore 
QRMs.
---------------------------------------------------------------------------

    \351\ See, for example, the discussion in the preamble to the 
2013 proposal at 57991 (78 FR 57928, 57991 (September 20, 2013)) and 
the proposed definition of commercial loan, which excluded any loan 
to a company or an individual for business purposes to purchase or 
refinance a one-to-four family residential property (78 FR 57928, 
58037 (September 20, 2013)).
    \352\ See, for example, https://www.americansecuritization.com/uploadedFiles/RMBS%20Outline.pdf
    \353\ The agencies also note that other regulations categorize 
mortgages on one-to-four unit (or family) properties as residential 
mortgages. See, for example, the definition of ``residential 
mortgage exposure'' in the banking agency capital regulations (12 
CFR 3.2, 12 CFR 217.2; 12 CFR 324.2). See also similar definitions 
in 12 CFR 37.2; 12 CFR part 30, appendix C; 12 CFR part 208, 
appendix C.
---------------------------------------------------------------------------

    The agencies are concerned that the categorical exclusion of some 
mortgage loans secured by three-to-four unit mortgages from the 
definition of ``covered transaction'' under Regulation Z (in accordance 
with the Official Interpretations) and the consequence that such loans 
appear not to be QMs even if they otherwise meet all of the other QM 
criteria, would inappropriately constrain funding from the 
securitization markets for these types of residential mortgages. This 
in turn could significantly impact the availability of credit to 
finance the purchase of such properties by owner-occupiers. While the 
overall volume of mortgage lending secured by three-to-four unit 
residential properties is small in relation to all residential mortgage 
lending, there are some metropolitan areas that contain a significant 
stock of such properties, including in many low-and-moderate income 
areas.\354\
---------------------------------------------------------------------------

    \354\ In a review mortgages originated from 2005 to 2013, with 
respect to each vintage, mortgages collateralized by two-to-four 
unit properties accounted for between 1 percent and 3 percent of the 
count of residential mortgages and to one to four percent of the 
dollar volume (at origination). Data sources reviewed do not 
generally separately identify one-to-four unit properties. (Data 
reviewed was from Black Knight Data and Analytics (formerly known as 
McDash)). It is noted that there are some metropolitan statistical 
areas across the country in which the share of housing units located 
in 3 and 4 unit properties is significantly higher than the national 
average of 4.5 percent, based on data from the U.S. Census, 2013 
American Community Survey, 1-year estimates.
---------------------------------------------------------------------------

    At the same time, the agencies believe that owner-occupied, three-
to-four unit mortgages that meet the same underwriting qualifications 
under the QM rule as two unit residential mortgages that meet the QM 
definition have similar risk characteristics. In order to ensure that 
such mortgage loans have the same access to securitization markets as 
similar loans secured by one-to-two unit properties, pursuant to the 
authority in section 15G(e)(1) of the Exchange Act, the agencies are 
exempting from risk retention requirements owner-occupied mortgage 
loans secured by three-to-four unit residential properties that meet 
all the criteria for QM in Regulation Z except for being a ``consumer 
credit transaction,'' as determined under Regulation Z and the Official 
Interpretations. These mortgages are referred to in the final rule as 
``qualifying three-to-four unit residential mortgage loans.'' To 
qualify for the exemption, a mortgage loan secured by a three-to-four 
unit residential property must be owner-occupied and must comply with 
all of the requirements for qualified mortgages as set forth in 
sections 1026.43(e) and (f) of Regulation Z as if the mortgage were a 
covered transaction for purposes of that section.\355\
---------------------------------------------------------------------------

    \355\ 12 CFR 1026.43(e).
---------------------------------------------------------------------------

    The agencies recognize that in order for qualifying three-to-four 
unit residential mortgage loans to benefit from the exemption from risk 
retention as intended and maintain access to securitization markets and 
mortgage credit similar to residential mortgages that are QRMs, it must 
be possible for sponsors to combine these loans with QRMs in a single 
collateral pool. Therefore, pursuant to their exemptive authority in 
section15G (e)(1), the agencies are also providing an exemption from 
risk retention for securitizations that contain both QRMs and 
qualifying three-to-four unit residential mortgage loans.
    To qualify for these combined pools, the final rule requires that 
depositors comply with the certification requirements for these exempt 
securitization transactions on the same basis as qualifying residential 
mortgage securitization transactions that are exempted from risk 
retention. That is, the depositor must certify that all the assets in 
the pool meet either the QRM definition or are qualifying three-to-four 
unit residential mortgage loans that meet the requirements of section 
1026.43(e) (other than being deemed a consumer credit transaction). 
Additionally, a sponsor must comply with the repurchase requirements 
for these exempt securitization transactions on the same basis as 
qualifying residential mortgage securitization transactions that are 
exempted from risk retention, if it is determined after closing that a 
loan does not meet all of the criteria to be either a QRM or a 
qualifying three-to-four unit residential mortgage loan.
    As discussed previously with respect to other exemptions from risk 
retention pursuant to section 15G(e)(1) of the Exchange Act, the 
agencies may issue exemptions, exceptions or adjustments to the risk 
retention rules, including for classes of institutions or assets 
relating to the risk retention requirement, if the exemption would: (i) 
Help ensure high-

[[Page 77698]]

quality underwriting standards for the securitizers and originators of 
assets that are securitized or available for securitization; and (ii) 
encourage appropriate risk management practices by the securitizers and 
originators of assets, improve the access of consumers and businesses 
to credit on reasonable terms, or otherwise be in the public interest 
and for the protection of investors.\356\
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    \356\ 15 U.S.C. 78o-11(e)(1) and (2).
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    The agencies believe that an exemption from risk retention for 
securitization transactions collateralized by qualifying three-to-four 
unit residential mortgage loans and an exemption for combining 
qualifying three-to-four unit residential mortgage loans and QRMs (as 
well as servicing assets) in a single securitization pool meets these 
statutory standards for an exemption under section 15G(e)(1). The 
exemptions will help ensure high-quality underwriting standards for 
securitizers and originators of assets that are securitized or 
available for securitization because all the collateral will have to be 
mortgage loans secured by owner-occupied, one-to-four family 
residential properties that met all the requirements to be a QM (other 
than being deemed a loan for business purposes, and therefore not a 
covered transaction, under the Official Interpretations of Regulation Z 
(12 CFR part 1026, Supplement I, paragraph 3(a)(5)(i)). As discussed 
above with respect to the alignment of the QRM and QM definitions, the 
agencies believe that the underwriting and product standards for QMs 
limit credit risk and promote sound underwriting.
    The agencies also believe that the exemptions will improve the 
access of consumers and businesses to credit on reasonable terms 
because they will help preserve access to securitization funding for 
mortgage loans to owner-occupied three-to-four unit residential 
properties on the same basis as other one-to-four unit residential 
properties. The exemptions are also in the public interest and for the 
protection of investors because they require all the loans in a 
securitization transaction that benefit from the exemption to meet the 
underwriting and product standards of QM, which, for the reasons 
discussed above in Section VI, appropriately limit credit risk for 
residential mortgages exempted from risk retention.
    The agencies also believe that, because the qualifying three-to-
four unit residential mortgage loans will meet all QM criteria other 
than being a consumer credit transaction, these exemptions are not 
inconsistent with the provisions of section 15G of the Exchange Act 
that, absent an exemption, require the agencies to apply risk retention 
to transactions collateralized by both QRMs and non-QRMs.\357\ The 
agencies have separately retained the exemption mandated in section 15G 
for risk retention for securitization transactions collateralized 
solely by QRMs, including the certification requirements also specified 
in the statute.\358\ Moreover, the exemption the agencies are providing 
for securitizations collateralized by both QRMs and qualifying three-
to-four unit residential mortgage loans is limited in scope and only 
permits the mixing of QRMs and non-QRM loans that are subject to the 
exact same underwriting and product type standards that limit credit 
risk and define QM. For these reasons, the agencies are adopting the 
above described exemption from risk retention in the final rule.
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    \357\ The agencies do not otherwise address the permissibility 
of exemptions for pools blending QRMs and non-QRMs at this time. See 
note 322, supra, and accompanying text.
    \358\ See 15 U.S.C. 78o-11(e)(5) and (e)(6).
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    Additionally, the agencies are committing in the final rule to 
review the exemption for qualifying three-to-four unit residential 
mortgage loans at the same time the agencies review the QRM definition 
(i.e., no later than four years after the effective date of this rule 
with respect to securitizations of residential mortgages, five years 
after the completion of that initial review, and every five years 
thereafter.) In addition, the agencies will commence a review of the 
exemption at any time upon the request of any one of the agencies. This 
will allow the agencies to assess the advantages and disadvantages of 
the exemption over time and as the market evolves.

VIII. Severability

    If any provision of this rule, or the application thereof to any 
person or circumstance, is held to be invalid, such invalidity shall 
not affect other provisions or application of such provisions to other 
persons or circumstances that can be given effect without the invalid 
provision or application.

IX. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, sec. 
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The Federal banking agencies invited 
comments on how to make the reproposal easier to understand.

X. Administrative Law Matters

A. Regulatory Flexibility Act

    OCC: The Regulatory Flexibility Act (RFA) generally requires that, 
when promulgating a final rule, an agency publish a final regulatory 
flexibility analysis that describes, among other items, the impact of 
the final rule on small entities.\359\ However, a regulatory 
flexibility analysis is not required if the head of the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities \360\ and publishes the 
certification and a statement of the factual basis for such 
certification.\361\
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    \359\ 5 U.S.C. 604.
    \360\ The Small Business Administration defines small entity to 
include national banks or Federal savings associations with assets 
of $550 million or less. 13 CFR 121.201.
    \361\ 5 U.S.C. 605(b).
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    As discussed in the Supplementary Information, the final rule 
generally requires a securitizer to retain not less than 5 percent of 
the credit risk of any asset that the securitizer, through the issuance 
of an asset-backed security (ABS), transfers, sells, or conveys to a 
third party; and prohibits a securitizer from directly or indirectly 
hedging or otherwise transferring the credit risk that the securitizer 
is required to retain. In certain situations, the final rule allows 
securitizers to allocate a portion of the risk retention requirement to 
the originator(s) of the securitized assets, if an originator 
contributes at least 20 percent of the assets in the securitization. 
The final rule also provides an exemption for ABS collateralized 
exclusively by QRM loans.
    In determining whether the final rule would have a significant 
economic impact on a substantial number of small national banks and 
Federal savings associations, the OCC reviewed December 31, 2013 Call 
Report data \362\ to evaluate the securitization activity and 
approximate the number of small banking organizations that potentially 
could retain credit risk under the final rule primarily through the 
allocation to originator provisions.
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    \362\ Call Report Schedule RC-S provides information on the 
servicing, securitization, and asset sale activities of banking 
organizations. For purposes of the RFA analysis, the OCC evaluated 
data regarding residential mortgage loan origination for 
securitization, as this is the primary securitization activity by 
small banking organizations.
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    As of December 31, 2013, the OCC regulated approximately 1,231 
small national banks and Federal savings associations that would be 
subject to

[[Page 77699]]

this rule. The Call Report data indicates that approximately 155 small 
national banks and Federal savings associations originate loans for 
securitization, predominantly one-to-four family residential mortgages. 
Using a threshold of 5 percent of small regulated institutions, the 
final rule could impact a substantial number of small national banks 
and Federal savings associations.
    The vast majority of securitization activity by small banks is in 
the residential mortgage sector. Many of these banks originate and sell 
residential mortgage loans to the Enterprises, which satisfy risk 
retention under the final rule when they securitize those loans and 
would not allocate risk retention to the originating banks under the 
final rule. Small banks that originate mortgages for securitization 
through other channels likely would be exempt from risk retention by 
another provision in the rule, such as that the loans meet the QRM 
definition or meet the community focused lending securitization 
exemption. For these reasons, the OCC concludes that the final rule 
would not have a significant economic impact on a substantial number of 
small national banks and Federal savings associations.\363\
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    \363\ The OCC previously concluded that the reproposed rule, if 
finalized, would not have a significant economic impact on a 
substantial number of small national banks and Federal savings 
associations. See Section VIII.A, 78 FR 57928 (September 20, 2013). 
The OCC requested comment and received no responsive comments on 
that conclusion.
---------------------------------------------------------------------------

    Board: In general, section 4 of the Regulatory Flexibility Act (5 
U.S.C. 604) requires an agency to prepare a final regulatory 
flexibility analysis for a final rule unless the agency certifies that 
the rule will not, if promulgated, have a significant economic impact 
on a substantial number of small entities (defined as of July 14, 2014, 
to include banking entities with total assets of $550 million or less) 
(``small banking entities'').\364\ Pursuant to section 505(b) of the 
Regulatory Flexibility Act, a final regulatory flexibility analysis is 
not required if an agency certifies that the final rule will not have a 
significant economic impact on a substantial number of small entities. 
The Board has considered the potential economic impact of the final 
rule on small banking entities supervised by the Board in accordance 
with the Regulatory Flexibility Act. The Board believes that the final 
rule will not have a significant economic impact on a substantial 
number of small banking entities supervised by the Board for the 
reasons described below.
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    \364\ See 13 CFR 121.201; See also 13 CFR 121.103(a)(6) (noting 
factors that the Small Business Administration considers in 
determining whether an entity qualifies as a small business, 
including receipts, employees, and other measures of its domestic 
and foreign affiliates).
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    For the reasons discussed in Part II of this Supplementary 
Information, the final rule defines a securitizer as a ``sponsor'' in a 
manner consistent with the definition of that term in the Commission's 
Regulation AB and provides that the sponsor of a securitization 
transaction is generally responsible for complying with the risk 
retention requirements established under section 15G. The Board is 
unaware of any small banking organization under the supervision of the 
Board that has acted as a sponsor of a securitization transaction \365\ 
(based on December 31, 2013 data).\366\ As of December 31, 2013, there 
were approximately 5,051 small banking organizations supervised by the 
Board, which includes 4,009 bank holding companies, 298 savings and 
loan holding companies, 651 state member banks, 23 Edge and agreement 
corporations and 70 U.S. offices of foreign banking organizations.
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    \365\ For purposes of the proposed rules, this would include a 
small bank holding company; savings and loan holding company; state 
member bank; Edge corporation; agreement corporation; foreign 
banking organization; and any subsidiary of the foregoing.
    \366\ Call Report Schedule RC-S; Data based on the Reporting 
Form FR 2866b; Structure Data for the U.S. Offices of Foreign 
Banking Organizations; and Aggregate Data on Assets and Liabilities 
of U.S. Branches and agencies of Foreign Banks based on the 
quarterly form FFIEC 002.
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    The final rule permits, but does not require, a sponsor to allocate 
a portion of its risk retention requirement to one or more originators 
of the securitized assets, subject to certain conditions being met. In 
particular, a sponsor may offset the risk retention requirement by the 
amount of any eligible vertical risk retention interest or eligible 
horizontal residual interest acquired by an originator of one or more 
securitized assets if certain requirements are satisfied, including, 
the originator must originate at least 20 percent of the securitized 
assets.\367\ A sponsor using this risk retention option remains 
responsible for ensuring that the originator has satisfied the risk 
retention requirements. In light of this option, the Board has 
considered the impact of the final rule on originators that are small 
banking organizations.
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    \367\ With respect to an open market CLO transaction, the risk 
retention retained by the originator must be at least 20 percent of 
the aggregate principal balance at origination of a CLO-eligible 
loan tranche.
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    The December 31, 2013 regulatory report data \368\ indicates that 
approximately 757 small banking organizations, 102 of which are small 
banking organizations that are supervised by the Board, originate loans 
for securitization, namely ABS issuances collateralized by one-to-four 
family residential mortgages. The majority of these originators sell 
their loans to the Enterprises, which retain credit risk through agency 
guarantees and would not be able to allocate credit risk to originators 
under this proposed rule. Additionally, based on publicly-available 
market data, it appears that most residential mortgage-backed 
securities offerings are collateralized by a pool of mortgages with an 
unpaid aggregate principal balance of at least $500 million.\369\ 
Accordingly, under the final rule a sponsor could potentially allocate 
a portion of the risk retention requirement to a small banking 
organization only if such organization originated at least 20 percent 
($100 million) of the securitized mortgages. As of December 31, 2012, 
only one small banking organization supervised by the Board reported an 
outstanding principal balance of assets sold and securitized of $100 
million or more.\370\
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    \368\ Call Report Schedule RC-S provides information on the 
servicing, securitization, and asset sale activities of banking 
organizations. For purposes of the RFA analysis, the agencies 
gathered and evaluated data regarding (1) the outstanding principal 
balance of assets sold and securitized by the reporting entity with 
servicing retained or with recourse or other seller-provided credit 
enhancements, and (2) assets sold with recourse or other seller-
provided credit enhancements and not securitized by the reporting 
bank.
    \369\ Based on the data provided in Table 1, page 29 of the 
Board's ``Report to the Congress on Risk Retention'', it appears 
that the average MBS issuance is collateralized by a pool of 
approximately $620 million in mortgage loans (for prime MBS 
issuances) or approximately $690 million in mortgage loans (for 
subprime MBS issuances). For purposes of the RFA analysis, the 
agencies used an average asset pool size of $500 million to account 
for reductions in mortgage securitization activity following 2007, 
and to add an element of conservatism to the analysis.
    \370\ The FDIC notes that this finding assumes that no portion 
of the assets originated by small banking organizations were sold to 
securitizations that qualify for an exemption from the risk 
retention requirements under the proposed rule.
---------------------------------------------------------------------------

    For residential mortgage-backed securitizations, the draft final 
rule is expected to have minimal impact on the cost of credit for 
sponsors of non-Enterprise mortgage-backed securitizations that 
currently retain less than the draft final rule's base risk retention 
requirement. The markets for those residential mortgages exempted under 
the draft final rule should be very large, and result in significant 
liquidity, economies of scale, little to no impact for these 
securitizations.

[[Page 77700]]

    Commercial loans that have in recent years been securitized through 
open market CLOs may experience a modest incremental impact in the cost 
of credit, as mangers of open market CLOs increase their credit 
exposure to 5 percent using the horizontal risk retention option under 
the draft final rule. There could also be consolidation in the asset 
manager industry as a result. The alternative option for lead arrangers 
to hold risk in the final rule should have minimal impact on the cost 
of credit (approximately 0-10 basis points) because it would be a 
vertical interest. An estimate for the incremental increase in the cost 
of credit for CLO managers is approximately 10-20 basis points, but 
because risk retention would affect the current business model, costs 
may be higher than expected.
    The draft final rule will also likely have an effect on CMBS 
transactions. The typical market practice of holding horizontal risk 
retention of 2.5 percent for conduit transactions will double to 5 
percent under the draft rule. The Board estimates that the rule will 
have a small incremental impact on cost of credit (of up to 10 basis 
points, approximately) for sponsors subject to the rule, but reducing 
the leverage of third-party purchasers could significantly improve 
issuer incentives, and other requirements in the rule could mitigate 
existing conflicts of interest between third-party purchasers and 
sponsors who hold residual interests and senior investors. Single-
Borrower CMBS, despite a lack of current risk retention in practice, 
should experience a modest incremental impact on cost of credit (of up 
to approximately 25 basis points). The rule should have little to no 
effect on the cost of credit for credit card, prime and non-prime auto, 
student loan, and less common (esoteric) securitizations, because the 
amount of credit risk retention typical to these securitizations 
already being held in the market is generally adequate to satisfy the 
requirements in the final rule.
    In light of the foregoing, the Board does not believe, for the 
banking entities subject to the Board's jurisdiction, that the final 
rule would have a significant economic impact on a substantial number 
of small entities.
    FDIC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
requires an agency, in connection with a final rule, to prepare a Final 
Regulatory Flexibility Act analysis describing the impact of the rule 
on small entities (defined by the Small Business Administration for 
purposes of the RFA to include banking entities with total assets of 
$550 million or less) or to certify that the rule will not have a 
significant economic impact on a substantial number of small 
entities.\371\
---------------------------------------------------------------------------

    \371\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    As of June 30, 2014, there were 3,573 small FDIC-supervised 
institutions, which include 3,267 state nonmember banks and 306 state-
chartered savings institutions. For the reasons provided below, the 
FDIC certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities, which in this context 
are small banking organizations supervised by the FDIC with total 
assets of $550 million or less. Accordingly, a regulatory flexibility 
analysis is not required.
    As discussed in the Supplementary Information above, section 941 of 
the Dodd-Frank Act \372\ generally requires the Federal banking 
agencies and the Commission, and, in the case of the securitization of 
any residential mortgage asset, together with HUD and FHFA, to jointly 
prescribe regulations, that (i) require a securitizer to retain not 
less than 5 percent of the credit risk of any asset that the 
securitizer, through the issuance of an asset-backed security (ABS), 
transfers, sells, or conveys to a third party; and (ii) prohibit a 
securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to retain 
under section 15G. Although the final rule will apply directly only to 
securitizers, subject to certain considerations section 15G authorizes 
the agencies to permit securitizers to allocate at least a portion of 
the risk retention requirement to the originator(s) of the securitized 
assets.
---------------------------------------------------------------------------

    \372\ Codified at section 15G of the Exchange Act, 17 U.S.C. 
78o-11.
---------------------------------------------------------------------------

    Section 15G provides a total exemption from the risk retention 
requirements for securitizers of certain securitization transactions, 
such as an ABS issuance collateralized exclusively by QRMs, and further 
authorizes the agencies to establish a lower risk retention requirement 
for securitizers of ABS issuances collateralized by other asset types, 
such as commercial, commercial real estate (CRE), and automobile loans, 
which satisfy underwriting standards established by the Federal banking 
agencies and the Commission. The risk retention requirements of section 
15G apply generally to a ``securitizer'' of ABS, where securitizer is 
defined to mean (i) an issuer of an ABS; or (ii) a person who organizes 
and initiates an asset-backed transaction by selling or transferring 
assets, either directly or indirectly, including through an affiliate, 
to the issuer. Section 15G also defines an ``originator'' as a person 
who (i) through the extension of credit or otherwise, creates a 
financial asset that collateralizes an asset-backed security; and (ii) 
sells an asset directly or indirectly to a securitizer. The final rule 
implements the credit risk retention requirements of section 15G. The 
final rule, as a general matter, requires that a ``sponsor'' of a 
securitization transaction retain the credit risk of the securitized 
assets in the form and amount required by the final rule. The agencies 
believe that imposing the risk retention requirement on the sponsor of 
the ABS--as permitted by section 15G--is appropriate in view of the 
active and direct role that a sponsor typically has in arranging a 
securitization transaction and selecting the assets to be securitized. 
The FDIC is aware of only 22 small banking organizations that currently 
sponsor securitizations (three of which are national banks, eight of 
which are state member banks, eight of which are state nonmember banks, 
and three of which are savings associations, based on June 30, 2014 
information) and, therefore, the risk retention requirements of the 
final rule, as generally applicable to sponsors, will not have a 
significant economic impact on small banking organizations. Under the 
final rule a sponsor may offset the risk retention requirement by the 
amount of any eligible vertical interest or eligible horizontal 
residual interest acquired by an originator of one or more securitized 
assets if certain requirements are satisfied, including, the originator 
must originate at least 20 percent of the securitized assets, as 
measured by the aggregate unpaid principal balance of the asset 
pool.\373\ In determining whether the allocation provisions of the 
final rule will have a significant economic impact on a substantial 
number of small banking organizations, the Federal banking agencies 
reviewed June 30, 2014, consolidated reports of condition and income 
(``Call Report'') data to evaluate the securitization activity and 
approximate the number of small banking organizations that potentially 
could retain credit risk under allocation provisions of the final 
rule.\374\ As of

[[Page 77701]]

June 30, 2014, the Call Report data indicates that approximately 763 
small banking organizations, 493 of which are state nonmember banks, 
originate loans for securitization which are largely ABS issuances 
collateralized by one-to-four family residential mortgages. Many of 
these originators sell their loans either to Fannie Mae or Freddie Mac, 
which retain credit risk through agency guarantees, and therefore will 
not be allocated credit risk under the final rule. Additionally, based 
on publicly available market data, it appears that most residential 
mortgage-backed securities offerings are collateralized by a pool of 
mortgages with an unpaid aggregate principal balance of at least $500 
million.\375\ Accordingly, under the final rule a sponsor could 
potentially allocate a portion of the risk retention requirement to a 
small banking organization only if such organization originated at 
least 20 percent ($100 million) of the securitized mortgages. As of 
June 30, 2014, only nine small banking organizations supervised by the 
FDIC reported an outstanding principal balance of assets sold and not 
securitized by the reporting bank of $100 million or more.\376\
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    \373\ With respect to an open market CLO transaction, the risk 
retention retained by the originator must be at least 20 percent of 
the aggregate principal balance at origination of a CLO-eligible 
loan tranche.
    \374\ Call Report Schedule RC-S provides information on the 
servicing, securitization, and asset sale activities of banking 
organizations. For purposes of the RFA analysis, the agencies 
gathered and evaluated data regarding (1) the outstanding principal 
balance of assets sold and securitized by the reporting entity with 
servicing retained or with recourse or other seller-provided credit 
enhancements, and (2) assets sold with recourse or other seller-
provided credit enhancements and not securitized by the reporting 
bank.
    \375\ Based on the data provided in Table 1, page 29 of the 
Board's October 2010 Report covering 2002 through 2010 entitled, 
``Report to the Congress on Risk Retention,'' it appears that the 
average RMBS issuance is collateralized by a pool of approximately 
$620 million in mortgage loans (for prime RMBS issuances) or 
approximately $690 million in mortgage loans (for subprime RMBS 
issuances). For purposes of the RFA analysis, the agencies used an 
average asset pool size of $500 million to account for reductions in 
mortgage securitization activity following 2007, and to add an 
element of conservatism to the analysis.
    \376\ The FDIC notes that this finding assumes that all assets 
originated by small banking organizations reported on RC-S as being 
sold, whether or not securitized by the reporting bank, would be 
subject to the 5 percent risk retention requirement (and would not 
qualify for an exemption from the risk retention requirements under 
the final rule).
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    Therefore, the FDIC does not believe that the final rule will 
result in a significant economic impact on a substantial number of 
small banking organizations under its supervisory jurisdiction. The 
FDIC certifies that the final rule will not have a significant economic 
impact on a substantial number of small FDIC-supervised institutions.
    Commission: The Regulatory Flexibility Act of 1980 requires the 
Commission, in promulgating rules, to consider the impact of those 
rules on small entities. An initial Regulatory Flexibility Act Analysis 
was prepared in accordance with the Regulatory Flexibility Act and 
included in the re-proposing release. The Commission certified in the 
re-proposing release, pursuant to 5 U.S.C. 605(b), that the proposed 
rule, if adopted, would not have a significant economic impact on a 
substantial number of small entities. The Commission received one 
comment \377\ on this certification.
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    \377\ One commenter urged the agencies to develop the required 
Regulatory Flexibility Act analysis to accurately assess the impact 
on small entities of the QM-plus approach to define QRM, if the 
agencies adopt such approach. The agencies are not adopting the QM-
plus approach to define QRM.
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    The final rule implements the risk retention requirements of 
section 15G of the Exchange Act, which, in general, requires the 
securitizer of asset-backed securities (ABS) to retain not less than 5 
percent of the credit risk of the assets collateralizing the ABS.\378\ 
Under the final rule, the risk retention requirements apply to 
``sponsors'', as defined in the final rule. Based on the analysis set 
forth in the original proposal and the reproposal, the Commission 
continues to believe that the final rule would not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \378\ See 17 U.S.C. 78o-11.
---------------------------------------------------------------------------

    Some commenters on the re-proposal expressed concern that the re-
proposed risk retention requirements could indirectly affect the costs 
and availability of credit to small businesses and the availability of 
mortgage credit to low- to moderate-income buyers. The Regulatory 
Flexibility Act only requires an agency to consider regulatory 
alternatives for those small entities subject to the final rule. The 
Commission has considered the broader economic impact of the final 
rule, including their potential effect on efficiency, competition and 
capital formation, in the Commission's Economic Analysis below.
    For the reasons described above, the Commission again hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the final rule will not 
have a significant economic impact on a substantial number of small 
entities.
    FHFA: FHFA has considered the impact of the final rule on the 
entities that it regulates, none of which come within the meaning of 
small entities as defined in the Regulatory Flexibility Act (RFA). See 
5 U.S.C. 601(6). Pursuant to section 605(b) of the RFA, FHFA hereby 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities.

B. Paperwork Reduction Act

1. Background
    Certain provisions of the final rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501-3521. In accordance 
with the requirements of the PRA, the agencies may not conduct or 
sponsor, and the respondent is not required to respond to, an 
information collection unless it displays a currently valid Office of 
Management and Budget (OMB) control number. The agencies published a 
notice requesting comment on the collection of information requirements 
in the Original Proposal and the Revised Proposal, and the information 
collection requirements contained in this joint final rule have been 
submitted by the FDIC, OCC, and the Commission to OMB for approval 
under section 3507(d) of the PRA and section 1320.11 of OMB's 
implementing regulations (5 CFR part 1320). The Board reviewed the rule 
under the authority delegated to the Board by OMB. While commenters 
provided qualitative comments on the possible costs of the rule, the 
agencies did not receive any quantitative comments on the PRA analysis.
2. Information Collection
    Title of Information Collection: Credit Risk Retention.
    Frequency of response: Event generated; annual.
    Affected Public: \379\
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    \379\ The affected public of the FDIC, OCC, and Board is 
assigned generally in accordance with the entities covered by the 
scope and authority section of their respective rule. The affected 
public of the Commission is based on those entities not already 
accounted for by the FDIC, OCC, and Board.
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    FDIC: Insured state non-member banks, insured state branches of 
foreign banks, state savings associations, and certain subsidiaries of 
these entities.
    OCC: National banks, Federal savings associations, Federal branches 
or agencies of foreign banks, or any operating subsidiary thereof.
    Board: Insured state member banks, bank holding companies, savings 
and loan holding companies, Edge and agreement corporations, foreign 
banking organizations, nonbank financial companies supervised by the 
Board, and any subsidiary thereof.
    Commission: All entities other than those assigned to the FDIC, 
OCC, or Board.
    Abstract: The rule sets forth permissible forms of risk retention 
for securitizations that involve issuance of asset-backed securities, 
as well as exemptions from the risk retention requirements, and 
contains requirements subject to the PRA. The information requirements 
in the joint regulations adopted by the three Federal banking agencies 
and the Commission

[[Page 77702]]

are found in sections _.4, _.5, _.6, _.7, _.8, _.9, _.10, _.11, _.13, 
_.15, _.16, _.17, _.18, and _.19(g). The agencies believe that the 
disclosure and recordkeeping requirements associated with the various 
forms of risk retention will enhance market discipline, help ensure the 
quality of the assets underlying a securitization transaction, and 
assist investors in evaluating transactions. Compliance with the 
information collections is mandatory. Responses to the information 
collections will not be kept confidential and, except for the 
recordkeeping requirements set forth in sections _.4(d), _.5(k)(3) and 
_.15(d), there will be no mandatory retention period for the 
collections of information.
3. Section-by-Section Analysis
    Section _.4 sets forth the conditions that must be met by sponsors 
electing to use the standard risk retention option, which may consist 
of an eligible vertical interest or an eligible horizontal residual 
interest, or any combination thereof. Sections _.4(c)(1) and _.4(c)(2) 
specify the disclosures required with respect to eligible horizontal 
residual interests and eligible vertical interests, respectively.
    A sponsor retaining any eligible horizontal residual interest (or 
funding a horizontal cash reserve account) is required to disclose: The 
fair value (or a range of fair values and the method used to determine 
such range) of the eligible horizontal residual interest that the 
sponsor expects to retain at the closing of the securitization 
transaction (Sec.  _.4(c)(1)(i)(A)); the material terms of the eligible 
horizontal residual interest (Sec.  _.4(c)(1)(i)(B)); the methodology 
used to calculate the fair value (or range of fair values) of all 
classes of ABS interests (Sec.  _.4(c)(1)(i)(C)); the key inputs and 
assumptions used in measuring the estimated total fair value (or range 
of fair values) of all classes of ABS interests (Sec.  
_.4(c)(1)(i)(D)); the reference data set or other historical 
information used to develop the key inputs and assumptions (Sec.  
_.4(c)(1)(i)(G)); the fair value of the eligible horizontal residual 
interest retained by the sponsor (Sec.  _.4(c)(1)(ii)(A)); the fair 
value of the eligible horizontal residual interest required to be 
retained by the sponsor (Sec.  _.4(c)(1)(ii)(B)); description of any 
material differences between the methodology used in calculating the 
fair value disclosed prior to sale and the methodology used to 
calculate the fair value at the time of closing (Sec.  
_.4(c)(1)(ii)(C)); and the amount placed by the sponsor in the 
horizontal cash reserve account at closing, the fair value of the 
eligible horizontal residual interest that the sponsor is required to 
fund through such account, and a description of such account (Sec.  
_.4(c)(1)(iii)).
    For eligible vertical interests, the sponsor is required to 
disclose: The form of the eligible vertical interest (Sec.  
_.4(c)(2)(i)(A)); the percentage that the sponsor is required to retain 
(Sec.  _.4(c)(2)(i)(B)); a description of the material terms of the 
vertical interest and the amount the sponsor expects to retain at 
closing (Sec.  _.4(c)(2)(i)(C)); and the amount of vertical interest 
retained by the sponsor at closing ((Sec.  _.4(c)(2)(ii)).
    Section _.4(d) requires a sponsor to retain the certifications and 
disclosures required in paragraphs (a) and (c) of this section in its 
records and must provide the disclosure upon request to the Commission 
and the sponsor's appropriate Federal banking agency, if any, until 
three years after no ABS interests are outstanding.
    Section _.5 requires sponsors relying on the master trust (or 
revolving pool securitization) risk retention option to disclose: The 
material terms of the seller's interest and the percentage of the 
seller's interest that the sponsor expects to retain at the closing of 
the transaction (Sec.  _.5(k)(1)(i)); the percentage of the seller's 
interest that the sponsor retained at closing (Sec.  _.5(k)(1)(ii)); 
the material terms of any horizontal risk retention offsetting the 
seller's interest under Sec.  _.5(g), Sec.  _.5(h) and Sec.  _.5(i) 
(Sec.  _.5(k)(1)(iii)); and the fair value of any horizontal risk 
retention retained by the sponsor (Sec.  _.5(k)(1)(iv)). Additionally, 
a sponsor must retain the disclosures required in Sec.  _.5(k)(1) in 
its records and must provide the disclosure upon request to the 
Commission and the sponsor's appropriate Federal banking agency, if 
any, until three years after no ABS interests are outstanding (Sec.  
_.5(k)(3)).
    Section _.6 addresses the requirements for sponsors utilizing the 
eligible ABCP conduit risk retention option. The requirements for the 
eligible ABCP conduit risk retention option include disclosure to each 
purchaser of ABCP and periodically to each holder of commercial paper 
issued by the ABCP conduit of the name and form of organization of the 
regulated liquidity provider that provides liquidity coverage to the 
eligible ABCP conduit, including a description of the material terms of 
such liquidity coverage, and notice of any failure to fund; and with 
respect to each ABS interest held by the ABCP conduit, the asset class 
or brief description of the underlying securitized assets, the standard 
industrial category code for each originator-seller that retains an 
interest in the securitization transaction, and a description of the 
percentage amount and form of interest retained by each originator-
seller (Sec.  _.6(d)(1)). An ABCP conduit sponsor relying upon this 
section shall provide, upon request, to the Commission and the 
sponsor's appropriate Federal banking agency, if any, the information 
required under Sec.  _.6(d)(1), in addition to the name and form of 
organization of each originator-seller that retains an interest in the 
securitization transaction (Sec.  _.6(d)(2)).
    A sponsor relying on the eligible ABCP conduit risk retention 
option shall maintain and adhere to policies and procedures to monitor 
compliance by each originator-seller (Sec.  _.6(f)(2)(i)). If the ABCP 
conduit sponsor determines that an originator-seller is no longer in 
compliance, the sponsor must promptly notify the holders of the ABCP, 
and upon request, the Commission and the sponsor's appropriate Federal 
banking agency, in writing of the name and form of organization of any 
originator-seller that fails to retain, and the amount of ABS interests 
issued by an intermediate SPV of such originator-seller and held by the 
ABCP conduit (Sec.  _.6(f)(2)(ii)(A)(1)); the name and form of 
organization of any originator-seller that hedges, directly or 
indirectly through an intermediate SPV, its risk retention in violation 
of the rule, and the amount of ABS interests issued by an intermediate 
SPV of such originator-seller and held by the ABCP conduit (Sec.  
_.6(f)(2)(ii)(A)(2)); and any remedial actions taken by the ABCP 
conduit sponsor or other party with respect to such ABS interests 
(Sec.  _.6(f)(2)(ii)(A)(3)).
    Section _.7 sets forth the requirements for sponsors relying on the 
commercial mortgage-backed securities risk retention option, and 
includes disclosures of: The name and form of organization of each 
initial third-party purchaser (Sec.  _.7(b)(7)(i)); each initial third-
party purchaser's experience in investing in commercial mortgage-backed 
securities (Sec.  _.7(b)(7)(ii)); other material information (Sec.  
_.7(b)(7)(iii)); the fair value and purchase price of the eligible 
horizontal residual interest retained by each third-party purchaser, 
and the fair value of the eligible horizontal residual interest that 
the sponsor would have retained if the sponsor had relied on retaining 
an eligible horizontal residual interest under the standard risk 
retention option (Sec.  _.7(b)(7)(iv) and (v)); a description of the 
material terms of the eligible horizontal residual interest retained by 
each initial third-party purchaser, including the same information as 
is

[[Page 77703]]

required to be disclosed by sponsors retaining horizontal interests 
pursuant to Sec.  _.4 (Sec.  _.7(b)(7)(vi)); the material terms of the 
applicable transaction documents with respect to the Operating Advisor 
(Sec.  _.7(b)(7)(vii)); and representations and warranties concerning 
the securitized assets, a schedule of any securitized assets that are 
determined not to comply with such representations and warranties, and 
the factors used to determine that such securitized assets should be 
included in the pool notwithstanding that they did not comply with the 
representations and warranties (Sec.  _.7(b)(7)(viii)). A sponsor 
relying on the commercial mortgage-backed securities risk retention 
option is also required to provide in the underlying securitization 
transaction documents certain provisions related to the Operating 
Advisor (Sec.  _.7(b)(6)), to maintain and adhere to policies and 
procedures to monitor compliance by third-party purchasers with 
regulatory requirements (Sec.  _.7(c)(2)(A)), and to notify the holders 
of the ABS interests in the event of noncompliance by a third-party 
purchaser with such regulatory requirements (Sec.  _.7(c)(2)(B)).
    Section _.8 requires that a sponsor relying on the Federal National 
Mortgage Association and Federal Home Loan Mortgage Corporation risk 
retention option must disclose a description of the manner in which it 
has met the credit risk retention requirements (Sec.  _.8(c)).
    Section _.9 sets forth the requirements for sponsors relying on the 
open market CLO risk retention option, and includes disclosures of a 
complete list of, and certain information related to, every asset held 
by an open market CLO (Sec.  _.9(d)(1)), and the full legal name and 
form of organization of the CLO manager (Sec.  _.9(d)(2)).
    Section _.10 sets forth the requirements for sponsors relying on 
the qualified tender option bond risk retention option, and includes 
disclosures of the name and form of organization of the qualified 
tender option bond entity, a description of the form and subordination 
features of the retained interest in accordance with the disclosure 
obligations in section _.4(d), the fair value of any portion of the 
retained interest that is claimed by the sponsor as an eligible 
horizontal residual interest, and the percentage of ABS interests 
issued that is represented by any portion of the retained interest that 
is claimed by the sponsor as an eligible vertical interest (Sec.  
_.10(e)(1)-(4)). In addition, to the extent any portion of the retained 
interest claimed by the sponsor is a municipal security held outside of 
the qualified tender option bond entity, the sponsor must disclose the 
name and form of organization of the qualified tender option bond 
entity, the identity of the issuer of the municipal securities, the 
face value of the municipal securities deposited into the qualified 
tender option bond entity, and the face value of the municipal 
securities retained outside of the qualified tender option bond entity 
by the sponsor or its majority-owned affiliates (Sec.  _.10(e)(5)).
    Section _.11 sets forth the conditions that apply when the sponsor 
of a securitization allocates to originators of securitized assets a 
portion of the credit risk the sponsor is required to retain, including 
disclosure of the name and form of organization of any originator that 
acquires and retains an interest in the transaction, a description of 
the form, amount and nature of such interest, and the method of payment 
for such interest (Sec.  _.11(a)(2)). A sponsor relying on this section 
is required to maintain and adhere to policies and procedures that are 
reasonably designed to monitor originator compliance with retention 
amount and hedging, transferring and pledging requirements (Sec.  
_.11(b)(2)(A)), and to promptly notify the holders of the ABS interests 
in the transaction in the event of originator non-compliance with such 
regulatory requirements (Sec.  _.11(b)(2)(B)).
    Sections _.13 and _.19(g) provide exemptions from the risk 
retention requirements for qualified residential mortgages and 
qualifying 3-to-4 unit residential mortgage loans that meet certain 
specified criteria, including that the depositor with respect to the 
securitization transaction certify that it has evaluated the 
effectiveness of its internal supervisory controls and concluded that 
the controls are effective (Sec. Sec.  _.13(b)(4)(i) and _.19(g)(2)), 
and that the sponsor provide a copy of the certification to potential 
investors prior to sale of asset-backed securities in the issuing 
entity (Sec. Sec.  _.13(b)(4)(iii) and _.19(g)(2)). In addition, 
Sec. Sec.  _.13(c)(3) and _.19(g)(3) provide that a sponsor that has 
relied upon the exemptions will not lose the exemptions if, after 
closing of the transaction, it is determined that one or more of the 
residential mortgage loans does not meet all of the criteria; provided 
that the depositor complies with certain specified requirements, 
including prompt notice to the holders of the asset-backed securities 
of any loan that is required to be repurchased by the sponsor, the 
amount of such repurchased loan, and the cause for such repurchase.
    Section _.15 provides exemptions from the risk retention 
requirements for qualifying commercial loans that meet the criteria 
specified in Section _.16, qualifying CRE loans that meet the criteria 
specified in Section _.17, and qualifying automobile loans that meet 
the criteria specified in Section _.18. Section _.15 also requires the 
sponsor to disclose a description of the manner in which the sponsor 
determined the aggregate risk retention requirement for the 
securitization transaction after including qualifying commercial loans, 
qualifying CRE loans, or qualifying automobile loans with 0 percent 
risk retention (Sec.  _.15(a)(4)). In addition, the sponsor is required 
to disclose descriptions of the qualifying commercial loans, qualifying 
CRE loans, and qualifying automobile loans (``qualifying assets''), and 
descriptions of the assets that are not qualifying assets, and the 
material differences between the group of qualifying assets and the 
group of assets that are not qualifying assets with respect to the 
composition of each group's loan balances, loan terms, interest rates, 
borrower credit information, and characteristics of any loan collateral 
(Sec.  _.15(b)(3)). Additionally, a sponsor must retain the disclosures 
required in Sec. Sec.  _.15(a) and (b) in its records and must provide 
the disclosure upon request to the Commission and the sponsor's 
appropriate Federal banking agency, if any, until three years after no 
ABS interests are outstanding (Sec.  _.15(d)).
    Sections _.16, _.17 and _.18 each require that: The depositor of 
the asset-backed security certify that it has evaluated the 
effectiveness of its internal supervisory controls and concluded that 
its internal supervisory controls are effective (Sec. Sec.  
_.16(a)(8)(i), _.17(a)(10)(i), and _.18(a)(8)(i)); the sponsor is 
required to provide a copy of the certification to potential investors 
prior to the sale of asset-backed securities in the issuing entity 
(Sec. Sec.  _.16(a)(8)(iii), _.17(a)(10)(iii), and _.18(a)(8)(iii)); 
and the sponsor must promptly notify the holders of the asset-backed 
securities of any loan included in the transaction that is required to 
be cured or repurchased by the sponsor, including the principal amount 
of such loan and the cause for such cure or repurchase (Sec. Sec.  
_.16(b)(3), _.17(b)(3), and _.18(b)(3)). Additionally, a sponsor must 
retain the disclosures required in Sec. Sec.  _.16(a)(8), _.17(a)(10) 
and _.18(a)(8) in its records and must provide the disclosure upon 
request to the Commission and the sponsor's appropriate Federal banking 
agency, if any, until three years after no ABS interests are 
outstanding (Sec.  _.15(d)).

[[Page 77704]]

4. Estimated Paperwork Burden
    Estimated Burden per Response:
    Sec.  _.4--Standard risk retention: horizontal interests: 
recordkeeping--0.5 hours, disclosures--5.5 hours; vertical interests: 
recordkeeping--0.5 hours, disclosures--2.0 hours; combined horizontal 
and vertical interests: recordkeeping--0.5 hours, disclosures--7.5 
hours.
    Sec.  _.5--Revolving master trusts: recordkeeping--0.5 hours; 
disclosures--7.0 hours.
    Sec.  _.6--Eligible BCP conduits: recordkeeping--20.0 hours; 
disclosures--3.0 hours.
    Sec.  _.7--Commercial mortgage-backed securities: recordkeeping--
30.0 hours; disclosures--20.75 hours.
    Sec.  _.8--Federal National Mortgage Association and Federal Home 
Loan Mortgage Corporation ABS: disclosures--1.5 hours.
    Sec.  _.9--Open market CLOs: disclosures--20.25 hours.
    Sec.  _.10--Qualified tender option bonds: disclosures--6.0 hours.
    Sec.  _.11--Allocation of risk retention to an originator: 
recordkeeping 20.0 hours; disclosures 2.5 hours.
    Sec. Sec.  _.13 and _.19(g)--Exemption for qualified residential 
mortgages and qualifying 3-to-4 unit residential mortgage loans: 
recordkeeping--40.0 hours; disclosures 1.25 hours.
    Sec.  _.15--Exemption for qualifying commercial loans, commercial 
real estate loans, and automobile loans: disclosure--20.0 hours; 
recordkeeping--0.5 hour.
    Sec.  _.16--Underwriting standards for qualifying commercial loans: 
recordkeeping--40.5 hours; disclosures--1.25 hours.
    Sec.  __.17-- Underwriting standards for qualifying CRE loans: 
recordkeeping--40.5 hours; disclosures--1.25 hours.
    Sec.  __.18--Underwriting standards for qualifying automobile 
loans: recordkeeping--40.5 hours; disclosures--1.25 hours.

FDIC

    Estimated Number of Respondents: 32 sponsors; 153 annual offerings 
per year.
    Total Estimated Annual Burden: 3,235 hours.

    OCC

    Estimated Number of Respondents: 35 sponsors; 166 annual offerings 
per year.
    Total Estimated Annual Burden: 3,444 hours.

    Board

    Estimated Number of Respondents: 22 sponsors; 102 annual offerings 
per year.
    Total Estimated Annual Burden: 2,114 hours.

    Commission

    Estimated Number of Respondents: 181 sponsors; 854 annual offerings 
per year.
    Total Estimated Annual Burden: 17,768 hours.
    Commission's explanation of the calculation:
    To determine the total paperwork burden for the requirements 
contained in this rule the agencies first estimated the universe of 
sponsors that would be required to comply with the disclosure and 
recordkeeping requirements. The agencies estimate that approximately 
270 unique sponsors conduct ABS offerings each year. This estimate was 
based on the average number of ABS offerings from 2004 through 2013 
reported by the ABS database Asset-Backed Alert for all non-CMBS 
transactions and by Commercial Mortgage Alert for all CMBS 
transactions. Of the 270 sponsors, the agencies have assigned 8 percent 
of these sponsors to the Board, 12 percent to the FDIC, 13 percent to 
the OCC, and 67 percent to the Commission.\380\
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    \380\ The allocation percentages among the agencies have been 
adjusted based on the agencies' latest assessment of more recent 
data, including the securitization activity reported by FDIC-insured 
depository institutions in the June 30, 2014 Consolidated Reports of 
Condition.
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    Next, the agencies estimated the burden per response that is 
associated with each disclosure and recordkeeping requirement, and then 
estimated how frequently the entities would make the required 
disclosure by estimating the proportionate amount of offerings per year 
for each agency. In making this determination, the estimate was based 
on the average number of ABS offerings from 2004 through 2013 and, 
therefore, the agencies estimate the total number of annual offerings 
per year to be 1,275.\381\ The agencies also made the following 
additional estimates:
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    \381\ Based on ABS issuance data from Asset-Backed Alert on the 
initial terms of offerings, supplemented with information from 
Commercial Mortgage Alert. This estimate includes registered 
offerings, offerings made under Securities Act Rule 144A, and 
traditional private placements. This estimate is for offerings that 
are not exempted under Sec. Sec.  _.19(a)-(f) and _.20 of the rule.
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     12 offerings per year will be subject to disclosure and 
recordkeeping requirements under Sec.  __.11, which are divided equally 
among the four agencies (i.e., 3 offerings per year per agency);
     100 offerings per year will be subject to disclosure and 
recordkeeping requirements under Sec. Sec.  __.13 and __.19(g), which 
are divided proportionately among the agencies based on the entity 
percentages described above (i.e., 8 offerings per year subject to 
Sec. Sec.  __.13 and __.19(g) for the Board; 12 offerings per year 
subject to Sec. Sec.  __.13 and __.19(g) for the FDIC; 13 offerings per 
year subject to Sec. Sec.  __.13 and __.19(g) for the OCC; and 67 
offerings per year subject to Sec. Sec.  __.13 and __.19(g) for the 
Commission); and
     120 offerings per year will be subject to the disclosure 
requirements under Sec.  __.15, which are divided proportionately among 
the agencies based on the entity percentages described above (i.e., 10 
offerings per year subject to Sec.  __.15 for the Board, 14 offerings 
per year subject to Sec.  __.15 for the FDIC; 16 offerings per year 
subject to Sec.  __.15 for the OCC, and 80 offerings per year subject 
to Sec.  __.15 for the Commission. Of these 120 offerings per year, 40 
offerings per year will be subject to disclosure and recordkeeping 
requirements under Sec. Sec.  __.16, __.17, and __.18, respectively, 
which are divided proportionately among the agencies based on the 
entity percentages described above (i.e., 3 offerings per year subject 
to each section for the Board, 5 offerings per year subject to each 
section for the FDIC; 5 offerings per year subject to each section for 
the OCC, and 27 offerings per year subject to each section for the 
Commission).
    To obtain the estimated number of responses (equal to the number of 
offerings) for each option in subpart B of the rule, the agencies 
multiplied the number of offerings estimated to be subject to the base 
risk retention requirements (i.e., 1,055) \382\ by the sponsor 
percentages described above. The result was the number of base risk 
retention offerings per year per agency. For the Commission, this was 
calculated by multiplying 1,055 offerings per year by 67 percent, which 
equals 707 offerings per year. This number was then divided by the 
number of base risk retention options under subpart B of the rule 
(i.e., nine) \383\ to arrive at the estimate of the number of offerings 
per year per agency per base risk retention option. For the Commission, 
this was calculated by dividing 707 offerings per year by nine options, 
resulting in 79 offerings per year per base risk retention option.
---------------------------------------------------------------------------

    \382\ Estimate of 1,275 offerings per year minus the estimate of 
the number of offerings qualifying for an exemption under Sec. Sec.  
__.13, __.15, and 19(g) (220 total).
    \383\ For purposes of this calculation, the horizontal, 
vertical, and combined horizontal and vertical risk retention 
methods under the standard risk retention option are each counted as 
a separate option under subpart B of the rule.
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    The total estimated annual burden for each agency was then 
calculated by multiplying the number of offerings per year per section 
for such agency by the number of burden hours estimated for the 
respective section, then adding these

[[Page 77705]]

subtotals together. For example, under Sec.  __.10, the Commission 
multiplied the estimated number of offerings per year for Sec.  __.10 
(i.e., 79 offerings per year) by the estimated annual frequency of the 
response for Sec.  __.10 of one response, and then by the disclosure 
burden hour estimate for Sec.  __.10 of 6.0 hours. Thus, the estimated 
annual burden hours for respondents to which the Commission accounts 
for the burden hours under Sec.  __.10 is 474 hours (79 x 1 x 6.0 hours 
= 474 hours).
    For disclosures made at the time of the securitization 
transaction,\384\ the Commission allocates 25 percent of these hours 
(1,773 hours) to internal burden for all sponsors. For the remaining 75 
percent of these hours, (5,319 hours), the Commission uses an estimate 
of $400 per hour for external costs for retaining outside professionals 
totaling $2,127,750. For disclosures made after the time of sale in a 
securitization transaction,\385\ the Commission allocated 75 percent of 
the total estimated burden hours (1,565 hours) to internal burden for 
all sponsors. For the remaining 25 percent of these hours (522 hours), 
the Commission uses an estimate of $400 per hour for external costs for 
retaining outside professionals totaling $208,650.
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    \384\ These are the disclosures required by Sec. Sec.  _.4 
(c)(1)(i) and (iii), and (c)(2)(i) (as applicable to horizontal 
interests, vertical interests, or any combination of horizontal and 
vertical interests); Sec. Sec.  _.5(k)(1)(i), (iii) and (iv) ; 
_.6(d); _.7(b)(7)(i) through (viii); _.8(c); _.9(d); 10(e); 
_.11(a)(2); _.13(b)(4)(iii); _.15(a)(4) and (b)(3); _.16(a)(8)(iii); 
_.17(a)(10)(iii); _.18(a)(8)(iii); and __.19(g)(2).
    \385\ These are the disclosures required by Sec. Sec.  _.4 
(c)(1)(ii) and (c)(2)(ii) (as applicable to horizontal interests, 
vertical interests, or any combination of horizontal and vertical 
interests); Sec. Sec.  _.5(k)(1)(ii); _.6(f)(2)(ii); _.7(c)(2)(B); 
_.9(d)(1); _.11(b)(2)(B); _13(c)(3); _.16(b)(3); _17(b)(3); 
_.18(b)(3); and __.19(g)(3).
---------------------------------------------------------------------------

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

C. Commission Economic Analysis

1. Introduction
    Pursuant to Section 15G (Section 15G) of the Securities Exchange 
Act of 1934 (Exchange Act), as added by Section 941(b) of the Dodd-
Frank Act, the agencies are jointly prescribing regulations that (i) 
require a sponsor to retain not less than 5 percent of the credit risk 
of any asset that the sponsor, through the issuance of an asset-backed 
security, transfers, sells, or conveys to a third party, and (ii) 
prohibit a sponsor from directly or indirectly hedging or otherwise 
transferring the credit risk that the sponsor is required to retain 
under Section 15G and the agencies' implementing rules.\386\ Section 
15G also exempts certain types of securitization transactions from 
these risk retention requirements and authorizes the agencies to exempt 
or establish a lower risk retention requirement for other types of 
securitization transactions.
---------------------------------------------------------------------------

    \386\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B).
---------------------------------------------------------------------------

    The Commission is sensitive to the economic impacts, including the 
costs and benefits, of its rules. The discussion below addresses the 
economic effects of the final rule, including the likely benefits and 
costs of the rule as well as their effects on efficiency, competition 
and capital formation. Some of the economic effects stem from the 
statutory mandate of Section 15G, whereas others are affected by the 
discretion the agencies have exercised in implementing this mandate. 
These two types of impacts may not be entirely separable to the extent 
that the agencies' discretion is exercised to realize the goals of 
Section 15G.
    Section 23(a)(2) of the Exchange Act requires the Commission, when 
making rules under the Exchange Act, to consider the impact on 
competition that the rules would have, and prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.\387\ 
Further, Section 3(f) of the Exchange Act requires the Commission,\388\ 
when engaging in rulemaking where it is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition and capital 
formation.
---------------------------------------------------------------------------

    \387\ 15 U.S.C. 78w(a).
    \388\ 17 U.S.C. 78c(f).
---------------------------------------------------------------------------

    While we make every reasonable attempt to quantify the economic 
impact of the rule that we are adopting, we are unable to do so for 
several components of the new rule due to the lack of available data. 
We also recognize that several components of the new rule are designed 
to change existing market practices and as a result, existing data may 
not provide a basis to fully assess the rule's economic impact. 
Specifically, the rule's effects will depend on how sponsors, issuers, 
investors, and other parties to the transactions (e.g., originators, 
trustees, underwriters, and other parties that facilitate transactions 
between borrowers, issuers and investors) will adjust on a long-term 
basis to this new rule and the resulting evolving conditions. The ways 
in which these parties could adjust, and the associated effects, are 
complex and interrelated. As a result, we are unable to predict them 
with specificity nor are we able to quantify them at this time.
2. Broad Economic Considerations
a. Policy Goals of the Risk Retention Requirement
    Asset-backed securitizations play an important role in the creation 
of credit by increasing the amount of capital available for the 
origination of loans and other receivables \389\ through the transfer 
of those assets--in exchange for new capital--to other market 
participants. The intended benefits of the securitization process 
include reduced cost of credit and expanded access to credit for 
borrowers, ability to match risk profiles of securities to investors' 
specific demands, and increased secondary market liquidity for loans 
and other receivables.\390\
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    \389\ While most securitized assets are loans or other 
extensions of credit, other assets are routinely securitized. This 
discussion focuses on loans because they are the most commonly 
securitized assets and their impact is more widespread. The 
Commission believes that the impact on other kinds of receivables 
should be similar.
    \390\ See, e.g., Board of Governors of the Federal Reserve 
System, ``Report to the Congress on Risk Retention'' (October 2010) 
and Financial Stability Oversight Committee, ``Macroeconomic Effects 
of Risk Retention Requirements'' (January 2011).
---------------------------------------------------------------------------

    Asset-backed securitizations can also generate significant risks to 
the economy. Indeed, many observers claim that the ``originate-to-
distribute'' model underlying securitization for some asset classes 
contributed to the onset of the financial crisis.\391\ The 
informational asymmetries in securitization markets generated between 
the borrower and the investors in the asset-backed securities, who are 
the ultimate providers of credit, give rise to the moral hazard problem 
of loan originators or securitization sponsors incurring risks in the 
underwriting or securitization process for which they did not bear the 
consequence. Loan originators who establish and enforce the 
underwriting standards are best able to understand the potential 
consequences of their credit decisions. If loan originators hold the 
loans they originated, then they are more likely to exercise 
appropriate care in evaluating the credit quality of the loan, 
including the borrower's ability to

[[Page 77706]]

repay. However, if the originator can sell the loan, the originator has 
less incentive to screen borrowers carefully. Likewise, sponsors have 
limited incentives to accurately assess the actual risks of the loans 
they purchase from originators because the consequences of their 
decisions are passed on to the investors in the asset-backed 
securities. Further, because both loan originators and asset-backed 
securities sponsors are compensated on the basis of volume rather than 
quality of underwriting, there are economic incentives to originate and 
securitize as many loans as possible. Consequently, default risk is 
less important to the market participants originating and securitizing 
loans.
---------------------------------------------------------------------------

    \391\ Purnanandam, ``Originate-to-Distribute Model and the Sub-
Prime Mortgage Crisis'', 24(6) Rev. Fin. Stud. 1881-1915 (2011).
---------------------------------------------------------------------------

    In addition to this fundamental moral hazard problem, other 
features of the securitization market contribute to the risks posed by 
these financing transactions. The ultimate investors in the securitized 
assets have access to less information about the credit quality and 
other relevant characteristics of the borrowers than either the 
originator or sponsor, and may not have effective recourse when the 
assets do not perform as expected. Moreover, in the early 2000s, demand 
from securitization sponsors for additional assets to securitize 
encouraged originators to focus capital towards higher risk assets, 
including the sub-prime residential mortgage market, which serves the 
mortgage needs of individuals who are less creditworthy than typical 
home buyers.\392\ The effects of these incentives were compounded by 
the entry of new market originators and sponsors with varying amounts 
of experience and capacity to effectively evaluate credit risk.
---------------------------------------------------------------------------

    \392\ Dell'Ariccia, Deniz and Laeven, ``Credit Booms and Lending 
Standards: Evidence from the Subprime Mortgage Market'', Journal of 
Money, Credit and Banking, vol. 44, no. 2-3, pp. 367-384, March-
April 2012; Mian and Sufi, ``The Consequences of Mortgage Credit 
Expansion: Evidence from the 2007 Mortgage Default Crisis'', 
Quarterly Journal of Economics 2009, vol. 124, no. 4, pp. 1449-1496.
---------------------------------------------------------------------------

    The moral hazard problem may be especially severe when there are 
inadequate processes in place to elicit sufficient transparency about 
the assets or securitization structure to overcome informational 
differences. In these cases, the securitization process can misalign 
incentives so that the welfare of some participants is maximized at the 
expense of other participants. Many of these risks are not adequately 
disclosed to investors in securitizations, an issue compounded as 
sponsors introduce increasingly complex structures.\393\ The financial 
crisis also revealed that credit rating agencies had generally not 
appropriately evaluated the credit risk of certain asset-backed 
securities. In particular, credit rating agencies assigned high ratings 
on the senior classes of RMBS or CDOs backed by RMBS that were 
subsequently not supported by the actual performance of those 
securities.\394\
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    \393\ Furfine, Complexity and Loan Performance: Evidence from 
the Securitization of Commercial Mortgages, Review of Corporate 
Finance Studies, v. 2, no. 2, March 2014, pp. 154-187; Ghent, 
Torous, and Valkanov, Complexity in Structured Finance: Financial 
Wizardry or Smoke and Mirrors? (2013, Working Paper, available at 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2325835).
    \394\ See, e.g., Benmelech and Dlugosz, 2010, The Credit Rating 
Crisis, Chapter 3 of NBER Macroeconomics Annual 2009, Vol. 24, pp. 
161-207, Acemoglu, Rogoff and Woodford, eds., University of Chicago 
Press; Bolton, Freixas and Shapiro, ``The Credit Ratings Game'', 
Journal of Finance, vol. 67, no. 1, pp. 85-111, February 2012; 
Griffin and Tang, ``Did Subjectivity Play a Role in CDO Credit 
Ratings?'', Journal of Finance, vol. 67, no. 4, pp. 1293-1328, 
August 2012.
---------------------------------------------------------------------------

    Requiring the retention of credit risk by sponsors of asset-backed 
securities is intended to address these misaligned incentives by 
requiring originators and sponsors of asset-backed securities to 
internalize some of the same risks faced by the investors in those 
asset-backed securities. For example, risk-averse sponsors will be 
reluctant to absorb the uncertain payouts associated with high-risk 
loans. In order to limit their exposure to loans with high default 
risk, these sponsors will be incentivized to scrutinize loan 
originators' loans and underwriting procedures more carefully.\395\ 
Under the risk retention requirements, securitized loans should 
therefore be less subject to the lax lending and credit enhancement 
standards that imposed large losses on asset-backed securities (in 
particular, RMBS) investors during the financial crisis. By requiring 
sponsors to retain credit exposure to the securitized assets, risk 
retention is intended to ensure that sponsors have ``skin in the game'' 
and thus are economically motivated to be more judicious in their 
selection of loans being securitized, thereby helping to produce asset-
backed securities collateralized by loans with higher underwriting 
standards. More generally, when a sponsor or originator with better 
information about the securitized loans is required to hold some of the 
same risks being transferred to asset-backed securities investors, 
those investors should be subject to lower risks. When a sponsor shares 
the risk of the securitized loans with asset-backed securities 
investors, the sponsor is more likely to be aware of the exact nature 
and scope of the potential risks, and therefore to be in a position to 
provide those investors with more accurately represented risks.
---------------------------------------------------------------------------

    \395\ Likewise, if the originator were required to share in the 
pool's risk, or were required to buy back loans that did not meet 
pre-specified underwriting standards, the originator could be 
incentivized to exercise more care in making loans. However, because 
such arrangements are unfunded, they may not effectively mitigate 
the moral hazard problem described above, and investors may not 
benefit from the credit protection because the obligor under the 
unfunded obligations may not be able to fulfill those obligations 
when they come due. Consequently, the agencies have not recognized 
these arrangements as acceptable forms of risk retention.
---------------------------------------------------------------------------

b. Potential Economic Effects of Requiring Risk Retention
    Mandatory risk retention reflects a belief that sponsors of asset-
backed securities have a more accurate assessment of the underlying 
assets' risk properties than can be attained by their ultimate 
investors. This information asymmetry can have adverse market effects 
to the extent that sponsors seek to profit from their differential 
information. Some observers contend that during the financial crisis, 
sponsors sold assets that they knew to be very risky, without conveying 
that information to ABS investors. One way to offset information 
asymmetries is to require that sponsors retain some ``skin in the 
game,'' through which loan performance can affect sponsors' profits as 
much as--or more than--those of the ABS investors.
    The standard forms of risk retention in the final rule include a 
vertical option, a horizontal option, or a combination of a vertical 
option and a horizontal option. Sponsors' choice of a particular risk 
retention option will depend on tradeoffs among direct costs, the 
sponsors' required returns on capital, and investors' uncertainty about 
the quality of the underlying loan pool. In turn, the overall economic 
impact of requiring risk retention will depend on the form in which it 
is held by sponsors.\396\ A sponsor relying exclusively on the vertical 
risk retention option will hold 5 percent of every tranche, from the 
senior tranche to the residual interest, and shares the same credit 
risk as investors in every tranche. The retention of a 5 percent 
vertical slice of ABS securities ties the sponsor's profits to the 
underlying assets' default rates. For any given securitization of 
assets characterized by a fixed set of underlying loan interest rates, 
the ABS

[[Page 77707]]

sponsor earns less if the loans default at a higher-than-expected rate. 
This gives the sponsor an enhanced incentive to be sure that the loan 
interest rates accurately reflect the loans' expected default rates. 
ABS investors can therefore be more confident that their ABS interests 
will perform as promised when the ABS sponsor retains a vertical slide 
of risk. In other words, the information asymmetry between sponsor and 
investors is ameliorated by the risk retention requirement, which leads 
the sponsor to make sure that loan interest rates reflect their 
expected default probabilities.\397\
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    \396\ See Section 5.a of this Economic Analysis for further 
detailed discussion of the economic effects associated with the 
different options of standard risk retention. Section 5.b discusses 
additional forms of risk retention available to sponsors of certain 
securitization structures, including revolving pool securitizations, 
tender option bonds, and asset-backed commercial paper conduits.
    \397\ If sponsors are risk-averse, vertical risk retention might 
also discourage them from securitizing higher-risk loans. See below.
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    An eligible horizontal residual interest, or EHRI, is the most 
subordinated tranche(s) of a securitization, which exposes the owner to 
a disproportionate share of losses from the securitized loans.\398\ A 
sponsor holding an EHRI will suffer greater default losses from a given 
percentage investment than from an equal percent investment in a 
vertical slice, making it a more expensive form of risk retention. 
Horizontal risk retention is nonetheless the norm in some market 
segments because ABS investors' beliefs about the quality of loans in 
the securitization are influenced by the ABS sponsor's exposure to 
credit losses. Investors can therefore be more confident that the 
underlying assets are high-quality when the sponsor retains a larger 
subordinate exposure.\399\ In other words, the sponsor ``signals'' to 
ABS investors its belief that defaults will be low by taking a larger, 
but junior, claim on the portfolio's cash flows.
---------------------------------------------------------------------------

    \398\ Sponsors also share credit risk in a horizontal manner 
through overcollateralization, subordinated management fees, or 
other arrangements. Many of such arrangements are unfunded, however, 
and consequently, the agencies have not recognized them as 
acceptable forms of risk retention.
    \399\ Two papers provide evidence that risk retention by a lead 
underwriter affects the risks perceived by other, less informed, 
members of the syndicate. Victoria Ivashina, 2009, Asymmetric 
information effects on loan spreads, Journal of Financial Economics, 
vol. 92, no. 2, pp. 300-319; Amir Sufi, 2007, Information Asymmetry 
and Financing Arrangements: Evidence from Syndicated Loans, The 
Journal of Finance, vol. 62, no. 2, pp. 629-668.,
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    In general, although ABS investors may find it difficult to assess 
the securitized assets' risks on their own, sponsors can signal the 
quality of the underlying assets by purchasing a first loss position at 
a price that reflects its fundamental value only if loan defaults turn 
out to be low. Relatively larger residual interest tranches may be 
required when the assets being securitized suffer from more acute 
information asymmetries or higher uncertainty about their true default 
risk. Horizontal risk retention forces the sponsor to accept more 
default losses than an equal investment in vertical retention. But the 
increased risk exposure permits a horizontal risk position to signal 
the pool's asset quality and, in turn, permits the securitization 
transaction to provide an economically efficient source of funding for 
the sponsor.
    We anticipate that the ultimate market impact of the credit risk 
retention requirements will depend in part on the individual sponsor's 
level of risk aversion and required return on invested capital. Some 
sponsors may find that holding relatively more risky assets would 
adversely impact their financial position. The risk retention 
requirement will incentivize these sponsors to securitize assets with 
lower default risk. Securitizing assets with lower anticipated losses 
would lessen the resulting credit risk exposure for asset-backed 
securities investors. Higher-quality loan pools with more homogenous 
risk characteristics would give sponsors more incentive to provide 
accurate information about the pool's risk characteristics. With less 
uncertainty about the quality of securitized assets, investors should 
be willing to pay more or demand a lower rate of return for bearing the 
credit risk, which in turn could reduce borrowing costs for underlying 
borrowers. Thus, the net effect of reducing the moral hazard in a 
securitization transaction may be to reduce the cost of loans for more 
creditworthy borrowers.
    The risk retention requirements, however, will not necessarily 
increase the quality of all loan pools offered for securitization. 
Asset-backed securities investors may fund riskier pools provided that 
they are properly compensated (in the form of higher promised tranche 
returns). The market's appetite for risk could lead sponsors to package 
high-risk loans that can generate high expected returns. Sponsors with 
higher cost of capital may also need to earn higher return on their 
retained tranches, which requires that the underlying loans have higher 
interest rates, which tend to be riskier loans. Less creditworthy 
borrowers could be required to pay higher loan interest rates than in 
the past to the extent that the risk retention requires sponsors to 
more accurately account for the potential losses associated with these 
riskier loans.
    The effect of risk retention on borrowing costs will also depend on 
how securitization investors react to the requirements of the final 
rule. If risk retention increases investor confidence that incentives 
are properly aligned in the securitization market, this should increase 
their likelihood of participating in the market, making more capital 
available and increasing competition for issuances of asset-backed 
securities. As a result, the higher prices paid for issuances will 
mitigate the costs imposed on sponsors to retain credit risk. In the 
past, asset-backed security investors did not always have accurate, 
timely or accessible information about securitized asset quality and in 
certain instances were misled about the quality of those assets.\400\ 
If risk retention results in the transmission of more accurate 
information about loan quality to investors (e.g., through pricing of 
EHRIs, the level of horizontal risk retention, or fair value 
disclosures) and allows asset-backed security investors to distinguish 
lower quality loans from higher quality loans, then risk should be more 
efficiently priced in asset-backed security markets.
---------------------------------------------------------------------------

    \400\ See Piskorski, Seru, and Witkin, 2013, Asset Quality 
Misrepresentation by Financial Intermediaries: Evidence from RMBS 
Market, NBER Working Paper No. 18843; and Griffin and Maturana, Who 
Facilitated Misreporting in Securitized Loans? Journal of Finance, 
forthcoming. Both papers find evidence of mortgage misreporting in 
non-agency RMBS by both originators and underwriters; this 
misreporting was not priced by investors at issuance and yet 
strongly predicted future RMBS losses.
---------------------------------------------------------------------------

    Quantifying the potential impact of the credit risk retention on 
borrowing rates of the loans underlying the asset-backed securities 
will depend on the tradeoff between the costs associated with financing 
the additional capital required by sponsors to fund the retained risk 
and its effect on the pricing of the asset-backed securities. For 
example, two studies by the Federal Reserve Bank of New York estimate 
the potential impact of risk retention on the cost of residential 
mortgage borrowing by estimating the change in interest rates on 
securitized loans required to compensate for the sponsors' risk 
retention requirements.\401\ The analyses suggest that incremental 
increases to sponsors' rate of return requirements for securitizations 
of residential mortgage loans with higher levels of risk retention are 
relatively modest, approximately 0-30 basis points.\402\ These 
estimates

[[Page 77708]]

suggest that the underlying loans would need to have an interest rate 
approximately 0.25 percent higher. As discussed above, however, risk 
retention will likely influence the composition of loan pools. Although 
the New York Fed studies do not incorporate this effect, perceptibly 
higher quality loan pools will require less costly financing or lower 
yielding asset-backed securities. Thus, the underlying loan interests 
rates may rise (due to more risk being borne by the sponsor or high 
opportunity cost of capital for retained capital) or fall (because the 
pool is higher quality). By contrast, to the extent that riskier loans 
continue to be securitized even with the requirement to retain risk, 
the underlying loan interest rates are likely to rise. Developments 
that make riskier loans more expensive, at a cost commensurate to their 
intrinsic risk, will improve the efficiency of capital markets.
---------------------------------------------------------------------------

    \401\ See appendix A of the 2013 Reproposal, 78 FR at 58019.
    \402\ This assessment assumes that the underlying loan pool 
characteristics are accurately disclosed and with sufficient detail 
for investors to properly assess the underlying risk. Such a 
scenario would be reflective of the risk retention requirements 
solving the moral hazard problem that might otherwise result in the 
obfuscation of intrinsic risks to the ultimate investors. These 
results also rely on specific assumptions about the return on equity 
demanded by different types of sponsors.
---------------------------------------------------------------------------

    Requiring sponsors to retain risk in the portfolios of assets they 
securitize could impose significant costs on financial markets. 
Currently, sponsors who do not retain 5 percent of the securitization 
deploy those funds to other uses, such as repaying lines of credit used 
to fund securitized loans, holding other assets or making new loans, 
which may earn a different interest rate and have a different risk 
exposure. Tying up capital as a result of the imposition of risk 
retention requirements could pose an opportunity cost to sponsors who 
do not currently retain risk and could limit the volume of 
securitizations that they can sponsor. These costs would likely be 
passed on to borrowers, either in terms of increased borrowing costs or 
loss of access to credit. In particular, borrowers whose loans do not 
qualify for an exemption from risk retention (e.g., those loans that do 
not meet the underwriting criteria for being deemed a qualified asset) 
could face increased borrowing costs, or be priced out of the loan 
market, thus restricting their access to credit. As a result, there 
could be a negative impact on capital formation by loan originators to 
the extent that it impedes the flow of capital from ABS investors, 
particularly if credit is denied to creditworthy borrowers. More 
generally, if the costs are deemed by sponsors to be significant enough 
that they would no longer be able to earn a sufficiently high expected 
return by sponsoring securitizations, this form of supplying capital to 
lenders would decline.
    The net impact of requiring credit risk retention on capital 
markets and the costs of credit will ultimately depend on the 
availability of alternative arrangements for transferring capital to 
lenders and the costs of transferring capital to sponsors. For example, 
the impact of the potential decrease in the use of securitizations in 
the residential mortgage market would depend on the cost and 
availability to lenders of alternative mortgage funding sources, and 
the willingness of these sponsors to retain the full burden of the 
risks associated with credit risk retention and securitization. To the 
extent there are funding alternatives, and these funding alternatives 
can provide funding to lenders on terms similar to those available as a 
result of sponsors' use of the securitization markets, the impact of 
the substitution of these alternatives for securitizations would likely 
be minimal. Similarly, to the extent that sponsors can find sources of 
capital at costs similar to the returns paid on retained interests in 
securitizations, the impact of risk retention requirements would likely 
be minimal. Currently, there is no relevant and available empirical 
evidence to reliably estimate the cost and consequence of either such 
outcome.
c. The Impact of Asset-Level Disclosure and Other Requirements of 
Revised Regulation AB
    On August 27, 2014, the Commission adopted significant revisions to 
Regulation AB and other rules governing the offering process, 
disclosure, and reporting for asset-backed securities.\403\ Among other 
things, these revisions require that prospectuses for registered 
offerings of asset-backed securities backed by residential and 
commercial mortgages, auto loans and leases, or debt securities 
(including resecuritizations), and ongoing reports with respect to such 
securities contain specified asset-level information about each of the 
assets in the pool.
---------------------------------------------------------------------------

    \403\ Asset-Backed Securities Disclosure and Registration; Final 
Rule, 79 FR 57184 (Sept. 24, 2014).
---------------------------------------------------------------------------

    Increased transparency for these securitizations through the 
introduction of enhanced disclosure requirements and enhanced 
transactional safeguards for ABS shelf offerings should help to address 
the moral hazard problem that contributed to the poor performance of 
asset-backed securities during the financial crisis.\404\ For 
registered offerings of asset-backed securities subject to the new 
requirements, the revisions to Regulation AB should improve the amount 
of information available to investors about the quality of securitized 
assets. The availability of detailed loan-level data in a machine 
readable format will provide investors with information needed to 
perform their own assessments of the associated risks and lessen the 
risk of overreliance on third-party evaluations such as credit ratings.
---------------------------------------------------------------------------

    \404\ See, Adam B. Ashcraft & Til Schuermann, Understanding the 
Securitization of Subprime Mortgage Credit (Staff Report, Fed. 
Reserve Bank of N.Y., Working Paper No. 318, 2008) (identifying at 
least seven different frictions in the residential mortgage 
securitization chain that can cause agency and adverse selection 
problems in a securitization transaction and explaining that given 
that there are many different parties in a securitization, each with 
differing economic interests and incentives, the overarching 
friction that creates all other problems at every step in the 
securitization process is asymmetric information).
---------------------------------------------------------------------------

    The new requirements for shelf offerings of asset-backed securities 
include additional safeguards to improve the offering process, 
encourage greater oversight of the structuring and disclosure of the 
transaction and provide additional recourse for resolving potential 
problems by providing stronger mechanisms to enforce compliance with 
the sponsors' representations and warranties.\405\ Combined, these 
rules should improve investors' willingness to invest in asset-backed 
securities and to help the recovery in the asset-backed securities 
market with attendant positive effects on informational and allocative 
efficiency, competition, and the level of capital formation.
---------------------------------------------------------------------------

    \405\ For example, the rules require a minimum three-business 
day waiting period before the first sale of securities in the 
offering to provide investors with time to conduct analysis of the 
offering. Additionally, as a shelf eligibility requirement, the 
chief executive officer of the depositor must provide a 
certification at the time of each takedown about the disclosure 
contained in the prospectus and the structure of the securitization. 
As another shelf eligibility requirement, the underlying transaction 
agreements must include provisions that require a review of pool 
assets upon the occurrence of a two-prong trigger based first upon 
the occurrence of a specified percentage of delinquencies in the 
pool and, if the delinquency trigger is met, upon the direction of 
investors by vote.
---------------------------------------------------------------------------

    The amendments to Regulation AB should significantly reduce the 
moral hazard problem in the publicly offered asset-backed securities 
market and offer an important complement to, but not a substitute for, 
the risk retention requirement. In particular, there are several ways 
in which the risk retention requirement will further address the moral 
hazard problem. As an initial matter, the scope of the risk retention 
requirement is significantly broader than the asset-level disclosure 
requirements of the revised Regulation AB, which does not apply across 
all

[[Page 77709]]

asset classes or to unregistered offerings (e.g., private sales of 
securities to qualified institutional buyers pursuant to Rule 144A 
under the Securities Act).\406\ Hence, the impact of the asset-level 
disclosure requirements under the revised Regulation AB may be limited 
by the extent to which market practices for asset classes not covered 
by the revised Regulation AB and privately offered asset-backed 
securities do not incorporate or develop similar disclosure standards 
and sponsors pursue private offerings instead of registered 
offerings.\407\
---------------------------------------------------------------------------

    \406\ Using the Asset-Backed Alert and Commercial Mortgage Alert 
databases, DERA staff calculated that, during the 2009-2013 period, 
only 12.8 percent of non-U.S. agency asset-backed securities deals 
(excluding ABCP and TOB), or 24.5 percent by dollar volume, will be 
subject to asset-level disclosure requirements under revised 
Regulation AB.
    \407\ The Commission continues to consider whether asset-level 
disclosure would be useful to investors across other asset classes 
as well as in private offerings. See revised Regulation AB Adopting 
Release, 79 FR at 57191 and 57197.
---------------------------------------------------------------------------

    There is reason to believe, however, that the revised Regulation AB 
could have positive spillover effects into the private markets. With 
the adoption of standardized loan-level disclosures and increased 
investor confidence in the registered market, similar practices may 
develop in the private offering market, particularly to the extent that 
sponsors and investors participate in both markets. At present, 37 
percent of the dollar volume of ABS transactions had sponsors who 
issued both registered and unregistered offerings.\408\ With respect to 
asset classes and originators for which these sponsors have conducted 
registered offerings, the sponsors would have relatively low 
incremental costs to apply existing infrastructure developed to comply 
with the new disclosure requirements of Regulation AB in any private 
market offerings that they may conduct for those asset classes and 
those originators.
---------------------------------------------------------------------------

    \408\ AB Alert.
---------------------------------------------------------------------------

    These benefits will be further supplemented with the overlay of the 
risk retention requirements. Risk retention forces sponsors to 
internalize the costs of inappropriate behaviors such as the 
obfuscation of the intrinsic risks of the securitization and failure to 
do appropriate diligence. This internalization will occur 
contemporaneously with the losses incurred by investors. In contrast, 
even with the additional disclosures and transactional safeguards 
required under the revised Regulation AB, sponsors may misrepresent the 
characteristics of the securitized assets and, in such cases, investor 
recourse to the sponsor can only occur after the fact of the losses, 
such as through legal remedy. Analysis from recent studies and details 
of Commission enforcement cases show that RMBS sponsors misrepresented 
the quality of the securitized asset pool in RMBS prospectuses leading 
up to the financial crisis.\409\ The additional disclosure requirements 
and transactional safeguards mandated by Regulation AB may not cause 
sponsors of registered securitizations to internalize the costs of such 
practices as fully as if the sponsor retained a portion of the credit 
risk. Thus, the risk retention requirements for certain registered 
offerings should be beneficial even with the existence of Regulation 
AB's additional disclosure and transactional requirements because those 
disclosure requirements do not create the same alignment of interests 
of sponsors and investors that would serve to reduce the prevalence of 
moral hazard and improve underwriting in the publicly offered 
securitization market.
---------------------------------------------------------------------------

    \409\ For example, in 2013, the Commission charged Bank of 
America entities for failing to disclose key risks and 
misrepresenting facts about the mortgages underlying an RMBS 
securitization that the firms underwrote, sponsored, and issued in 
2008 (see Commission press release of August 6, 2013, available at 
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539751924). Similarly, in 2014, the Commission charged Morgan 
Stanley entities, with misleading investors and misrepresenting the 
current or historical delinquency status of mortgage loans 
underlying two subprime RMBS securitizations that the firms 
underwrote, sponsored, and issued in 2007 (see Commission press 
release of July 24, 2014, available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542355594). See also footnote 
400 for academic papers that find evidence of mortgage misreporting 
in non-agency MBS by both originators and underwriters.
---------------------------------------------------------------------------

    The disclosure practices that evolve in connection with revised 
Regulation AB will work together with the credit risk retention 
requirement to address the moral hazard problem in the publicly offered 
asset-backed securities market, encourage better underwriting, and 
better inform investors on the nature of the retained risk. In 
particular, revised Regulation AB may influence a sponsor's choice 
between the vertical and (potentially more costly) horizontal forms of 
risk retention. The revisions to Regulation AB require public 
disclosure of asset-level information for registered offerings, and 
because investors in these transactions will be able to better assess 
the characteristics of the securitized assets, they may be willing to 
invest in more risky tranches of securitizations, which could increase 
the ability of the sponsor to rely on a larger vertical interest. As a 
result, more sponsors might choose to use the less costly vertical risk 
retention option (or, if they use a combination of the horizontal and 
vertical forms of risk retention, they might choose to reduce the 
relative weight of the horizontal form and increase the relative weight 
of the vertical form), and if so, the implementation of the revisions 
to Regulation AB could reduce the costs of risk retention to sponsors 
of registered offerings.
    After the implementation of both revised Regulation AB and the risk 
retention rules, asset-backed securities offerings will be subject to 
varying levels of compliance with asset-level requirements and the risk 
retention rules, which may result in differing levels of incentive 
alignment and transparency. Offerings would fall into different groups 
\410\ and these groups may have different levels of exposure to 
underwriting quality, moral hazard and asymmetric information problems 
and may attract different types of investors because different risk 
tolerances among investors will result in preferences for different 
types of asset classes and offering methods. Some of these offering 
groups would be subject to higher underwriting standards and lower risk 
of default, but could be relatively more exposed to the moral hazard 
problem (e.g., an incentive to misrepresent the characteristics of the 
securitized assets) due to the lack of risk retention and asset-level 
disclosures. Other offering groups may contain lower quality assets, 
but could be less exposed to the moral hazard problem because of the 
risk retention requirement. Such distinction could create different 
demand for each group commensurate with the level of perceived asset 
underwriting quality and moral hazard, with corresponding implications 
for risk premium and cost of capital.
---------------------------------------------------------------------------

    \410\ The groups are: (1) Those where the sponsor is subject to 
risk retention and for which asset-level disclosure is required 
(e.g., registered RMBS of loans that are not qualified residential 
mortgages (QRM), CMBS of loans that are not qualifying commercial 
real estate (QCRE) loans, and registered asset-backed securities 
backed by non-qualifying automobile loans); (2) those for which only 
asset-level disclosure is required (e.g., registered RMBS of QRM 
loans, registered CMBS of QCRE loans, and registered asset-backed 
securities backed by qualifying automobile loans); (3) those for 
which only risk retention is required (e.g., unregistered RMBS of 
non-QRM loans, unregistered CMBS of non-QCRE loans, unregistered 
asset-backed securities backed by non-qualifying automobile loans, 
and all unregistered asset-backed securities backed by any other 
assets not otherwise exempt from risk retention); and (4) those for 
which neither asset-level disclosure nor risk retention is required 
(e.g., unregistered non-U.S. agency RMBS backed by QRM loans and 
U.S. agency RMBS).
---------------------------------------------------------------------------

3. Economic Baseline
    The baseline the Commission uses to analyze the economic effects of 
the risk retention requirements mandated by

[[Page 77710]]

Section 15G is the current set of rules, regulations, and market 
practices that may affect the amount of credit exposure retained by 
sponsors. To the extent not already encompassed by current market 
practices, the risk retention requirements being adopted are expected 
to have a significant impact on market practices of, and risks faced 
by, asset-backed securities market participants, including loan 
originators, sponsors and investors in asset-backed securities, and 
consumers and businesses that seek access to credit using financial 
products that are securitized. The costs and benefits of the risk 
retention requirements depend largely on the current market practices 
specific to each securitization asset class--including current risk 
retention practices--and corresponding asset characteristics. The 
magnitude of the potential effects of the risk retention requirements 
depend on the overall size of the securitization market and the extent 
to which the requirements affect borrower access to credit and the cost 
of capital for lenders. The discussion below describes the Commission's 
understanding of the securitization markets that are affected by the 
final rule.\411\
---------------------------------------------------------------------------

    \411\ The impact of the recently adopted but not yet effective 
revisions to Regulation AB is discussed in Section 2.c of this 
Economic Analysis.
---------------------------------------------------------------------------

a. Size of Securitization Markets
    The asset-backed securities market is important for the U.S. 
economy and comprises a large fraction of the U.S. debt market. During 
the five-year period from 2009 to 2013, 31.5 percent of the $33.2 
trillion in public and private debt issued in the United States was in 
the form of mortgage-backed securities (MBS) or other asset-backed 
securities, and 3.0 percent was in the form of non-U.S. agency backed 
(private label) MBS or asset-backed securities. For comparison, 32.9 
percent of all debt issued was U.S. Treasury debt, and 5.6 percent was 
municipal debt at the end of 2013.\412\ Figure 1 shows the percentage 
breakdown of total non-agency issuances from 2009 to 2013 for various 
asset classes excluding short term asset-backed securities, such as 
asset-backed commercial paper (ABCP) or Tender Option Bonds (TOBs) and 
excluding collateralized loan and debt obligations (CLOs and 
CDOs).\413\ Consumer credit categories, including asset-backed 
securities backed by automobile loans and leases and credit card 
receivables, comprise 37 percent and 14 percent of the total annual 
issuance volume, respectively. Non-agency RMBS and CMBS comprise 4 
percent and 18 percent of the market, respectively, while asset-backed 
securities backed by student loans account for 9 percent of the market. 
Below the Commission analyzes the variation in issuance among these 
five largest asset classes. For several categories, the Commission 
outlines detailed information about issuance volume and the number of 
active sponsors (Tables 2 and 3).
---------------------------------------------------------------------------

    \412\ Source: SIFMA Statistics available at http://www.sifma.org/research/statistics.aspx, accessed on July 11, 2014.
    \413\ To estimate the size and composition of the private-label 
securitization market, the Commission uses data from the Securities 
Industry and Financial Markets Association (SIFMA) and Asset-Backed 
Alert. It is not clear how corporate debt repackagings are 
classified in these databases. In the following analysis, the 
Commission excludes all securities guaranteed by U.S. government 
agencies. ABCP is a short-term financing instrument and is 
frequently rolled over; thus, its issuance volume is not directly 
comparable to the issuance volume of other asset classes of asset-
backed securities.
[GRAPHIC] [TIFF OMITTED] TR24DE14.000

    Prior to the financial crisis of 2008, the number of non-agency 
RMBS issuances was substantial. For example, new issuances totaled 
$760.3 billion in 2005 and peaked at $801.7 billion in 2006. Non-agency 
RMBS issuances fell dramatically in 2008, to $34.5 billion, as did the 
total number of sponsors, from a high of 80 in 2006 to 27 in 2008. In 
2013, there was only $25.2 billion in new non-agency RMBS issuances by 
22 separate sponsors.

[[Page 77711]]



              Table 2--Annual Issuance Volume and Number of Sponsors by Offering Type for Asset-Backed Securities Backed by Consumer Loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Credit Card ABS                       Automobile ABS                      Student Loan ABS
                   Year                   --------------------------------------------------------------------------------------------------------------
                                             SEC      144A    Private   Total     SEC      144A    Private   Total     SEC      144A    Private   Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Panel A--Annual Issuance Volume by Offering Type ($ bn)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2005.....................................     61.2      1.8       0.0     62.9     85.1      8.7       0.0     93.9     54.1      8.1       0.4     62.6
2006.....................................     60.0     12.5       0.0     72.5     68.0     12.2       0.0     80.2     54.9     10.9       0.5     66.2
2007.....................................     88.1      6.4       0.0     94.5     55.8      6.8       0.0     62.6     41.7     16.0       0.6     58.3
2008.....................................     56.7      5.0       0.0     61.6     31.9      5.7       0.0     37.6     25.8      2.4       0.0     28.2
2009.....................................     34.1     12.5       0.0     46.6     33.9     15.4       0.0     49.2      8.3     12.5       0.0     20.8
2010.....................................      5.3      2.1       0.0      7.5     37.9     15.3       0.0     53.2      2.8     16.2       1.2     20.2
2011.....................................     10.0      4.8       1.5     16.3     41.9     14.4       0.0     56.3      2.5     13.9       1.1     17.5
2012.....................................     28.7     10.5       0.0     39.2     65.6     13.9       0.0     79.5      6.6     23.2       0.0     29.9
2013.....................................     32.0      3.1       0.0     35.1     62.5     12.8       0.0     75.2      6.5     14.9       0.0     21.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Panel B--Annual Number of Sponsors by Offering Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
2005.....................................       13        5         0       17       30        9         0       38       13        7         1       19
2006.....................................       10       11         0       18       23       12         0       30        8       17         1       24
2007.....................................       12        8         0       16       23        9         0       28        7       17         1       22
2008.....................................        9        3         0       11       16        8         0       21        3        6         0        8
2009.....................................        9        6         0       11       13       13         0       22        3        6         0        6
2010.....................................        5        5         0        9       19       15         0       27        2       18         1       19
2011.....................................        5        7         1       12       14       16         0       25        1       19         1       20
2012.....................................        7        9         0       13       18       24         0       36        1       26         0       26
2013.....................................        9        5         0       14       17       19         0       32        1       22         0       22
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: The numbers in the table were calculated by staff from the Commission's Division of Economic and Risk Analysis (DERA) using the Asset-Backed
  Alert database. The deals are categorized by offering year, underlying asset type, and offering type (SEC registered offerings, Rule 144A offerings,
  or traditional private placements). Automobile asset-backed securities include asset-backed securities backed by automobile loans and leases, both
  prime and subprime, motorcycle loans, and truck loans. Panel A shows the total issuance amount in billions of dollars. Panel B shows the number of
  unique sponsors (based on sponsor name) of ABS in each category (the number in the column ``Total'' may not be the sum of the numbers in the columns
  ``SEC'', ``144A'' and ``Private'' because some sponsors may sponsor deals in several categories). Only asset-backed securities classified by Asset-
  Backed Alert as deals sold in the U.S. and sponsors of such deals are counted.


       Table 3--Annual Issuance Volume and Number of Sponsors by Offering Type for Real Estate-Backed ABS
----------------------------------------------------------------------------------------------------------------
                                        Non-agency RMBS                                  CMBS
          Year           ---------------------------------------------------------------------------------------
                             SEC        144A     Private     Total       SEC        144A     Private     Total
----------------------------------------------------------------------------------------------------------------
                             Panel A--Annual Issuance Volume by Offering Type ($ bn)
----------------------------------------------------------------------------------------------------------------
2005....................      738.5       21.7        0.0      760.3     136.23      34.44       0.00     170.68
2006....................      727.1       74.6        0.0      801.7     161.76      41.05       0.00     202.81
2007....................      634.8       80.4        0.0      715.3     190.57      40.58       0.00     231.15
2008....................       12.2       22.3        0.0       34.5      10.71       1.49       0.00      12.20
2009....................        0.0       48.1        0.0       48.1       0.00       6.86       0.00       6.86
2010....................        0.2       67.2       12.8       80.3       0.00      19.54       0.00      19.54
2011....................        0.7       40.8        9.7       51.3       8.45      26.05       0.00      34.50
2012....................        1.9       27.0        0.0       29.0      32.56      18.68       0.00      51.24
2013....................        4.0       21.1        0.0       25.2      53.07      33.27       0.00      86.35
----------------------------------------------------------------------------------------------------------------
                               Panel B--Annual Number of Sponsors by Offering Type
----------------------------------------------------------------------------------------------------------------
2005....................         54         21          0         60         41         42          0         61
2006....................         55         43          0         80         39         40          0         57
2007....................         53         45          0         78         43         29          0         54
2008....................         12         22          0         27         19          2          0         21
2009....................          0         17          0         17          0         13          0         13
2010....................          1         26          1         28          0         25          0         25
2011....................          1         16          2         18         16         31          0         31
2012....................          1         20          0         21         26         33          0         56
2013....................          1         22          0         22         32         57          0         83
----------------------------------------------------------------------------------------------------------------
Notes: The numbers in the table were calculated by DERA staff using the Asset-Backed Alert and Commercial
  Mortgage Alert databases. The deals are categorized by offering year, underlying asset type, and offering type
  (SEC registered offerings, Rule 144A offerings, or traditional private placement). Non-agency RMBS include
  residential, Alt-A, and subprime RMBS. Panel A shows the total issuance amount in billions of dollars. Panel B
  shows the number of unique sponsors (based on sponsor name) of asset-backed securities in each category (the
  number in the column ``Total'' may not be the sum of the numbers in the columns ``SEC'', ``144A'' and
  ``Private'' because some sponsors may sponsor deals in several categories). Only asset-backed securities deals
  classified by Asset-Backed Alert as sold in the U.S. and sponsors of such deals are counted.


[[Page 77712]]

    Similar to the market for non-agency RMBS, the market for CMBS also 
experienced a decline following the financial crisis. There were 
$231.15 billion in new issuances at the market's peak in 2007. New 
issuances fell to $12.20 billion in 2008 and to $6.86 billion in 2009. 
In 2013, there were $86.35 billion in new CMBS issuances.
    While the markets for asset-backed securities backed by credit card 
receivables, automobile loans and leases, and student loans experienced 
a similar decline in issuances following the financial crisis, the 
issuance trends in Table 2 indicate that they have rebounded 
substantially more than the non-agency RMBS and CMBS markets. Asset-
backed securities collateralized by automobile loans and leases 
currently have the largest issuance volume and the largest number of 
active sponsors of asset-backed securities among all asset classes. 
There were $75.2 billion in new asset-backed securities issuances 
collateralized by automobile loans and leases in 2013 from 32 sponsors. 
This amount of new issuances is approximately twice the amount of new 
issuances in 2008 ($37.6 billion) in this asset class and is similar to 
the amount of new issuances in this asset class from 2004 to 2007.
    Although the amount of new issuances of asset-backed securities 
backed by credit card receivables has not fully rebounded from pre-
crisis levels, it is currently substantially larger than in recent 
years. There were $35.6 billion in new issuances of asset-backed 
securities backed by credit card receivables in 2013, a five-fold 
increase over the amount of new issuances in 2010 ($7.5 billion). The 
number of sponsors of such transactions has remained steady over time, 
totaling 14 in 2013. The amount of new issuances of asset-backed 
securities backed by student loans has also not fully rebounded from 
pre-crisis levels.\414\ There were $21.3 billion in new issuances of 
asset-backed securities backed by student loans in 2013, compared to a 
range from $45.9 billion to $58.3 billion between 2004 and 2007. The 
number of sponsors of such transactions has returned to pre-crisis 
levels, totaling 22 in 2013.
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    \414\ The elimination of the Federal Family Education Loan 
Program (FFELP), a federally guaranteed student loan program, in 
March 2010 may be a significant contributor to the decline in the 
issuance of asset-backed securities backed by student loans as no 
subsequent loans were permitted to be made under the program after 
June 2010.
---------------------------------------------------------------------------

    In addition to these asset classes, sponsors will have to retain 
risk for all issuances of asset-backed securities, including equipment 
loans and leases, corporate debt repackagings, TOBs, ABCP, CDOs and 
CLOs.
    Information describing the amount of issuances and the number of 
sponsors in the ABCP markets is not readily available. Information on 
the total amount of issuances outstanding indicates that the ABCP 
market has decreased since the end of 2006, when the total amount 
outstanding was $1,081.4 billion, or 55 percent of the entire 
commercial paper market.\415\ As of the end of 2013, there were $254.7 
billion of ABCP outstanding, accounting for less than 25 percent of the 
commercial paper market.
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    \415\ Based on information from the Federal Reserve Bank of St. 
Louis FRED Economic Data database.

                                Table 4--Commercial Paper (CP) Outstanding ($bn)
----------------------------------------------------------------------------------------------------------------
                                                                                      All CP        ABCP share
                              Year                                     ABCP         outstanding         (%)
----------------------------------------------------------------------------------------------------------------
2004............................................................           688.9         1,401.5            49.2
2005............................................................           860.3         1,637.5            52.5
2006............................................................         1,081.4         1,974.7            54.8
2007............................................................           774.5         1,785.9            43.4
2008............................................................           734.0         1,681.5            43.7
2009............................................................           487.0         1,170.0            41.6
2010............................................................           348.1           971.5            35.8
2011............................................................           328.8           959.3            34.3
2012............................................................           319.0         1,065.6            29.9
2013............................................................           254.7         1,086.2            23.4
----------------------------------------------------------------------------------------------------------------
Notes: Source--Federal Reserve.

    Like other asset-backed securities markets, the CLO market went 
through the same cycle of high growth right before the crisis in 2005-
2007 followed by steep decline in 2008-2010. However, by 2013 the CLO 
market had almost recovered to its pre-crisis level (see Table 5), in 
terms of the number of CLO deals per year, the aggregate dollar volume 
of issuance, and the number of active sponsors (CLO managers). It 
should also be noted that, in most of the years in the table below, the 
median sponsor had only one CLO deal sponsored per year.

                 Table 5--Annual Issuance Volume and Number of Sponsors for Arbitrage CLOs \416\
----------------------------------------------------------------------------------------------------------------
                                                                                   Total volume,    Unique CLO
                              Year                                     Deals           $ bn          managers
----------------------------------------------------------------------------------------------------------------
2004............................................................              89            30.6              60
2005............................................................             124           56.05              79
2006............................................................             215          106.74             119
2007............................................................             187           95.56             101
2008............................................................              44           22.05              26
2009............................................................               8            2.84               6
2010............................................................               7            2.39               6
2011............................................................              30           12.86              26
2012............................................................             123           55.99              72

[[Page 77713]]

 
2013............................................................             179           85.83              97
----------------------------------------------------------------------------------------------------------------
Notes: The numbers in the table were calculated by DERA staff using the Asset-Backed Alert database. Only
  arbitrage CLOs backed by corporate loans and sold in the U.S. and sponsors of such deals are counted. The
  total issuance amount is in billions of dollars.

b. Current Risk Retention Market Practices
    As noted earlier, the potential economic effects of the final risk 
retention requirements will depend on current market practices. 
Currently, risk retention is not legally mandated in any sector of the 
U.S. asset-backed securities market (with the exception of the FDIC 
safe harbor option discussed below where risk retention is one of the 
compliance options), although some sponsors of different asset-backed 
securities classes do remain exposed to credit risk, at least at 
initial issuance, in response to investors' or rating agencies' demand. 
The new risk retention requirements will impose a cost on sponsors that 
will depend on the amount and form of risk currently retained by a 
sponsor of asset-backed securities and the length of time sponsors 
remain exposed to such risk. Market practices are different for 
different sectors (to the extent that they are applied at all) and 
there is no uniform reporting of the types or amounts of risk exposure. 
Because of the lack of aggregated quantitative information relating to 
the current risk exposure practices of sponsors, the Commission does 
not have full information on the extent to which sponsors remain 
exposed to risk. Below the Commission describes current risk exposure 
practices for various asset classes based upon its understanding of 
these markets and public comment received to date.\417\ Almost all 
asset classes include structural features in which sponsors remain 
exposed to some amount of credit risk, including RMBS, CMBS, automobile 
loans and leases, credit card receivables, equipment loans and leases 
and automobile floorplan loans. We note, however, that even if some 
sponsors voluntarily retain risk in the form of a combination of 
several tranches, including residual interest that adds up to 5 percent 
of the principal amount of the deal, the sponsors typically do not 
contractually commit in the transaction documents to holding these 
interests after the initial sale (however, a rating agency might 
downgrade the entire securitization if the residual is sold). Notable 
exceptions include: TOBs, CLOs and CMBS where depending on the specific 
structure and the funding needs of the sponsor, either the sponsor or a 
third party might purchase a residual or equity interest; and 
structures in which parties involved in the securitization, other than 
the sponsors, retain risk, such as ABCP conduits, in which the seller 
of receivables holds a pro rata or residual interest in the receivables 
sold to the ABCP conduit.
---------------------------------------------------------------------------

    \416\ The agencies are adopting a risk retention option for CLOs 
that meet certain criteria, described herein as ``open-market 
CLOs.'' Arbitrage CLOs have many of the features of open-market 
CLOs, but as these requirements were not part of the market prior to 
this rulemaking, there is no reasonable means of determining which 
CLOs would have qualified as an open-market CLO.
    \417\ See also the Board of Governors of the Federal Reserve 
System's ``Report to the Congress on Risk Retention'' (October 
2010), pp. 41-48, where other mechanisms intended to align 
incentives and mitigate risk are described, including alternatives 
such as overcollateralization, subordination, guarantees, 
representations and warranties, and conditional cash flows as well 
as the retention of credit risk. The report also contains a 
description of the most common incentive alignment and credit 
enhancement mechanisms used in the various securitization asset 
classes. The report does not establish the extent to which these 
alternatives might be substitutes for the retention of credit risk.
---------------------------------------------------------------------------

    In 2010, the Federal Deposit Insurance Corporation (FDIC) adopted 
an amended rule regarding the treatment by the FDIC, as receiver or 
conservator of an insured depository institution, of financial assets 
transferred by the institution in connection with a 
securitization.\418\ If the FDIC does not deem a transfer of assets to 
a securitization vehicle a true sale, the FDIC could repudiate 
transaction agreements for the securitization, recover financial assets 
that had been transferred, and thereby compromise the ``legal 
isolation,'' as determined by relevant accounting standards, of the 
assets upon which the securitization was predicated.\419\ The FDIC's 
rule imposes several new conditions to qualify for a safe harbor from 
such repudiation, with risk retention being one of the new conditions. 
Thus, in the absence of other forms of ``true sale'' protection, 
banking institutions that would like to avoid the potential future FDIC 
repudiation of a securitization could retain credit risk. As discussed 
below in Section 3.b.iii, some banks sponsoring asset-backed securities 
comply with the FDIC safe harbor rule by retaining risk in the form of 
a representative sample of the securitized assets--one of the forms of 
risk retention permitted under the FDIC's rule.
---------------------------------------------------------------------------

    \418\ See 12 CFR 360.6. Upon their effective date, the final 
rule will replace the FDIC regulations and shall exclusively govern 
the requirement to retain credit risk for insured depository 
institutions.
    \419\ The FDIC would have to pay damages to the securitization 
vehicle for any repossessed assets; however, those damages might be 
less than the full amount of principal and interest due on 
outstanding securities backed by such assets.
---------------------------------------------------------------------------

    Finally, sponsors that intend to market their asset-backed 
securities in both the United States and the European Union and that 
issue securities after January 1, 2014, may need to retain 5 percent 
credit risk to comply with E.U. risk retention rules that, instead of 
imposing a direct risk retention obligation on sponsors, regulate the 
types of securities that certain investors can buy.\420\ The Commission 
does not have data on the fraction or types of asset-backed securities 
currently sold in the U.S. that retain credit risk to comply with these 
rules or asset-backed securities sold by U.S. sponsors to investors 
covered by E.U. risk retention rules.
---------------------------------------------------------------------------

    \420\ Article 122a of the Capital Requirements Directive 
mandates that European Economic Area-regulated credit institutions 
and investment firms and their affiliates may only invest in 
securitization transactions if the original lender, originator or 
sponsor of the securitization retains 5 percent of the net economic 
interest of the transaction. Related EU Alternative Investment Fund 
Manager's Directive imposes similar risk retention requirements on 
securitizations that most private equity, real estate investment 
services and hedge funds are allowed to invest in.
---------------------------------------------------------------------------

i. Residential Mortgage-Backed Securities
    The Commission understands that sponsors of non-agency RMBS 
historically did not generally retain a portion of credit risk in the 
form and at a level consistent with the rule being adopted. One study 
\421\ finds that, on

[[Page 77714]]

average, RMBS deals had a 1.2 percent residual interest by face value 
that was proportional to the perceived level of information asymmetry 
between the sponsor and ABS investors, although the study could not 
determine whether sponsors retained the residual interest or, if 
retained, for how long it was held after issuance. Thus, even if 
sponsors of RMBS deals were holding the residual interest and were not 
selling it to third parties, they were not, on average, retaining 5 
percent of the credit risk by face value.\422\ Consequently, as 
discussed below, except in the case where exemptions are applicable 
(e.g., the QRM exemption), the final risk retention requirements likely 
will impose new constraints on RMBS sponsors.
---------------------------------------------------------------------------

    \421\ Taylor Begley and Amiyatosh Purnanandam, Design of 
Financial Securities: Empirical Evidence from Private-label RMBS 
Deals (2014), University of Michigan working paper. They find that 
the size of the residual interest is proportional to the fraction of 
no document loans--their proxy for increased information asymmetry 
between sponsors and investors.
    \422\ We also note that one of the largest sponsors of 
registered RMBS has stated it currently retains some interest in the 
RMBS transactions that it sponsors. See Sequoia Mortgage Trust 2013-
1, Final Prospectus filed pursuant to Rule 424(b)(5), File No. 333-
179292-06 filed January 16, 2013; http://www.sec.gov/Archives/edgar/data/1176320/000114420413002646/v332142_424b5.htm.
---------------------------------------------------------------------------

ii. Commercial Mortgage-Backed Securities
    The current risk retention practice in the CMBS market is to retain 
at issuance the ``first loss piece'' (riskiest tranche). This tranche 
is typically sold to a specialized category of CMBS investor, known as 
a ``B-piece buyer.'' \423\ The B-piece investors in CMBS 
securitizations often hold dual roles as bond investors, if the assets 
remain current on their obligations, and as holders of controlling 
interests to appoint special servicers, if the loans default and go 
into special servicing. As holders of the controlling interest, they 
will typically appoint an affiliate as the special servicer. The B-
piece CMBS investors are typically commercial real estate specialists 
who use their knowledge about the securitized assets in the pools to 
conduct extensive due diligence on new deals.\424\ The B-piece market 
has very few participants.\425\ The B-pieces are often ``buy-and-hold'' 
investments, and, based on the Commission's knowledge of the asset-
backed securities market, the secondary market for B-pieces is 
relatively illiquid at this time. According to one comment letter, a 
typical B-piece makes up 2.6 percent of economic and 7 percent of the 
notional balance of a CMBS. Thus, the Commission believes the 
prevailing market practice for risk retention in the CMBS sector is to 
hold less than the final rule's risk retention option for CMBS 
sponsors.
---------------------------------------------------------------------------

    \423\ However, not every CMBS deal has a B-piece buyer. 
According to Commercial Mortgage Alert, 46 percent of CMBS deals in 
2009-2013 had a B-piece buyer.
    \424\ CMBS have much smaller number of underlying loans in a 
pool (based on data from Commercial Mortgage Alert, in 2009-2013, 
CMBS, on average, had about 100 commercial properties in a pool, 
whereas RMBS had about 3,000 assets in a pool and automobile loan/
lease ABS typically had 75,000 assets) and these loans are often not 
standardized. Thus, direct management of individual underperforming 
loans is often necessary and is much more viable for CMBS than for 
other asset classes.
    \425\ Based on Commercial Mortgage Alert data, in 2009-2013, 
there were 38 different B-piece buyers with 9 of them participating 
in 70 percent of CMBS deals.
---------------------------------------------------------------------------

iii. Master Trusts (Revolving Pool Securitizations)
    Master trusts generally issue multiple series of asset-backed 
securities over time, backed by a common pool of securitized assets. 
The transaction agreements require the sponsor to maintain the 
principal balance of the securitized assets at an amount that is at all 
times sufficient to back the aggregate amount of asset-backed 
securities outstanding to investors with a specified amount of 
collateral above that amount. The principal amount of outstanding 
investor ABS interests changes over time as new series are issued or 
existing series are paid off. Moreover, as each series is issued, it 
begins with a revolving period (typically for some number of years), 
during which the investors receive only interest, and cash from 
borrower principal repayments on the pool assets are used to buy 
additional assets for the pool from the sponsor. This provides the 
sponsor with ongoing funding for its operations, and maintains the 
level of pool assets over time. Then, at a date specified under the 
terms of the series, the revolving phase for the series comes to an 
end, and cash from borrower principal repayments on pool assets is used 
to repay investors and retire that series of investor ABS interests.
    Sponsors of revolving master trusts often maintain risk exposures 
through the use of a seller's interest which is intended to be 
equivalent to the sponsor's interest in the receivables underlying the 
asset-backed securities. In current market practices, the amount and 
form of risk exposure generally depends on the asset class in the 
master trust; there is typically more risk exposure for assets with 
higher rates of default or that are more difficult to assess. For 
example, credit card master trusts sponsors retain economic exposure 
through excess spread and fees, while dealer floorplan asset-backed 
securities have significant residual exposure. The Commission requested 
additional information about current practices and data from market 
participants, but none was provided. As a result, the Commission does 
not have reasonably accessible data about revolving master trusts that 
would permit it to estimate current market practice about the amount of 
risk exposure held by sponsors.
    As discussed above, banks sponsoring asset-backed securities that 
intend to comply with the FDIC safe harbor rule could retain 5 percent 
of credit risk of the securitized pool. Some banks that use trust 
structures to sponsor asset-backed securities backed by automobile 
loans and leases use one of the allowed options under the FDIC rule, 
the representative sample option, to comply with the safe harbor rule 
requirements. Under this option, the sponsor randomly selects a 
separate pool of receivables that represents the characteristics of the 
securitized pool of assets and holds it on their balance sheet.\426\
---------------------------------------------------------------------------

    \426\ See, for example, Bank of America Auto Trust 2012-1 
(http://www.sec.gov/Archives/edgar/data/1488082/000119312512149853/d309744d424b3.htm) or Ally Auto Receivables Trust 2012-3 (http://www.sec.gov/Archives/edgar/data/1477336/000119312512243201/d357186d424b5.htm).
---------------------------------------------------------------------------

iv. Other Asset-Backed Securities
    The current market practices for other categories of asset-backed 
securities that serve to align the interests of the sponsor and 
investors vary across asset classes. The Commission understands that 
sponsors of automobile loans typically maintain exposure to the quality 
of their underwriting by retaining a significant residual interest in 
their securitization transactions. However, there is insufficient data 
available to the Commission to estimate the fair value of these 
retained residual interests. Also, as discussed above, some banking 
institutions that are affiliated with a sponsor of asset-backed 
securities collateralized by automobile loans and leases retain a 5 
percent representative sample to comply with the FDIC safe harbor rule. 
As noted above, the final rule does not include a representative sample 
option. The Commission also understands that many sponsors of asset-
backed securities backed by student loans did not retain credit risk as 
many were federally guaranteed. Sallie Mae, the largest sponsor of 
student loan asset-backed securities, typically retains through an 
affiliate a residual interest in the form of overcollateralization in 
the securitizations that it sponsors.
v. Asset-Backed Commercial Paper
    ABCP is a type of asset-backed security that is typically issued to 
investors by a special purpose vehicle (commonly referred to as a 
``conduit'')

[[Page 77715]]

sponsored by a financial institution. The commercial paper issued by 
the conduit is collateralized by a pool of asset-backed securities, 
which may change over the life of the entity. ABCP conduits generally 
purchase longer-term assets financed by the issuance of shorter-term 
liabilities, and the liabilities are ``rolled,'' or refinanced, at 
regular intervals.\427\
---------------------------------------------------------------------------

    \427\ See Original Proposal at Sec.  __.9.
---------------------------------------------------------------------------

    In a typical ABCP conduit transaction, the sponsor's customer (an 
``originator-seller'') sells loans or receivables to an intermediate, 
bankruptcy remote special purpose vehicle (SPV). The credit risk of the 
receivables transferred to the intermediate SPV then typically is 
separated into two classes--a senior ABS interest that is acquired by 
the ABCP conduit and a residual interest that absorbs first losses on 
the receivables and that is retained by the originator-seller. The 
residual interest retained by the originator-seller typically is sized 
with the intention that it be sufficiently large to absorb all losses 
on the underlying receivables.
    In this structure, the ABCP conduit issues short-term ABCP that is 
collateralized by the senior ABS interests purchased from one or more 
intermediate SPVs, which are, in turn, supported by the subordination 
provided by the residual ABS interests retained by the originator-
sellers (i.e., the sponsors of underlying ABS interests would be 
subject to risk retention requirements). The sponsor of this type of 
ABCP conduit, which is usually a bank or other regulated financial 
institution or their affiliate, also typically provides (or arranges 
for another regulated financial institution or group of financial 
institution to provide) 100 percent liquidity coverage on the ABCP 
issued by the conduit. This liquidity coverage typically requires the 
support provider to provide funding to, or purchase assets or ABCP 
from, the ABCP conduit in the event that the conduit lacks the funds 
necessary to repay maturing ABCP issued by the conduit.
    Commenting on the original proposal, ABCP conduit sponsors noted 
that there are structural features in ABCP securitizations that align 
the interests of the ABCP conduit sponsor and the ABCP investors. For 
instance, commenters stated that ABCP conduits usually have some mix of 
credit support and liquidity support equal to 100 percent of the ABCP 
outstanding. In the view of commenters, this liquidity and credit 
support exposes the ABCP conduit sponsor to the quality of the assets 
in an amount that far exceeds 5 percent of the fair value of the 
outstanding ABCP.\428\
---------------------------------------------------------------------------

    \428\ See footnote 395 for the general agencies position on 
acceptability of unfunded arrangements as forms of risk retention.
---------------------------------------------------------------------------

vi. Collateralized Loan Obligations
    A collateralized loan obligation (CLO) is an asset-backed security 
that is typically collateralized by portions of tranches of senior, 
secured commercial loans or similar obligations of non-investment grade 
borrowers.\429\ CLOs are organized and initiated by a CLO manager, 
usually when the CLO manager partners with a structuring bank that 
assists in financing asset purchases that occur before the formation of 
the CLO.\430\ The CLO manager actively manages the asset portfolio and 
earns management fees and performance fees for investment management 
services provided to the CLO.
---------------------------------------------------------------------------

    \429\ The term ``CLO'' is also used to refer to the special 
purpose vehicle that issues the asset-backed securities and the 
overall securitization structure.
    \430\ Report to the Congress on Risk Retention, Board of 
Governors of the Federal Reserve System, at 22 (Oct. 2010), 
available at http://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf.
---------------------------------------------------------------------------

    The Commission understands that CLO managers often retain a small 
portion--significantly less than 5 percent--of the residual interest, 
although the party retaining the risk may vary depending on the CLO. 
Some types of CLO managers are more likely to hold a significant 
residual interest in their CLO, while others are more likely to secure 
a third-party equity investor to purchase the residual interest. 
According to one commenter, a common CLO market practice is for the CLO 
manager to hold 5 percent of the residual interest, which is typically 
around 8 percent of the value of the CLO at issuance.\431\ This level 
of retention equates to approximately 0.4 percent of the value of the 
CLO.
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    \431\ In general, the size of the equity tranche increases in 
downturns and decreases in booms. See Updating the CLO Primer, Bank 
of America/Merrill Lynch, July 2012.
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    The Commission understands that many CLO structures use 
overcollateralization--the amount by which the face value of the 
underlying loan portfolio \432\ exceeds the face value of the 
outstanding asset-backed securities--which many CLO managers consider 
as a form of risk retention because the value of the 
overcollateralization is ascribed to the residual interest. For 
example, the current senior overcollateralization for older vintage CLO 
1.0 deals (CLO structure used before the crisis) is 132 percent, while 
for CLO 2.0 deals (the structure used for newer CLO) it is 135 
percent.\433\ This means that a CLO 1.0 deal has $132 supporting every 
$100 of the most senior tranche outstanding. The amount of 
overcollateralization for the entire CLO structure would be much lower 
because it would also include mezzanine and subordinate bonds in 
addition to the residual interest. The agencies do not consider 
overcollateralization by face value to be an acceptable form of risk 
retention because the face values of both the securitized assets and of 
the ABS interests can materially differ from their relative value and/
or cost to the sponsor.\434\
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    \432\ The face value of the underlying loans may be adjusted in 
accordance with the CLOs transaction documents to reflect 
concentration limits, delinquencies and/or discounted purchase 
prices.
    \433\ Asset-Backed Alert, July 11th, 2014.
    \434\ As discussed below, the final rule does give sponsors 
credit for overcollateralization to the extent the fair value of the 
horizontal form of risk retention takes into consideration the fair 
value of the overcollateralization.
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    The Commission requested comments on whether any practices in the 
CLO market reflected risk retention as envisioned by the proposed rule. 
Many commenters indicated that the proposed rule requirements would 
change current practices and therefore substantially impact the CLO 
market. No commenter indicated the presence of, or development towards, 
risk retention practices that would satisfy the requirements of the 
proposed rule. Some commenters described the amount of risk retention 
currently held and how managers of CLOs often retain a small portion of 
the residual interest and asserted that sponsors retain risk through 
subordinated management and performance fees that have performance 
components that depend on the performance of the overall pool or junior 
tranches.\435\
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    \435\ The agencies have not recognized subordinated management 
fees as an acceptable form of risk retention in the final rule 
because, if the CLO underperforms, subordinate management fees may 
not align the interests of the manager with those of investors. See 
also footnote 395 for the general agencies position on acceptability 
of unfunded arrangements as forms of risk retention.
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vii. Tender Option Bonds
    There are two typical tender option bonds (TOBs) structures that 
generally have different amounts of risk retention. One type of TOB is 
a bank-sponsored TOB where a single bank and its affiliates serve as 
the sponsor, residual holder and liquidity provider; in this structure, 
the bank will typically hold nominal equity. Commenters noted that the 
bank's credit exposure is significantly greater than 5 percent because 
it is the provider of 100 percent

[[Page 77716]]

liquidity support. The second type of TOB is one in which the bank that 
is the liquidity provider does not hold the residual interest; in this 
case the TOB residual holder will retain a more significant amount of 
risk. Other features of TOBs include a put feature as part of the bond 
that allows investors to put the bond back to the sponsor and a 100 
percent liquidity support. The Commission requested data on current 
market levels of risk retention for TOBs but received no data from 
commenters.
4. Analysis of Risk Retention Requirements
    As discussed above, the agencies are adopting the rule requiring 
sponsors of asset-backed securitizations to retain risk. Each of the 
asset classes subject to the final rule has its own particular 
structure and, as a result, the implementation and impact of risk 
retention will vary across asset classes, although certain attributes 
of risk retention are common to all asset classes. In this section, the 
Commission discusses those aspects of the final rule that apply across 
a broad range of asset classes: The requirement that sponsors hold 5 
percent of the credit risk of a securitization; the use of fair value 
of the securitization to measure the amount of horizontal risk retained 
by the sponsor; and the length of time that a sponsor will be required 
to hold its risk exposure.
a. Level and Measurement of Risk Retention
i. Requirement To Hold Five Percent of Risk
    Section 15G requires the agencies to jointly prescribe regulations 
that require a sponsor to retain not less than 5 percent of the credit 
risk of any asset that the sponsor, through the issuance of ABS, 
transfers, sells, or conveys to a third party, unless an exemption from 
the risk retention requirements for the securities or transaction is 
otherwise available. The agencies reproposed a requirement to hold a 
minimum 5 percent base risk retention for most ABS transactions that 
are within the scope of Section 15G, with some exemptions.
    Commenters did not comment specifically on the discussion of the 5 
percent risk retention requirement in the Commission's Economic 
Analysis in the 2013 reproposal. One commenter did suggest the minimum 
amount of risk retention be increased to 20 percent. As discussed in 
more detail below, increasing the minimum amount of risk retention 
could increase the cost to sponsors and impede capital formation in the 
economy by preventing the more efficient reinvestment of the sponsors' 
capital, while not necessarily providing significant incremental 
benefit to investors. In addition, several commenters suggested risk 
retention requirements be determined by reference to asset 
quality.\436\
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    \436\ The agencies do not believe that it is necessary or 
appropriate to attempt to vary the amount of risk retention based on 
the quality of the assets or other, similar, factors. Doing so would 
unnecessarily complicate compliance with the rule. Furthermore, as 
discussed in the following section, the Commission believes that 
requiring risk retention to be measured by fair value adequately 
incorporates the quality of the assets. Specifically, it would 
calibrate the sponsor's economic exposure to the asset pool 
depending on quality of securitized assets. For example, the 
Commission notes that if the securitized asset pool consists of low-
quality assets, the value of the residual interest would be 
relatively low and a sponsor would have to hold a larger equity 
tranche to meet the five percent fair value credit risk exposure 
requirement. On the other hand, if the securitized asset pool 
consists of high quality assets, the value of the residual interest 
would be relatively higher and a sponsor would be able to satisfy 
the requirement by holding smaller residual interest. Use of face 
value or overcollateralization to avoid the 5 percent risk retention 
requirement will not be possible using fair value methodologies 
acceptable under GAAP as it would account for the expected losses 
associated with the residual interest.
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    The agencies are adopting a 5 percent risk retention requirement as 
reproposed. The Commission lacks the data--and commenters did not 
provide quantitative information--to allow for analysis of an optimal 
level of retained risk, taking into account the goal of aligning the 
incentives of the sponsors and the investors in asset-backed 
securities. As discussed above, barring any exemption, the required 
level of risk retention is set by statute at no less than 5 percent. 
Below is a discussion of the trade-offs between setting the level of 
required risk retention too high or too low.
    As a general matter, if the required level of risk retention is set 
too low, it may not adequately align the incentives of investors and 
sponsors. While we recognize that Congress prescribed a minimum level 
of risk retention, the Commission is also aware that, as discussed in 
the Economic Baseline, sponsors of asset-backed securities in many 
asset classes retained less than 5 percent credit exposure to 
securitizations in the past. Moral hazard problems persisted at these 
lower levels. In contrast, asset classes with relatively higher levels 
of risk retention (e.g., asset-backed securities backed by auto loans 
and leases) performed relatively better throughout the financial 
crisis.
    A level of risk retention that is set too high, however, could lead 
to inefficient deployment of capital by unduly restricting a sponsor's 
ability to structure new deals. If sponsors are limited in their 
ability to secure the necessary financing to retain the required amount 
of credit risk in their intended offerings, then this could adversely 
impact the flow of capital from ABS investors to originators of the 
assets intended for securitization. Hence, excessive required risk 
retention levels may lead to less capital available to lenders, 
potentially increasing borrowing rates as borrowers compete for a more 
limited supply of credit. In this scenario, the reduction in capital 
formation would have a negative impact on competition due to the 
increased cost of securitizing non-qualified assets, disadvantaging 
their ability to be financed by ABS investors relative to qualified 
assets and other sources of capital.
ii. Measurement of Risk Retention Using Fair Value
    The agencies are adopting a requirement for sponsors to measure 
risk retention of an ``eligible horizontal residual interest'' (EHRI) 
using a fair value measurement framework consistent with GAAP. As 
described in the 2013 reproposal, the agencies believe that measuring 
risk retention with a fair value measurement framework will align the 
measurement more closely with the credit risk of a securitization 
transaction than alternative frameworks. The agencies are not requiring 
vertical interests to be measured using a fair value measurement 
framework, as proposed, because they were persuaded by commenters that 
such measurement is not necessary to ensure that the sponsor has 
retained 5 percent of the credit risk of the ABS interests issued.
    Commenters generally supported basing the measurement of the 
horizontal risk retention requirement on fair value. Some commenters 
raised general concerns with the proposed method by which sponsors 
would be required to measure their risk retention because some sponsors 
do not currently use fair value calculations. Thus, requiring such 
sponsors to measure their risk retention with fair value would create 
significant burden and expense. Commenters also expressed several 
specific accounting concerns regarding use of fair value to measure 
risk retention. Specifically, they expressed concern regarding the 
timing of the pre-sale fair value disclosure requirement. Commenters 
noted that the most objective and accurate way to calculate the fair 
value of the residual interest is to base the valuation on observable 
market prices for the remaining securities; however, because the 
reproposal required that sponsors

[[Page 77717]]

calculate the fair value of the residual interest in advance of the 
final pricing of the issued securities, the fair value of the residual 
interest would have to be calculated using estimates of final pricing 
levels. Commenters asserted that potential differences between the pre-
sale fair value calculated using estimated pricing levels and the post-
closing fair value calculated using actual pricing levels would confuse 
investors.
    To provide investors with sufficient information to allow them to 
evaluate whether the sponsor's estimated calculation of fair value was 
reasonable, the proposed rule would have required sponsors to disclose 
the key inputs and assumptions used in measuring fair value and the 
sponsor's technique(s) used to derive the key inputs and assumptions. 
Many commenters expressed concerns about the proposed requirement, 
indicating that the proposal would require sponsors to disclose 
information that is proprietary, highly confidential and commercially 
sensitive, which could be used by third parties to the competitive 
disadvantage of the sponsor. Other commenters suggested significant 
modifications to the disclosure requirements. For example, several 
commenters asserted that sponsors should only be required to make 
disclosures to the Commission and banking agencies, rather than to 
investors. Significant concern was raised regarding potential liability 
and litigation that commenters indicated may result when fair value 
projections, assumptions and calculations disclosed to investors turn 
out to be incorrect.
    A few commenters asserted that for simple structures, sponsors 
should not be required to make fair value determinations or related 
disclosures, nor should the cash flow restriction (as described below) 
apply. Several commenters requested that the final rule should not 
require sponsors to measure and disclose the fair value of eligible 
vertical interests, so long as the underlying ABS interests have either 
a principal or notional balance. The commenters noted that a 5 percent 
interest in the cash flow of each class would always be equivalent to 5 
percent of the fair value of each class. In this regard, the commenters 
asserted that requiring fair value measurement and disclosures for the 
vertical option would be unnecessary for ensuring compliance with the 
rule.
    The final rule does not require sponsors holding risk retention in 
a vertical form to measure and disclose the fair value of their 
vertical risk retention. With the vertical form of risk retention, 
requiring sponsors to measure and disclose the fair value would impose 
additional cost on the sponsor with little, if any, corresponding 
enhancement of investors' ability to evaluate and understand the amount 
of credit risk exposure of the sponsor. This is because 5 percent of 
the fair value of each tranche will be equal to 5 percent of face value 
of each tranche. Therefore, if investors know that a sponsor is holding 
5 percent of each tranche, they will be able to assess the credit 
exposure of the sponsor regardless of whether it is face value or fair 
value.
    Using a fair value measurement framework acceptable under GAAP, as 
applicable, to value the EHRI will provide a number of benefits. First, 
it allows investors and sponsors to objectively measure and understand 
the amount of credit risk exposure of the sponsor. The use of fair 
value is intended to prevent sponsors from structuring around risk 
retention, as may otherwise be the case when using the face value of 
residual interests or overcollateralization to measure the amount of 
horizontal risk retention. For example, if a sponsor issues $100 
million in asset-backed securities at par and retains a first-loss 
residual interest with a face value of $5 million, that residual 
interest could yield a market value below $5 million given the expected 
losses associated with the securitized assets, in which case the 
sponsor would be holding less than 5 percent of the deal's value. Use 
of face value or overcollateralization to avoid the 5 percent risk 
retention requirement will not be possible using fair value 
methodologies acceptable under GAAP as it would account for the 
expected losses associated with the residual interest. Moreover, and as 
a general matter, most investors and sponsors have experience with fair 
value methodologies acceptable under GAAP and therefore using it in 
this context will help to minimize the costs of evaluating the amount 
of risk retention held by sponsors because it will be consistent with 
other valuation experiences.
    There are also potential costs to investors associated with the use 
of a fair value measurement framework. Fair value is a measurement 
framework that, for certain types of instruments, where significant 
unobservable inputs are used to determine fair value, requires an 
extensive use of judgment. Because of this extensive use of judgment, 
an investor may be unable to determine if the sponsor's fair value 
calculation uses assumptions that are similar to the investor's 
assumptions. In order to help mitigate this potential cost, the 
agencies also are requiring, as proposed, that the sponsor disclose 
specified information about how it calculates fair value. While this 
requirement should discourage manipulation, sponsors will incur 
additional costs to prepare the necessary disclosures. In addition, 
because the final rule specifies that fair value must be determined 
using a fair value measurement framework consistent with GAAP, sponsors 
will incur costs to ensure that the reported valuations are compliant 
with the valuation standard.
    With respect to the disclosure required in order to allow investors 
to evaluate and understand the sponsor's fair value calculation, the 
reproposal discussed the appropriate level of detail to be provided to 
investors. One approach would be to provide the same model inputs 
(e.g., prepayment rate, discount rates) that the sponsors used so that 
investors could more precisely evaluate the sponsor's fair value 
calculations. While sponsors already have the model inputs they use to 
calculate fair value, as commenters noted, there may be costs to the 
sponsors associated with providing investors with sponsors' proprietary 
information. For example, sponsors may base their model inputs on 
proprietary information derived from the historical performance data of 
their loan pools, information that has commercial value and is often 
compiled and sold to market participants who purchase the data in order 
to derive model inputs similar to the ones that sponsors would be 
required to disclose. Disclosure of the model inputs could thus lower 
the commercial value of the historical data. Disclosing their inputs 
could also provide competitors--with similar access to historical 
performance data--with insight into the sponsor's interpretation or 
selection of relevant benchmark data. Access to this insight could 
reveal proprietary valuation methods or, as some commenters suggested, 
give rise to litigation risk to the extent that there are differences 
in opinions on how to interpret the data. Taken together, requiring 
sponsors to disclose precise information about their model inputs could 
increase the cost to sponsors without necessarily providing additional 
benefit to investors.
    To help mitigate these potential costs, the final rule permits the 
disclosure of fair value based on estimated ranges for tranche size, 
interest rates for each tranche, and underwriting discount. The 
information is required to be provided a reasonable amount of time 
prior to the sale of the asset-backed security. Also required to be 
included are the sponsor's key inputs and assumptions that may be 
described as a curve. The rule requires that this disclosure be

[[Page 77718]]

updated to reflect actual fair values of the ABS interests sold at the 
closing date. This approach may enable investors to make meaningful 
assessments of whether a sponsor's fair value calculations are 
reasonable prior to making their investment decisions, and at the same 
time may help to address sponsors' concerns about disclosing what they 
believe to be proprietary information and the timing of the disclosure. 
The ranges of pricing information will allow investors to decide if the 
sponsor's model input curves are aggressive or conservative compared to 
their own expectations based on their experiences and knowledge of the 
asset class.
    In the case of revolving pool securitizations, the agencies are 
permitting the seller's interest option to be measured using face 
value. These securitizations have unique structures described further 
below that would address the agencies' concerns about the use of face 
value of the ABS interests or the face value of the securitized assets 
to circumvent risk retention requirements as described above. This 
option recognizes the unique characteristics of certain structures and 
the impact of those structures on the alignment of incentives for the 
transaction parties. This option also helps to minimize the burden of 
fair value disclosure discussed in the reproposal while still allowing 
certain structures to have a meaningful amount of risk retained and 
addressing some commenters' concerns about using a fair value 
measurement framework to measure risk retention. One unique 
characteristic is that the vehicle will engage in multiple issuances 
for the life of the master trust. Because of this, if the revolving 
pool securitization contains poorly underwritten receivables that are 
expected to default then, in the future, this will impact the ability 
of the sponsor to make future issuances of asset-backed securities 
using the revolving pool securitization. The structure of revolving 
pool securitizations aligns incentives between sponsors and investors, 
reduces the need for fair value measurement that does not bring 
benefits to investors, and allows for face value measurement, which 
will help to minimize costs for sponsors of revolving pool 
securitizations.
b. Duration of the Risk Retention Requirement
    Under the reproposal, sponsors would have been prohibited from 
selling or otherwise transferring any interest or assets that they 
would be required to retain under the rule to any person other than a 
consolidated affiliate for specified time periods. For all ABS other 
than RMBS, the specified time period would have been the later of two 
years after the closing date of the securitization or when the 
aggregate unpaid balance of the ABS interests has been reduced to 33 
percent. For RMBS, the specified time period would have been the later 
of five years after the closing of the securitization or when the pool 
balance has been reduced to 25 percent, but in no event later than 
seven years after the closing of the securitization.
    In response to the reproposal, commenters recommended various 
modifications to the length of risk retention requirements. Some 
commenters suggested lengthening the non-RMBS duration to three years, 
while other commenters questioned why only RMBS and CMBS had asset 
specific durations and suggested lengthening or shortening periods of 
time that were tied to a specific asset class or securitized asset 
quality. Finally, some commenters suggested eliminating the alternative 
sunset period contingent on the unpaid pool balance.
    The agencies are adopting the sunset provisions as reproposed. The 
Commission lacks the data to determine an optimal duration of these 
risk retention requirements, and while commenters supported their 
positions based on relevant time periods that are tied to securitized 
assets, no commenters submitted relevant data or other quantifiable 
information. In particular, as stated in the reproposal, these time 
periods were chosen to strike a balance between retaining risk long 
enough to align the sponsors' and investors' incentives and allowing 
the redeployment of retained capital for other productive uses. A 
shorter duration was chosen for non-mortgage asset classes, because 
these loans tend to have shorter maturities than mortgages and thus it 
may not be necessary to retain risk for a longer period. The 
alternative sunset component contingent on the reduction of pool 
balance further calibrates the required duration of risk retention 
based on the remaining balances. By the time the loan pool balance 
decreases to 33 percent, the information about the loan pool 
performance will be largely revealed, at which point the moral hazard 
problem between the sponsor and the investor is likely to be 
significantly reduced.
    We recognize that, in the case where the loan pool balance drops 
below the prescribed threshold (25 percent for RMBS and 33 percent for 
other ABS) before the prescribed number of years (five years for RMBS 
and two years for other ABS), the additional required duration might be 
costly to the sponsor. A requirement that the sponsor continue to 
retain exposure to the securitization once the impact of the initial 
uncertainty about the ABS is resolved could potentially impede 
allocative efficiency by limiting the sponsor's ability to redeploy 
capital to new securitizations or other investment opportunities. 
Moreover, as loan balances are paid down, the sponsor may hold more 
risk relative to other investors because the size of the credit risk 
retention piece is based on the initial size of the securitization and 
does not change with the current market value. Thus, sponsors could 
face increased levels of risk retention on a percentage of outstanding 
basis at the same time retained risk becomes less necessary. While 
economic efficiency might be increased in certain circumstances by 
allowing sponsors to withdraw their risk retention investment to use in 
new securitizations or other credit forming activities,\437\ the 
minimum fixed duration of risk retention is appropriate to prevent 
structuring securitizations that would be quickly paid off to the 
balance threshold points (25 percent or 33 percent) for the purposes of 
avoiding risk retention.
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    \437\ See Hartman-Glaser, Piskorski and Tchistyi, 2012, Optimal 
Securitization with Moral Hazard. Journal of Financial Economics, 
vol. 104, no. 1, April 2012, pp. 186-202. They consider the optimal 
design of MBS contracts between a mortgage underwriter that can 
engage in costly hidden effort to screen borrowers and investors and 
show, among other things, that the maturity of the optimal contract 
can be short.
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5. Forms of Risk Retention Menu of Options
    Rather than prescribe a single form of risk retention, the final 
rule allows sponsors to choose from a range of options to satisfy their 
risk retention requirements. As a standard form of risk retention 
available to sponsors of all securitizations, sponsors may choose 
vertical risk retention, horizontal risk retention, or any combination 
of those two forms. Both the vertical and horizontal forms of risk 
retention require the sponsor to share the risk of the securitized 
asset pool. The final rule also includes options tailored to specific 
asset classes and structures such as revolving master trusts, CMBS, 
ABCP, CLOs, and TOBs. Given the special characteristics of certain 
asset classes, some of these options permit the sponsor to allocate a 
portion of the shared risk to originators, allow the risk to be held by 
specified third parties, or

[[Page 77719]]

allow the risk to be held in an identical asset outside of the 
securitization.
    Commenters generally supported the menu-based approach of providing 
sponsors with the flexibility to choose from a number of permissible 
forms of risk retention. These commenters believed that this provides 
sponsors with the flexibility to structure their risk retention 
requirements to accommodate current market practices.
    By adopting a rule that will allow sponsors flexibility to choose 
how they retain risk, the agencies seek to enable sponsors to select 
the approach that is most cost-effective for them, while still 
fulfilling the purposes of Section 15G. As discussed previously, the 
agencies are sensitive to the need to balance the goals of risk 
retention (reduction of the moral hazard problem and better 
underwriting) with the need to facilitate the efficient deployment of 
capital. A flexible approach to retaining risk will permit sponsors to 
take into account a variety of factors, as discussed in more detail 
below.
    Various factors are likely to impact sponsors' preferred method of 
retaining risk, including size, funding costs, financial condition, 
riskiness of the securitized assets, potential regulatory capital 
requirements, return on capital requirements, risk tolerances, and 
accounting conventions. All else being equal, sponsors may prefer the 
option that involves the least exposure to credit risk. For example, 
the horizontal form of standard risk retention creates a fully 
subordinated residual interest that is more exposed to the expected 
losses of the deal than a similarly sized vertical form, and therefore 
is more sensitive to the deal's credit risk. By contrast, a vertical 
form of standard risk retention is comparable to a stand-alone pass-
through securitization, which when held by the sponsor, is the form of 
risk retention least exposed to a deal's credit risk. As discussed 
below, some sponsors may choose to use the horizontal method of risk 
retention or some combination of the horizontal and vertical method in 
order to meet the risk retention requirement.
    In particular, sponsors have an incentive to calibrate the level of 
risk exposure that minimizes their overall cost of funding. For 
example, some investors may be more likely to purchase senior ABS 
interests if the sponsor retains a larger residual interest and thus 
has more ``skin in the game.'' Alternatively, the sponsor may be unable 
to sell the residual interest on terms that would minimize the 
sponsor's cost of funding. In both instances, sponsors would prefer an 
option with a higher level of exposure to credit risk. This might be 
particularly true for securitizations that involve riskier or more 
opaque assets or more complicated securitization structures. As 
discussed previously, the potential need for retaining risk in a more 
costly form because the sponsor could not sell the residual interest on 
acceptable terms could be attenuated for registered offerings that are 
subject to the asset-level disclosure requirements under revised 
Regulation AB to the extent that investors are able to quantify risks 
using the required loan-level disclosures and are willing to purchase 
more of the residual interest on terms acceptable to the sponsor.
    As the Commission discusses below, a number of the options also 
attempt to correspond to current market practices. By allowing sponsors 
to satisfy their risk retention requirement while still maintaining 
current market practices, the proposed menu of options approach should 
help to reduce additional costs of the required regime. Moreover, the 
flexibility sponsors have to design how they hold credit risk will 
allow them to calibrate and adjust their selections for each 
transaction according to changing market conditions.
    On the other hand, because sponsors will have a choice on how to 
retain risk, their chosen structure may not always align interests and 
mitigate risks for investors in the same manner. Thus, to the extent 
that some forms of risk retention create disparate incentives for 
sponsors and investors,\438\ the ability to rely on those options may 
not fully address some of the conflicts of interest that contribute to 
the moral hazard problem that characterize securitizations. In 
addition, the flexibility of this approach may increase the complexity 
of implementation of risk retention because of the wide range of 
possible choices available to sponsors.
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    \438\ For example, if a sponsor is affiliated with a servicer 
(or has another way to influence the servicing of assets), then 
different forms of risk retention may change how distressed assets 
are serviced--more to the benefit of all investors or more to the 
benefit of junior tranche holders'. In most cases, investors in the 
more senior tranches would favor liquidation because liquidation of 
the securitized assets would reduce uncertainty and eliminate the 
credit risk of a delinquent or defaulted asset and because losses 
resulting from such liquidation of the securitized assets would be 
absorbed by investors in more subordinated tranches. Alternatively, 
investors in more subordinated tranches would favor a modification 
of the terms of a defaulted or delinquent asset because modification 
potentially could minimize losses.
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a. Standard Risk Retention
    The agencies are adopting the standard risk retention option as 
reproposed. In the reproposal, the Commission provided separate 
analyses of the economic effects of vertical risk retention, horizontal 
risk retention, or any combination of these two forms. Many commenters 
generally supported the reproposal to allow a sponsor to meet its risk 
retention obligation by using the standard risk retention option and 
approved of the flexibility that the proposal would provide to sponsors 
in structuring their risk retention. One commenter specifically 
expressed support for the single vertical security option, asserting 
that it would simplify compliance and monitoring obligations of the 
sponsor.
    The agencies continue to believe that it is appropriate to provide 
flexibility to sponsors. This approach allows sponsors to minimize 
costs by selecting a customized combination of vertical and horizontal 
risk retention that suits their individual situation and circumstances, 
including relative market demand for the various types of interest that 
may be retained under the rule. To the extent that the costs and 
benefits of credit risk retention vary across time, across asset 
classes, or across sponsors, this approach would implement risk 
retention in the broadest possible manner such that sponsors may choose 
the combination of vertical and horizontal risk retention that they 
view as optimal. For example, if investors are unable to accurately 
estimate the risk of the securitized asset, the sponsor may be unable 
to sell the residual interest on acceptable terms, which would mean any 
excess vertical risk retention would be an additional cost to such a 
sponsor. Allowing flexibility will not only benefit sponsors but also 
will allow investors' demands to be more easily satisfied.
    Below we discuss the economic implications of particular risk 
retention structures.
i. Eligible Horizontal Residual Interest
    Under the eligible horizontal residual interest (EHRI) option, 
sponsors would hold the first loss piece, which as described above, 
would reflect a larger credit exposure than an equal percentage of 
retained risk using a form that included vertical retention. To the 
extent that such a holding signals to investors that the information 
about the asset portfolio being securitized is accurately represented 
and fairly priced, having this option available to sponsors may improve 
investor participation and lead to enhanced capital formation. However, 
horizontal risk retention used without vertical risk retention may not 
fully align sponsor incentives with the incentives of investors in all 
of the

[[Page 77720]]

tranches or classes. Investors who are investing in the most senior 
tranches will have different interests than the sponsor holding the 
residual interest, which is the most junior tranche, especially 
concerning the servicing of under-performing assets.\439\
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    \439\ See footnote 438.
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    There are several reasons why a sponsor may choose to hold a 
residual interest instead of a vertical interest. Sponsors may be 
unable to sell the residual interest or, if they are securitizing 
riskier loans, may hold the residual interest to increase investors' 
interest in more senior tranches. In particular, to the extent that a 
sponsor is willing to incur exposure to the first losses, investors may 
be willing to purchase the senior tranches at higher prices. Also, if 
sponsors have a cost of capital that is higher than the return provided 
by holding vertical risk retention, sponsors may choose to hold more 
subordinated tranches and more of the credit risk to generate a return 
sufficient to meet their required cost of capital. The holder of the 
residual interest generally receives a higher rate of return than any 
other tranche of the deal and therefore a sponsor may choose to hold 
horizontal risk retention in order to make the deal economically viable 
for the sponsor. This would increase the amount of capital available 
for riskier loans as sponsors' demand for loans of a higher risk 
increases. In all these cases, any requirement to retain a vertical 
interest would only impose additional costs on such sponsors.
    In the reproposal, the agencies included cash flow restrictions 
with EHRI, reasoning that if sponsors can structure securitizations in 
such a way that the residual interest is able to receive cash early on 
in the deal then the sponsor's incentive to select loans with better 
underwriting may be reduced because the sponsor may be repaid all of 
their principal investment (``cash out of the deal'') before losses 
accumulate and the deal underperforms.
    Many commenters supported elimination of the cash flow 
restrictions. They asserted that these restrictions are incompatible 
with a variety of securitization structures, that the certifications 
and disclosures to investors that would be required by the proposed 
cash flow restriction would create potential liability, and that there 
are possible ways around these restrictions such that they will not be 
meaningful but only increase costs to sponsors. Commenters also stated 
that cash flow restrictions would prohibit almost all securitizations 
from being issued as they are designed to pay high interest rates early 
on to the residual holder as compensation for risk taken, and that most 
of the structures in previously issued asset-backed securities would 
have failed the cash flow restriction tests. According to these 
commenters, imposing the cash flow restrictions could thus require 
current market participants to change their current practices, which 
could lead to a reduction or cessation of the securitization markets, 
resulting in a decrease in capital formation and reduction in 
allocative efficiency.
    After considering the numerous comments received, the agencies have 
concluded that the proposed cash flow restrictions on the EHRI (as well 
as the alternative described in the reproposal and alternatives 
suggested by commenters) could lead to unintended consequences and 
impose unnecessary burdens on some asset classes. Therefore, the 
agencies have eliminated the previously proposed restrictions from the 
final rule. The revised disclosure requirements being adopted relating 
to the key inputs and assumptions underlying fair value calculations, 
however, should provide investors with the information necessary to 
analyze whether the sponsor is being conservative or aggressive in its 
estimate of the 5 percent risk retention holding. The rule also 
requires disclosure of the material terms of the residual interest. By 
providing this information to investors, the disclosure helps mitigate 
the concern that sponsors may provide accelerated returns to themselves 
through the residual interest since investors will be able assess the 
likelihood of such scenario based on this information. Eliminating the 
cash flow restriction requirements would eliminate the costs to 
sponsors associated with changing their market practice while 
potentially promoting competition among the sponsors for alternative 
structures that optimize their retention and investor preferences.
ii. Eligible Vertical Interest
    A sponsor relying solely on the vertical option would hold a 
percentage of each tranche, resulting in an economic exposure of 5 
percent of the credit risk of the entire loan pool. The primary benefit 
of vertical risk retention as compared to other standard forms of risk 
retention is that investor-sponsor incentives will be equally aligned 
across all ABS tranches.
    Vertical risk retention is also subject to less credit risk 
exposure, and thus it will be a cheaper method for the sponsor to 
satisfy the requirement both in terms of cost of capital and in 
measurement and disclosure to investors. There is no requirement for 
sponsors to provide a fair value estimate to investors, which could 
reduce the cost of retaining risk relative to the costs associated with 
the other risk retention options. Vertical risk retention will be 
relatively simple for investors to evaluate because the sponsor will 
hold a specified percentage of each tranche. However, vertical risk 
retention may be less optimal for sponsors who typically hold a first 
loss piece with the intent of signaling higher quality of the senior 
tranches or for other reasons.
    The benefits of the vertical form of risk retention extend to other 
market participants as well. By allowing sponsors to choose a vertical 
form of risk retention, there will be increased flexibility to choose 
higher yielding assets and provide greater access to credit to viable 
but higher-risk borrowers than would otherwise be possible through only 
a horizontal form of risk retention. Investors interested in holding 
residual interests will benefit from a vertical form of risk retention 
as they will be able to purchase more higher-yielding first loss pieces 
of securitizations, while investors who demand tranches above the first 
loss piece will have less supply available because the sponsor would 
hold 5 percent of each tranche instead of holding all of its retained 
risk in the residual interest.
    The final rule also permits a single vertical security, as 
proposed. All economic considerations that apply to vertical risk 
retention will apply to the single vertical security except that the 
single vertical security may allow sponsors to comply with risk 
retention in a less costly manner in terms of administrative fees and 
accounting costs. If the sponsors' costs of risk retention are lower 
while still providing the same incentive alignment, then cost of credit 
for borrowers may be lower.
iii. Combined Risk Retention Option
    The final rule allows sponsors to retain risk through any 
combination of a vertical form and a horizontal form provided that the 
total percentages of retained forms in the securitization add up to 5 
percent. For example, a sponsor can hold 3 percent in the vertical form 
and 2 percent in the horizontal form in reliance on a combination of 
the horizontal and vertical forms of risk retention.
    As noted above, horizontal risk retention allows sponsors to 
provide a stronger signal about their private information about asset 
quality than vertical risk retention because of the increased amount of 
credit exposure for

[[Page 77721]]

sponsors. Hence, a sponsor choosing to retain risk in a more expensive 
horizontal form over a vertical form would have greater exposure to 
credit risk, and that sponsor's incentives should be better aligned 
with investors'. As previously described, by choosing a higher cost 
method of retaining risk, such as through the horizontal form, a 
sponsor can signal to the market greater certainty about the quality of 
assets and the level of risk in the senior tranches because the sponsor 
is willing to incur the losses in the lower subordination. However, the 
optimal size of the residual interest for a sponsor that seeks to 
maximize the proceeds and minimize the sponsor's overall cost of 
funding from securitization may not be 5 percent.
    Finally, sponsors may choose to hold some residual interest in an 
attempt to gain a higher return on capital. In this case, again, the 
optimal size of the residual interest to achieve sponsor's required 
return may not be 5 percent. The combination of the horizontal and 
vertical forms reduces costs to sponsors by allowing them to hold some 
of their risk retention in the cheaper vertical form while still 
receiving credit for the residual interest they retain. Moreover, the 
vertical form of risk retention still allows for a more equal alignment 
of sponsors' interests with all types of investors because the sponsor 
will hold a portion of all of the tranches in the securitization.
    Allowing a flexible combination of the horizontal and vertical 
forms accommodates various current market practices. Some asset classes 
have been able to monetize more of their exposure to securitized assets 
than other asset classes. Typically the range for RMBS has been closer 
to 1-3 percent of overcollateralization than to the 5 percent of fair 
value for the retained first loss piece required by the final rule. 
Thus, the flexible combination of horizontal and vertical forms will 
allow sponsors to continue to retain risk as they have in the past 
while keeping the cost of risk retention to a minimum.
    The flexibility of the combination of the horizontal and vertical 
forms also allows sponsors to better meet demands of investors. If 
investors want to hold more of the residual tranche, the sponsor can 
hold less risk in the horizontal form and more risk in the vertical 
form to be able to sell interests in the residual tranche to investors. 
Alternatively, if there is a larger demand for more senior tranches, 
then sponsors can hold more risk horizontally. This flexibility will 
increase allocative efficiency within the ABS market. The flexible 
combination of the horizontal and vertical forms also increases 
competition among sponsors because it allows sponsors to adjust several 
dimensions of the securitization: risk retention costs, expected 
returns on retained pieces, and supply of tranches with different risk 
characteristics.
b. Options for Specific Asset Classes and Structures
i. Seller's Interest Option
    The reproposed rule would have allowed a sponsor of a revolving 
master trust that is collateralized by loans or other extensions of 
credit to meet its risk retention requirement by retaining a seller's 
interest in an amount not less than 5 percent of the unpaid principal 
balance of the pool assets held by the sponsor. Commenters stated that 
the reproposed version of the seller's interest option would not 
accommodate all the common market practices in the master trust market. 
They suggested methods to broaden the options available to revolving 
master trusts to allow a wider variety of market practices to count as 
risk retention.
    The agencies are revising the seller's interest option for 
revolving pool securitizations (referred to as revolving master trusts 
in the reproposal) in the final rule in order to accommodate more of 
the practices of sponsors that currently rely on revolving pool 
securitizations as an important component of their funding. These 
revisions recognize and accommodate the meaningful exposure to credit 
risk currently held by sponsors of these revolving pool 
securitizations, in light of the heightened alignment of incentives 
between sponsors and investors that attaches to their structural 
features. The agencies are also making a number of other refinements in 
the final rule in order to align the seller's interest option more 
closely with the mechanics of revolving pool securitizations as they 
are structured in the market today.
    The pari passu seller's interest option in the final rule 
represents a special form of exposure to credit risk for the asset-
backed security issued by a revolving pool securitization. Under this 
option, the sponsor must maintain the size of the seller's interest 
position, most commonly through the ongoing addition of receivables to 
the pool or repayment of investor ABS interests. Commenters also 
requested that the agencies accommodate other revolving pool 
securitizations that are common in the market and rely on a seller's 
interest that is structured in a different manner, which varies among 
the revolving pool securitizations used for certain asset classes. 
Commenters described two different structures, which the agencies 
believe should be recognized as an eligible form of risk retention 
under the final rule.
    The agencies have recognized a series subordinated seller's 
interest in a revolving pool securitization as eligible risk retention 
in the final rule. As described by commenters, a series subordinated 
seller's interest is a common feature of revolving pool securitizations 
for certain asset classes, such as equipment leasing and floorplan 
financing. In these revolving pool securitizations, the sponsor is 
obligated, as is the case with the pari passu seller's interest, to 
maintain an undivided interest in the receivables in the collateral 
pool, in an amount equal to a specified percentage of the trust's 
outstanding investor ABS interests. Whereas the pari passu seller's 
interest is a trust-level interest equal to a minimum percentage of the 
combined outstanding investor ABS interests, the minimum percentage in 
subordinated seller's interest revolving pool securitizations may be 
tied to the outstanding investor ABS interests of each separate series. 
While the sponsor's right to receive distributions on the seller's 
interest included in the reproposal was required to be pari passu, the 
sponsor's right to receive distributions on its share of distributions 
in subordinated seller's interest revolving pool securitizations may be 
subordinated to varying extents to the series' share of credit losses.
    Importantly, commenters noted that notwithstanding these 
differences with the pari passu seller's interest, the sponsor of a 
series subordinated seller's interest revolving pool securitization is 
still required to maintain the minimum amount of securitized assets in 
the pool, if the securitization is to continue revolving, through the 
ongoing addition of assets to the pool if necessary. The sponsor has 
incentives to monitor the quality of the assets added to the pool in 
both structures. If the sponsor replaces repaid or defaulted assets 
with poorly underwritten assets, those assets will, in turn, suffer 
losses, and the sponsor will be obligated to add even more assets. If 
this cycle is perpetuated and the minimum asset target is breached, the 
revolving pool securitization will enter an early amortization period, 
and the sponsor will no longer have access to future funding from the 
revolving pool securitization. Because the subordination of the 
seller's interest does not change this potential consequence and 
provides similar economic incentives as the pari passu seller's 
interest for the sponsor to

[[Page 77722]]

monitor and maintain the quality of securitized assets in the pool, the 
final rule recognizes this ``series subordinated'' form of seller's 
interest as an eligible form of risk retention for revolving pool 
securitizations. Allowing the series subordinated seller's interest 
accommodates existing market practice and will therefore minimize costs 
to certain revolving pool securitizations, while providing the intended 
benefit of aligning sponsor and investor incentives which will 
encourage higher quality underwriting.
    Commenters also described another form of seller's interest used in 
revolving pool securitizations for certain asset classes, such as 
equipment leasing and floorplan financing, which are often 
collateralized by various types of ``excess'' receivables. The 
transaction documents for revolving pool securitizations typically 
impose eligibility requirements on the receivables that are allowed to 
be included as collateral for purposes of calculating the total amount 
of outstanding investor ABS interests that may be issued by the 
revolving trust. These eligibility requirements include concentration 
limits on receivables with common characteristics, such as those 
originating from a particular manufacturer or dealer or a particular 
geographic area. The sponsor places assets that exceed these 
concentration limits (ineligible assets) in the revolving pool 
securitization, where they are often subject to the pledge of 
collateral to the holders of the ABS interests, but they are not 
included when calculating the amount of the seller's interest under the 
revolving pool securitization. Distributions on these ineligible assets 
are typically allocated to the sponsor, but depending on the terms of 
the securitization, the sponsor's claim to the cash flow from these 
assets may be partially or fully subordinated to the claims of investor 
ABS interests, and these subordination features may be at the trust 
level, at the series level, or some combination of both.
    While the agencies are persuaded that revolving pool 
securitizations should be allowed to hold these receivables without 
violating the common pool requirement, the final rule, consistent with 
market practice described above, does not allow these excess 
receivables to be included in the measurement of seller's interest. 
Because these are assets that by their terms are not representative of 
the assets that stand as the principal repayment source for investor 
ABS interests issued by the revolving pool securitization, the agencies 
believe, in conformance with market practice, that it would be 
inappropriate to include them in the calculation of the seller's 
interest. This accommodation for existing market practice allows a 
greater number of existing revolving pool securitization structures to 
meet the risk retention requirements, which should reduce the costs of 
compliance with the final rule and minimize disruption to existing 
structures. The agencies also recognize that some revolving pool 
securitizations make distributions on these receivables available to 
cover losses on eligible pool assets, which increases the amount of 
credit enhancement available to investors.
    The agencies are adopting the seller's interest option generally as 
reproposed with certain modifications to incorporate more existing 
revolving pool securitizations. The Commission believes that there are 
several benefits to recognizing the existing seller's interests in 
revolving pool securitizations as an eligible form of risk retention. 
Aligning the rule's requirements with current market practice will 
reduce implementation costs for sponsors using the master trust 
structure while still retaining the benefits that investors receive 
through improved selection of underlying assets by the sponsors of 
revolving pool securitizations. Accommodating current practice will be 
transparent and easy for the market to understand and will preserve 
current levels of efficiency and help to maintain investors' 
willingness to invest in the market. Accommodating current practice 
will also provide clarity to market participants and may encourage 
additional investor participation given the removal of previous 
uncertainty about potential changes to current practices, thereby 
helping to promote capital formation. Under this option, there would be 
a cost to sponsors of measuring the seller's interest amount on an 
ongoing basis in accordance with the final rule, but since ongoing 
measurement is a current market practice, the additional cost should be 
low. Unlike more traditional securitization transactions collateralized 
by a static pool of assets, revolving pool securitizations use a single 
issuing entity to issue multiple series. These accommodations should 
allow sponsors of revolving pool securitizations to continue to use the 
same issuing entity and minimize the potential disruption to the market 
that could be caused by bifurcating the common pool of securitized 
assets or any other restructuring of the issuing entities, and any of 
their outstanding asset-backed securities issued prior to the 
applicable effective date of the final rule.
    As discussed above, the agencies are modifying the seller's 
interest option to accommodate more of the market practices that 
currently exist. Accommodating more market practices will reduce costs 
for sponsors of revolving pool securitizations that otherwise would not 
been able to rely on the reproposed version of the seller's interest 
option and thereby help to promote competition within this segment of 
the market.
ii. Representative Sample
    The agencies also considered the alternative option of risk 
retention held through a representative sample of the securitized 
assets that was proposed in 2011, but not included in the 2013 
reproposal.
    While some commenters were supportive of the original proposal's 
inclusion of the representative sample option, many commenters were 
critical of the option, stating that it would be impractical to 
implement this option for a variety of reasons, including that it would 
be unworkable for various asset classes, it would be subject to 
manipulation, and its disclosure requirements were too burdensome. Some 
commenters on the reproposal asked for the representative sample to be 
reinstated, asserting that a revised representative sample option would 
be particularly useful for automobile loan and lease securitizations, 
and more generally, for securitizations with large pools of consumer or 
retail assets, such as student loans. However, these commenters did not 
specify the costs of not including such an option in the final rule.
    The agencies continue to believe a representative sample option 
should not be included in the final rule because, among other reasons, 
it would be difficult and potentially costly for investors and 
regulators to monitor or verify that exposures were indeed selected 
randomly, rather than in a manner that favored the sponsor. In order to 
allow sponsors to hold a representative sample, a number of material 
factors would need to be considered for the sample to be truly 
representative. However, even if many factors are considered, a factor 
could potentially be missed, and as a result, sponsors would end up 
holding a sample that differed in a material way from the pool assets. 
This could lead to ineffective alignment of incentives and therefore 
fail to realize one of the intended benefits of the rule. Due to these 
concerns, the agencies have decided not to include a representative 
sample option in the final rule. Sponsors using this structure will 
incur costs to comply with the requirements of the final rule because 
the final rule

[[Page 77723]]

does not include a representative sample option as one of the 
permissible forms of risk retention.
iii. Asset-Backed Commercial Paper Conduits Option
    Under the reproposal, sponsors of ABCP conduits could either hold 5 
percent of the risk using the standard risk retention option, as 
discussed above, or could rely on the ABCP option. The proposed ABCP 
option would not have required the sponsor of the conduit, which is 
typically a special purpose vehicle, to retain risk as long as the 
assets held in the ABCP conduit, which are often ABS interests in other 
asset classes, are not purchased in the secondary markets, and the 
sponsor of every ABS interest held by the ABCP conduit complies with 
the credit risk retention requirements. Another condition of the 
proposed conduit option was the requirement that the ABCP conduit have 
100 percent liquidity support from a regulated institution.
    Commenters generally repeated earlier requests that the agencies 
provide an exemption based on, or otherwise recognize, unfunded risk 
retention provided by banks in the form of liquidity support, program 
wide credit enhancement, unconditional letters of credit, and similar 
features, as satisfying the risk retention requirements. Commenters 
also requested that ABCP conduits relying on this option be permitted 
to use a broader range of transaction structures and purchase a wider 
variety of assets. Finally, some commenters suggested the elimination 
or modification of the proposed requirements to disclose fair value 
calculations and supporting information by conduit managers about an 
originator-seller's failure to comply with risk retention requirements, 
stating that such disclosure under current market conditions could risk 
the collapse of the particular ABCP conduit and pose a contagion risk 
to the other conduits.\440\
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    \440\ The Commission believes that the diversification of ABS 
interests and the 100 percent liquidity support requirement make 
this scenario highly improbable.
---------------------------------------------------------------------------

    The agencies are adopting the ABCP option substantially as 
reproposed except for certain modifications based on comments received 
to accommodate a greater range of current market practices for existing 
ABCP structures in the ABCP option. The agencies have not adopted 
commenters' suggestion to permit the application of the ABCP option to 
certain types of assets not covered by the reproposal or transaction 
structures with less than 100 percent liquidity support. Restricting 
the option to ABCP conduits that hold only certain ABS interests is a 
structural safeguard that while possibly limiting the ability raise 
capital through ABCP conduits, will increase the alignment of 
incentives between sponsors of ABCP conduits and investors.
    Under the final rule, eligible ABCP conduits may only purchase ABS 
interests in an initial issuance. By limiting an eligible ABCP conduit 
to holding ABS interests acquired in initial issuances, a sponsor will 
be in a better position to potentially influence the terms of the deal 
and have an effect on the quality of assets underlying the ABS 
interests relative to if the ABS interests were acquired in the 
secondary market post issuance. However, by conditioning ABCP conduit 
eligibility to rely on the ABCP option on the purchase of ABS interests 
in an initial issuance, the rule could have a negative impact on 
secondary markets, possibly resulting in lower liquidity and 
potentially decreasing the efficiency in the secondary markets for ABS 
interests. Additionally, the agencies understand that ABCP conduit 
structures that primarily relied on secondary market purchases 
(arbitrage ABCP conduits) performed poorly during the financial crisis.
    Allowing the ABCP option provides incentive to improve underwriting 
while minimizing the impact on ABCP funding costs, thereby lessening 
the potential burden on capital formation as ABCP conduit sponsors will 
not need to use their capital to retain 5 percent of the ABS interest 
issued by the ABCP conduit. The risk retention option for ABCP conduits 
includes specific requirements for a regulated liquidity provider that 
provides liquidity support with contractual terms that meet certain 
requirements. We estimate that approximately half of existing ABCP 
conduit sponsors may need to adjust the terms of their existing 
liquidity support in order to comply with the requirements of the final 
rule, and therefore will incur costs to implement the liquidity support 
necessary to meet the new requirements. The liquidity support 
requirements are largely consistent with the exclusion from the 
definition of covered fund for certain ABCP conduits in the rules 
implementing Section 619 of the Dodd-Frank Act. As a result, the 
Commission believes ABCP conduits sponsored by banks, which make up the 
bulk of the ABCP market,\441\ already have or will have liquidity 
support that will comply with the final rule, and therefore the new 
requirements will not materially increase their costs.
---------------------------------------------------------------------------

    \441\ Asset-Backed Alert, March 28, 2014, lists the 20 largest 
ABCP conduit administrators. All but one of them are large banks. 
The non-bank is Lord Securities.
---------------------------------------------------------------------------

    Maintaining current practice and requiring 100 percent liquidity 
coverage without regard to asset performance will be transparent and 
easy for investors to understand and implement, and help to maintain 
investor's willingness to invest in ABCP. Adoption of the liquidity 
coverage requirement and removal of previous uncertainty about 
liquidity coverage (i.e. under what conditions liquidity support would 
be provided) should also provide clarity to investors and may encourage 
additional investment, thereby lowering the cost, or increasing the 
amount, of capital formation in ABCP and underlying asset-backed 
securities markets. However, the liquidity support could have the 
effect of lowering the yields of the ABS interests because investors 
will face less risk compared to less than 100 percent liquidity 
support.
    Other modifications that the agencies are making will also permit 
more existing market practices to be used with the ABCP option. 
Accommodating these market practices will reduce costs to those ABCP 
conduits that were not covered under the reproposed version of the ABCP 
option and thereby help to promote competition within this segment of 
the market.
iv. Commercial Mortgage-Backed Securities Option
    The agencies are adopting the CMBS option largely as reproposed. 
The Commission continues to believe that the option provides a means to 
satisfy the risk retention requirements that, for the most part, will 
allow CMBS issuers to continue current market practice relating to 
techniques that align incentives and improve underwriting standards. 
Under the final rule, a sponsor will be able to satisfy the risk 
retention requirements by having up to two third-party purchasers 
(provided that each party's interest is pari passu with the other 
party's interest) purchase an eligible horizontal residual interest (B-
piece) in the issuing entity if it is backed solely by commercial real 
estate loans and servicing assets. The third-party purchaser(s) would 
be required to acquire and retain an eligible horizontal residual 
interest in the issuing entity in the same form, amount, and manner as 
the sponsor (with the same hedging, transfer, and other restrictions) 
except that after five years the third-party

[[Page 77724]]

purchaser can sell the B-piece to another eligible third-party 
purchaser.
    As discussed in Section 3.b.ii of this Economic Analysis, currently 
the B-piece investors in CMBS often hold dual roles as bond investors, 
if the assets remain current on their obligations, and as holders of 
controlling interests to appoint special servicers, if the loans 
default and go into special servicing. The B-piece investors are 
typically real estate specialists who use their extensive knowledge 
about the underlying assets and mortgages in the pools to conduct 
extensive due diligence on new deals. Such due diligence is feasible 
because typically CMBS have much smaller number of underlying loans in 
a pool.\442\ Consequently, since B-piece buyers are taking the credit 
risk and have an ability to perform their own due diligence on 
securitized assets before purchasing the residual tranche, the third 
party holding risk effectively serves as an independent re-underwriter 
of the underlying loans, achieving a quality of re-underwriting 
consistent with the quality of underwriting of a sponsor that would 
retain credit risk on its own balance sheet. B-piece buyers also have 
the ability to affect the performance of the securitization when 
problems arise. Because they usually have expertise in commercial real 
estate and are holders of controlling interests to appoint special 
servicers (and often have special servicers affiliates), they 
facilitate restructuring of underperforming loans to maintain the 
structure of a CMBS. By providing for the continued retention of risk 
and strong incentive to the sponsor to limit potential moral hazard 
problems at the time the structure is put in place, the effect of the 
CMBS risk retention option on the moral hazard problem will likely be 
similar to the effect of one of the standard risk retention options.
---------------------------------------------------------------------------

    \442\ See also footnote 424.
---------------------------------------------------------------------------

    Allowing the third-party purchaser to sell the B-piece to another 
eligible third-party purchaser after a minimum holding period should 
generate secondary market liquidity, thereby lessening the original 
purchaser's cost of retaining the risk and encourages greater 
participation in the CMBS market by eligible B-piece purchasers. The 
resulting secondary market transactions could generate additional 
benefits to CMBS investors to the extent that B-piece buyers have 
differential skills with respect to assessing the risk at the time of 
origination, monitoring performance, and engaging in restructuring 
activity when performance issues arise. Allowing the transfer of the B-
piece will allow the transfer of the B-piece to a purchaser with 
specialized skills appropriate to the particular situations.
    Under the final rule, use of the CMBS option requires the 
appointment of an independent operating advisor who, among other 
obligations, has the authority to recommend and call a vote for removal 
of the special servicer under certain conditions. This requirement may 
serve to limit potential conflicts of interest between the investors in 
senior tranches and the B-piece buyer(s), thus helping to ensure that 
the benefits of the risk retention requirements are preserved and 
extended to all investors. There will be costs, however, related to the 
appointment of the independent operating advisor, including, but not 
limited to, the payments to the advisor.\443\
---------------------------------------------------------------------------

    \443\ According to CRE Finance World, Autumn 2012, Volume 14, 
No.3, pp. 47-50, the operating advisor fee rate is ``modest.'' Other 
costs may include delays in special servicer replacement due to the 
need to call for investors' vote, and a possible loss of efficiency 
because operating advisors may be less knowledgeable of the special 
servicing market than B-piece buyers.
---------------------------------------------------------------------------

    The primary benefit of allowing sponsors to maintain their current 
market practices is to effectively achieve the intended objectives of 
risk retention with minimized cost to the CMBS market. Commenters 
generally supported the CMBS option as reproposed, with one investor 
commenter cautioning against further modifications to the proposed CMBS 
option, expressing the view that CMBS underwriting standards were 
beginning to deteriorate. However, some comment letters suggested 
changes from the reproposal.
    Commenters suggested increasing the 5 percent minimum quorum 
requirement for a vote to replace the special servicer to 15 percent or 
20 percent, and adding a requirement that no fewer than three 
unaffiliated investors participate in the vote. The agencies have 
decided to permit CMBS transaction parties to specify in the underlying 
transaction documents the quorum required for a vote to remove the 
special servicer, provided it is not more than 20 percent of the 
outstanding principal balance of all ABS interests in the issuing 
entity, with such quorum including at least three ABS interest holders 
that are not affiliated with each other.
    The final rule includes these suggested changes to address the 
concern that a 5 percent quorum could allow a B-piece buyer holding 5 
percent of the CMBS deal to replace the special servicer alone without 
consent of other investors. As discussed in Section 3.b.ii of this 
Economic Analysis and in Part III.B.5 of the Supplementary Information, 
the B-piece investors in CMBS often have an affiliate special servicer 
and, as holders of controlling interests, they can appoint that 
affiliated entity if the loans default and go into special servicing. 
An affiliate special servicer could make decisions about loan 
restructuring in the interest of its affiliated B-piece holder that are 
inconsistent with the interests of all investors. Thus, requiring at 
least three investors that are not affiliated with each other for the 
quorum would ensure that the economic interest of at least some senior 
tranche investors would be accommodated in the selection of the special 
servicer and subsequent restructuring.
    Raising the maximum quorum requirement to 20 percent from 5 percent 
in the final rule will further ensure that other CMBS investors will 
participate in the selection of the special servicer. Limiting the 
maximum quorum requirement to 20 percent also ensures that investors do 
not face an undue burden in coordinating with other dispersed investors 
to call a vote to change the special servicer. Currently, transaction 
agreements can stipulate any quorum threshold. If a transaction 
agreement currently stipulates a threshold that is too high, the 
coordination costs attributed to collective action could prevent 
potentially efficient changes in the special servicer. On the other 
hand, with less ability to influence the selection of the special 
servicer, combined with an inability to disinvest until the expiration 
of the sunset period, B-piece buyers will have less incentive to invest 
in B-pieces. Hence, relative to current practices, mandating a lower 
maximum quorum requirement could generate benefits in some cases.
    The agencies considered but did not adopt the suggestion to allow 
third party purchasers to hold their interests in a senior/subordinate 
structure, rather than pari passu, to match the risk of loss of each B-
piece interest and the risk tolerances of each B-piece buyer. 
Commenters asserted that a senior-subordinated structure would better 
allow the market to appropriately and efficiently price the B-piece 
interests in a manner that is commensurate with the risk of loss of 
each interest, and to address the different risk tolerance levels of 
each third-party purchaser. However, other commenters strongly opposed 
allowing third-party purchasers to satisfy the risk retention 
requirements through a senior-subordinated structure, commenting that 
such a change would significantly

[[Page 77725]]

dilute and render ineffective the risk retention requirements. The 
agencies have decided not to allow third-party purchasers to satisfy 
the risk retention requirement with a senior-subordinated structure. As 
noted earlier, the purpose of third-party risk retention is to create a 
transaction participant that would serve as an independent re-
underwriter of the underlying loans. A ``senior'' B-piece holder in 
this structure might not be appropriately compensated for employing 
sufficient resources to re-underwrite a CMBS transaction because its 
expected return would be too low to compensate for the expenditure of 
resources necessary for re-underwriting. In addition, the pari passu 
requirement better aligns the interests of the most junior tranche 
buyer(s) with those of more senior noteholders whereas the senior/
subordinated structure for the B-piece would further separate the 
interests of most junior tranche buyer(s) (that in this case could hold 
the first loss tranche that might be significantly smaller than 5 
percent) from those of the senior noteholders, which could exacerbate 
conflicts of interest issues in this area.
    Some commenters opposed the disclosure of the purchase price paid 
by third-party purchasers for the eligible horizontal residual 
interest. These commenters pointed out that such information has 
traditionally been viewed by all market participants as highly 
confidential and proprietary, and that the disclosure requirement would 
deter B-piece buyers from retaining risk. The Commission acknowledges 
that, if B-piece buyers are deterred from purchasing eligible residual 
horizontal interests, this could lower the liquidity of the junior 
tranches of CMBS and, thus, potentially increase the sponsors' cost of 
capital and the cost of credit for borrowers. However, the agencies 
continue to believe that requiring disclosure of the price at which the 
B-piece is sold is important to understanding the value of the third 
party's risk retention (and therefore whether the required amount has 
been retained) and would be consistent with other required fair value 
disclosures for any eligible horizontal residual interest retained by 
the sponsor that allow investors to assess the amount of risk being 
retained.\444\ Hence, the ability of investors to quantify the amount 
of credit risk exposure of the B-piece buyer, and thus the level of 
incentive alignment with other investors, generates benefits that would 
not be possible if B-piece buyers were able to keep the price 
confidential.
---------------------------------------------------------------------------

    \444\ See Section 4.a.ii of this Economic Analysis.
---------------------------------------------------------------------------

    The final rule provides additional flexibility for the CMBS option 
by allowing up to two third-party purchasers to satisfy the risk 
retention requirement. This provision accommodates the current market 
practice \445\ and should facilitate liquidity of the residual piece 
market, contributing to a lower cost of capital for sponsors and 
borrowers. While commenters generally supported allowing up to two 
third-party purchasers to hold risk retention, one commenter 
recommended expanding the number of third-party purchasers to allow 
participation by more than two B-piece investors. The agencies do not 
believe it would be appropriate to allow more than two third-party 
purchasers in a single transaction. While allowing more than two 
purchasers could increase B-piece market liquidity and, in turn, reduce 
costs for CMBS sponsors, it also could dilute the incentives generated 
by the risk retention requirement to monitor the credit quality of the 
commercial mortgages in the pool, thereby undermining the intended 
benefits of the rule. Each B-piece investor who has exposure to 
significantly less than 5 percent credit risk, would have not enough 
``skin in the game'' to be incentivized to monitor the quality of 
underwriting as discussed in Section 4.a.i. of this Economic Analysis.
---------------------------------------------------------------------------

    \445\ Based on Commercial Mortgage Alert, out of 61 private 
label U.S. CMBS deals in 2013 that had B-piece buyers, 50 had a 
single B-piece buyer, 12 had two B-piece buyers, and none of the 
deals had more than two B-piece buyers.
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v. Government Sponsored Entities Option
    The final rule allows the full guarantee of the Enterprises under 
conservatorship or receivership to count as risk retention for purposes 
of the risk retention requirements. Because of the capital support 
provided by the U.S. government for the Enterprises, investors in 
Enterprise ABS are not exposed to credit loss, and there is no 
incremental benefit to be gained by requiring the Enterprises to retain 
risk.
    Commenters generally supported allowing the Enterprises' guarantee 
to be an acceptable form of risk retention in accordance with the 
conditions proposed and did not suggest any alternatives. The agencies 
are adopting the Enterprise option as reproposed.
    This option along with the Enterprises' capital support from the 
U.S. government creates a competitive advantage for the Enterprises 
over private-sector sponsors when purchasing non-QRM loans as long as 
they are conforming to the Enterprises underwriting standards. 
Recognizing the Enterprises' guarantee as fulfilling their risk 
retention requirement and the resulting additional competitive 
advantage over sponsors of non-QRM conforming loans has two significant 
economic benefits. First, it will allow the Enterprises to facilitate 
the availability of capital to segments of the population that might 
not otherwise have access through private sector channels. Second, it 
will provide stable funding of home financing in periods when lenders 
curb their lending due to limited access to capital and private-sector 
sponsors are unable or unwilling to meet excess demand.
    A potential cost of recognizing the Enterprises' guarantee as 
fulfilling their risk retention requirement is that it may incentivize 
them to purchase loans that do not meet the QRM criteria (i.e., 
expanding the Enterprises' conforming loans underwriting criteria), 
which would introduce risk that the risk retention requirement is 
intended to mitigate. However, analysis of loans originated between 
1997 and 2009, a period that spans the onset of the financial crisis, 
shows that private label loans had a much higher serious delinquency 
rate than Enterprise purchased loans, even after accounting for 
different underlying loan characteristics.\446\ Hence, this historical 
performance-based evidence suggests that Enterprise underwriting 
standards may offset any incentive to incur excess risk because of 
their capital support, at least in relation to the incentives and 
behaviors among private label sponsors during the same period.
---------------------------------------------------------------------------

    \446\ See Joshua White and Scott Bauguess, Qualified Residential 
Mortgage: Background Data Analysis on Credit Risk Retention, (August 
2013), available at http://www.sec.gov/divisions/riskfin/whitepapers/qrm-analysis-08-2013.pdf.
---------------------------------------------------------------------------

    If the Enterprises' conservatorship is terminated, their 
securitizations will no longer be exempt from risk retention 
requirements unless the securitized assets meet the QRM definition. 
This will put the Enterprises on even footing with private label 
securitizations in terms of risk retention, but, as was the case before 
the crisis, the Enterprises still carry an implicit guarantee of the 
U.S. government and, thus, will retain some of their funding advantage 
for both QRM and non-QRM securitizations. Private label securitizations 
may still have limited ability to be a significant source of capital to 
conforming non-QRM loan originations until the Enterprises wind down 
their activity or the implicit guarantee is eliminated. As is the case 
now, private label

[[Page 77726]]

securitizations would not have to compete with the Enterprises for 
securitizations of non-conforming loans (e.g., riskier non-qualified 
mortgage (non-QM) loans or jumbo loans), which will still fall outside 
of the Enterprises domain if current conforming loan underwriting 
standards remain in place.
vi. Open Market Collateralized Loan Obligations
    A collateralized loan obligation (CLO) is an asset-backed security 
that is typically collateralized by portions of tranches of senior, 
secured commercial loans or similar obligations of borrowers who are of 
lower credit quality or that do not have a third-party evaluation of 
the likelihood of timely payment of interest and repayment of 
principal. Commenters distinguished between two general types of CLOs: 
open market CLOs and balance sheet CLOs. As described by commenters, a 
balance sheet CLO securitizes loans already held by a single 
institution or its affiliates in portfolio (including assets originated 
by the institution or its affiliate). An open market CLO securitizes 
assets purchased on the secondary market at the direction of an asset 
manager, in accordance with investment guidelines. Under the final 
rule, sponsors of CLOs are required to retain 5 percent of risk using 
the standard form of risk retention and have not been provided with an 
exemption from the rule's requirements. CLOs are subject to the same 
sunset provisions as other non-residential mortgage securitizations.
    As an alternative to this standard risk retention, the agencies are 
adopting, as proposed, an option for sponsors of open market CLOs to 
satisfy the risk retention requirement by holding only ``CLO-eligible'' 
tranches for which the syndicated loan's ``lead arranger'' retains (for 
the duration of the loan) at least 5 percent of the tranche's value. A 
syndication's ``lead arranger'' is defined as a syndicated member that 
holds an initial allocation of the overall syndicated credit facility 
equal to (at least) the greater of (a) 20 percent of the aggregate 
principal balance and (b) the largest allocation taken by any other 
member (or members affiliated with each other) of the syndication 
group. The agencies have defined open market CLOs for purposes of the 
lead arranger option being adopted. The analysis below considers the 
impact of the risk retention requirements and the lead arranger option 
on the market for open market CLOs, which was the subject of many 
comment letters.\447\
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    \447\ In balance sheet CLOs the originator of the loan is the 
sponsor or an affiliate of the sponsor. For balance sheet CLOs, 
economically there is no difference between the lead arranger option 
and standard risk retention when the sponsor is the originator or 
its affiliate.
---------------------------------------------------------------------------

    Under the final rule, the risk retention requirements for open 
market CLOs are subject to the same sunset provisions as other non-
residential mortgage securitizations. These provisions require CLO 
sponsors to retain risk until the latest of: (1) The date on which the 
principal balance of the securitized assets reduces to 33 percent of 
the original unpaid principal balance as of the cut-off date or similar 
date for establishing the composition of the securitized assets 
collateralizing the asset-backed securities issued pursuant to the 
securitization transaction, (2) the date on which the unpaid principal 
obligations of securities has been reduced to 33 percent of the 
original unpaid principal obligations at the closing of the 
securitization transaction, or (3) two years after the date of the 
closing of the securitization transaction.
    The loans backing CLOs typically have maturities that can extend 
beyond the term of the CLOs, particularly when the loans are added to 
the pool after issuance, which could mean that loan balances of loans 
held by a CLO may not necessarily decrease prior to the maturity or 
redemption of the CLO. Hence, the final rule may effectively require 
the CLO manager (as the sponsor of the CLO) to retain risk beyond the 
minimum sunset period. This should lessen the incentive for managers to 
alter the composition of the loan portfolio in a way that could harm 
investors relative to what may be present with a shorter sunset period.
    A key difference between this lead arranger option and those 
related to, for example, commercial mortgage backed securities is that 
the CLO manager must rely on the lead arranger's continuing 5 percent 
retention of risk in the CLO-eligible loans, in order for the CLO 
manager to satisfy its risk retention obligations. Thus, unlike a 
portfolio of commercial mortgages, the CLO requirement extends beyond 
the initiation date of the securitization so that the status of the 
lead arrangers' continuing participation may affect the CLO manager.
    The agencies received many comments about the lead arranger option, 
and the impact of risk retention on the market for open market CLOs. 
These comments can be categorized into four main areas: (1) The impact 
of the lead arranger option on the availability and cost of leveraged 
loans; (2) the unwillingness or inability of arrangers to create CLO-
eligible tranches; (3) alternative options for sponsors of open market 
CLOs to retain risk; and (4) general concerns about the impact of risk 
retention on the CLO industry and the syndicated loan market.
    Regarding the impact of the lead arranger option on borrowing 
costs, commenters asserted that the proposed option would be unworkable 
with existing CLO practices and therefore the risk retention 
requirements would result in a significant reduction in CLO issuances 
and a corresponding reduction in credit to commercial borrowers. 
Commenters further asserted that the requirement that the lead arranger 
retain at least 5 percent of an eligible tranche would increase the 
required capital and FDIC assessment charges, thereby increasing the 
pricing of CLO-eligible tranches, and adversely impacting borrowing 
costs. Moreover, some commenters noted that only a very small number of 
arrangers can meet the definition of ``lead arranger'' as proposed, 
because the syndication of leveraged loans is concentrated among a 
small number of banks.\448\ According to these commenters, requiring 
lead arrangers to hold a relatively large piece of these syndicated 
loans on their balance sheets would cause a substantial increase in 
their risk-based capital requirement.\449\ Further, commenters noted 
that the requirement to retain 5 percent of the eligible tranche, 
combined with the hedging and transfer restrictions, is inconsistent 
with sound risk management practices, overly burdensome in light of 
regulatory and lending limits and would reduce the lead arranger's 
ability to extend credit. Commenters also stated that these additional 
costs, imposed on the lead arranger, would be passed on to the 
corporate borrowers, restricting access to and cost of capital.
---------------------------------------------------------------------------

    \448\ Based on Bloomberg L.P. data, the largest five banks 
arranged 47 percent of the syndicated leveraged loans in 2013.
    \449\ One commenter pointed out that banks and other highly 
regulated financial entities represent almost the entire market of 
originators of the loans that comprise the assets collateralizing 
CLOs. This commenter stated that the requirement for lead arrangers 
to hold additional exposure to a borrower that is unhedged until 
maturity of the loan is generally inconsistent with prudent lending 
practices and internal lending policies. Such a requirement also, 
impacts the amount of other banking products that such lead 
arrangers can extend to other borrowers.
---------------------------------------------------------------------------

    One commenter observed that only a handful of non-regulated 
entities have a sufficient amount of available capital to arrange and 
syndicate leveraged loans and satisfy the proposed risk retention 
requirements under the lead arranger option. According to this 
commenter, adopting the lead arranger option, as

[[Page 77727]]

proposed, would cause a severe contraction in CLO-related activities by 
regulated institutions and a significant reduction in liquidity to a 
critical sector of the U.S. economy. The Commission notes, however, 
that this conclusion assumes that other lenders will not enter the 
market with sufficient capital to compensate for the loss of bank 
capital in the event that large banks curtail their involvement in the 
CLO sector. For example, other commenters asserted that if the risk 
retention requirement caused a reduction in participation by open 
market CLOs in the leveraged loan market, other institutions would 
enter the market to fill the unmet credit needs. Ultimately, if this 
were to occur, the commenters asserted that non-CLO credit providers 
likely would incur higher costs than the CLO credit providers that have 
operated in the past, and these costs would be passed along to the 
ultimate borrowers, raising their cost of funding.
    Commenters' second main area of concern was the practical ability 
and willingness of originators to create and retain CLO-eligible 
tranches. One commenter stated that the lead arranger option is not 
workable because the implementation difficulties associated with 
creating CLO-eligible tranches are substantial and observed that 
surveyed banks have indicated they would not be willing to take on this 
endeavor. In particular, to qualify for the option, CLO-eligible 
tranches would be required to carry separate voting rights, which the 
same commenter asserted would be administratively unworkable and 
commercially unacceptable to the other parties to the loan transaction. 
Commenters also expressed concern that it was unclear how a CLO would 
be able to monitor whether the CLO-eligible loan tranche continues to 
meet the necessary criteria. Commenters stated that the requirement 
that a lead arranger represent that the loans continue to meet the 
rule's criteria exposes the lead arranger to potential liability that 
the lead arranger cannot realistically bear. While the Commission 
acknowledges these concerns, the Commission also notes that, because 
CLOs are a major source of funding for leveraged loan originators, 
there is significant economic incentive for arrangers to use the lead 
arranger option to ensure the continued participation of CLO managers.
    Other commenters argued that open-market CLOs should be exempted 
from the risk retention requirements altogether because the 
organizational structure of open market CLOs provides investors with 
sufficient safeguards. These commenters indicated that open market CLOs 
operate independently of originators and are not part of, and do not 
pose the same risks as, the originate-to-distribute model. They also 
asserted that CLO managers' interests are fully aligned with the 
interests of CLO investors because CLO managers bear significant risk 
through their deferred, contingent compensation structure, which they 
noted is based heavily on performance of the underlying assets. 
Commenters also noted that most CLO managers are registered investment 
advisers, with associated fiduciary duties to their clients. Commenters 
also noted that many CLO managers are subject to existing regulations 
that provide meaningful protections against imprudent or inferior 
underwriting, including the leveraged lending guidance released by the 
Federal banking agencies in 2013.\450\ Commenters further asserted that 
existing industry best practices mitigate risks, and that CLO assets 
are actively managed and often include select senior secured commercial 
loans with investor protection features. More generally, commenters 
asserted that: (1) unlike many other securitizations, CLOs are 
securitizations of liquid assets and are structurally transparent, (2) 
CLOs have historically performed well even during the financial crisis, 
and (3) this strong performance is evidence that risk retention is 
unnecessary.
---------------------------------------------------------------------------

    \450\ See Leveraged Lending Guidance. However, as discussed 
above in Part III.B.7 of the Supplementary Information, the Federal 
banking agencies noted that there is evidence that increased 
activity in the leveraged loan market has coincided with widespread 
loosening of underwriting standards and that many banks have not 
fully implemented standards set forth in the guidance, see 
Semiannual Risk Perspective: Spring 2014, Office of the Comptroller 
of the Currency, at 5 (June 2014), available at http://www.occ.gov/publications/publications-by-type/other-publications-reports/semiannual-risk-perspective/semiannual-risk-perspective-spring-2014.pdf, Shared National Credits Program: 2013 Review, Board of 
Governors of the Federal Reserve System, Federal Deposit Insurance 
Corporation, Office of the Comptroller of the Currency (September 
2013), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131010a1.pdf and ``Fed Scrutiny of Leveraged Loans 
Grows Along With Bubble Concern'', Bloomberg News, October 1, 2014, 
available at http://www.bloomberg.com/news/2014-10-01/fed-scrutiny-of-leveraged-loans-grows-along-with-bubble-concern.html.
---------------------------------------------------------------------------

    Some commenters proposed a new option for ``qualified CLOs'' that 
would codify many of the existing practices of open-market CLOs and 
require CLO managers to hold 5 percent of the equity tranche of at 
least 8 percent of the value of the CLO. As discussed below, the 
Commission does not believe this option would provide sufficient 
incentive alignment for open-market CLOs. Although some commenters 
stated their belief that CLO managers select and manage CLO assets free 
from the potential conflicts and misaligned incentives related to the 
originate-to-distribute model, the Commission notes that, without a 
risk retention requirement, there is little economic incentive to 
discourage practices associated with an originate-to-distribute model 
from developing.
    The fourth category of comments reflected a general concern about 
the lead arranger option and the impact of risk retention on the market 
for open market CLOs. One commenter expressed concern that designating 
one tranche of a syndicated facility the CLO-eligible loan tranche 
would significantly affect the pricing of other tranches due to the 
decreased liquidity of such tranches, as such tranches would not be 
available for securitization in the CLO market. The same commenter 
noted that the universe of CLO-eligible loan tranches would be very 
limited and restrict the CLO manager's ability to invest in a diverse 
number of loans. Further, several commenters asserted that the costs of 
imposing risk retention on CLO managers exceeds the benefits and that 
the agencies have not performed an adequate economic analysis in 
connection with the lead arranger option.
    One study by Oliver Wyman\451\ claimed that as a result of the 
proposed requirements, credit spreads will increase from 117 to 292 
basis points and costs to borrowers will increase between $2.5 billion 
and $3.8 billion per year because non-CLO lenders will charge a higher 
interest rate to leveraged loan borrowers than CLOs. To arrive at these 
estimates, the study assumed that CLO managers unaffiliated with a 
large financial institution or market participant will no longer be 
able to provide capital to the leveraged loan market and that credit 
would not be provided to borrowers through other channels.
---------------------------------------------------------------------------

    \451\ http://www.sec.gov/comments/s7-14-11/s71411-535.pdf.
---------------------------------------------------------------------------

    In reaching these conclusions, the study makes several assumptions 
that are questionable. For instance, the study assumes that CLO 
managers cannot or will not be able to hold 5 percent risk retention. 
However, the Commission believes that there may be economically 
feasible means for CLO managers to meet the risk retention 
requirements, particularly if there is economic incentive of the 
magnitude described in the study (i.e., predicted spread increases 
ranging from 100 to 200 basis points). Another assumption is that not 
enough lead arrangers will use the lead arranger option which will mean 
there

[[Page 77728]]

will not be enough CLO-eligible tranches for CLOs to be formed using 
the lead arranger option. Given that CLOs currently account for a 
significant portion of the leveraged loan market, there are significant 
economic incentives for loan arrangers to create CLO-eligible tranches 
particularly because, by not doing so, originators may not have enough 
demand for their issuances. Hence, lead arrangers may make CLO-eligible 
tranches available, which would create enough diversification and 
supply for CLOs to rely on the lead arranger option.
    The study's third assumption relies on an estimate of elasticity of 
supply of credit in the leveraged loan market (i.e., the change in the 
availability of credit associated with a given change in the loan 
interest rate). The study proxied for the elasticity of supply of 
credit with an estimate of elasticity of demand for credit in the 
leveraged loan market (i.e., the change in the borrowers' demand for 
credit associated with a given change in the loan interest rate) 
published in another (academic) study.\452\ However, the commenter's 
study does not justify its assumption that the elasticity of supply 
should be equal to the elasticity of demand. Indeed, the commenter's 
study implicitly assumes that demand is inelastic and would not change 
in response to the change in interest rate (i.e., that borrowers would 
demand the same amount of credit regardless of the level of interest 
rates). The commenter's study also assumes that the credit supply curve 
would not shift in response to the change in interest rate (i.e., as a 
result of entrance of new lenders).\453\ Taken together, the Commission 
believes the assumptions in the commenter's study contribute to an 
estimate of the cost to the leveraged loan and the CLO industry that is 
likely to be significantly inflated.
---------------------------------------------------------------------------

    \452\ Greg Nini, ``Institutional Investors in Corporate Loans'', 
University of Pennsylvania working paper, 2013, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2349840.
    \453\ The study asks the question ``How much ``extra'' yield 
would be needed to induce these non-CLO loan buyers to increase the 
amount of credit they are willing to supply?'' and proceeds to 
estimate ``the increase in credit quantity that non-CLO leveraged 
loan credit providers would have to supply to fully replace lost CLO 
capacity.''
---------------------------------------------------------------------------

    More generally, there are several considerations that could affect 
the extent of the rule's impact on the leveraged loan market, as 
described in the commenter's study. One consideration is that non-CLO 
investors might invest more capital given the right incentives (higher 
yields or less risk). These investors include hedge funds, loan mutual 
funds, and insurance companies. Another possibility is that these 
investors, instead of purchasing leveraged loans on the secondary 
market, would join in as part of the syndication. Finally, CLO managers 
with lower cost of funds and capability to satisfy the risk retention 
requirements may replace some of the supply of credit lost due to exit 
from the market of CLO managers with higher cost of funds. Any of these 
possibilities would mitigate the loss of CLO capital as other investors 
invested more capital into the leveraged loan market.
    Although the Commission acknowledges commenters' concerns about the 
lead arranger option, the Commission does not believe there is an 
economic justification for an exemption from the standard 5 percent 
risk retention requirement for CLOs. The Commission believes that the 
amount of risk retention included in the alternative approach suggested 
by commenters of a CLO option retaining 5 percent of the equity tranche 
of at least 8 percent of the value of the CLO transaction (effectively 
amounting to as low as 0.4 percent risk retention in the entire 
securitization) would not sufficiently address the originate-to-
distribute risks in the leveraged loan market. In particular, a CLO 
market absent of meaningful risk retention may not have the protections 
against future moral hazard problems that the final rule is designed to 
provide. The Commission acknowledges that risk retention may generate 
significant upfront costs to the CLO and the leveraged loan market 
relative to current practices or the proposed alternatives provided by 
commenters. However, the Commission believes that these current 
practices and the proposed alternatives would not do enough to align 
incentives between sponsors and investors which, in the long term, 
could impose larger costs on the market than the risk retention 
requirements of the final rule.
    The Commission is also sensitive to the claim by commenters that 
the CLO market performed well during the financial crisis in comparison 
to other asset classes and, in particular, to RMBS. However, the 
Commission believes that this claim has the benefit of hindsight, and 
that during the financial crisis, there were considerable concerns with 
the ability of borrowers to meet their financial obligations through 
their collateralized loans.\454\ Ultimately, aggressive monetary policy 
resulted in sharp declines in the interest rates payable on floating-
rate leveraged loans, making it easier for borrowers to meet their loan 
obligations. The Commission believes that it is this extraordinary 
influence on borrowing costs, and not the underlying market practices 
of CLO managers, which largely explains CLO performance during the 
financial crisis. Hence, CLO performance during the financial crisis 
does not provide a sound basis for an exemption from the rule's 
requirements.
---------------------------------------------------------------------------

    \454\ See, e.g., Ng, S., and K. Haywood, 2009, ``Rates Low, 
Firms Race to Refinance Their Debts,'' The Wall Street Journal, June 
26, 2009, http://online.wsj.com/articles/SB124597520948957427. They 
observe: ``Bankers and borrowers alike worry that the overhang could 
create serious problems in the years ahead if financial markets 
don't heal enough to allow hundreds of non-investment-grade 
companies to refinance their debt.''
---------------------------------------------------------------------------

    The Commission believes that commenters' alternative suggestions do 
not create sufficient incentive alignment, or ``skin in the game,'' for 
sponsors to ensure that originators maintain high underwriting 
standards in accordance with the purposes of Section 15G. While the 
Oliver Wyman study claims that risk retention will have a large 
negative impact on the leverage loan market and the CLO industry, the 
Commission believes that the assumptions underlying that assessment are 
questionable. In particular, the study assumes that CLO managers, who 
currently hold 53 percent \455\ of the leveraged loans sold by 
originators, will no longer be able to purchase leveraged loans and 
that a significant proportion would otherwise go unfunded. The 
Commission acknowledges that this may increase cost to leveraged loans 
borrowers, but, for the reasons explained above, the Commission 
believes these are likely to be at a much lower level than the study 
suggests. Originators may sell leveraged loans to other purchasers, in 
which case, as discussed below, smaller CLO managers may be affected 
but there would not be a significant impact on the CLO market.
---------------------------------------------------------------------------

    \455\ See Bloomberg Business Week, January 1, 2014, available at 
http://www.businessweek.com/news/2014-01-31/leveraged-loan-trades-in-u-dot-s-dot-rise-to-most-since-07-lsta-says.
---------------------------------------------------------------------------

    Under current practices in the leveraged loan market, syndicates 
hold the revolving piece of the origination, which is a line of credit 
that allows the borrower to drawdown additional capital from the 
arranger. Hence, the revolving piece of a leveraged loan represents a 
potential future liability to the lead arranger that could ultimately 
increase the amount of risk retained. The agencies did not create an 
option for treating this future liability as retained risk. In this 
way, the final rule may result in the lead arranger holding more 
exposure to the borrower of the leveraged loan than what would be 
required to satisfy the risk retention

[[Page 77729]]

requirement. Therefore, allowing the lead arranger to hold risk 
retention in place of the CLO manager should not diminish, and may 
increase, the alignment of incentives between loan arrangers and 
ultimate investors in the CLO, by providing strong incentives for the 
loan arranger to create loans with high underwriting standards.
    The impact of the lead arranger option on the leveraged loan market 
will be determined by the likelihood that lead arrangers are willing to 
retain risk in the manner required and CLO managers are willing to rely 
on this commitment. As commenters stated, there are frictions in the 
market that may prevent CLO managers from purchasing CLO-eligible loans 
or originators from creating CLO-eligible tranches. CLO managers may 
not be able to ensure that the bank will meet the CLO-eligible tranche 
requirements for the length of the loan. In addition, the special 
voting rights attached to the CLO-eligible tranche may prevent other 
parties from wanting to create a CLO-eligible tranche.
    Large commercial banks are the primary source for leveraged loan 
origination and may be reluctant to retain ongoing exposure to 
leveraged loans because the loans are typically longer term and riskier 
than the other assets banks usually hold on their balance sheet. As 
such, they may not be willing to serve as a lead arranger for the 
purpose of creating a CLO-eligible tranche. Should these banks choose 
to create CLO-eligible tranches to facilitate additional demand for 
their originations, it is possible that they would charge borrowers 
higher rates to compensate for the additional capital charge they could 
incur under existing regulatory requirements, or because it would 
impede a redeployment of capital for other projects.
    CLO managers that use the lead arranger option will be relying on 
lead arranger commitments to hold 5 percent of the CLO-eligible tranche 
for the duration of the loan. A CLO manager relying on the lead 
arranger option would need to sell any tranches that cease to be CLO-
eligible tranches due to the failure of a loan arranger to hold the 
required amount of risk, which could generate an otherwise unnecessary 
loss if the forced sale provides a buyer with leverage to negotiate a 
discount. However, a CLO manager should have some level of confidence 
in a lead arranger's ongoing commitment to meet the requirement because 
there will be recourse against the lead arranger for breach of 
contract, as the lead arranger will warrant in the transaction 
documents to hold 5 percent of the CLO-eligible tranche for the 
duration of the loan. Any costs the CLO manager incurs from the forced 
sale of the loan could be part of their claim against the loan arranger 
for breach of contract. Moreover, failure of a lead arranger to keep 
this commitment could harm their reputation with respect to continued 
participation in the leveraged loan market because potential CLO 
managers would be less willing to engage in their transactions, leaving 
the lead arranger unable to sell or face higher costs in selling CLO-
eligible loan tranches or any other loans, in the future.
    To accommodate potential demand for CLO-eligible tranches and the 
concomitant costs of the ongoing credit exposure from the risk 
retention requirement, lead arrangers may be willing to charge higher 
rates to borrowers and, as a result, continue generating revenue from 
underwriting, warehousing, and selling leveraged loans. There is strong 
incentive for loan arrangers to do so given that CLO purchases of 
leveraged loans currently represent about half of the total investment 
in the leveraged loan market.\456\ The prospect of CLO managers 
declining to purchase non CLO-eligible loan tranches should encourage 
lead arrangers to hold enough exposure to create CLO-eligible tranches 
in order to meet current investor demand. Hence, the Commission 
believes that CLO managers have significant influence over, and lead 
arrangers will have increased incentive to facilitate, the use of the 
lead arranger option and the creation of CLO-eligible tranches. 
Moreover, if non-CLO investors perceive loans with CLO-eligible 
tranches as higher quality loans, this may create additional demand for 
CLO-eligible tranches that would lead to higher prices and lower 
interest rates for such loans.
---------------------------------------------------------------------------

    \456\ See commentaries by Wells Capital Management, ``Global 
Opportunities in Bank Loans'', February 2014, available at http://www.wellscap.com/docs/expert_commentary/global_bank_loans_0214.pdf 
and by Loomis, Sayles & Company, L.P. Investment, ``The Myth of 
Overcrowding in the Bank Loan Market'', May 2014, available at 
http://www.loomissayles.com/internet/internetdata.nsf/0/
CA96B70BA0BE8BB585257CD8004F1A03/$FILE/The-Myth-of-Overcrowding-in-
the-Bank-Loan-Market.pdf for the leveraged loan investor base 
breakdown. Statistics from both of these sources are based on data 
from Standard & Poor's Capital IQ Leveraged Commentary & Data.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns about the workability of 
the option expressed in the comment letters and, as described above, 
has considered the attendant costs, but continues to believe that 
adopting the lead arranger option in the final rule will provide CLOs 
with additional meaningful flexibility in satisfying the risk retention 
requirements.
    If the lead arranger option is not used, then CLO managers will 
have to satisfy the risk retention requirement using one of the 
standard options. In this case, the Commission recognizes that the 
final rule may have differing impacts on CLO managers, which could have 
a negative effect on competition. The amount of capital available to 
managers can vary with the size and affiliations of the manager. In 
particular, the availability and cost of capital for managers with a 
relatively smaller amount of capital available to finance required risk 
retention may be less favorable than for managers with access to larger 
balance sheets or sources of capital. This could result in different 
funding costs between smaller and larger managers and could impact 
competition by creating an advantage for managers with lower funding 
costs, particularly larger financial institutions and banks.
    If smaller CLO managers do not have sufficient available capital to 
hold 5 percent risk retention, then they will be unable to sponsor CLO 
transactions unless they are able to get funding from another source. A 
reduction in CLO managers may reduce the number of CLOs, which may lead 
to a decrease in capital formation, a decrease in price efficiency for 
leveraged loans, and a decrease in competition for leveraged loans. If 
this impairs the supply of capital to borrowers using leveraged loans, 
such borrowers could expect to pay higher rates or have less access to 
financing. This potential impact on capital formation is ameliorated to 
the extent that larger CLO managers--or other potential investors--are 
able to replace smaller CLO managers as buyers of leveraged loans. Such 
an outcome would benefit these other investors at the expense of 
smaller CLO managers.
    A number of commenters asserted that the final rule would force 
many smaller CLO managers to exit the CLO market. Because the 
Commission did not have data with respect to the cost of funds for each 
CLO manager or each CLO manager's desired return on capital, the 
Commission was unable to directly analyze the potential cost of the 
additional capital necessary to satisfy the risk retention requirements 
or the relative portion of the current CLO market managed by those 
smaller CLO managers that would no longer sponsor CLOs as a result of 
the increased costs. In order to estimate the potential impact of the 
exit of smaller CLO managers from the market, the Commission identified 
and categorized 111 CLO managers known to have participated in the CLO 
market between 2009 and 2013

[[Page 77730]]

using categorizations that serve as a proxy for the CLO managers' 
access to capital, whether internal or external, and thus their 
potential capital capacity and ability to satisfy the risk retention 
requirements.\457\ The first category included CLO managers that are 
not subject to the periodic reporting requirements of the Exchange Act 
and do not appear to be subsidiaries of or affiliated with other 
financial institutions (banks, insurance companies, diversified asset 
managers that managed investment vehicles other than CLOs, etc.), which 
the Commission believes is the set of CLO managers that may face the 
greatest burden in obtaining capital to finance and retain the 5 
percent required risk retention. These CLO managers were responsible 
for 39 percent of the CLO market issuances between 2009 and 2013, 37 
percent by dollar volume, and represented 48 percent of all CLO 
managers analyzed.
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    \457\ CLO market issuance data and the list of CLO managers that 
were analyzed are from the Asset-Backed Alert database. The 
Commission categorized CLO sponsors that issued CLOs in the U.S. 
between January 1, 2009 and December 31, 2013. In order to estimate 
the possible impact of the risk retention requirement we examine the 
fraction of the CLO market that each group comprises. A sponsor's 
category was determined by using the 2014 Fitch Ratings CLO Asset 
Manager Handbook, sponsors' Web sites and other publicly available 
information. If it was not immediately apparent which category best 
described a manager, a conservative approach was taken and such 
manager was included in the category of managers with limited access 
to capital.
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    The second category included CLO managers who fall into at least 
one of the following categories (A) subject to the periodic reporting 
requirements of the Exchange Act,\458\ or (B) also the sponsor of 
asset-backed securities other than CLOs, or (C) a bank or insurance 
company, or (D) affiliated with, or otherwise related to an entity 
described in (A), (B) or (C). These CLO managers were responsible for 
61 percent of CLO issuances between 2009 and 2013 by number or 63 
percent of CLO issuance by dollar volume, and represented 52 percent of 
the population of CLO managers analyzed. The Commission believes that 
the second category of CLO managers, given their affiliations, 
diversified business lines and demonstrated ability to raise capital in 
public capital markets, would have greater access to capital, whether 
internal or external, and would face fewer obstacles and lower funding 
costs to obtain the capital necessary to satisfy the risk retention 
requirements.
---------------------------------------------------------------------------

    \458\ The second category of CLO managers would also include 
those CLO managers that maintain a listing of a class of securities 
on an exchange in a non-U.S. jurisdiction.
---------------------------------------------------------------------------

    If the risk retention requirements cause certain CLO managers to 
exit the leveraged loan market, there could be a commensurate decrease 
in the supply of capital unless other investors compensate for their 
exit. From the above analysis, the Commission believes it would be 
reasonable to estimate that the exit of the first category of CLO 
managers from the CLO market could impact current levels of capital 
formation by CLOs by 37 percent, which is considerably less than Oliver 
Wyman lower bound estimate of 60 percent.\459\ The Commission believes 
that a significantly greater impact would be unlikely without an exit 
from the market of entities with potentially easier access to capital.
---------------------------------------------------------------------------

    \459\ The Oliver Wyman estimate is based on a sample of the top 
30 CLO managers and the assumption that managers that could feasibly 
hold the 5 percent risk retention make up 25 percent of the CLO 
assets under management.
---------------------------------------------------------------------------

    The potential impact of the loss of certain CLO managers will 
depend on whether the CLO investors would continue to supply credit to 
the leveraged loan market through alternative channels. If some senior 
CLO tranches become unavailable, then, because of their sensitivity to 
credit risk, banks and other investors whose investment guidelines 
require purchasing of very high quality loans (e.g., triple-A rated) 
and who buy senior CLO tranches may be less likely to provide direct 
investment into leveraged loan market, which offers higher risk (e.g., 
single-B rated) investments on average. In contrast, CLO investors who 
seek higher returns and tend to be less sensitive to credit risk may 
decide to participate directly in the leveraged loan market or use 
other intermediaries to do so because they have an appetite for that 
level of credit risk. Both categories of investors may channel their 
investments into one of multiple existing participants in the leveraged 
loan market. Mutual funds, private equity funds, private equity 
mezzanine loan funds and credit funds (entities that are generally 
formed as partnerships with third-party capital and invest in loans or 
make loans or otherwise extend the type of credit that banks are 
authorized to undertake on their own balance sheet) currently invest 
directly in the leveraged loan market and may increase their direct 
purchase of leveraged loans if smaller CLO managers exit the market. 
Thus, there are multiple existing sources of capital that could 
compensate for any potential exit of some CLO managers.
    Based on estimates of the CLO investor base in the Oliver Wyman 
study (Exhibit 4 of the study), approximately 20 percent of CLO 
tranches are rated ``BBB'' or lower and are held by asset managers and 
other investors such as hedge funds, pension funds, and structured 
credit funds. If certain CLO deals were no longer available, assuming 
that these investors in lower rated tranches would be able to find an 
alternative channel to invest in the leveraged loan market and the 
remaining 80 percent (the risk-sensitive investors that purchase higher 
quality tranches) would not, then the overall estimated impact of a 37 
percent decline in the supply of credit from the potential exit of 
certain CLO managers would account for an approximately 14.8 percent 
reduction in supply of capital to the leveraged loan market.\460\ This 
assumes CLO sponsors comprise approximately 50 percent of the leveraged 
loan market,\461\ and that any resulting increase in the underlying 
loan rates would not encourage the emergence of other capital sources. 
Because risk-sensitive CLO investors have other relatively low risk 
means of investing in the leveraged loan market (e.g., mutual funds 
that concentrate on leveraged loans), the Commission believes that the 
actual impact may be lower.
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    \460\ 14.8 percent is the product of the CLO market share of the 
leveraged loan market, 50 percent, the CLO managers market share of 
those CLO managers that the Commission believe it would be 
reasonable to assume could exit the CLO market, 37 percent, and the 
fraction of risk-sensitive investors in such CLOs that would not 
invest through other means, 80 percent (the percentage of risk-
sensitive investors assumed by the Oliver Wyman study).
    \461\ See footnote 456 for references.
---------------------------------------------------------------------------

vii. Qualified Tender Option Bonds
    The final rule includes two options for tender option bonds (TOBs). 
Both options require 100 percent liquidity protection and provide for a 
mechanism by which the sponsors' incentives are aligned with the 
investors. In the first option, the sponsor maintains horizontal risk 
retention unless there is a tender option termination event (TOTE), in 
which case the sponsor's interest converts to vertical risk retention. 
After a TOTE, the sponsors will receive a distribution pari passu with 
tender option bond holders. In a termination that is triggered by an 
event that is not a TOTE the sponsor will continue to hold horizontal 
risk retention and will receive the remaining balance after the 
distribution is paid to the bond holders. The second option, which is 
very similar to a representative sample option, allows the sponsor to 
sell the entire TOB but requires the sponsor to hold municipal 
securities from the same issuance with a face

[[Page 77731]]

value of 5 percent of the deposited municipal security.
    Commenters suggested providing a full exemption for TOBs, not 
counting TOBs as a securitization, or allowing third-party risk 
retention. Commenters also requested an exemption or recognition of 
unfunded risk retention in the form of liquidity support. They also 
commented on the cost to the TOB market, however, no commenter provided 
data to allow us to calculate potential costs from requiring risk 
retention to the TOB market. Requiring TOBs to hold risk retention 
imposes a cost on sponsors who were not currently retaining exposure to 
credit risk in a form permissible under the final rule.
    After considering comments, the agencies have decided to adopt the 
reproposal options with some changes to further accommodate market 
practices. The agencies were not persuaded to create a structural 
exemption for TOBs, as commenters requested, as this would exempt 
future TOB structures, with unknown incentive alignment, from risk 
retention. Under the final rule, the agencies are accommodating the 
bulk of those structures currently issuing in the market.
    By accommodating current market practice, these options help reduce 
the cost of retaining risk but still effectively align the incentives 
between sponsors and investors. The first option, by accommodating TOB 
tax requirements, allows TOBs to hold horizontal risk retention. In the 
absence of this accommodation, any TOB that tried to retain risk using 
the standard horizontal form would be in violation of the IRS tax code, 
invalidating the tax exemption of the TOB structure. By allowing TOB 
sponsors to hold horizontal risk retention while maintaining their tax 
exemption the first option provides additional flexibility for TOB 
sponsors to retain risk in a manner that better suits their specific 
needs, thereby reducing compliance costs. At the same time, investor-
sponsor incentive alignment is maintained because sponsors have 
horizontal risk retention for the duration of the TOB unless a TOTE 
occurs at which time the TOB is terminated and the sponsor shares any 
losses with the investors in a pro-rata manner.
    The agencies believe that the second option described above is 
appropriate in this specific context (as opposed to other ABS markets 
where the agencies do not adopt a representative sample option) because 
most TOBs are made up of one municipal bond, which is the same bond 
held by the sponsor. Thus, there are no characteristics of underlying 
assets that might make the representative sample different from the 
underlying assets, thereby skewing incentives between the sponsor and 
investor different. Consequently, the second option does not pose the 
same complexities and costs that make the representative sample option 
not feasible in other contexts. As with the first option, permitting 
this additional flexibility will help to reduce costs for TOB sponsors 
without jeopardizing investors' interests. In addition, the alignment 
of incentives may encourage investors to invest in the TOB market, 
which may increase capital formation. If there are more investors, 
liquidity will also increase, which may lead to increased price 
efficiency and reduce the cost of capital within the TOB market.
    As mentioned above, existing TOB transactions typically have a 100 
percent liquidity guarantee, which the sponsor (or an affiliate) may be 
providing. Thus requiring the sponsor to retain 5 percent of the risk 
despite this liquidity guarantee will impose additional costs but helps 
to ensure that the sponsor is selecting high-quality municipal bonds 
and not selling off their risk to a third party. The Commission also 
acknowledges that because these options are based on current TOB 
structures it may be too costly for new structures to be created. This 
may impact competition by creating a barrier to entry for future novel 
types of TOB structures.
viii. Alternatives
    In developing the forms of permissible risk retention to be 
included the final rule, the agencies considered a number of 
alternative approaches. Some of the alternatives were suggested by 
commenters and considered by the agencies following the previous rule 
proposals.
    In response to the reproposal, for instance, several commenters 
requested that the final rule recognize other forms of, or substitutes 
for, risk retention such as: third party credit support, including 
insurance policies, guarantees, liquidity facilities, and standby 
letters of credit; 5 percent participation interest in each securitized 
asset; representations and warranties; ``contractual'' risk retention; 
private mortgage insurance; overcollateralization; subordination; and 
conditional cash flows. One commenter requested that the final rule, at 
a minimum, should permit such forms of unfunded risk retention for a 
sub-set of sponsors, such as regulated banks. Another commenter 
asserted that the final rule should provide more flexibility by 
allowing sponsors to satisfy their risk retention requirement through a 
combination of various means and that the rule should not mandate forms 
of risk retention for specific types of asset classes or specific types 
of transactions.
    The agencies have generally declined to recognize unfunded forms of 
risk retention for the purposes of the final rule, except in the case 
of the Enterprises under the conditions specified for their guarantees. 
The Commission acknowledges that recognizing unfunded forms of risk 
retention could help to reduce the costs of compliance, since many of 
these features are currently used, to varying degrees, in the 
securitization market. However, because these forms of credit support 
generally are not funded at closing, they may not be available to 
absorb credit losses at the time such losses occur. Therefore, the 
Commission believes that unfunded forms of risk retention fail to 
provide sufficient alignment of incentives between sponsors and 
investors and could impose unwarranted costs on investors if recognized 
as an eligible form of risk retention.
    Further, the agencies received several comments requesting that the 
final rule include a representative sample or participation interest 
option.\462\ The agencies considered allowing for loan participations 
as a means of satisfying the risk retention requirements. The agencies 
were concerned that offering loan participations as a standard option 
would introduce substantial additional complexity to the rule in order 
to ensure that these forms of retention were implemented in a way that 
ensured that the holder had the same economic exposure as the holder of 
an ABS interest. In addition, the agencies were concerned that 
permitting these types of interests to be held as risk retention could 
raise concerns about regulatory capital arbitrage. Accordingly, the 
agencies decided not to add a loan participation option to the menu of 
risk retention options. Since, according to one commenter, the option 
currently is not widely used by the market, the Commission believes 
that there may be little economic benefit to allowing this option.
---------------------------------------------------------------------------

    \462\ See Section 5.b.ii of this Economic Analysis for a 
discussion of comments on a representative sample option.
---------------------------------------------------------------------------

c. Allocation to the Originator
    The final rule permits the originator to share the risk retained by 
the sponsor. Specifically, the rule permits a sponsor to reduce its 
required risk retention obligations in a securitization

[[Page 77732]]

transaction by the portion of risk retention obligations assumed by one 
or more of the originators of the securitized assets as long as the 
originator originates at least 20 percent of the securitized assets in 
the underlying asset pool. The originator is required to hold its 
allocated share of the risk retention obligation \463\ in the same 
manner as would have been required of the sponsor, and subject to the 
same restrictions on transferring, hedging, or financing the retained 
interest.
---------------------------------------------------------------------------

    \463\ The amount of the retention interest held by each 
originator that is allocated credit risk in accordance with the 
final rule is required to be at least 20 percent, but not in excess 
of the percentage of the securitized assets it originated.
---------------------------------------------------------------------------

    Comments on the allocation-to-originator proposal focused on the 20 
percent threshold for allocation and the requirement that an originator 
to which risk retention was allocated share pro rata in all of the 
losses allocated to the type of interest (i.e., horizontal or vertical) 
it holds rather than only the losses on assets that it originated. Some 
of the commenters asserted that the 20 percent minimum should be 
eliminated and that it would hurt small originators while another 
commenter supported the limit and asserted that it protected small 
originators. With respect to the required pro rata sharing by the 
originator, commenters stated that because securitization tranches are 
developed so that tranche holders share pari passu in losses, it would 
cause unnecessary complexity to limit an originator's interests to the 
loans that it had originated. The agencies concluded that the changes 
to the reproposal suggested by the commenters are not necessary or 
appropriate. Therefore, the agencies are adopting the option largely as 
reproposed with minor changes.
    This option benefits sponsors by allowing them to reduce their 
costs of retaining risk by sharing the costs with willing originators. 
This is also a benefit to investors as incentives are aligned at the 
level closer to loan origination, which could increase investor 
confidence and improve capital formation. As commenters noted, the 
allocation to originator option may create barriers to entry for 
smaller originators who will not be able to afford to share in 
retaining risk and therefore find their portfolios less liquid or more 
costly for sponsors to purchase. This would negatively affect 
competition within the securitization market. However, as noted above, 
the 20 percent threshold serves to make the allocation option available 
only for entities whose assets form a significant portion of a pool and 
who, thus, ordinarily could be expected to have some bargaining power 
with a sponsor. This will prevent sponsors from forcing the allocation 
to originator on smaller originators as a condition of buying the loans 
they originate that can increase cost of capital for such small 
originators or force such originators from the market thereby reducing 
competition. In addition, allowing smaller originators to retain a 
smaller fraction of credit risk of the pool could dilute the incentives 
generated by the risk retention requirement to monitor the credit 
quality of the loans in the pool, thereby undermining the intended 
benefits of the rule. A benefit of the adopted approach is that larger 
originators will be are able to help smaller sponsors that may have a 
harder time retaining risk and otherwise would not participate in the 
asset-backed securities market. Providing more sponsors with feasible 
options in meeting the requirements may increase capital formation and 
allocative efficiency.
d. Hedging, Transfer and Financing Restrictions
    Under the final rule, a sponsor and its consolidated affiliates 
generally would be prohibited from hedging or transferring the risk 
they are required to retain, except for currency and interest rate 
hedges and some index hedging. Additionally, the sponsor and its 
consolidated affiliates would be prohibited from financing the retained 
interest on a non-recourse basis.
    While some commenters supported the proposed restrictions on 
hedging, others criticized the provisions as being overly restrictive, 
and certain commenters requested clarification as to the scope of the 
proposed restrictions. According to some commenters, the proposed 
restrictions were overly broad, raising questions about what 
constitutes permissible and impermissible hedges.
    The agencies are adopting hedging, transfer and financing 
restrictions as reproposed. Without the hedging and transfer 
restrictions, sponsors could hedge/transfer their (credit) risk 
exposure to the retained interests, thereby eliminating the ``skin in 
the game'' intent of the rule. Thus, the restriction benefits investors 
by preventing actions that could undermine the purpose of the final 
rule. More narrowly tailored restrictions could impose costs on 
investors by inadvertently excluding transactions that have the effect 
of hedging or transferring credit risk. On the other hand, the broad 
nature of the adopted restrictions could create uncertainty about which 
transactions are covered by the prohibition. This uncertainty may 
induce strategic responses that are designed to evade the rule. For 
example, derivative or cash instrument positions can be used to hedge 
risk, but it may be difficult to determine whether such a hedge is 
designed to evade the rule.
    Costs related to the hedging and transfer restrictions include 
direct administrative costs and compliance monitoring costs. The 
hedging, transfer, and financing restrictions cover sponsors and their 
affiliates, and, thus, to assure compliance a sponsor must track both 
its own portfolio and the portfolios of all its affiliates to verify 
that no prohibited transactions are included in the aggregate 
portfolio. Such tracking may present additional challenges for large 
financial organizations with many affiliates. However, because the 
hedging and transfer prohibitions cover only hedging against the risks 
of the specific pool or securities based on the specific pool, the 
ultimate cost of monitoring compliance should be minimal even for large 
organizations.
6. General Exemptions
    In certain cases the agencies have determined to exempt asset 
classes from the risk retention requirements altogether or adopt 
reduced risk retention requirements. As discussed below, the Commission 
believes these exemptions are warranted because there is either 
sufficient incentive alignment already in place or other features to 
make further constraints unnecessary to address moral hazard concerns. 
In particular, the securitizations of these exempted asset classes have 
characteristics that help to ensure that the quality of the assets is 
high. For example, if the pool of assets are drawn from an asset class 
with a low probability of default, opportunities to exploit potentially 
misaligned incentives are fewer and investors may have a 
correspondingly lesser need for the protection accorded by risk 
retention requirements. Below the Commission describes the particular 
costs and benefits relevant to each of the asset classes that the 
agencies are exempting from risk retention.
a. Federally Insured or Guaranteed Residential, Multifamily, and Health 
Care Mortgage Loan Assets
    Consistent with Section 15G, the agencies are adopting an exemption 
from the risk retention requirements for any securitization transaction 
that is collateralized solely by residential, multifamily, or health 
care facility mortgage loan assets if the assets are insured or 
guaranteed in whole or in part as to the payment of principal and 
interest by the United States or an

[[Page 77733]]

agency of the United States. The agencies are also adopting an 
exemption from the risk retention requirements for any securitization 
transaction that involves the issuance of ABS if the ABS are insured or 
guaranteed as to the payment of principal and interest by the United 
States or an agency of the United States and that are collateralized 
solely by residential, multifamily, or health care facility mortgage 
loan assets, or interests in such assets.
    Several commenters expressed support for the exemption for 
securitization transactions collateralized solely by assets (or that 
involve the issuance of ABS) that are insured or guaranteed as to the 
payment of principal and interest by the United States or its agencies. 
One commenter urged the agencies to extend the government-backed 
exemptions to ABS backed by foreign governments. Another commenter 
requested that the agencies clarify that GSE securitizations of 
multifamily loans are exempt from the risk retention requirements.
    Risk retention is not currently mandated or practiced for these 
securitizations and, thus, this exemption will maintain consistency 
with current market practice. Because these securitizations are 
guaranteed by the United States or its agencies, and there is no 
default risk beyond what is otherwise priced in a U.S. Treasury 
security, there is no benefit to investors from sponsors retaining risk 
and it would otherwise create costs to sponsors where they are not 
necessary. However, the exemption will provide continued incentives to 
sponsors to use federally insured or guaranteed assets, which increases 
the value of the securities sold. This could have an adverse impact on 
the capital-raising ability of sponsors offering securitizations in the 
same asset classes where the underlying assets are not federally 
insured or guaranteed, requiring these sponsors to compete for investor 
capital by offering higher yields and thereby selling asset backed 
securities interests at lower prices. As a result, there may be less 
demand from sponsors and investors to securitize these (non-federally 
insured or guaranteed) assets under private labels, which would impede 
the capital formation process in public markets for originators in the 
same asset classes that do not qualify under these programs. This 
could, in turn, increase borrowing costs for underlying borrowers in 
these assets classes.
    There would be potentially significant effects, however, from not 
granting this exemption. In particular, these programs provide 
subsidized access to credit for consumers who may not otherwise qualify 
for loans underwritten by private issuers, and thereby promote social 
benefits in the public interest. For example, FHA-insured mortgages 
enable many home buyers, particularly those with impaired credit or who 
are first time buyers, to purchase a home with a low down payment that 
may not otherwise be possible because they would not qualify for a 
privately underwritten mortgage.\464\ The economic footprint of this 
program is large. At the end of 2013, the FHA had 7.8 million active 
loans with insurance in force,\465\ and during that year (2013), 
insured 1.3 million new mortgages with the total loan value of $240 
billion,\466\ larger than all other federally insured loan programs 
combined.\467\ In total, the FHA provided mortgage insurance to more 
than 15 percent of households that purchased houses in 2012.\468\
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    \464\ The Federal Reserve Board Report to the Congress on Risk 
Retention, October 2010, available at http://www.federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.html.
    \465\ FHA Single Family Loan Performance Trends, January 2014, 
Table 3, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/hsgrroom/loanperformance.
    \466\ Quarterly Report to Congress on FHA Single-Family Mutual 
Mortgage Insurance Fund Programs, 2014, Quarter 1, Exhibits A-1 and 
A-2 available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/fhartcqtrly.
    \467\ Other federal mortgage loan guarantee programs include 
programs run by the Department of Veterans Affairs, the Farm Service 
Agency (FSA), the Rural Housing Service (RHS), and the Department of 
Housing and Urban Development's Office of Public and Indian Housing 
(PIH). Among them, for example, U.S. Department of Veterans Affairs 
guaranteed 630,000 loans in 2013 and Rural Housing Service 
guaranteed 163,000 loans in 2013, see 2013 VBA Performance and 
Accountability Report available at http://www.benefits.va.gov/reports/annual_performance_reports.asp and USDA Rural Development 
Housing Obligations Fiscal Year 2013 Year-End Report available at 
http://ruralhome.org/storage/documents/rd_obligations/fy2013/yearend/usdard-fy13-ye-obligations-combined.pdf.
    \468\ See FHA Share of Home Purchase Activity, June 2012, 
available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/fhamktsh/fhamkt.
---------------------------------------------------------------------------

    The exemption from the risk retention requirements for 
securitizations of federally insured or guaranteed loans will not 
provide for the incentive alignment that sponsors would otherwise have 
with investors in the securitization if they had an economic exposure 
to the performance of the securitization. We note, however, that under 
one large federally guaranteed program, the program run by the U.S. 
Department of Veterans Affairs (VA), the lender has some stake in how 
the borrower performs unless the lender sells the loan. The VA provides 
insurance in the form of a first-loss guarantee,\469\ but VA lenders 
have residual risk after the VA's first-loss obligation is exhausted. 
We also note that mortgage loans guaranteed by both FHA and VA programs 
performed better than mortgage loans securitized through private-label 
RMBS. For instance, both VA-guaranteed and FHA-insured mortgages 
originated in 2006, at the peak of the housing boom, had a 
significantly lower serious delinquency rate (15 percent for VA-
guaranteed loans,\470\ and between 18 percent \471\ and 31 percent 
\472\ by different estimates for FHA-insured loans) than mortgages 
securitized through private-label RMBS transactions (58 percent).\473\ 
Although risk retention requirements were not historically practiced in 
private label securitizations, and delinquency rates of securitizations 
with risk retention during the mortgage crisis period are therefore not 
available, the disparity in performance between VA- and FHA-insured 
loans and other loans purchased for private label securitizations 
suggests that the combination of underwriting practices, mortgage 
insurance premiums, and lenders' residual risk exposure, has a material 
impact on the mitigation of the moral hazard problem in the 
securitization process.
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    \469\ 25 percent of the loan amount with a minimum guarantee of 
$36,000.
    \470\ See Table 1 in Urban Institute Commentary, July 2014, ``VA 
Loans Outperform FHA Loans. Why? And What Can We Learn?'' available 
at http://www.urban.org/UploadedPDF/413182-VA-Loans-Outperform-FHA-Loans.pdf.
    \471\ See the FHA Loan Performance Trends report available at 
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/hsgrroom/loanperformance.
    \472\ See footnote 471.
    \473\ The serious delinquency rate for mortgages securitized 
through private-label RMBS is calculated by DERA staff based on 
MBSData dataset.
---------------------------------------------------------------------------

    While the historical loan performance data indicate that FHA-
insured mortgages performed better than other mortgages purchased by 
private label securitizations, one commenter was concerned that, with 
the exemption, the increase in the FHA's share of the market will be 
difficult to shrink to a more rational proportion of the mortgage 
market. While the current 15 percent market share is considerably 
greater than 4 to 6 percent market shares during the 2004 to 2007 
period, it is consistent with the historical market shares of between 
12 and 14 percent during the 1993 to 2002 period, and below the 19 
percent market share recorded in 2009 and 2010.\474\ Hence,

[[Page 77734]]

the current FHA market share does not seem out of proportion relative 
to certain previous periods. Instead, the trend shows a strong counter 
cyclical relation with the health of the private market, consistent 
with the benefits of a federally insured program for home mortgage that 
provides access to capital when private markets are unable to do so.
---------------------------------------------------------------------------

    \474\ See FHA Share of Home Purchase Activity, June 2012, 
available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/fhamktsh/fhamkt.
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b. Securitizations of Assets Issued, Insured or Guaranteed by the 
United States or any Agency of the United States
    Consistent with Section 15G, the final rule contains exemptions 
from risk retention for any securitization transaction if the ABS 
issued in the transaction were (1) collateralized solely (excluding 
servicing assets) by obligations issued by the United States or an 
agency of the United States; (2) collateralized solely (excluding 
servicing assets) by assets that are fully insured or guaranteed as to 
the payment of principal and interest by the United States or an agency 
of the United States (other than residential, multifamily, or health 
care facility mortgage loan securitizations discussed above); or (3) 
fully guaranteed as to the timely payment of principal and interest by 
the United States or any agency of the United States. Also consistent 
with Section 15G, the final rule contains an exemption from risk 
retention for ABS issued or guaranteed by any state of the United 
States (including a political subdivision or public instrumentality of 
a state).
    One commenter requested that the final rule retain the full 
exemption for securities issued by a state (including a political 
subdivision or public instrumentality of a state), and for securities 
that meet the definition of a qualified scholarship funding bond. This 
commenter requested that the exemption for state-issued securities and 
qualified scholarship funding bonds be extended to both securities 
issued on a federally taxable basis and securities issued on a federal 
tax-exempt basis. Another commenter urged that the agencies clarify 
that all securities issued by housing finance agencies and other state 
government agencies and backed by loans financed by housing finance 
agencies are exempted.
    Risk retention is not currently mandated or practiced for these 
asset classes and thus, this exemption maintains consistency with 
current market practice. Because investors will be sufficiently 
protected from loss by the government guarantee that applies to these 
securities, there is no benefit to investors from sponsors retaining 
risk, and it would otherwise create costs to sponsors where they are 
not necessary. However, as with the exemption for federally insured 
mortgages, this exemption will incentivize sponsors to use federally 
insured or guaranteed assets, which will have an impact on competition 
with other assets that are not federally insured or guaranteed.
c. Certain Student Loan Securitizations
    The final rule provides a separate exemption for securitization 
transactions that are collateralized by student loans that were made 
under the Federal Family Education Loan Program (FFELP). Under the 
final rule, a securitization transaction that is collateralized solely 
by FFELP loans that are guaranteed as to 100 percent of defaulted 
principal and accrued interest will be exempt from the risk retention 
requirements. A securitization transaction that is collateralized 
solely by FFELP loans that are guaranteed as to at least 98 percent of 
defaulted principal and accrued interest will have the sponsor's risk 
retention requirement reduced to 2 percent. All other securitizations 
collateralized solely by FFELP loans will have the sponsor's risk 
retention requirement reduced to 3 percent. Because loans underlying 
FFELP student loan securitizations are federally guaranteed from 97 
percent to 100 percent depending on the date of origination, and there 
is little to no default risk beyond what is otherwise priced in a U.S. 
Treasury security, there is no benefit to investors from sponsors 
retaining risk and it would otherwise create costs to sponsors where 
they are not necessary.
    Several commenters suggested different ways to expand the scope of 
the exemption or add new categories of student loans to the exemption. 
Other commenters recommended that the agencies accept alternative forms 
of risk retention for FFELP loan securitizations. The suggested 
alternative forms of risk retention include a simplified representative 
sample method, an exemption for on-balance sheet transactions where the 
structure clearly demonstrates at least 5 percent risk retention, 
initial equity contribution, overcollateralization, and other unfunded 
forms of risk retention.
    The agencies believe that expansion of the definitions of exempted 
assets would undercut the purpose of risk retention of aligning 
incentives of sponsors and investors because other student loans would 
not be guaranteed by the U.S. government and, thus, would be subject to 
the same moral hazard problem described above. The agencies have also 
generally declined to recognize unfunded forms of risk retention for 
the purposes of the risk retention rule and continue to believe that 
unfunded forms of risk retention fail to provide sufficient alignment 
of incentives between sponsors and investors.
    The economic impact of this exemption will likely be minimal 
because FFELP was eliminated in 2010 and student loans were no longer 
issued under the program after June 2010.\475\
---------------------------------------------------------------------------

    \475\ Health Care and Education Reconciliation Act of 2010, Pub. 
L. 111-152, Sec.  2201, 124 Stat. 1029, 1074.
---------------------------------------------------------------------------

d. Resecuritizations
    The proposed rule would have provided two exemptions for certain 
resecuritizations where duplicative risk retention requirements would 
not appear to provide any added benefit. The first of these exemptions 
would have applied to pass-through resecuritizations that met certain 
specified conditions. The second one would have applied only to 
resecuritizations of certain first pay classes of mortgage backed 
securities. Under the reproposal, sponsors of resecuritizations that 
were not structured to meet the terms of one of these two exemptions 
would have been required to meet the credit risk retention requirements 
with respect to the resecuritization transaction unless another 
exemption was available.
    The agencies received a number of comments on the proposed 
resecuritization exemptions. The comments did not raise specific 
objections or concerns with either of the two proposed exemptions, but 
generally urged the agencies to expand the exemptions to other types of 
structures, including those that re-tranche credit risk. Commenters 
noted that applying risk retention to resecuritizations of asset-backed 
securities that are already in the market, especially where the 
underlying interests are asset-backed securities compliant with the 
risk retention requirement, cannot alter the incentives for the 
original ABS sponsor to ensure high-quality assets. Other commenters 
stated that the lack of a broad resecuritization exemption would 
negatively affect markets by making it harder for investors to re-
structure and sell existing ABS. A number of commenters stated that the 
agencies should provide an exemption for resecuritizations of ABS that 
were issued prior to the effective date of the rule. Still others 
expressed the view that the agencies could develop an exemption that 
would allow credit tranching in resecuritized ABS while

[[Page 77735]]

limiting the scope of such exemption, such as by excluding actively 
managed pools, to address the agencies' concerns with CDOs and similar 
structures.
    The agencies are adopting these exemptions as reproposed. For 
transactions that meet the exemptions' requirements, the 
resecuritization process would neither increase nor reallocate the 
credit risk of the underlying asset-backed securities because, by 
definition, there is no tranching of the credit risk in a pass through 
security. Hence, the resecuritization does not alter the incentive 
alignment present in the original securitizations that are already 
compliant with the risk retention requirement. Under the final rule, 
sponsors of resecuritizations that do not have one of the structures 
described above would not be exempted from risk retention. These 
resecuritization transactions re-tranche the credit risk of the 
underlying asset-backed securities, and are subject to the same moral 
hazard problem that exists in the underlying securitizations, because 
sponsors' discretion in the choice of underlying securitizations allows 
for the reallocation of credit risk. Hence, these resecuritizations 
will be subject to risk retention requirements to the same extent as 
the underlying asset-backed securities (unless the underlying 
securities qualify for an exemption). Thus, not exempting these 
resecuritizations is consistent with the purposes of the rule and 
lessens the likelihood of unwarranted costs on investors.
    Because the exemption would allow the creation of securities that 
may be used to aggregate asset-backed securities backed by small asset 
pools, the exemption for these types of resecuritization could improve 
access to credit at reasonable terms to consumers and businesses by 
allowing for the creation of an additional investment vehicle for such 
asset pools. This, in turn, would lead to increased liquidity of such 
pools and attendant decrease in cost of capital for some borrowers. 
However, the final rule may also have an adverse impact on capital 
formation and efficiency if they make certain resecuritization 
transactions costlier or infeasible to conduct because of two layers of 
credit risk retention.
e. Other Exemptions and Alternatives
    The reproposal also included exemptions for utility legislative 
securitizations, seasoned loans, and securitization transactions that 
are sponsored by the FDIC acting as conservator or receiver.
    The agencies received no comments on the utility legislative 
securitization exemption, and are adopting the exemption as reproposed. 
The agencies continue to believe the implicit state guarantee in place 
for these securitizations addresses the moral hazard problem discussed 
above and adding the cost of risk retention would create costs to 
sponsors where they are not necessary as the incentive alignment 
problem is already being addressed.
    The agencies received a number of comments on the seasoned loan 
exemption. Commenters generally favored expanding the seasoned loan 
exemption, although they differed in how to expand the exemption. 
Because seasoned loans have had a sufficient period of time to prove 
their performance, adding the cost of risk retention would create costs 
to sponsors where they are not necessary as any risk associated with 
the underlying assets' moral hazard problem will have manifested 
itself.
    Risk retention is not currently mandated or practiced for these 
asset classes, and thus, permitting these exemptions will maintain 
consistency with current market practice. As discussed above, because 
these assets classes have unique features that sufficiently protect 
investors from loss, there is no benefit to investors from sponsors 
retaining risk, and it would create costs to sponsors where they are 
not necessary. However, providing these exemptions will incentivize the 
creation of utility legislative securitizations and securitizations 
with seasoned loans, thus potentially lowering the cost of capital 
formation for these loans.
    In the reproposal, the agencies provided an exemption from risk 
retention for securitization transactions that are sponsored by the 
FDIC, acting as conservator or receiver. One commenter expressly 
supported this exemption, noting, among other things, that it would 
help the FDIC maximize the value of assets in conservatorship and 
receivership. The agencies are adopting the FDIC securitization 
exemption as reproposed. There is no benefit to investors from FDIC 
retaining risk on its securitizations because its actions are guided by 
sound underwriting practices and the quality of the assets is carefully 
monitored in accordance with the relevant statutory authority, and 
absence of exemption would otherwise create costs to FDIC where they 
are not necessary.
    In response to the reproposal, commenters also asked for exemptions 
for other specific asset classes such as: Corporate debt repackagings, 
legacy loan securitizations, securitizations of unsecured direct 
obligations of the sponsor, and servicer advance receivables. These 
asset classes have either unfunded risk retention or include loans 
created before the new underwriting qualifications were in place and 
they do not have features that mitigate the moral hazard problem. Thus, 
providing an exemption would impose an unwarranted cost on investors.
f. Safe Harbor for Certain Foreign-Related Securitizations
    The final rule includes a safe harbor provision for certain, 
predominantly foreign, transactions based on the limited nature of the 
transactions' connections with the United States and U.S. investors. 
Specifically, the safe harbor excludes from the risk retention 
requirements transactions in which, among other limitations, no more 
than 10 percent of the value of the ABS interests are sold to U.S. 
persons and no more than 25 percent of the assets collateralizing the 
ABS assets are acquired from U.S. persons. The safe harbor is intended 
to exclude from the risk retention requirements transactions in which 
the effects on U.S. interests are sufficiently remote so as not to 
significantly impact underwriting standards and risk management 
practices in the United States or the interests of U.S. investors.
    Commenters on the proposal generally supported the existence of a 
safe harbor for certain foreign securitizations. A few commenters 
suggested increasing the 10 percent limit on the value of ABS interests 
permitted to be sold to or for the account of U.S. persons. These 
commenters also requested that the agencies clarify that the 10 percent 
limit applies only at the time of initial issuance and does not include 
secondary market transfers. Commenters also proposed to exclude from 
the 10 percent limitation (A) securitization transactions with a 
sponsor or issuing entity that is a U.S. person in which no offers are 
made to U.S. persons and (B) asset-backed securities issuances that 
comply with Regulation S under the Securities Act.
    Several commenters requested that the rule provide for coordination 
of the rule's risk retention requirement with foreign risk retention 
requirements, including by permitting a foreign sponsor to comply with 
home country or other applicable foreign risk retention rules. In this 
regard, some commenters stated that the U.S. risk retention rules may 
be incompatible with foreign risk retention requirements, such as the 
European Union risk retention

[[Page 77736]]

requirements and, accordingly, that sponsors required to comply with 
both U.S. and foreign risk retention regulations could be subject to 
conflicting rules.
    As noted in the reproposal the costs of the foreign transaction 
safe harbor should be small. There will be negligible effect of the 
safe harbor on efficiency, competition and capital formation in the 
United States (compared to the universal application of the risk 
retention rule) because the affected ABS are predominantly foreign with 
limited connection to U.S. markets. As noted above, the foreign 
transaction safe harbor is narrowly tailored to capture only those 
transactions in which the effects on U.S. interests are sufficiently 
remote so as not to significantly impact U.S. underwriting standards 
and risk management practices or the interests of U.S. investors. The 
agencies asked for comment on whether or not the 10 percent proceeds 
trigger should be different. Commenters suggested the proceeds trigger 
be raised to 20 percent or 40 percent. The agencies are adopting the 
foreign safe harbor provision as reproposed. The relatively narrow 
scope of the foreign safe harbor provision may have negative effect on 
foreign sponsors that seek U.S. investors because they may need to 
satisfy risk retention requirements of two jurisdictions (their home 
country and the United States). In addition, the rule may reduce 
competition and investment opportunities for U.S. investors because 
foreign securitizers may exclude U.S. persons from their transactions 
to avoid triggering the risk retention requirements. These costs may be 
mitigated by the fact that the final rule provides flexibility for 
sponsors with respect to the forms of eligible risk retention, which 
may permit foreign sponsors seeking a material U.S. investor base to 
retain risk in a format that satisfies both home country and U.S. 
regulatory requirements, without jeopardizing protection to the U.S. 
investors in the form of risk retention. Moreover, raising the trigger 
could provide sponsors relying on the safe harbor with a competitive 
advantage of not needing to hold risk retention. The larger the amount 
of the securitization foreign sponsors are allowed to sell to U.S. 
persons without triggering risk retention, the more competition 
domestic securitization deals will have to face.
7. Reduced Risk Retention Requirements for ABS Backed by Qualifying 
Assets
    As contemplated by Section 15G, the agencies are adopting 
exemptions for securitizations consisting solely of automobile loans, 
commercial real estate loans, commercial loans, and residential 
mortgage loans that satisfy certain specific underwriting standards 
that indicate a low credit risk with respect to the loan.\476\
---------------------------------------------------------------------------

    \476\ Section 15G allocates authority to prescribe the 
underwriting criteria for qualifying assets to the federal banking 
agencies, and the SEC is not promulgating this aspect of the final 
rule. Consequently, the Commission's Economic Analysis does not 
address this aspect of the final rule. However, see the discussion 
below for a general discussion of the economic effects of providing 
an exemption for qualifying assets, as contemplated by Section 15G.
---------------------------------------------------------------------------

    The benefit to exempting qualifying assets from risk retention is 
that it will avoid tying up sponsors' capital in transactions in which 
the underlying assets are subject to underwriting standards that 
indicate a low credit risk and thus a diminished need for risk 
retention to address the moral hazard problem. Avoiding this 
unnecessary restraint will leave sponsors with more capital available 
to deploy for other and potentially more efficient purposes. The 
economic consequences of exempting qualifying assets are analogous to 
the discussion associated with requiring stricter lending standards for 
a ``qualified mortgage'' (QM) in the residential lending market. Also 
there will be fewer administrative, monitoring and compliance costs for 
sponsors of qualifying assets if there is no risk retention. Lower 
costs of securitizing loans may enhance competition in the market for 
qualifying auto, commercial real estate and commercial loans by 
allowing more firms to be profitable. While we believe that the 
qualified standards will result in only a small percentage of 
securitizations to be exempt from risk retention, we believe that many 
of these asset classes have existing practices that are consistent with 
the risk retention requirements that the agencies are adopting 
today.\477\ Further, as discussed elsewhere in this economic analysis, 
the agencies have made adjustments to other areas of the rule (e.g., 
CMBS option, horizontal risk retention) to address concerns about the 
implementation of risk retention to particular asset classes or 
structures.
---------------------------------------------------------------------------

    \477\ But see discussion of open market CLOs in Section 5.b.vi 
of this Economic Analysis.
---------------------------------------------------------------------------

a. Blended Pools of Qualifying Assets
    The reproposal would permit sponsors to blend pools of qualifying 
automobile loans, qualifying commercial loans or QCRE loans with non-
qualifying assets of the same class to receive up to a 50 percent 
reduction in the minimum required risk retention amount.
    While many sponsor commenters supported the ability to blend pools 
of qualifying and non-qualifying assets to obtain a reduced risk 
retention amount, these commenters requested that the agencies remove 
the 50 percent limit on the reduction for blended pools of commercial, 
CRE, or automobile loans. Investor commenters, however, generally 
opposed allowing blended pools of qualifying and non-qualifying assets.
    The agencies are adopting the provision as reproposed. Allowing 
blended pools with a reduced risk retention requirement will improve 
efficiency, competition and capital formation by allowing sponsors to 
securitize more loans when it is difficult to obtain a large enough 
pool of qualifying assets to issue an ABS consisting entirely of 
exempted assets.
    By allowing reduced risk retention on blended pools, sponsors hold 
less risk retention on lower quality loans than they would otherwise. 
For example, a sponsor that holds vertical risk retention and that 
forms of pool of 50 percent non-qualifying loans would be exposed to 
2.5 percent of the credit risk of the non-qualifying loans compared to 
5 percent if the pool were comprised entirely of non-qualifying loans. 
Hence, increasing the fraction of qualifying loans into the pool 
lessens the fraction of credit exposure to the remaining non-qualifying 
loans. In the extreme, inclusion of 1 percent of non-qualifying loans 
would result in a sponsor being exposed to only 0.05 percent of the 
non-qualifying loans. This could erode the disincentives of the 
originate-to-distribute model that the risk retention requirement was 
designed to address. In order to ensure sponsors hold a meaningful 
amount of risk and do not have incentives to underwrite and securitize 
low quality loans the limit on the reduction of risk retention 
requirement is 50 percent. Thus, even in the case of a pool of 1 
percent non-qualified loans a sponsor would still have to retain 2.5 
percent of the credit risk of the pool.
b. Buyback Requirement
    Exempting certain type of loans gives sponsors an incentive to 
misrepresent qualifications of loans, similar to what was observed in 
the run-up to the financial crisis. However, the final rule requires 
that, if after issuance of a qualifying asset securitization, it was 
discovered that a loan did not meet the

[[Page 77737]]

qualifying underwriting criteria, the sponsor would have to repurchase 
or cure the loan (buyback requirement).
    Commenters did not provide any comments on the buyback requirement 
except for the effect of the provision on CLOs. Some sponsor commenters 
opposed the buyback provision for CLOs, noting that open market CLO 
managers are thinly capitalized and generally would not have 
significant financial resources available to buy back loans in the 
pools they manage. The agencies are adopting this provision as 
reproposed.
    The benefit of this provision is that it helps to prevent and 
disincentivize sponsors from trying to include non-qualifying loans in 
the securitization without representing them as such for the purpose of 
avoiding risk retention. The buyback provision should increase 
investors' willingness to invest because it makes sponsors of asset-
backed securities responsible for correcting discovered underwriting 
mistakes and ensures that the actual characteristics of the underlying 
asset pool conform to the promised characteristics.
c. Qualified Residential Mortgages
    The risk to financial markets from poor underwriting practices and 
inadequate disclosure of risks to investors in the RMBS securitizations 
is considerable. A body of academic literature has emerged since the 
financial crisis that supports the view that, during the early to mid-
2000s, residential mortgage-backed securitizations (RMBSs) contributed 
to a significant decline in underwriting standards for residential 
mortgage loans, particularly in the private label securitization 
market.\478\ During this time, the volume of private label RMBS 
issuance increased significantly from $343 billion in 2003 to $726 
billion in 2005 and $685 billion by 2006.\479\ GSE sponsored 
securitizations fell during this same period. An analysis of historical 
performance among loans securitized into private-label RMBS that 
originated between 1997 and 2009 shows that those meeting the QM 
standard sustained exceedingly high serious delinquency rates, greater 
than 30 percent during that period.\480\
---------------------------------------------------------------------------

    \478\ Keys, Mukherjee, Seru and Vig, ``Did Securitization Lead 
to Lax Screening? Evidence from Subprime Loans'', Quarterly Journal 
of Economics, vol. 125, no. 1, pp. 307-362, February 2010 and 
Nadauld and Sherlund, ``The Impact of Securitization on the 
Expansion of Subprime Credit'', Journal of Financial Economics, vol. 
107, no. 2, February 2013, pp. 454-476.
    \479\ Source: SIFMA Statistics available at http://www.sifma.org/research/statistics.aspx.
    \480\ See Joshua White and Scott Bauguess, Qualified Residential 
Mortgage: Background Data Analysis on Credit Risk Retention, (August 
2013), available at http://www.sec.gov/divisions/riskfin/whitepapers/qrm-analysis-08-2013.pdf.
---------------------------------------------------------------------------

    These high delinquency rates underscore the moral hazard problem 
described earlier that can arise when disclosures to investors do not 
provide sufficient detail to adequately evaluate the quality of the 
loans backing the security. This problem was exacerbated by the fact 
that the underlying RMBS loan pools were typically comprised of 
thousands of loans that required time and resources to evaluate, but 
with key features of the loans not always available to investors in 
sufficient detail to make those evaluations. The resulting information 
asymmetry, combined with the originate-to-distribute incentives that 
allowed sponsors to receive full compensation before investors had the 
opportunity to learn about loan quality and ultimate risks, generated 
the conditions that contributed to the financial crisis. It is these 
conditions that the risk retention rule is designed to address.
    The rule the agencies are adopting today exempts from the risk 
retention requirements any securitization comprised exclusively of 
QRMs. Section 15G requires that asset-backed securities that are 
collateralized solely by QRMs be completely exempted from risk 
retention requirements and allows the agencies to define the terms and 
conditions under which a residential mortgage would qualify as a QRM. 
Section 15G mandates that the definition of a QRM be no broader than 
the definition of a QM, as such term is defined under Section 
129C(b)(2) of the Truth in Lending Act.
    Pursuant to the statutory mandate, the agencies are exempting 
securitizations collateralized solely by QRMs and, pursuant to the 
discretion permitted, are defining QRMs as QMs. As outlined in the 
reproposal, the Commission believes that this definition of QRM would 
achieve a number of important benefits. First, since the criteria 
established by the Consumer Financial Protection Bureau (CFPB) to 
define QMs focus on underwriting standards, less risky product 
features, and affordability, the Commission believes that aligning the 
definition of QRM with QM is likely to promote more prudent lending and 
contribute to a sustainable, resilient and liquid mortgage 
securitization market.
    Second, the Commission believes that a single mortgage quality 
standard (as opposed to creating a second mortgage quality standard) 
would benefit market participants by simplifying the lending and 
securitization requirements and eligibilities applicable to the 
residential mortgage and RMBS market. Moreover, having a separate 
mortgage standard for the exemption from risk retention could impact 
the relevance of the QM standard, particularly if the definitions were 
not sufficiently different. For example, if the two standards resulted 
in qualified mortgages of similar risk, it is possible that sponsors 
would focus on securitizing only mortgages that met the higher QRM 
standard because of the exemption from risk retention. If so, this 
could impact access to capital for creditworthy borrowers who could not 
secure a QRM, because their loans would be less attractive to 
securitizers and impact an originator's ability to sell it. Commenters 
suggested that this would hit middle income and first time borrowers 
the hardest, and have a detrimental impact to capital formation.
    Third, a broad definition of QRM avoids the potential effect of 
squeezing out certain lenders, such as community banks and credit 
unions, which may not have sufficient resources to hold the capital 
associated with the origination of non-QRMs, thus enhancing competition 
within this segment of the lending market. The Commission believes that 
a broad QRM definition will increase the ability of these lenders to 
securitize their mortgage originations and thus increase their ability 
to generate new loans and facilitate enhanced borrower access to 
capital.
    Finally, a broad definition of QRM may help encourage the re-
emergence of private capital in securitization markets. The Enterprises 
currently have a competitive advantage over private label 
securitizations because the Enterprises benefit from lower funding 
costs attributed to the recognition of their explicit Federal capital 
support, a subsidy to their lending activity that is not available to 
private label securitizations. Moreover, the Enterprises' current 
guarantee of their securitizations fulfill the risk retention 
requirements as long as they are in receivership and conservatorship 
and meet other conditions, and they would not have the same concomitant 
costs of complying with the rule as private parties during this time. 
Hence, the less restrictive QRM criteria should enhance the 
competitiveness of sponsors of private label securitizations by 
expanding the scope of loans eligible for securitization without 
triggering risk retention requirements. This, in turn, would reduce the 
need for borrowers to rely on programs offered by the Enterprises.
    Aligning the definition of QRM to QM incorporates into the 
definition of QRM certain loan product features that historical 
performance data indicates

[[Page 77738]]

results in a lower risk of default. The Commission thus acknowledges 
that the QM standard does not fully address the loan underwriting 
features that are most likely to result in a lower risk of default, 
including down payment requirements and measures of borrower credit 
history. The Commission, however, believes that other regulatory 
developments may provide investors with additional information that 
allows them to more effectively assess the potential risks underlying 
securitizations as well as more effective recourse against sponsors 
when problems arise with the performance of underlying loans. In 
particular, the Commission has recently adopted revisions to Regulation 
AB \481\ that require in registered RMBS transactions disclosure of 
detailed loan-level information at the time of issuance and on an 
ongoing basis. As previously described, for registered offerings 
covered by the revised Regulation AB, the loan level disclosures should 
enhance an investor's ability to accurately assess the quality of the 
underlying assets. The revised Regulation AB also requires issuers to 
provide investors with this information in sufficient time prior to the 
first sale of securities so that they can analyze this information when 
making their investment decision and provides additional transactional 
safeguards for registered shelf offerings. These regulatory reforms, 
combined with the prudential underwriting standards embodied in the QM 
definition, should serve to significantly mitigate the moral hazard 
problem for registered RMBS securitizations. As previously discussed, 
private-label securitizations issued through unregistered offerings are 
not subject to the asset-level requirements under revised Regulation 
AB.
---------------------------------------------------------------------------

    \481\ See 79 FR 57184.
---------------------------------------------------------------------------

    The Commission is aware that defining QRMs broadly to equate with 
the definition of QM may result in a number of economic costs. Most 
notably, sponsors will not be required to retain an economic interest 
in the credit risk of QRM loans, and thus, there will be less 
incentivized to avoid the originate-to-distribute model that can 
contribute to poor quality underwriting and the obfuscation of risk to 
the ultimate investors in RMBS securitizations. Moreover, although the 
QRM exemption is based on the premise that well-underwritten mortgages 
were not the cause of the financial crisis, the criteria for QM loans 
do not account for all borrower characteristics that may provide 
additional information about default rates. In particular, QM loans do 
not account for certain underwriting and product features that 
historical loan performance indicate lower risk of default. For 
instance, borrowers' credit history, down payment and loan-to-value 
ratio have been shown to be significantly associated with lower 
borrower default rates.\482\ This introduces additional risk into 
securitizations without a risk retention requirement relative to a more 
narrowly defined QRM definition.
---------------------------------------------------------------------------

    \482\ See footnote 481.
---------------------------------------------------------------------------

    Some commenters indicated that the QM-Plus alternative proposal 
that included a down payment requirement was unnecessarily restrictive, 
did not account for compensating factors in underwriting practices, and 
that the foreclosure crisis was predominantly a result of abusive loan 
terms and practices that are addressed by the QM definition. The 
commenters concluded that the QM definition adequately addresses 
product features that historical loan performance data indicate result 
in a lower risk of default, that low down payment loans have been used 
with great success to promote sustainable homeownership, and aligning 
the definition of QRM to QM strikes the right balance of improved 
standards and the need to improve access to affordable credit on 
reasonable terms.
    Commenters also questioned the estimated delinquency rates reported 
in the Commission analysis of historical loan performance among loans 
packaged by private label securitizations that would have met the 
current QM definition. These commenters claimed that the SEC staff 
study included loans with risky features linked to default that would 
not meet the QM definition, and that the period of analysis of the SEC 
staff study focused too narrowly on the origination years leading up to 
the financial crisis, and thus the most poorly underwritten mortgages. 
As a result, these commenters stated that the 34 percent estimated 
serious delinquency rate among securitized private label loans found in 
the SEC staff study did not fairly reflect the effect of the QM 
definition, which when applied to their broader sample of mortgages 
(that included GSE purchased loans and non-securitized loans) was 5.8 
percent.
    The Commission recognizes that estimates of delinquency rates are 
sensitive to the sample of mortgages analyzed, and in particular, can 
vary significantly based on the time period and types of loans 
analyzed. In particular, as previously noted, there is a large 
difference in the historical performance of GSE purchased loans, for 
which GSEs' current guarantee fulfills the risk retention requirements 
as long as GSEs are in receivership and conservatorship and meet other 
conditions, which effectively currently exempts such loans from risk 
retention requirements, and securitized private labels loans. The SEC 
staff study focused on securitized private labels loans to respond to 
previous commenter concern that the original proposal inappropriately 
focused on loans purchased by GSEs and thus excluded originations held 
in non-GSE securitizations. The SEC staff study also focused on the 
years leading up to the crisis years because this was the period of 
underwriting abuses for which the presence of a QM definition would 
have had the most relevance. Moreover, the 34 percent delinquency rate 
reported in the SEC staff study is consistent with estimates provided 
in the analysis of another commenter when restricted to the same loan 
types and period.\483\
---------------------------------------------------------------------------

    \483\ Urban Institute, Table 1 reports 36 percent delinquency 
rate for Private Label Securities originated during the 2006-2008 
period.
---------------------------------------------------------------------------

    As previously discussed, some asymmetric information issues 
contributing to the moral hazard problem of the originate-to-distribute 
model are addressed by the revisions to Regulation AB. In particular, 
while registered RMBS backed by QRM loans are exempt from risk 
retention, issuers of such securities are required to provide loan-
level information for each asset in the underlying pool in accordance 
with revised Regulation AB. Thus, the moral hazard problem is reduced 
for these issuances because asset-level disclosure should mitigate the 
information asymmetry problem to the extent that the disclosures 
adequately inform investors of the risks.
    At present, private label RMBS transactions comprise only a small 
fraction of the total non-agency asset-backed securities market--6.4 
percent by dollar volume in 2013.\484\ Moreover, only 16 percent of 
RMBS were registered issues. This is far below the pre-crisis levels. 
For example, the issuance volume of private label RMBS securitizations 
was $801 billion in 2006, which accounted for 39 percent of the total 
non-agency asset-backed securities issuance in 2006. Of these 
transactions, only 9.3 percent were privately-issued offerings (e.g., 
resales under Rule 144A or private placements), transactions that would 
not be subject to asset-level disclosures by the revised Regulation AB 
rules. If the private label

[[Page 77739]]

securitization market were to return to pre-crisis levels and 
registration practices, then a significant portion of the RMBS market 
would be subject to asset-level disclosures. For the remaining 
unregistered offerings, risk retention requirements would still apply 
and address the potential moral hazard problem to the extent that the 
underlying securitizations were not comprised of QRMs.
---------------------------------------------------------------------------

    \484\ All figures in this paragraph are calculated by DERA staff 
using the Asset-Backed Alert and Commercial Mortgage Alert 
databases.
---------------------------------------------------------------------------

    Broadly, by aligning the definition of QRM to QM the agencies are 
fostering the least restrictive capital formation regime for 
residential mortgages allowed under the statute. This alignment allows 
for securitizations exempt from the requirement of risk retention that 
include loans with low down payment and loans without down payment or 
borrower credit history requirements. By not adopting these additional 
credit overlays, the agencies have sought to facilitate the ability of 
mortgage originators to have sponsors package their loans into 
securitizations and thereby generate new capital for the continued 
origination of new mortgages. In the near term, under prevailing tight 
mortgage lending conditions, this definition is intended to promote 
borrower access to capital, especially for low-and moderate income, 
minority and first-time home buyers, and accelerate the recovery of the 
private label RMBS market.
    However, aligning the definition of QRM to QM also provides the 
least restrictive regulatory measure available under the statute to 
mitigate the reemergence of the moral hazard problem in the RMBS 
market. By exempting from the risk retention requirement 
securitizations comprised of loans with characteristics that 
historically have been indicators of a higher probability of mortgage 
default, the same economic incentives for the originate-to-distribute 
model that existed prior to the onset of the financial crisis may 
persist.
    Hence the alignment of the definition of the two mortgage standards 
involves a tradeoff between, on the one hand, promoting financial 
market recovery and borrower access to capital, and, on the other hand, 
adding additional credit requirements that may lessen the likelihood of 
future moral hazards related to the lending practices in the housing 
market but also further constrain mortgage credit. The agencies have 
sought to address this tradeoff through the introduction of a periodic 
review of the QRM definition that allows the agencies to monitor the 
rule's effects as the RMBS market evolves in the new regulatory 
environment. The agencies will review the QRM definition at regular 
intervals and in response to any changes made to the QM definition by 
the CFPB, and as a result of these reviews, may or may not decide to 
modify the definition of QRM through notice and comment rulemaking. 
Moreover, the agencies will commence a review at any time upon the 
request of any one of the agencies. By including this review process in 
the final rule, the agencies recognize that prevailing market 
conditions could change in a way that merits a stricter definition of 
QRM, and have introduced a process by which the alignment of QRM to QM 
can be assessed going forward.
d. Mortgage Loans Exempt From QM
    The agencies are also adopting an exemption from risk retention for 
securitizations of loans originated through community-focused lending 
programs that are currently exempt from the CFPB's ability-to-repay 
requirements and an exemption for certain three-to-four unit mortgage 
loans.
    Exempting securitizations of loans originated through community-
focused lending programs that are currently exempt from the CFPB's 
ability-to-repay requirements from risk retention will increase capital 
formation. The mission of many of these community-based lenders is to 
provide access to capital for underserved communities; requiring risk 
retention for them would impose a cost that might impinge on their 
ability to make loans or might increase their cost of capital. The 
borrowers that rely on community based lenders may also avoid higher 
borrowing costs as the result of this exemption. Efficiency may be 
improved to the extent community based underwriters have more 
information about their borrowers than other lenders and use soft 
information to underwrite their loans.\485\ We acknowledge, however, 
that underwriting standards may change allowing lower quality loans to 
be securitized. The exemption for these loans, as with QRM, however, 
will be subject to periodic review by the agencies.
---------------------------------------------------------------------------

    \485\ See, e.g., O.E. Ergungor, ``Bank Branch Presence and 
Access to Credit in Low- to Moderate-Income Neighborhoods'' Journal 
of Money, Credit, and Banking, 2010; S. Agrawal, B. Ambrose, S. 
Chomsisengphet, and C. Liu, ``The role of Soft Information in a 
Dynamic Contract Setting: Evidence from the Home Equity Credit 
Market,'' Journal of Money Credit and Banking, 2011; C. Chang, G. 
Liao, Z. Yu, Z. Ni, ``Information From Relationship Lending: 
Evidence from Loan Defaults in China,'' working paper, 2010.
---------------------------------------------------------------------------

    The agencies are also providing an exemption from the risk 
retention requirements for certain mortgage loans secured by three-to-
four unit residential properties that meet the criteria for QM other 
than being a consumer credit transaction, as well as an exemption to 
permit sponsors to securitize these exempted mortgage loans with QRMs. 
The exemption for these loans, as with QRM, will be subject to periodic 
review by the agencies.
    Even though three-to-four unit mortgages comprise a relatively 
small fraction of the one-to-four residential mortgage market, 
exempting securitizations of such loans from risk retention could 
increase access to capital for these borrowers. Among loans acquired or 
guaranteed by Fannie Mae (Freddie Mac) between 2000 and 2013, only 0.93 
percent (0.70 percent) of loans by initial balance were three-to-four 
unit mortgages, and the total principal balance of such mortgages 
acquired or guaranteed by the Enterprises exceeded $56 billion. Three-
to-four unit mortgages were slightly more prominent in the private-
label securitization market, for which 1.51 percent of loans by initial 
balance were three-to-four unit mortgages, with the total original 
principal balance of almost $23 billion.\486\
---------------------------------------------------------------------------

    \486\ DERA staff calculations based on MBSData dataset. The 
dataset provides data for the number of units for 31.3 percent of 
the loans securitized privately between 2000 and 2012.
---------------------------------------------------------------------------

    Currently, the Enterprises' guarantee is an acceptable form of risk 
retention as long as they are in receivership or conservatorship and 
meet other conditions. Thus, under current conditions, three-to-four 
unit mortgages guaranteed by the Enterprises can be securitized without 
having to comply with the risk retention requirements. However, without 
the exemption, should the Enterprises in the future no longer be in 
receivership or conservatorship, these three-to-four unit mortgages 
would be subject to the risk retention requirements even if they 
otherwise met the QM criteria. The exemption will allow such mortgages 
to continue to be securitized with two unit mortgages, as has been 
historical practice, regardless of the legal status of the Enterprises 
and provided that all of the loans in the pool meet the QM criteria. In 
this way, the exemption will help to facilitate continued access to 
capital for borrowers of three-to-four unit mortgages.
    Based on historical data, three-to-four unit residential mortgages 
that otherwise satisfy the QM criteria exhibit comparable or lower 
delinquency rates as QM two unit residential mortgages. The average 
serious delinquency rate \487\

[[Page 77740]]

among such three-to-four unit mortgages securitized through private-
label securitizations in 2000-2009 was 36 percent, whereas among two 
unit mortgages it was 41 percent. Moreover, the difference in 
delinquency rates are not statistically different when controlling for 
other factors known to influence delinquency rates like credit score, 
loan-to-value ratio, debt-to-income ratio, etc.\488\ These results 
indicate that historical three-to-four unit residential mortgage 
delinquency rates are no higher than those of two unit residential 
mortgages, and thus do not provide any evidence that exempting such 
mortgages from risk retention would introduce additional risk into 
securitizations that would include such loans. The Commission believes 
that this equivalent performance is likely to continue after the 
implementation of this exemption because both two unit and three-to-
four unit mortgages would be required to satisfy the same QM 
underwriting criteria.
---------------------------------------------------------------------------

    \487\ Serious delinquency (SDQ) is defined as a loan having ever 
been 90 days late, foreclosed, or real estate owned.
    \488\ Specifically, DERA staff ran the predictive logit 
regression from the White and Bauguess (2013) study (see footnote 
446) for privately securitized 2, 3, and 4 unit mortgages in the 
MBSData database satisfying QM criteria and originated over the 
period 2000-2009. Adding an indicator variable marking three-to-four 
unit residential mortgages does not generate a statistically 
significant coefficient estimate, and does not improve the 
regression's goodness-of-fit measure (pseudo-R-squared).
---------------------------------------------------------------------------

D. OCC Unfunded Mandates Reform Act of 1995 Determination

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (UMRA) requires that an agency prepare a budgetary impact 
statement before promulgating a rule that includes a Federal mandate 
that may result in an expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more, adjusted for inflation ($152 million in 2014) in any 
one year. If a budgetary impact statement is required, section 205 of 
the UMRA also requires an agency to identify and consider a reasonable 
number of regulatory alternatives before promulgating a rule.
    The OCC has determined this final rule is likely to result in the 
expenditure by the private sector of $152 million or more in any one 
year. The OCC has prepared a budgetary impact analysis and identified 
and considered alternative approaches, including approaches suggested 
by commenters and discussed in the SUPPLEMENTARY INFORMATION section 
above. When the final rule is published in the Federal Register, the 
full text of the OCC's analysis will be available at: http://www.regulations.gov, Docket ID OCC-2013-0010.

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

    Section 1313 of the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992 requires the Director of FHFA, when 
promulgating regulations relating to the Federal Home Loan Banks 
(Banks), to consider the following differences between the Banks and 
the Enterprises (Fannie Mae and Freddie Mac): cooperative ownership 
structure; mission of providing liquidity to members; affordable 
housing and community development mission; capital structure; and joint 
and several liability.\489\ The Director also may consider any other 
differences that are deemed appropriate. In preparing the portions of 
this final rule over which FHFA has joint rulemaking authority, the 
Director considered the differences between the Banks and the 
Enterprises as they relate to the above factors and determined that the 
rule was appropriate. No comments were received on the reproposed rule 
with respect to this issue.
---------------------------------------------------------------------------

    \489\ See 12 U.S.C. 4513.
---------------------------------------------------------------------------

Text of the Common Rule

(All Agencies)

    The text of the common rule appears below:

PART_--CREDIT RISK RETENTION

Subpart A--Authority, Purpose, Scope and Definitions

Sec.
_.1 [Reserved]
_.2 Definitions.
Subpart B--Credit Risk Retention
_.3 Base risk retention requirement.
_.4 Standard risk retention.
_.5 Revolving pool securitizations.
_.6 Eligible ABCP conduits.
_.7 Commercial mortgage-backed securities.
_.8 Federal National Mortgage Association and Federal Home Loan 
Mortgage Corporation ABS.
_.9 Open market CLOs.
_.10 Qualified tender option bonds.
Subpart C--Transfer of Risk Retention
_.11 Allocation of risk retention to an originator.
_.12 Hedging, transfer and financing prohibitions.
Subpart D--Exceptions and Exemptions
_.13 Exemption for qualified residential mortgages.
_.14 Definitions applicable to qualifying commercial loans, 
commercial real estate loans, and automobile loans.
_.15 Qualifying commercial loans, commercial real estate loans, and 
automobile loans.
_.16 Underwriting standards for qualifying commercial loans.
_.17 Underwriting standards for qualifying CRE loans.
_.18 Underwriting standards for qualifying automobile loans.
_.19 General exemptions.
_.20 Safe harbor for certain foreign-related transactions.
_.21 Additional exemptions.
_.22 Periodic review of the QRM definition, exempted three-to-four 
unit residential mortgage loans, and community-focused residential 
mortgage exemption.

Subpart A--Authority, Purpose, Scope and Definitions


Sec.  _.1  [Reserved]


Sec.  _.2  Definitions.

    For purposes of this part, the following definitions apply:
    ABS interest means:
    (1) Any type of interest or obligation issued by an issuing entity, 
whether or not in certificated form, including a security, obligation, 
beneficial interest or residual interest (other than an uncertificated 
regular interest in a REMIC that is held by another REMIC, where both 
REMICs are part of the same structure and a single REMIC in that 
structure issues ABS interests to investors, or a non-economic residual 
interest issued by a REMIC), payments on which are primarily dependent 
on the cash flows of the collateral owned or held by the issuing 
entity; and
    (2) Does not include common or preferred stock, limited liability 
interests, partnership interests, trust certificates, or similar 
interests that:
    (i) Are issued primarily to evidence ownership of the issuing 
entity; and
    (ii) The payments, if any, on which are not primarily dependent on 
the cash flows of the collateral held by the issuing entity; and
    (3) Does not include the right to receive payments for services 
provided by the holder of such right, including servicing, trustee 
services and custodial services.
    Affiliate of, or a person affiliated with, a specified person means 
a person that directly, or indirectly through one or more 
intermediaries, controls, or is controlled by, or is under common 
control with, the person specified.
    Appropriate Federal banking agency has the same meaning as in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).

[[Page 77741]]

    Asset means a self-liquidating financial asset (including but not 
limited to a loan, lease, mortgage, or receivable).
    Asset-backed security has the same meaning as in section 3(a)(79) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(79)).
    Collateral means, with respect to any issuance of ABS interests, 
the assets that provide the cash flow and the servicing assets that 
support such cash flow for the ABS interests irrespective of the legal 
structure of issuance, including security interests in assets or other 
property of the issuing entity, fractional undivided property interests 
in the assets or other property of the issuing entity, or any other 
property interest in or rights to cash flow from such assets and 
related servicing assets. Assets or other property collateralize an 
issuance of ABS interests if the assets or property serve as collateral 
for such issuance.
    Commercial real estate loan has the same meaning as in Sec.  _.14.
    Commission means the Securities and Exchange Commission.
    Control including the terms ``controlling,'' ``controlled by'' and 
``under common control with'':
    (1) Means the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
person, whether through the ownership of voting securities, by 
contract, or otherwise.
    (2) Without limiting the foregoing, a person shall be considered to 
control another person if the first person:
    (i) Owns, controls or holds with power to vote 25 percent or more 
of any class of voting securities of the other person; or
    (ii) Controls in any manner the election of a majority of the 
directors, trustees or persons performing similar functions of the 
other person.
    Credit risk means:
    (1) The risk of loss that could result from the failure of the 
borrower in the case of a securitized asset, or the issuing entity in 
the case of an ABS interest in the issuing entity, to make required 
payments of principal or interest on the asset or ABS interest on a 
timely basis;
    (2) The risk of loss that could result from bankruptcy, insolvency, 
or a similar proceeding with respect to the borrower or issuing entity, 
as appropriate; or
    (3) The effect that significant changes in the underlying credit 
quality of the asset or ABS interest may have on the market value of 
the asset or ABS interest.
    Creditor has the same meaning as in 15 U.S.C. 1602(g).
    Depositor means:
    (1) The person that receives or purchases and transfers or sells 
the securitized assets to the issuing entity;
    (2) The sponsor, in the case of a securitization transaction where 
there is not an intermediate transfer of the assets from the sponsor to 
the issuing entity; or
    (3) The person that receives or purchases and transfers or sells 
the securitized assets to the issuing entity in the case of a 
securitization transaction where the person transferring or selling the 
securitized assets directly to the issuing entity is itself a trust.
    Eligible horizontal residual interest means, with respect to any 
securitization transaction, an ABS interest in the issuing entity:
    (1) That is an interest in a single class or multiple classes in 
the issuing entity, provided that each interest meets, individually or 
in the aggregate, all of the requirements of this definition;
    (2) With respect to which, on any payment date or allocation date 
on which the issuing entity has insufficient funds to satisfy its 
obligation to pay all contractual interest or principal due, any 
resulting shortfall will reduce amounts payable to the eligible 
horizontal residual interest prior to any reduction in the amounts 
payable to any other ABS interest, whether through loss allocation, 
operation of the priority of payments, or any other governing 
contractual provision (until the amount of such ABS interest is reduced 
to zero); and
    (3) That, with the exception of any non-economic REMIC residual 
interest, has the most subordinated claim to payments of both principal 
and interest by the issuing entity.
    Eligible horizontal cash reserve account means an account meeting 
the requirements of Sec.  _.4(b).
    Eligible vertical interest means, with respect to any 
securitization transaction, a single vertical security or an interest 
in each class of ABS interests in the issuing entity issued as part of 
the securitization transaction that constitutes the same proportion of 
each such class.
    Federal banking agencies means the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, and the 
Federal Deposit Insurance Corporation.
    GAAP means generally accepted accounting principles as used in the 
United States.
    Issuing entity means, with respect to a securitization transaction, 
the trust or other entity:
    (1) That owns or holds the pool of assets to be securitized; and
    (2) In whose name the asset-backed securities are issued.
    Majority-owned affiliate of a person means an entity (other than 
the issuing entity) that, directly or indirectly, majority controls, is 
majority controlled by or is under common majority control with, such 
person. For purposes of this definition, majority control means 
ownership of more than 50 percent of the equity of an entity, or 
ownership of any other controlling financial interest in the entity, as 
determined under GAAP.
    Originator means a person who:
    (1) Through an extension of credit or otherwise, creates an asset 
that collateralizes an asset-backed security; and
    (2) Sells the asset directly or indirectly to a securitizer or 
issuing entity.
    REMIC has the same meaning as in 26 U.S.C. 860D.
    Residential mortgage means:
    (1) A transaction that is a covered transaction as defined in Sec.  
1026.43(b) of Regulation Z (12 CFR 1026.43(b)(1));
    (2) Any transaction that is exempt from the definition of ``covered 
transaction'' under Sec.  1026.43(a) of Regulation Z (12 CFR 
1026.43(a)); and
    (3) Any other loan secured by a residential structure that contains 
one to four units, whether or not that structure is attached to real 
property, including an individual condominium or cooperative unit and, 
if used as a residence, a mobile home or trailer.
    Retaining sponsor means, with respect to a securitization 
transaction, the sponsor that has retained or caused to be retained an 
economic interest in the credit risk of the securitized assets pursuant 
to subpart B of this part.
    Securitization transaction means a transaction involving the offer 
and sale of asset-backed securities by an issuing entity.
    Securitized asset means an asset that:
    (1) Is transferred, sold, or conveyed to an issuing entity; and
    (2) Collateralizes the ABS interests issued by the issuing entity.
    Securitizer means, with respect to a securitization transaction, 
either:
    (1) The depositor of the asset-backed securities (if the depositor 
is not the sponsor); or
    (2) The sponsor of the asset-backed securities.
    Servicer means any person responsible for the management or 
collection of the securitized assets or making allocations or 
distributions to holders of the ABS interests, but does not include a 
trustee for the issuing entity or the asset-backed securities that 
makes allocations or distributions to

[[Page 77742]]

holders of the ABS interests if the trustee receives such allocations 
or distributions from a servicer and the trustee does not otherwise 
perform the functions of a servicer.
    Servicing assets means rights or other assets designed to assure 
the servicing or timely distribution of proceeds to ABS interest 
holders and rights or other assets that are related or incidental to 
purchasing or otherwise acquiring and holding the issuing entity's 
securitized assets. Servicing assets include amounts received by the 
issuing entity as proceeds of securitized assets, including proceeds of 
rights or other assets, whether as remittances by obligors or as other 
recoveries.
    Single vertical security means, with respect to any securitization 
transaction, an ABS interest entitling the sponsor to a specified 
percentage of the amounts paid on each class of ABS interests in the 
issuing entity (other than such single vertical security).
    Sponsor means a person who organizes and initiates a securitization 
transaction by selling or transferring assets, either directly or 
indirectly, including through an affiliate, to the issuing entity.
    State has the same meaning as in Section 3(a)(16) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(16)).
    United States or U.S. means the United States of America, including 
its territories and possessions, any State of the United States, and 
the District of Columbia.
    Wholly-owned affiliate means a person (other than an issuing 
entity) that, directly or indirectly, wholly controls, is wholly 
controlled by, or is wholly under common control with, another person. 
For purposes of this definition, ``wholly controls'' means ownership of 
100 percent of the equity of an entity.

Subpart B--Credit Risk Retention


Sec.  _.3  Base risk retention requirement.

    (a) Base risk retention requirement. Except as otherwise provided 
in this part, the sponsor of a securitization transaction (or majority-
owned affiliate of the sponsor) shall retain an economic interest in 
the credit risk of the securitized assets in accordance with any one of 
Sec. Sec.  _.4 through __.10. Credit risk in securitized assets 
required to be retained and held by any person for purposes of 
compliance with this part, whether a sponsor, an originator, an 
originator-seller, or a third-party purchaser, except as otherwise 
provided in this part, may be acquired and held by any of such person's 
majority-owned affiliates (other than an issuing entity).
    (b) Multiple sponsors. If there is more than one sponsor of a 
securitization transaction, it shall be the responsibility of each 
sponsor to ensure that at least one of the sponsors of the 
securitization transaction (or at least one of their majority-owned or 
wholly-owned affiliates, as applicable) retains an economic interest in 
the credit risk of the securitized assets in accordance with any one of 
Sec. Sec.  __.4, _.5, _.8, __.9, or _.10.


Sec.  _.4  Standard risk retention.

    (a) General requirement. Except as provided in Sec. Sec.  __.5 
through __.10, the sponsor of a securitization transaction must retain 
an eligible vertical interest or eligible horizontal residual interest, 
or any combination thereof, in accordance with the requirements of this 
section.
    (1) If the sponsor retains only an eligible vertical interest as 
its required risk retention, the sponsor must retain an eligible 
vertical interest in a percentage of not less than 5 percent.
    (2) If the sponsor retains only an eligible horizontal residual 
interest as its required risk retention, the amount of the interest 
must equal at least 5 percent of the fair value of all ABS interests in 
the issuing entity issued as a part of the securitization transaction, 
determined using a fair value measurement framework under GAAP.
    (3) If the sponsor retains both an eligible vertical interest and 
an eligible horizontal residual interest as its required risk 
retention, the percentage of the fair value of the eligible horizontal 
residual interest and the percentage of the eligible vertical interest 
must equal at least five.
    (4) The percentage of the eligible vertical interest, eligible 
horizontal residual interest, or combination thereof retained by the 
sponsor must be determined as of the closing date of the securitization 
transaction.
    (b) Option to hold base amount in eligible horizontal cash reserve 
account. In lieu of retaining all or any part of an eligible horizontal 
residual interest under paragraph (a) of this section, the sponsor may, 
at closing of the securitization transaction, cause to be established 
and funded, in cash, an eligible horizontal cash reserve account in the 
amount equal to the fair value of such eligible horizontal residual 
interest or part thereof, provided that the account meets all of the 
following conditions:
    (1) The account is held by the trustee (or person performing 
similar functions) in the name and for the benefit of the issuing 
entity;
    (2) Amounts in the account are invested only in cash and cash 
equivalents; and
    (3) Until all ABS interests in the issuing entity are paid in full, 
or the issuing entity is dissolved:
    (i) Amounts in the account shall be released only to:
    (A) Satisfy payments on ABS interests in the issuing entity on any 
payment date on which the issuing entity has insufficient funds from 
any source to satisfy an amount due on any ABS interest; or
    (B) Pay critical expenses of the trust unrelated to credit risk on 
any payment date on which the issuing entity has insufficient funds 
from any source to pay such expenses and:
    (1) Such expenses, in the absence of available funds in the 
eligible horizontal cash reserve account, would be paid prior to any 
payments to holders of ABS interests; and
    (2) Such payments are made to parties that are not affiliated with 
the sponsor; and
    (ii) Interest (or other earnings) on investments made in accordance 
with paragraph (b)(2) of this section may be released once received by 
the account.
    (c) Disclosures. A sponsor relying on this section shall provide, 
or cause to be provided, to potential investors, under the caption 
``Credit Risk Retention'', a reasonable period of time prior to the 
sale of the asset-backed securities in the securitization transaction 
the following disclosures in written form and within the time frames 
set forth in this paragraph (c):
    (1) Horizontal interest. With respect to any eligible horizontal 
residual interest held under paragraph (a) of this section, a sponsor 
must disclose:
    (i) A reasonable period of time prior to the sale of an asset-
backed security issued in the same offering of ABS interests,
    (A) The fair value (expressed as a percentage of the fair value of 
all of the ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS interests are issued, as applicable)) of the eligible 
horizontal residual interest that the sponsor expects to retain at the 
closing of the securitization transaction. If the specific prices, 
sizes, or rates of interest of each tranche of the securitization are 
not available, the sponsor must disclose a range of fair values 
(expressed as a percentage of the fair value of all of the ABS 
interests issued in the securitization transaction and dollar amount 
(or corresponding

[[Page 77743]]

amount in the foreign currency in which the ABS interests are issued, 
as applicable)) of the eligible horizontal residual interest that the 
sponsor expects to retain at the close of the securitization 
transaction based on a range of bona fide estimates or specified 
prices, sizes, or rates of interest of each tranche of the 
securitization. A sponsor disclosing a range of fair values based on a 
range of bona fide estimates or specified prices, sizes or rates of 
interest of each tranche of the securitization must also disclose the 
method by which it determined any range of prices, tranche sizes, or 
rates of interest.
    (B) A description of the material terms of the eligible horizontal 
residual interest to be retained by the sponsor;
    (C) A description of the valuation methodology used to calculate 
the fair values or range of fair values of all classes of ABS 
interests, including any portion of the eligible horizontal residual 
interest retained by the sponsor;
    (D) All key inputs and assumptions or a comprehensive description 
of such key inputs and assumptions that were used in measuring the 
estimated total fair value or range of fair values of all classes of 
ABS interests, including the eligible horizontal residual interest to 
be retained by the sponsor.
    (E) To the extent applicable to the valuation methodology used, the 
disclosure required in paragraph (c)(1)(i)(D) of this section shall 
include, but should not be limited to, quantitative information about 
each of the following:
    (1) Discount rates;
    (2) Loss given default (recovery);
    (3) Prepayment rates;
    (4) Default rates;
    (5) Lag time between default and recovery; and
    (6) The basis of forward interest rates used.
    (F) The disclosure required in paragraphs (c)(1)(i)(C) and (D) of 
this section shall include, at a minimum, descriptions of all inputs 
and assumptions that either could have a material impact on the fair 
value calculation or would be material to a prospective investor's 
ability to evaluate the sponsor's fair value calculations. To the 
extent the disclosure required in this paragraph (c)(1) includes a 
description of a curve or curves, the description shall include a 
description of the methodology that was used to derive each curve and a 
description of any aspects or features of each curve that could 
materially impact the fair value calculation or the ability of a 
prospective investor to evaluate the sponsor's fair value calculation. 
To the extent a sponsor uses information about the securitized assets 
in its calculation of fair value, such information shall not be as of a 
date more than 60 days prior to the date of first use with investors; 
provided that for a subsequent issuance of ABS interests by the same 
issuing entity with the same sponsor for which the securitization 
transaction distributes amounts to investors on a quarterly or less 
frequent basis, such information shall not be as of a date more than 
135 days prior to the date of first use with investors; provided 
further, that the balance or value (in accordance with the transaction 
documents) of the securitized assets may be increased or decreased to 
reflect anticipated additions or removals of assets the sponsor makes 
or expects to make between the cut-off date or similar date for 
establishing the composition of the asset pool collateralizing such 
asset-backed security and the closing date of the securitization.
    (G) A summary description of the reference data set or other 
historical information used to develop the key inputs and assumptions 
referenced in paragraph (c)(1)(i)(D) of this section, including loss 
given default and default rates;
    (ii) A reasonable time after the closing of the securitization 
transaction:
    (A) The fair value (expressed as a percentage of the fair value of 
all of the ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS are issued, as applicable)) of the eligible horizontal residual 
interest the sponsor retained at the closing of the securitization 
transaction, based on actual sale prices and finalized tranche sizes;
    (B) The fair value (expressed as a percentage of the fair value of 
all of the ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS are issued, as applicable)) of the eligible horizontal residual 
interest that the sponsor is required to retain under this section; and
    (C) To the extent the valuation methodology or any of the key 
inputs and assumptions that were used in calculating the fair value or 
range of fair values disclosed prior to sale and required under 
paragraph (c)(1)(i) of this section materially differs from the 
methodology or key inputs and assumptions used to calculate the fair 
value at the time of closing, descriptions of those material 
differences.
    (iii) If the sponsor retains risk through the funding of an 
eligible horizontal cash reserve account:
    (A) The amount to be placed (or that is placed) by the sponsor in 
the eligible horizontal cash reserve account at closing, and the fair 
value (expressed as a percentage of the fair value of all of the ABS 
interests issued in the securitization transaction and dollar amount 
(or corresponding amount in the foreign currency in which the ABS 
interests are issued, as applicable)) of the eligible horizontal 
residual interest that the sponsor is required to fund through the 
eligible horizontal cash reserve account in order for such account, 
together with other retained interests, to satisfy the sponsor's risk 
retention requirement;
    (B) A description of the material terms of the eligible horizontal 
cash reserve account; and
    (C) The disclosures required in paragraphs (c)(1)(i) and (ii) of 
this section.
    (2) Vertical interest. With respect to any eligible vertical 
interest retained under paragraph (a) of this section, the sponsor must 
disclose:
    (i) A reasonable period of time prior to the sale of an asset-
backed security issued in the same offering of ABS interests,
    (A) The form of the eligible vertical interest;
    (B) The percentage that the sponsor is required to retain as a 
vertical interest under this section; and
    (C) A description of the material terms of the vertical interest 
and the amount that the sponsor expects to retain at the closing of the 
securitization transaction.
    (ii) A reasonable time after the closing of the securitization 
transaction, the amount of the vertical interest the sponsor retained 
at closing, if that amount is materially different from the amount 
disclosed under paragraph (c)(2)(i) of this section.
    (d) Record maintenance. A sponsor must retain the certifications 
and disclosures required in paragraphs (a) and (c) of this section in 
its records and must provide the disclosure upon request to the 
Commission and its appropriate Federal banking agency, if any, until 
three years after all ABS interests are no longer outstanding.


Sec.  _.5  Revolving pool securitizations.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    Revolving pool securitization means an issuing entity that is 
established to issue on multiple issuance dates more than one series, 
class, subclass, or tranche of asset-backed securities that are 
collateralized by a common pool of

[[Page 77744]]

securitized assets that will change in composition over time, and that 
does not monetize excess interest and fees from its securitized assets.
    Seller's interest means an ABS interest or ABS interests:
    (1) Collateralized by the securitized assets and servicing assets 
owned or held by the issuing entity, other than the following that are 
not considered a component of seller's interest:
    (i) Servicing assets that have been allocated as collateral only 
for a specific series in connection with administering the revolving 
pool securitization, such as a principal accumulation or interest 
reserve account; and
    (ii) Assets that are not eligible under the terms of the 
securitization transaction to be included when determining whether the 
revolving pool securitization holds aggregate securitized assets in 
specified proportions to aggregate outstanding investor ABS interests 
issued; and
    (2) That is pari passu with each series of investor ABS interests 
issued, or partially or fully subordinated to one or more series in 
identical or varying amounts, with respect to the allocation of all 
distributions and losses with respect to the securitized assets prior 
to early amortization of the revolving securitization (as specified in 
the securitization transaction documents); and
    (3) That adjusts for fluctuations in the outstanding principal 
balance of the securitized assets in the pool.
    (b) General requirement. A sponsor satisfies the risk retention 
requirements of Sec.  _.3 with respect to a securitization transaction 
for which the issuing entity is a revolving pool securitization if the 
sponsor maintains a seller's interest of not less than 5 percent of the 
aggregate unpaid principal balance of all outstanding investor ABS 
interests in the issuing entity.
    (c) Measuring the seller's interest. In measuring the seller's 
interest for purposes of meeting the requirements of paragraph (b) of 
this section:
    (1) The unpaid principal balance of the securitized assets for the 
numerator of the 5 percent ratio shall not include assets of the types 
excluded from the definition of seller's interest in paragraph (a) of 
this section;
    (2) The aggregate unpaid principal balance of outstanding investor 
ABS interests in the denominator of the 5 percent ratio may be reduced 
by the amount of funds held in a segregated principal accumulation 
account for the repayment of outstanding investor ABS interests, if:
    (i) The terms of the securitization transaction documents prevent 
funds in the principal accumulation account from being applied for any 
purpose other than the repayment of the unpaid principal of outstanding 
investor ABS interests; and
    (ii) Funds in that account are invested only in the types of assets 
in which funds held in an eligible horizontal cash reserve account 
pursuant to Sec.  _.4 are permitted to be invested;
    (3) If the terms of the securitization transaction documents set 
minimum required seller's interest as a proportion of the unpaid 
principal balance of outstanding investor ABS interests for one or more 
series issued, rather than as a proportion of the aggregate outstanding 
investor ABS interests in all outstanding series combined, the 
percentage of the seller's interest for each such series must, when 
combined with the percentage of any minimum seller's interest set by 
reference to the aggregate outstanding investor ABS interests, equal at 
least 5 percent;
    (4) The 5 percent test must be determined and satisfied at the 
closing of each issuance of ABS interests to investors by the issuing 
entity, and
    (i) At least monthly at a seller's interest measurement date 
specified under the securitization transaction documents, until no ABS 
interest in the issuing entity is held by any person not a wholly-owned 
affiliate of the sponsor; or
    (ii) If the revolving pool securitization fails to meet the 5 
percent test as of any date described in paragraph (c)(4)(i) of this 
section, and the securitization transaction documents specify a cure 
period, the 5 percent test must be determined and satisfied within the 
earlier of the cure period, or one month after the date described in 
paragraph (c)(4)(i).
    (d) Measuring outstanding investor ABS interests. In measuring the 
amount of outstanding investor ABS interests for purposes of this 
section, ABS interests held for the life of such ABS interests by the 
sponsor or its wholly-owned affiliates may be excluded.
    (e) Holding and retention of the seller's interest; legacy trusts.
    (1) Notwithstanding Sec.  _.12(a), the seller's interest, and any 
offsetting horizontal retention interest retained pursuant to paragraph 
(g) of this section, must be retained by the sponsor or by one or more 
wholly-owned affiliates of the sponsor, including one or more 
depositors of the revolving pool securitization.
    (2) If one revolving pool securitization issues collateral 
certificates representing a beneficial interest in all or a portion of 
the securitized assets held by that securitization to another revolving 
pool securitization, which in turn issues ABS interests for which the 
collateral certificates are all or a portion of the securitized assets, 
a sponsor may satisfy the requirements of paragraphs (b) and (c) of 
this section by retaining the seller's interest for the assets 
represented by the collateral certificates through either of the 
revolving pool securitizations, so long as both revolving pool 
securitizations are retained at the direction of the same sponsor or 
its wholly-owned affiliates.
    (3) If the sponsor retains the seller's interest associated with 
the collateral certificates at the level of the revolving pool 
securitization that issues those collateral certificates, the 
proportion of the seller's interest required by paragraph (b) of this 
section retained at that level must equal the proportion that the 
principal balance of the securitized assets represented by the 
collateral certificates bears to the principal balance of the 
securitized assets in the revolving pool securitization that issues the 
ABS interests, as of each measurement date required by paragraph (c) of 
this section.
    (f) Offset for pool-level excess funding account. The 5 percent 
seller's interest required on each measurement date by paragraph (c) of 
this section may be reduced on a dollar-for-dollar basis by the 
balance, as of such date, of an excess funding account in the form of a 
segregated account that:
    (1) Is funded in the event of a failure to meet the minimum 
seller's interest requirements or other requirement to maintain a 
minimum balance of securitized assets under the securitization 
transaction documents by distributions otherwise payable to the holder 
of the seller's interest;
    (2) Is invested only in the types of assets in which funds held in 
a horizontal cash reserve account pursuant to Sec.  _.4 are permitted 
to be invested; and
    (3) In the event of an early amortization, makes payments of 
amounts held in the account to holders of investor ABS interests in the 
same manner as payments to holders of investor ABS interests of amounts 
received on securitized assets.
    (g) Combined seller's interests and horizontal interest retention. 
The 5 percent seller's interest required on each measurement date by 
paragraph (c) of this section may be reduced to a percentage lower than 
5 percent to the extent that, for all series of investor ABS interests 
issued after the applicable effective date of this Sec.  _.5, the 
sponsor, or notwithstanding Sec.  _.12(a) a wholly-owned affiliate of 
the sponsor, retains, at a minimum, a corresponding

[[Page 77745]]

percentage of the fair value of ABS interests issued in each series, in 
the form of one or more of the horizontal residual interests meeting 
the requirements of paragraphs (h) or (i).
    (h) Residual ABS interests in excess interest and fees. The sponsor 
may take the offset described in paragraph (g) of this section for a 
residual ABS interest in excess interest and fees, whether certificated 
or uncertificated, in a single or multiple classes, subclasses, or 
tranches, that meets, individually or in the aggregate, the 
requirements of this paragraph (h);
    (1) Each series of the revolving pool securitization distinguishes 
between the series' share of the interest and fee cash flows and the 
series' share of the principal repayment cash flows from the 
securitized assets collateralizing the revolving pool securitization, 
which may according to the terms of the securitization transaction 
documents, include not only the series' ratable share of such cash 
flows but also excess cash flows available from other series;
    (2) The residual ABS interest's claim to any part of the series' 
share of the interest and fee cash flows for any interest payment 
period is subordinated to all accrued and payable interest due on the 
payment date to more senior ABS interests in the series for that 
period, and further reduced by the series' share of losses, including 
defaults on principal of the securitized assets collateralizing the 
revolving pool securitization (whether incurred in that period or 
carried over from prior periods) to the extent that such payments would 
have been included in amounts payable to more senior interests in the 
series;
    (3) The revolving pool securitization continues to revolve, with 
one or more series, classes, subclasses, or tranches of asset-backed 
securities that are collateralized by a common pool of assets that 
change in composition over time; and
    (4) For purposes of taking the offset described in paragraph (g) of 
this section, the sponsor determines the fair value of the residual ABS 
interest in excess interest and fees, and the fair value of the series 
of outstanding investor ABS interests to which it is subordinated and 
supports using the fair value measurement framework under GAAP, as of:
    (i) The closing of the securitization transaction issuing the 
supported ABS interests; and
    (ii) The seller's interest measurement dates described in paragraph 
(c)(4) of this section, except that for these periodic determinations 
the sponsor must update the fair value of the residual ABS interest in 
excess interest and fees for the numerator of the percentage ratio, but 
may at the sponsor's option continue to use the fair values determined 
in (h)(4)(i) for the outstanding investor ABS interests in the 
denominator.
    (i) Offsetting eligible horizontal residual interest. The sponsor 
may take the offset described in paragraph (g) of this section for ABS 
interests that would meet the definition of eligible horizontal 
residual interests in Sec.  _.2 but for the sponsor's simultaneous 
holding of subordinated seller's interests, residual ABS interests in 
excess interests and fees, or a combination of the two, if:
    (1) The sponsor complies with all requirements of paragraphs (b) 
through (e) of this section for its holdings of subordinated seller's 
interest, and paragraph (h) for its holdings of residual ABS interests 
in excess interests and fees, as applicable;
    (2) For purposes of taking the offset described in paragraph (g) of 
this section, the sponsor determines the fair value of the eligible 
horizontal residual interest as a percentage of the fair value of the 
outstanding investor ABS interests in the series supported by the 
eligible horizontal residual interest, determined using the fair value 
measurement framework under GAAP:
    (i) As of the closing of the securitization transaction issuing the 
supported ABS interests; and
    (ii) Without including in the numerator of the percentage ratio any 
fair value based on:
    (A) The subordinated seller's interest or residual ABS interest in 
excess interest and fees;
    (B) the interest payable to the sponsor on the eligible horizontal 
residual interest, if the sponsor is including the value of residual 
ABS interest in excess interest and fees pursuant to paragraph (h) of 
this section in taking the offset in paragraph (g) of this section; 
and,
    (C) the principal payable to the sponsor on the eligible horizontal 
residual interest, if the sponsor is including the value of the 
seller's interest pursuant to paragraphs (b) through (f) of this 
section and distributions on that seller's interest are available to 
reduce charge-offs that would otherwise be allocated to reduce 
principal payable to the offset eligible horizontal residual interest.
    (j) Specified dates. A sponsor using data about the revolving pool 
securitization's collateral, or ABS interests previously issued, to 
determine the closing-date percentage of a seller's interest, residual 
ABS interest in excess interest and fees, or eligible horizontal 
residual interest pursuant to this Sec.  __.5 may use such data 
prepared as of specified dates if:
    (1) The sponsor describes the specified dates in the disclosures 
required by paragraph (k) of this section; and
    (2) The dates are no more than 60 days prior to the date of first 
use with investors of disclosures required for the interest by 
paragraph (k) of this section, or for revolving pool securitizations 
that make distributions to investors on a quarterly or less frequent 
basis, no more than 135 days prior to the date of first use with 
investors of such disclosures.
    (k) Disclosure and record maintenance. (1) Disclosure. A sponsor 
relying on this section shall provide, or cause to be provided, to 
potential investors, under the caption ``Credit Risk Retention'' the 
following disclosure in written form and within the time frames set 
forth in this paragraph (k):
    (i) A reasonable period of time prior to the sale of an asset-
backed security, a description of the material terms of the seller's 
interest, and the percentage of the seller's interest that the sponsor 
expects to retain at the closing of the securitization transaction, 
measured in accordance with the requirements of this Sec.  __.5, as a 
percentage of the aggregate unpaid principal balance of all outstanding 
investor ABS interests issued, or as a percentage of the aggregate 
unpaid principal balance of outstanding investor ABS interests for one 
or more series issued, as required by the terms of the securitization 
transaction;
    (ii) A reasonable time after the closing of the securitization 
transaction, the amount of seller's interest the sponsor retained at 
closing, if that amount is materially different from the amount 
disclosed under paragraph (k)(1)(i) of this section; and
    (iii) A description of the material terms of any horizontal 
residual interests offsetting the seller's interest in accordance with 
paragraphs (g), (h), and (i) of this section; and
    (iv) Disclosure of the fair value of those horizontal residual 
interests retained by the sponsor for the series being offered to 
investors and described in the disclosures, as a percentage of the fair 
value of the outstanding investor ABS interests issued, described in 
the same manner and within the same timeframes required for disclosure 
of the fair values of eligible horizontal residual interests specified 
in Sec.  _.4(c).
    (2) Adjusted data. Disclosures required by this paragraph (k) to be 
made a reasonable period of time prior to the sale of an asset-backed 
security of the amount of seller's interest, residual ABS interest in 
excess interest and fees,

[[Page 77746]]

or eligible horizontal residual interest may include adjustments to the 
amount of securitized assets for additions or removals the sponsor 
expects to make before the closing date and adjustments to the amount 
of outstanding investor ABS interests for expected increases and 
decreases of those interests under the control of the sponsor.
    (3) Record maintenance. A sponsor must retain the disclosures 
required in paragraph (k)(1) of this section in its records and must 
provide the disclosure upon request to the Commission and its 
appropriate Federal banking agency, if any, until three years after all 
ABS interests are no longer outstanding.
    (l) Early amortization of all outstanding series. A sponsor that 
organizes a revolving pool securitization that relies on this Sec.  
__.5 to satisfy the risk retention requirements of Sec.  __.3, does not 
violate the requirements of this part if its seller's interest falls 
below the level required by Sec.  __. 5 after the revolving pool 
securitization commences early amortization, pursuant to the terms of 
the securitization transaction documents, of all series of outstanding 
investor ABS interests, if:
    (1) The sponsor was in full compliance with the requirements of 
this section on all measurement dates specified in paragraph (c) of 
this section prior to the commencement of early amortization;
    (2) The terms of the seller's interest continue to make it pari 
passu with or subordinate in identical or varying amounts to each 
series of outstanding investor ABS interests issued with respect to the 
allocation of all distributions and losses with respect to the 
securitized assets;
    (3) The terms of any horizontal interest relied upon by the sponsor 
pursuant to paragraph (g) to offset the minimum seller's interest 
amount continue to require the interests to absorb losses in accordance 
with the terms of paragraph (h) or (i) of this section, as applicable; 
and
    (4) The revolving pool securitization issues no additional ABS 
interests after early amortization is initiated to any person not a 
wholly-owned affiliate of the sponsor, either at the time of issuance 
or during the amortization period.


Sec.  __.6  Eligible ABCP conduits.

    (a) Definitions. For purposes of this section, the following 
additional definitions apply:
    100 percent liquidity coverage means an amount equal to the 
outstanding balance of all ABCP issued by the conduit plus any accrued 
and unpaid interest without regard to the performance of the ABS 
interests held by the ABCP conduit and without regard to any credit 
enhancement.
    ABCP means asset-backed commercial paper that has a maturity at the 
time of issuance not exceeding 397 days, exclusive of days of grace, or 
any renewal thereof the maturity of which is likewise limited.
    ABCP conduit means an issuing entity with respect to ABCP.
    Eligible ABCP conduit means an ABCP conduit, provided that:
    (1) The ABCP conduit is bankruptcy remote or otherwise isolated for 
insolvency purposes from the sponsor of the ABCP conduit and from any 
intermediate SPV;
    (2) The ABS interests acquired by the ABCP conduit are:
    (i) ABS interests collateralized solely by assets originated by an 
originator-seller and by servicing assets;
    (ii) Special units of beneficial interest (or similar ABS 
interests) in a trust or special purpose vehicle that retains legal 
title to leased property underlying leases originated by an originator-
seller that were transferred to an intermediate SPV in connection with 
a securitization collateralized solely by such leases and by servicing 
assets;
    (iii) ABS interests in a revolving pool securitization 
collateralized solely by assets originated by an originator-seller and 
by servicing assets; or
    (iv) ABS interests described in paragraph (2)(i), (ii), or (iii) of 
this definition that are collateralized, in whole or in part, by assets 
acquired by an originator-seller in a business combination that 
qualifies for business combination accounting under GAAP, and, if 
collateralized in part, the remainder of such assets are assets 
described in paragraph (2)(i), (ii), or (iii) of this definition; and
    (v) Acquired by the ABCP conduit in an initial issuance by or on 
behalf of an intermediate SPV:
    (A) Directly from the intermediate SPV,
    (B) From an underwriter of the ABS interests issued by the 
intermediate SPV, or
    (C) From another person who acquired the ABS interests directly 
from the intermediate SPV;
    (3) The ABCP conduit is collateralized solely by ABS interests 
acquired from intermediate SPVs as described in paragraph (2) of this 
definition and servicing assets; and
    (4) A regulated liquidity provider has entered into a legally 
binding commitment to provide 100 percent liquidity coverage (in the 
form of a lending facility, an asset purchase agreement, a repurchase 
agreement, or other similar arrangement) to all the ABCP issued by the 
ABCP conduit by lending to, purchasing ABCP issued by, or purchasing 
assets from, the ABCP conduit in the event that funds are required to 
repay maturing ABCP issued by the ABCP conduit. With respect to the 100 
percent liquidity coverage, in the event that the ABCP conduit is 
unable for any reason to repay maturing ABCP issued by the issuing 
entity, the liquidity provider shall be obligated to pay an amount 
equal to any shortfall, and the total amount that may be due pursuant 
to the 100 percent liquidity coverage shall be equal to 100 percent of 
the amount of the ABCP outstanding at any time plus accrued and unpaid 
interest (amounts due pursuant to the required liquidity coverage may 
not be subject to credit performance of the ABS interests held by the 
ABCP conduit or reduced by the amount of credit support provided to the 
ABCP conduit and liquidity support that only funds performing loans or 
receivables or performing ABS interests does not meet the requirements 
of this section).
    Intermediate SPV means a special purpose vehicle that:
    (1) (i) Is a direct or indirect wholly-owned affiliate of the 
originator-seller; or
    (ii) Has nominal equity owned by a trust or corporate service 
provider that specializes in providing independent ownership of special 
purpose vehicles, and such trust or corporate service provider is not 
affiliated with any other transaction parties;
    (2) Is bankruptcy remote or otherwise isolated for insolvency 
purposes from the eligible ABCP conduit and from each originator-seller 
and each majority-owned affiliate in each case that, directly or 
indirectly, sells or transfers assets to such intermediate SPV;
    (3) Acquires assets from the originator-seller that are originated 
by the originator-seller or acquired by the originator-seller in the 
acquisition of a business that qualifies for business combination 
accounting under GAAP or acquires ABS interests issued by another 
intermediate SPV of the originator-seller that are collateralized 
solely by such assets; and
    (4) Issues ABS interests collateralized solely by such assets, as 
applicable.
    Originator-seller means an entity that originates assets and sells 
or transfers those assets, directly or through a majority-owned 
affiliate, to an intermediate SPV, and includes (except for the 
purposes of identifying the sponsorship and affiliation of an 
intermediate SPV pursuant to this Sec.  __.6) any affiliate of the 
originator-

[[Page 77747]]

seller that, directly or indirectly, majority controls, is majority 
controlled by or is under common majority control with, the originator-
seller. For purposes of this definition, majority control means 
ownership of more than 50 percent of the equity of an entity, or 
ownership of any other controlling financial interest in the entity, as 
determined under GAAP.
    Regulated liquidity provider means:
    (1) A depository institution (as defined in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813));
    (2) A bank holding company (as defined in 12 U.S.C. 1841), or a 
subsidiary thereof;
    (3) A savings and loan holding company (as defined in 12 U.S.C. 
1467a), provided all or substantially all of the holding company's 
activities are permissible for a financial holding company under 12 
U.S.C. 1843(k), or a subsidiary thereof; or
    (4) A foreign bank whose home country supervisor (as defined in 
Sec.  211.21 of the Federal Reserve Board's Regulation K (12 CFR 
211.21)) has adopted capital standards consistent with the Capital 
Accord of the Basel Committee on Banking Supervision, as amended, and 
that is subject to such standards, or a subsidiary thereof.
    (b) In general. An ABCP conduit sponsor satisfies the risk 
retention requirement of Sec.  _.3 with respect to the issuance of ABCP 
by an eligible ABCP conduit in a securitization transaction if, for 
each ABS interest the ABCP conduit acquires from an intermediate SPV:
    (1) An originator-seller of the intermediate SPV retains an 
economic interest in the credit risk of the assets collateralizing the 
ABS interest acquired by the eligible ABCP conduit in the amount and 
manner required under Sec.  _.4 or Sec.  _.5; and
    (2) The ABCP conduit sponsor:
    (i) Approves each originator-seller permitted to sell or transfer 
assets, directly or indirectly, to an intermediate SPV from which an 
eligible ABCP conduit acquires ABS interests;
    (ii) Approves each intermediate SPV from which an eligible ABCP 
conduit is permitted to acquire ABS interests;
    (iii) Establishes criteria governing the ABS interests, and the 
securitized assets underlying the ABS interests, acquired by the ABCP 
conduit;
    (iv) Administers the ABCP conduit by monitoring the ABS interests 
acquired by the ABCP conduit and the assets supporting those ABS 
interests, arranging for debt placement, compiling monthly reports, and 
ensuring compliance with the ABCP conduit documents and with the ABCP 
conduit's credit and investment policy; and
    (v) Maintains and adheres to policies and procedures for ensuring 
that the requirements in this paragraph (b) of this section have been 
met.
    (c) Originator-seller compliance with risk retention. The use of 
the risk retention option provided in this section by an ABCP conduit 
sponsor does not relieve the originator-seller that sponsors ABS 
interests acquired by an eligible ABCP conduit from such originator-
seller's obligation to comply with its own risk retention obligations 
under this part.
    (d) Disclosures--(1) Periodic disclosures to investors. An ABCP 
conduit sponsor relying upon this section shall provide, or cause to be 
provided, to each purchaser of ABCP, before or contemporaneously with 
the first sale of ABCP to such purchaser and at least monthly 
thereafter, to each holder of commercial paper issued by the ABCP 
conduit, in writing, each of the following items of information, which 
shall be as of a date not more than 60 days prior to date of first use 
with investors:
    (i) The name and form of organization of the regulated liquidity 
provider that provides liquidity coverage to the eligible ABCP conduit, 
including a description of the material terms of such liquidity 
coverage, and notice of any failure to fund.
    (ii) With respect to each ABS interest held by the ABCP conduit:
    (A) The asset class or brief description of the underlying 
securitized assets;
    (B) The standard industrial category code (SIC Code) for the 
originator-seller that will retain (or has retained) pursuant to this 
section an interest in the securitization transaction; and
    (C) A description of the percentage amount of risk retention 
pursuant to the rule by the originator-seller, and whether it is in the 
form of an eligible horizontal residual interest, vertical interest, or 
revolving pool securitization seller's interest, as applicable.
    (2) Disclosures to regulators regarding originator-sellers. An ABCP 
conduit sponsor relying upon this section shall provide, or cause to be 
provided, upon request, to the Commission and its appropriate Federal 
banking agency, if any, in writing, all of the information required to 
be provided to investors in paragraph (d)(1) of this section, and the 
name and form of organization of each originator-seller that will 
retain (or has retained) pursuant to this section an interest in the 
securitization transaction.
    (e) Sale or transfer of ABS interests between eligible ABCP 
conduits. At any time, an eligible ABCP conduit that acquired an ABS 
interest in accordance with the requirements set forth in this section 
may transfer, and another eligible ABCP conduit may acquire, such ABS 
interest, if the following conditions are satisfied:
    (1) The sponsors of both eligible ABCP conduits are in compliance 
with this section; and
    (2) The same regulated liquidity provider has entered into one or 
more legally binding commitments to provide 100 percent liquidity 
coverage to all the ABCP issued by both eligible ABCP conduits.
    (f) Duty to comply. (1) The ABCP conduit sponsor shall be 
responsible for compliance with this section.
    (2) An ABCP conduit sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures that are 
reasonably designed to monitor compliance by each originator-seller 
which is satisfying a risk retention obligation in respect of ABS 
interests acquired by an eligible ABCP conduit with the requirements of 
paragraph (b)(1) of this section; and
    (ii) In the event that the ABCP conduit sponsor determines that an 
originator-seller no longer complies with the requirements of paragraph 
(b)(1) of this section, shall:
    (A) Promptly notify the holders of the ABCP, and upon request, the 
Commission and its appropriate Federal banking agency, if any, in 
writing of:
    (1) The name and form of organization of any originator-seller that 
fails to retain risk in accordance with paragraph (b)(1) of this 
section and the amount of ABS interests issued by an intermediate SPV 
of such originator-seller and held by the ABCP conduit;
    (2) The name and form of organization of any originator-seller that 
hedges, directly or indirectly through an intermediate SPV, its risk 
retention in violation of paragraph (b)(1) of this section and the 
amount of ABS interests issued by an intermediate SPV of such 
originator-seller and held by the ABCP conduit; and
    (3) Any remedial actions taken by the ABCP conduit sponsor or other 
party with respect to such ABS interests; and
    (B) Take other appropriate steps pursuant to the requirements of 
paragraphs (b)(2)(iv) and (v) of this section which may include, as 
appropriate, curing any breach of the requirements in this section, or 
removing from the eligible ABCP conduit any ABS interest that does not 
comply with the requirements in this section.

[[Page 77748]]

Sec.  _.7  Commercial mortgage-backed securities.

    (a) Definitions. For purposes of this section, the following 
definition shall apply:
    Special servicer means, with respect to any securitization of 
commercial real estate loans, any servicer that, upon the occurrence of 
one or more specified conditions in the servicing agreement, has the 
right to service one or more assets in the transaction.
    (b) Third-party purchaser. A sponsor may satisfy some or all of its 
risk retention requirements under Sec.  __.3 with respect to a 
securitization transaction if a third party (or any majority-owned 
affiliate thereof) purchases and holds for its own account an eligible 
horizontal residual interest in the issuing entity in the same form, 
amount, and manner as would be held by the sponsor under Sec.  __.4 and 
all of the following conditions are met:
    (1) Number of third-party purchasers. At any time, there are no 
more than two third-party purchasers of an eligible horizontal residual 
interest. If there are two third-party purchasers, each third-party 
purchaser's interest must be pari passu with the other third-party 
purchaser's interest.
    (2) Composition of collateral. The securitization transaction is 
collateralized solely by commercial real estate loans and servicing 
assets.
    (3) Source of funds. (i) Each third-party purchaser pays for the 
eligible horizontal residual interest in cash at the closing of the 
securitization transaction.
    (ii) No third-party purchaser obtains financing, directly or 
indirectly, for the purchase of such interest from any other person 
that is a party to, or an affiliate of a party to, the securitization 
transaction (including, but not limited to, the sponsor, depositor, or 
servicer other than a special servicer affiliated with the third-party 
purchaser), other than a person that is a party to the transaction 
solely by reason of being an investor.
    (4) Third-party review. Each third-party purchaser conducts an 
independent review of the credit risk of each securitized asset prior 
to the sale of the asset-backed securities in the securitization 
transaction that includes, at a minimum, a review of the underwriting 
standards, collateral, and expected cash flows of each commercial real 
estate loan that is collateral for the asset-backed securities.
    (5) Affiliation and control rights. (i) Except as provided in 
paragraph (b)(5)(ii) of this section, no third-party purchaser is 
affiliated with any party to the securitization transaction (including, 
but not limited to, the sponsor, depositor, or servicer) other than 
investors in the securitization transaction.
    (ii) Notwithstanding paragraph (b)(5)(i) of this section, a third-
party purchaser may be affiliated with:
    (A) The special servicer for the securitization transaction; or
    (B) One or more originators of the securitized assets, as long as 
the assets originated by the affiliated originator or originators 
collectively comprise less than 10 percent of the unpaid principal 
balance of the securitized assets included in the securitization 
transaction at the cut-off date or similar date for establishing the 
composition of the securitized assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction.
    (6) Operating Advisor. The underlying securitization transaction 
documents shall provide for the following:
    (i) The appointment of an operating advisor (the Operating Advisor) 
that:
    (A) Is not affiliated with other parties to the securitization 
transaction;
    (B) Does not directly or indirectly have any financial interest in 
the securitization transaction other than in fees from its role as 
Operating Advisor; and
    (C) Is required to act in the best interest of, and for the benefit 
of, investors as a collective whole;
    (ii) Standards with respect to the Operating Advisor's experience, 
expertise and financial strength to fulfill its duties and 
responsibilities under the applicable transaction documents over the 
life of the securitization transaction;
    (iii) The terms of the Operating Advisor's compensation with 
respect to the securitization transaction;
    (iv) When the eligible horizontal residual interest has been 
reduced by principal payments, realized losses, and appraisal reduction 
amounts (which reduction amounts are determined in accordance with the 
applicable transaction documents) to a principal balance of 25 percent 
or less of its initial principal balance, the special servicer for the 
securitized assets must consult with the Operating Advisor in 
connection with, and prior to, any material decision in connection with 
its servicing of the securitized assets, including, without limitation:
    (A) Any material modification of, or waiver with respect to, any 
provision of a loan agreement (including a mortgage, deed of trust, or 
other security agreement);
    (B) Foreclosure upon or comparable conversion of the ownership of a 
property; or
    (C) Any acquisition of a property.
    (v) The Operating Advisor shall have adequate and timely access to 
information and reports necessary to fulfill its duties under the 
transaction documents, including all reports made available to holders 
of ABS interests and third-party purchasers, and shall be responsible 
for:
    (A) Reviewing the actions of the special servicer;
    (B) Reviewing all reports provided by the special servicer to the 
issuing entity or any holder of ABS interests;
    (C) Reviewing for accuracy and consistency with the transaction 
documents calculations made by the special servicer; and
    (D) Issuing a report to investors (including any third-party 
purchasers) and the issuing entity on a periodic basis concerning:.
    (1) Whether the Operating Advisor believes, in its sole discretion 
exercised in good faith, that the special servicer is operating in 
compliance with any standard required of the special servicer in the 
applicable transaction documents; and
    (2) Which, if any, standards the Operating Advisor believes, in its 
sole discretion exercised in good faith, the special servicer has 
failed to comply.
    (vi)(A) The Operating Advisor shall have the authority to recommend 
that the special servicer be replaced by a successor special servicer 
if the Operating Advisor determines, in its sole discretion exercised 
in good faith, that:
    (1) The special servicer has failed to comply with a standard 
required of the special servicer in the applicable transaction 
documents; and
    (2) Such replacement would be in the best interest of the investors 
as a collective whole; and
    (B) If a recommendation described in paragraph (b)(6)(vi)(A) of 
this section is made, the special servicer shall be replaced upon the 
affirmative vote of a majority of the outstanding principal balance of 
all ABS interests voting on the matter, with a minimum of a quorum of 
ABS interests voting on the matter. For purposes of such vote, the 
applicable transaction documents shall specify the quorum and may not 
specify a quorum of more than the holders of 20 percent of the 
outstanding principal balance of all ABS interests in the issuing 
entity, with such quorum including at least three ABS interest holders 
that are not affiliated with each other.
    (7) Disclosures. The sponsor provides, or causes to be provided, to 
potential investors a reasonable period of time prior to the sale of 
the asset-backed securities as part of the securitization

[[Page 77749]]

transaction and, upon request, to the Commission and its appropriate 
Federal banking agency, if any, the following disclosure in written 
form under the caption ``Credit Risk Retention'':
    (i) The name and form of organization of each initial third-party 
purchaser that acquired an eligible horizontal residual interest at the 
closing of a securitization transaction;
    (ii) A description of each initial third-party purchaser's 
experience in investing in commercial mortgage-backed securities;
    (iii) Any other information regarding each initial third-party 
purchaser or each initial third-party purchaser's retention of the 
eligible horizontal residual interest that is material to investors in 
light of the circumstances of the particular securitization 
transaction;
    (iv) The fair value (expressed as a percentage of the fair value of 
all of the ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS interests are issued, as applicable)) of the eligible 
horizontal residual interest that will be retained (or was retained) by 
each initial third-party purchaser, as well as the amount of the 
purchase price paid by each initial third-party purchaser for such 
interest;
    (v) The fair value (expressed as a percentage of the fair value of 
all of the ABS interests issued in the securitization transaction and 
dollar amount (or corresponding amount in the foreign currency in which 
the ABS interests are issued, as applicable)) of the eligible 
horizontal residual interest in the securitization transaction that the 
sponsor would have retained pursuant to Sec.  _.4 if the sponsor had 
relied on retaining an eligible horizontal residual interest in that 
section to meet the requirements of Sec.  _.3 with respect to the 
transaction;
    (vi) A description of the material terms of the eligible horizontal 
residual interest retained by each initial third-party purchaser, 
including the same information as is required to be disclosed by 
sponsors retaining horizontal interests pursuant to Sec.  _.4;
    (vii) The material terms of the applicable transaction documents 
with respect to the Operating Advisor, including without limitation:
    (A) The name and form of organization of the Operating Advisor;
    (B) A description of any material conflict of interest or material 
potential conflict of interest between the Operating Advisor and any 
other party to the transaction;
    (C) The standards required by paragraph (b)(6)(ii) of this section 
and a description of how the Operating Advisor satisfies each of the 
standards; and
    (D) The terms of the Operating Advisor's compensation under 
paragraph (b)(6)(iii) of this section; and
    (viii) The representations and warranties concerning the 
securitized assets, a schedule of any securitized assets that are 
determined not to comply with such representations and warranties, and 
what factors were used to make the determination that such securitized 
assets should be included in the pool notwithstanding that the 
securitized assets did not comply with such representations and 
warranties, such as compensating factors or a determination that the 
exceptions were not material.
    (8) Hedging, transfer and pledging--(i) General rule. Except as set 
forth in paragraph (b)(8)(ii) of this section, each third-party 
purchaser and its affiliates must comply with the hedging and other 
restrictions in Sec.  _.12 as if it were the retaining sponsor with 
respect to the securitization transaction and had acquired the eligible 
horizontal residual interest pursuant to Sec.  _.4; provided that, the 
hedging and other restrictions in Sec.  _.12 shall not apply on or 
after the date that each CRE loan (as defined in Sec.  _.14) that 
serves as collateral for outstanding ABS interests has been defeased. 
For purposes of this section, a loan is deemed to be defeased if:
    (A) cash or cash equivalents of the types permitted for an eligible 
horizontal cash reserve account pursuant to Sec.  _.4 whose maturity 
corresponds to the remaining debt service obligations, have been 
pledged to the issuing entity as collateral for the loan and are in 
such amounts and payable at such times as necessary to timely generate 
cash sufficient to make all remaining debt service payments due on such 
loan; and
    (B) the issuing entity has an obligation to release its lien on the 
loan.
    (ii) Exceptions--(A) Transfer by initial third-party purchaser or 
sponsor. An initial third-party purchaser that acquired an eligible 
horizontal residual interest at the closing of a securitization 
transaction in accordance with this section, or a sponsor that acquired 
an eligible horizontal residual interest at the closing of a 
securitization transaction in accordance with this section, may, on or 
after the date that is five years after the date of the closing of the 
securitization transaction, transfer that interest to a subsequent 
third-party purchaser that complies with paragraph (b)(8)(ii)(C) of 
this section. The initial third-party purchaser shall provide the 
sponsor with complete identifying information for the subsequent third-
party purchaser.
    (B) Transfer by subsequent third-party purchaser. At any time, a 
subsequent third-party purchaser that acquired an eligible horizontal 
residual interest pursuant to this section may transfer its interest to 
a different third-party purchaser that complies with paragraph 
(b)(8)(ii)(C) of this section. The transferring third-party purchaser 
shall provide the sponsor with complete identifying information for the 
acquiring third-party purchaser.
    (C) Requirements applicable to subsequent third-party purchasers. A 
subsequent third-party purchaser is subject to all of the requirements 
of paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section 
applicable to third-party purchasers, provided that obligations under 
paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section that 
apply to initial third-party purchasers at or before the time of 
closing of the securitization transaction shall apply to successor 
third-party purchasers at or before the time of the transfer of the 
eligible horizontal residual interest to the successor third-party 
purchaser.
    (c) Duty to comply. (1) The retaining sponsor shall be responsible 
for compliance with this section by itself and for compliance by each 
initial or subsequent third-party purchaser that acquired an eligible 
horizontal residual interest in the securitization transaction.
    (2) A sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures to monitor 
each third-party purchaser's compliance with the requirements of 
paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section; and
    (ii) In the event that the sponsor determines that a third-party 
purchaser no longer complies with one or more of the requirements of 
paragraphs (b)(1), (b)(3) through (5), or (b)(8) of this section, shall 
promptly notify, or cause to be notified, the holders of the ABS 
interests issued in the securitization transaction of such 
noncompliance by such third-party purchaser.


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

    (a) In general. A sponsor satisfies its risk retention requirement 
under this part if the sponsor fully guarantees the timely payment of 
principal and interest on all ABS interests issued by the issuing 
entity in the securitization transaction and is:
    (1) The Federal National Mortgage Association or the Federal Home 
Loan Mortgage Corporation operating under

[[Page 77750]]

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


Sec.  _.9  Open market CLOs.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    CLO means a special purpose entity that:
    (i) Issues debt and equity interests, and
    (ii) Whose assets consist primarily of loans that are securitized 
assets and servicing assets.
    CLO-eligible loan tranche means a term loan of a syndicated 
facility that meets the criteria set forth in paragraph (c) of this 
section.
    CLO manager means an entity that manages a CLO, which entity is 
registered as an investment adviser under the Investment Advisers Act 
of 1940, as amended (15 U.S.C. 80b-1 et seq.), or is an affiliate of 
such a registered investment adviser and itself is managed by such 
registered investment adviser.
    Commercial borrower means an obligor under a corporate credit 
obligation (including a loan).
    Initial loan syndication transaction means a transaction in which a 
loan is syndicated to a group of lenders.
    Lead arranger means, with respect to a CLO-eligible loan tranche, 
an institution that:
    (i) Is active in the origination, structuring and syndication of 
commercial loan transactions (as defined in Sec.  _.14) and has played 
a primary role in the structuring, underwriting and distribution on the 
primary market of the CLO-eligible loan tranche.
    (ii) Has taken an allocation of the funded portion of the 
syndicated credit facility under the terms of the transaction that 
includes the CLO-eligible loan tranche of at least 20 percent of the 
aggregate principal balance at origination, and no other member (or 
members affiliated with each other) of the syndication group that 
funded at origination has taken a greater allocation; and
    (iii) Is identified in the applicable agreement governing the CLO-
eligible loan tranche; represents therein to the holders of the CLO-
eligible loan tranche and to any holders of participation interests in 
such CLO-eligible loan tranche that such lead arranger satisfies the 
requirements of paragraph (i) of this definition and, at the time of 
initial funding of the CLO-eligible tranche, will satisfy the 
requirements of paragraph (ii) of this definition; further represents 
therein (solely for the purpose of assisting such holders to determine 
the eligibility of such CLO-eligible loan tranche to be held by an open 
market CLO) that in the reasonable judgment of such lead arranger, the 
terms of such CLO-eligible loan tranche are consistent with the 
requirements of paragraphs (c)(2) and (3) of this section; and 
covenants therein to such holders that such lead arranger will fulfill 
the requirements of paragraph (c)(1) of this section.
    Open market CLO means a CLO:
    (i) Whose assets consist of senior, secured syndicated loans 
acquired by such CLO directly from the sellers thereof in open market 
transactions and of servicing assets,
    (ii) That is managed by a CLO manager, and
    (iii) That holds less than 50 percent of its assets, by aggregate 
outstanding principal amount, in loans syndicated by lead arrangers 
that are affiliates of the CLO or the CLO manager or originated by 
originators that are affiliates of the CLO or the CLO manager.
    Open market transaction means:
    (i) Either an initial loan syndication transaction or a secondary 
market transaction in which a seller offers senior, secured syndicated 
loans to prospective purchasers in the loan market on market terms on 
an arm's length basis, which prospective purchasers include, but are 
not limited to, entities that are not affiliated with the seller, or
    (ii) A reverse inquiry from a prospective purchaser of a senior, 
secured syndicated loan through a dealer in the loan market to purchase 
a senior, secured syndicated loan to be sourced by the dealer in the 
loan market.
    Secondary market transaction means a purchase of a senior, secured 
syndicated loan not in connection with an initial loan syndication 
transaction but in the secondary market.
    Senior, secured syndicated loan means a loan made to a commercial 
borrower that:
    (i) Is not subordinate in right of payment to any other obligation 
for borrowed money of the commercial borrower,
    (ii) Is secured by a valid first priority security interest or lien 
in or on specified collateral securing the commercial borrower's 
obligations under the loan, and
    (iii) The value of the collateral subject to such first priority 
security interest or lien, together with other attributes of the 
obligor (including, without limitation, its general financial 
condition, ability to generate cash flow available for debt service and 
other demands for that cash flow), is adequate (in the commercially 
reasonable judgment of the CLO manager exercised at the time of 
investment) to repay the loan and to repay all other indebtedness of 
equal seniority secured by such first priority security interest or 
lien in or on the same collateral, and the CLO manager certifies, on or 
prior to each date that it acquires a loan constituting part of a new 
CLO-eligible tranche, that it has policies and procedures to evaluate 
the likelihood of repayment of loans acquired by the CLO and it has 
followed such policies and procedures in evaluating each CLO-eligible 
loan tranche.
    (b) In general. A sponsor satisfies the risk retention requirements 
of Sec.  _.3 with respect to an open market CLO transaction if:
    (1) The open market CLO does not acquire or hold any assets other 
than CLO-eligible loan tranches that meet the requirements of paragraph 
(c) of this section and servicing assets;
    (2) The governing documents of such open market CLO require that, 
at all times, the assets of the open market CLO consist of senior, 
secured syndicated loans that are CLO-eligible loan tranches and 
servicing assets;
    (3) The open market CLO does not invest in ABS interests or in 
credit derivatives other than hedging

[[Page 77751]]

transactions that are servicing assets to hedge risks of the open 
market CLO;
    (4) All purchases of CLO-eligible loan tranches and other assets by 
the open market CLO issuing entity or through a warehouse facility used 
to accumulate the loans prior to the issuance of the CLO's ABS 
interests are made in open market transactions on an arms-length basis;
    (5) The CLO manager of the open market CLO is not entitled to 
receive any management fee or gain on sale at the time the open market 
CLO issues its ABS interests.
    (c) CLO-eligible loan tranche. To qualify as a CLO-eligible loan 
tranche, a term loan of a syndicated credit facility to a commercial 
borrower must have the following features:
    (1) A minimum of 5 percent of the face amount of the CLO-eligible 
loan tranche is retained by the lead arranger thereof until the 
earliest of the repayment, maturity, involuntary and unscheduled 
acceleration, payment default, or bankruptcy default of such CLO-
eligible loan tranche, provided that such lead arranger complies with 
limitations on hedging, transferring and pledging in Sec.  _.12 with 
respect to the interest retained by the lead arranger.
    (2) Lender voting rights within the credit agreement and any 
intercreditor or other applicable agreements governing such CLO-
eligible loan tranche are defined so as to give holders of the CLO-
eligible loan tranche consent rights with respect to, at minimum, any 
material waivers and amendments of such applicable documents, including 
but not limited to, adverse changes to the calculation or payments of 
amounts due to the holders of the CLO-eligible tranche, alterations to 
pro rata provisions, changes to voting provisions, and waivers of 
conditions precedent; and
    (3) The pro rata provisions, voting provisions, and similar 
provisions applicable to the security associated with such CLO-eligible 
loan tranches under the CLO credit agreement and any intercreditor or 
other applicable agreements governing such CLO-eligible loan tranches 
are not materially less advantageous to the holder(s) of such CLO-
eligible tranche than the terms of other tranches of comparable 
seniority in the broader syndicated credit facility.
    (d) Disclosures. A sponsor relying on this section shall provide, 
or cause to be provided, to potential investors a reasonable period of 
time prior to the sale of the asset-backed securities in the 
securitization transaction and at least annually with respect to the 
information required by paragraph (d)(1) of this section and, upon 
request, to the Commission and its appropriate Federal banking agency, 
if any, the following disclosure in written form under the caption 
``Credit Risk Retention'':
    (1) Open market CLOs. A complete list of every asset held by an 
open market CLO (or before the CLO's closing, in a warehouse facility 
in anticipation of transfer into the CLO at closing), including the 
following information:
    (i) The full legal name, Standard Industrial Classification (SIC) 
category code, and legal entity identifier (LEI) issued by a utility 
endorsed or otherwise governed by the Global LEI Regulatory Oversight 
Committee or the Global LEI Foundation (if an LEI has been obtained by 
the obligor) of the obligor of the loan or asset;
    (ii) The full name of the specific loan tranche held by the CLO;
    (iii) The face amount of the entire loan tranche held by the CLO, 
and the face amount of the portion thereof held by the CLO;
    (iv) The price at which the loan tranche was acquired by the CLO; 
and
    (v) For each loan tranche, the full legal name of the lead arranger 
subject to the sales and hedging restrictions of Sec.  _.12; and
    (2) CLO manager. The full legal name and form of organization of 
the CLO manager.


Sec.  _.10  Qualified tender option bonds.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    Municipal security or municipal securities shall have the same 
meaning as the term ``municipal securities'' in Section 3(a)(29) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(29)) and any rules 
promulgated pursuant to such section.
    Qualified tender option bond entity means an issuing entity with 
respect to tender option bonds for which each of the following applies:
    (i) Such entity is collateralized solely by servicing assets and by 
municipal securities that have the same municipal issuer and the same 
underlying obligor or source of payment (determined without regard to 
any third-party credit enhancement), and such municipal securities are 
not subject to substitution.
    (ii) Such entity issues no securities other than:
    (A) A single class of tender option bonds with a preferred variable 
return payable out of capital that meets the requirements of paragraph 
(b) of this section, and
    (B) One or more residual equity interests that, in the aggregate, 
are entitled to all remaining income of the issuing entity.
    (C) The types of securities referred to in paragraphs (ii)(A) and 
(B) of this definition must constitute asset-backed securities.
    (iii) The municipal securities held as assets by such entity are 
issued in compliance with Section 103 of the Internal Revenue Code of 
1986, as amended (the ``IRS Code'', 26 U.S.C. 103), such that the 
interest payments made on those securities are excludable from the 
gross income of the owners under Section 103 of the IRS Code.
    (iv) The terms of all of the securities issued by the entity are 
structured so that all holders of such securities who are eligible to 
exclude interest received on such securities will be able to exclude 
that interest from gross income pursuant to Section 103 of the IRS Code 
or as ``exempt-interest dividends'' pursuant to Section 852(b)(5) of 
the IRS Code (26 U.S.C. 852(b)(5)) in the case of regulated investment 
companies under the Investment Company Act of 1940, as amended.
    (v) Such entity has a legally binding commitment from a regulated 
liquidity provider as defined in Sec.  _.6(a), to provide a 100 percent 
guarantee or liquidity coverage with respect to all of the issuing 
entity's outstanding tender option bonds.
    (vi) Such entity qualifies for monthly closing elections pursuant 
to IRS Revenue Procedure 2003-84, as amended or supplemented from time 
to time.
    Tender option bond means a security which has features which 
entitle the holders to tender such bonds to the issuing entity for 
purchase at any time upon no more than 397 days' notice, for a purchase 
price equal to the approximate amortized cost of the security, plus 
accrued interest, if any, at the time of tender.
    (b) Risk retention options. Notwithstanding anything in this 
section, the sponsor with respect to an issuance of tender option bonds 
may retain an eligible vertical interest or eligible horizontal 
residual interest, or any combination thereof, in accordance with the 
requirements of Sec.  _.4. In order to satisfy its risk retention 
requirements under this section, the sponsor with respect to an 
issuance of tender option bonds by a qualified tender option bond 
entity may retain:
    (1) An eligible vertical interest or an eligible horizontal 
residual interest, or any combination thereof, in accordance with the 
requirements of Sec.  _.4; or
    (2) An interest that meets the requirements set forth in paragraph 
(c) of this section; or

[[Page 77752]]

    (3) A municipal security that meets the requirements set forth in 
paragraph (d) of this section; or
    (4) Any combination of interests and securities described in 
paragraphs (b)(1) through (b)(3) of this section such that the sum of 
the percentages held in each form equals at least five.
    (c) Tender option termination event. The sponsor with respect to an 
issuance of tender option bonds by a qualified tender option bond 
entity may retain an interest that upon issuance meets the requirements 
of an eligible horizontal residual interest but that upon the 
occurrence of a ``tender option termination event'' as defined in 
Section 4.01(5) of IRS Revenue Procedure 2003-84, as amended or 
supplemented from time to time will meet the requirements of an 
eligible vertical interest.
    (d) Retention of a municipal security outside of the qualified 
tender option bond entity. The sponsor with respect to an issuance of 
tender option bonds by a qualified tender option bond entity may 
satisfy its risk retention requirements under this Section by holding 
municipal securities from the same issuance of municipal securities 
deposited in the qualified tender option bond entity, the face value of 
which retained municipal securities is equal to 5 percent of the face 
value of the municipal securities deposited in the qualified tender 
option bond entity.
    (e) Disclosures. The sponsor shall provide, or cause to be 
provided, to potential investors a reasonable period of time prior to 
the sale of the asset-backed securities as part of the securitization 
transaction and, upon request, to the Commission and its appropriate 
Federal banking agency, if any, the following disclosure in written 
form under the caption ``Credit Risk Retention'':
    (1) The name and form of organization of the qualified tender 
option bond entity;
    (2) A description of the form and subordination features of such 
retained interest in accordance with the disclosure obligations in 
Sec.  _.4(c);
    (3) To the extent any portion of the retained interest is claimed 
by the sponsor as an eligible horizontal residual interest (including 
any interest held in compliance with Sec.  _.10(c)), the fair value of 
that interest (expressed as a percentage of the fair value of all of 
the ABS interests issued in the securitization transaction and as a 
dollar amount);
    (4) To the extent any portion of the retained interest is claimed 
by the sponsor as an eligible vertical interest (including any interest 
held in compliance with Sec.  _.10(c)), the percentage of ABS interests 
issued represented by the eligible vertical interest; and
    (5) To the extent any portion of the retained interest claimed by 
the sponsor is a municipal security held outside of the qualified 
tender option bond entity, the name and form of organization of the 
qualified tender option bond entity, the identity of the issuer of the 
municipal securities, the face value of the municipal securities 
deposited into the qualified tender option bond entity, and the face 
value of the municipal securities retained by the sponsor or its 
majority-owned affiliates and subject to the transfer and hedging 
prohibition.
    (f) Prohibitions on Hedging and Transfer. The prohibitions on 
transfer and hedging set forth in Sec.  _.12, apply to any interests or 
municipal securities retained by the sponsor with respect to an 
issuance of tender option bonds by a qualified tender option bond 
entity pursuant to of this section.

Subpart C--Transfer of Risk Retention


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

    (a) In general. A sponsor choosing to retain an eligible vertical 
interest or an eligible horizontal residual interest (including an 
eligible horizontal cash reserve account), or combination thereof under 
Sec.  _.4, with respect to a securitization transaction may offset the 
amount of its risk retention requirements under Sec.  _.4 by the amount 
of the eligible interests, respectively, acquired by an originator of 
one or more of the securitized assets if:
    (1) At the closing of the securitization transaction:
    (i) The originator acquires the eligible interest from the sponsor 
and retains such interest in the same manner and proportion (as between 
horizontal and vertical interests) as the sponsor under Sec.  _.4, as 
such interest was held prior to the acquisition by the originator;
    (ii) The ratio of the percentage of eligible interests acquired and 
retained by the originator to the percentage of eligible interests 
otherwise required to be retained by the sponsor pursuant to Sec.  _.4, 
does not exceed the ratio of:
    (A) The unpaid principal balance of all the securitized assets 
originated by the originator; to
    (B) The unpaid principal balance of all the securitized assets in 
the securitization transaction;
    (iii) The originator acquires and retains at least 20 percent of 
the aggregate risk retention amount otherwise required to be retained 
by the sponsor pursuant to Sec.  _.4; and
    (iv) The originator purchases the eligible interests from the 
sponsor at a price that is equal, on a dollar-for-dollar basis, to the 
amount by which the sponsor's required risk retention is reduced in 
accordance with this section, by payment to the sponsor in the form of:
    (A) Cash; or
    (B) A reduction in the price received by the originator from the 
sponsor or depositor for the assets sold by the originator to the 
sponsor or depositor for inclusion in the pool of securitized assets.
    (2) Disclosures. In addition to the disclosures required pursuant 
to Sec.  _.4(c), the sponsor provides, or causes to be provided, to 
potential investors a reasonable period of time prior to the sale of 
the asset-backed securities as part of the securitization transaction 
and, upon request, to the Commission and its appropriate Federal 
banking agency, if any, in written form under the caption ``Credit Risk 
Retention'', the name and form of organization of any originator that 
will acquire and retain (or has acquired and retained) an interest in 
the transaction pursuant to this section, including a description of 
the form and amount (expressed as a percentage and dollar amount (or 
corresponding amount in the foreign currency in which the ABS interests 
are issued, as applicable)) and nature (e.g., senior or subordinated) 
of the interest, as well as the method of payment for such interest 
under paragraph (a)(1)(iv) of this section.
    (3) Hedging, transferring and pledging. The originator and each of 
its affiliates complies with the hedging and other restrictions in 
Sec.  _.12 with respect to the interests retained by the originator 
pursuant to this section as if it were the retaining sponsor and was 
required to retain the interest under subpart B of this part.
    (b) Duty to comply. (1) The retaining sponsor shall be responsible 
for compliance with this section.
    (2) A retaining sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures that are 
reasonably designed to monitor the compliance by each originator that 
is allocated a portion of the sponsor's risk retention obligations with 
the requirements in paragraphs (a)(1) and (3) of this section; and
    (ii) In the event the sponsor determines that any such originator 
no longer complies with any of the requirements in paragraphs (a)(1) 
and (3) of this section, shall promptly notify, or cause to be 
notified, the holders of the ABS interests issued in the

[[Page 77753]]

securitization transaction of such noncompliance by such originator.


Sec.  _.12  Hedging, transfer and financing prohibitions.

    (a) Transfer. Except as permitted by Sec.  _.7(b)(8), and subject 
to Sec.  _.5, a retaining sponsor may not sell or otherwise transfer 
any interest or assets that the sponsor is required to retain pursuant 
to subpart B of this part to any person other than an entity that is 
and remains a majority-owned affiliate of the sponsor and each such 
majority-owned affiliate shall be subject to the same restrictions.
    (b) Prohibited hedging by sponsor and affiliates. A retaining 
sponsor and its affiliates may not purchase or sell a security, or 
other financial instrument, or enter into an agreement, derivative or 
other position, with any other person if:
    (1) Payments on the security or other financial instrument or under 
the agreement, derivative, or position are materially related to the 
credit risk of one or more particular ABS interests that the retaining 
sponsor (or any of its majority-owned affiliates) is required to retain 
with respect to a securitization transaction pursuant to subpart B of 
this part or one or more of the particular securitized assets that 
collateralize the asset-backed securities issued in the securitization 
transaction; and
    (2) The security, instrument, agreement, derivative, or position in 
any way reduces or limits the financial exposure of the sponsor (or any 
of its majority-owned affiliates) to the credit risk of one or more of 
the particular ABS interests that the retaining sponsor (or any of its 
majority-owned affiliates) is required to retain with respect to a 
securitization transaction pursuant to subpart B of this part or one or 
more of the particular securitized assets that collateralize the asset-
backed securities issued in the securitization transaction.
    (c) Prohibited hedging by issuing entity. The issuing entity in a 
securitization transaction may not purchase or sell a security or other 
financial instrument, or enter into an agreement, derivative or 
position, with any other person if:
    (1) Payments on the security or other financial instrument or under 
the agreement, derivative or position are materially related to the 
credit risk of one or more particular ABS interests that the retaining 
sponsor for the transaction (or any of its majority-owned affiliates) 
is required to retain with respect to the securitization transaction 
pursuant to subpart B of this part; and
    (2) The security, instrument, agreement, derivative, or position in 
any way reduces or limits the financial exposure of the retaining 
sponsor (or any of its majority-owned affiliates) to the credit risk of 
one or more of the particular ABS interests that the sponsor (or any of 
its majority-owned affiliates) is required to retain pursuant to 
subpart B of this part.
    (d) Permitted hedging activities. The following activities shall 
not be considered prohibited hedging activities under paragraph (b) or 
(c) of this section:
    (1) Hedging the interest rate risk (which does not include the 
specific interest rate risk, known as spread risk, associated with the 
ABS interest that is otherwise considered part of the credit risk) or 
foreign exchange risk arising from one or more of the particular ABS 
interests required to be retained by the sponsor (or any of its 
majority-owned affiliates) under subpart B of this part or one or more 
of the particular securitized assets that underlie the asset-backed 
securities issued in the securitization transaction; or
    (2) Purchasing or selling a security or other financial instrument 
or entering into an agreement, derivative, or other position with any 
third party where payments on the security or other financial 
instrument or under the agreement, derivative, or position are based, 
directly or indirectly, on an index of instruments that includes asset-
backed securities if:
    (i) Any class of ABS interests in the issuing entity that were 
issued in connection with the securitization transaction and that are 
included in the index represents no more than 10 percent of the dollar-
weighted average (or corresponding weighted average in the currency in 
which the ABS interests are issued, as applicable) of all instruments 
included in the index; and
    (ii) All classes of ABS interests in all issuing entities that were 
issued in connection with any securitization transaction in which the 
sponsor (or any of its majority-owned affiliates) is required to retain 
an interest pursuant to subpart B of this part and that are included in 
the index represent, in the aggregate, no more than 20 percent of the 
dollar-weighted average (or corresponding weighted average in the 
currency in which the ABS interests are issued, as applicable) of all 
instruments included in the index.
    (e) Prohibited non-recourse financing. Neither a retaining sponsor 
nor any of its affiliates may pledge as collateral for any obligation 
(including a loan, repurchase agreement, or other financing 
transaction) any ABS interest that the sponsor is required to retain 
with respect to a securitization transaction pursuant to subpart B of 
this part unless such obligation is with full recourse to the sponsor 
or affiliate, respectively.
    (f) Duration of the hedging and transfer restrictions--(1) General 
rule. Except as provided in paragraph (f)(2) of this section, the 
prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of 
this section shall expire on or after the date that is the latest of:
    (i) The date on which the total unpaid principal balance (if 
applicable) of the securitized assets that collateralize the 
securitization transaction has been reduced to 33 percent of the total 
unpaid principal balance of the securitized assets as of the cut-off 
date or similar date for establishing the composition of the 
securitized assets collateralizing the asset-backed securities issued 
pursuant to the securitization transaction;
    (ii) The date on which the total unpaid principal obligations under 
the ABS interests issued in the securitization transaction has been 
reduced to 33 percent of the total unpaid principal obligations of the 
ABS interests at closing of the securitization transaction; or
    (iii) Two years after the date of the closing of the securitization 
transaction.
    (2) Securitizations of residential mortgages. (i) If all of the 
assets that collateralize a securitization transaction subject to risk 
retention under this part are residential mortgages, the prohibitions 
on sale and hedging pursuant to paragraphs (a) and (b) of this section 
shall expire on or after the date that is the later of:
    (A) Five years after the date of the closing of the securitization 
transaction; or
    (B) The date on which the total unpaid principal balance of the 
residential mortgages that collateralize the securitization transaction 
has been reduced to 25 percent of the total unpaid principal balance of 
such residential mortgages at the cut-off date or similar date for 
establishing the composition of the securitized assets collateralizing 
the asset-backed securities issued pursuant to the securitization 
transaction.
    (ii) Notwithstanding paragraph (f)(2)(i) of this section, the 
prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of 
this section shall expire with respect to the sponsor of a 
securitization transaction described in paragraph (f)(2)(i) of this 
section on or after the date that is seven years after the date of the 
closing of the securitization transaction.
    (3) Conservatorship or receivership of sponsor. A conservator or 
receiver of the

[[Page 77754]]

sponsor (or any other person holding risk retention pursuant to this 
part) of a securitization transaction is permitted to sell or hedge any 
economic interest in the securitization transaction if the conservator 
or receiver has been appointed pursuant to any provision of federal or 
State law (or regulation promulgated thereunder) that provides for the 
appointment of the Federal Deposit Insurance Corporation, or an agency 
or instrumentality of the United States or of a State as conservator or 
receiver, including without limitation any of the following 
authorities:
    (i) 12 U.S.C. 1811;
    (ii) 12 U.S.C. 1787;
    (iii) 12 U.S.C. 4617; or
    (iv) 12 U.S.C. 5382.
    (4) Revolving pool securitizations. The provisions of paragraphs 
(f)(1) and (2) are not available to sponsors of revolving pool 
securitizations with respect to the forms of risk retention specified 
in Sec.  _.5.

Subpart D--Exceptions and Exemptions


Sec.  _.13  Exemption for qualified residential mortgages.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    Currently performing means the borrower in the mortgage transaction 
is not currently thirty (30) days or more past due, in whole or in 
part, on the mortgage transaction.
    Qualified residential mortgage means a ``qualified mortgage'' as 
defined in section 129C of the Truth in Lending Act (15 U.S.C.1639c) 
and regulations issued thereunder, as amended from time to time.
    (b) Exemption. A sponsor shall be exempt from the risk retention 
requirements in subpart B of this part with respect to any 
securitization transaction, if:
    (1) All of the assets that collateralize the asset-backed 
securities are qualified residential mortgages or servicing assets;
    (2) None of the assets that collateralize the asset-backed 
securities are asset-backed securities;
    (3) As of the cut-off date or similar date for establishing the 
composition of the securitized assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction, each 
qualified residential mortgage collateralizing the asset-backed 
securities is currently performing; and
    (4)(i) The depositor with respect to the securitization transaction 
certifies that it has evaluated the effectiveness of its internal 
supervisory controls with respect to the process for ensuring that all 
assets that collateralize the asset-backed security are qualified 
residential mortgages or servicing assets and has concluded that its 
internal supervisory controls are effective; and
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls must be performed, for each issuance of 
an asset-backed security in reliance on this section, as of a date 
within 60 days of the cut-off date or similar date for establishing the 
composition of the asset pool collateralizing such asset-backed 
security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (b)(4)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
the Commission and its appropriate Federal banking agency, if any.
    (c) Repurchase of loans subsequently determined to be non-qualified 
after closing. A sponsor that has relied on the exemption provided in 
paragraph (b) of this section with respect to a securitization 
transaction shall not lose such exemption with respect to such 
transaction if, after closing of the securitization transaction, it is 
determined that one or more of the residential mortgage loans 
collateralizing the asset-backed securities does not meet all of the 
criteria to be a qualified residential mortgage provided that:
    (1) The depositor complied with the certification requirement set 
forth in paragraph (b)(4) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at 
a price at least equal to the remaining aggregate unpaid principal 
balance and accrued interest on the loan(s) no later than 90 days after 
the determination that the loans do not satisfy the requirements to be 
a qualified residential mortgage; and
    (3) The sponsor promptly notifies, or causes to be notified, the 
holders of the asset-backed securities issued in the securitization 
transaction of any loan(s) included in such securitization transaction 
that is (or are) required to be repurchased by the sponsor pursuant to 
paragraph (c)(2) of this section, including the amount of such 
repurchased loan(s) and the cause for such repurchase.


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

    The following definitions apply for purposes of Sec. Sec.  _.15 
through _.18:
    Appraisal Standards Board means the board of the Appraisal 
Foundation that develops, interprets, and amends the Uniform Standards 
of Professional Appraisal Practice (USPAP), establishing generally 
accepted standards for the appraisal profession.
    Automobile loan:
    (1) Means any loan to an individual to finance the purchase of, and 
that is secured by a first lien on, a passenger car or other passenger 
vehicle, such as a minivan, van, sport-utility vehicle, pickup truck, 
or similar light truck for personal, family, or household use; and
    (2) Does not include any:
    (i) Loan to finance fleet sales;
    (ii) Personal cash loan secured by a previously purchased 
automobile;
    (iii) Loan to finance the purchase of a commercial vehicle or farm 
equipment that is not used for personal, family, or household purposes;
    (iv) Lease financing;
    (v) Loan to finance the purchase of a vehicle with a salvage title; 
or
    (vi) Loan to finance the purchase of a vehicle intended to be used 
for scrap or parts.
    Combined loan-to-value (CLTV) ratio means, at the time of 
origination, the sum of the principal balance of a first-lien mortgage 
loan on the property, plus the principal balance of any junior-lien 
mortgage loan that, to the creditor's knowledge, would exist at the 
closing of the transaction and that is secured by the same property, 
divided by:
    (1) For acquisition funding, the lesser of the purchase price or 
the estimated market value of the real property based on an appraisal 
that meets the requirements set forth in Sec.  _.17(a)(2)(ii); or
    (2) For refinancing, the estimated market value of the real 
property based on an appraisal that meets the requirements set forth in 
Sec.  _.17(a)(2)(ii).
    Commercial loan means a secured or unsecured loan to a company or 
an individual for business purposes, other than any:
    (1) Loan to purchase or refinance a one-to-four family residential 
property;
    (2) Commercial real estate loan.
    Commercial real estate (CRE) loan means:
    (1) A loan secured by a property with five or more single family 
units, or by nonfarm nonresidential real property, the primary source 
(50 percent or more) of repayment for which is expected to be:
    (i) The proceeds of the sale, refinancing, or permanent financing 
of the property; or
    (ii) Rental income associated with the property;

[[Page 77755]]

    (2) Loans secured by improved land if the obligor owns the fee 
interest in the land and the land is leased to a third party who owns 
all improvements on the land, and the improvements are nonresidential 
or residential with five or more single family units; and
    (3) Does not include:
    (i) A land development and construction loan (including 1- to 4-
family residential or commercial construction loans);
    (ii) Any other land loan; or
    (iii) An unsecured loan to a developer.
    Debt service coverage (DSC) ratio means:
    (1) For qualifying leased CRE loans, qualifying multi-family loans, 
and other CRE loans:
    (i) The annual NOI less the annual replacement reserve of the CRE 
property at the time of origination of the CRE loan(s) divided by
    (ii) The sum of the borrower's annual payments for principal and 
interest (calculated at the fully-indexed rate) on any debt obligation.
    (2) For commercial loans:
    (i) The borrower's EBITDA as of the most recently completed fiscal 
year divided by
    (ii) The sum of the borrower's annual payments for principal and 
interest on all debt obligations.
    Debt to income (DTI) ratio means the borrower's total debt, 
including the monthly amount due on the automobile loan, divided by the 
borrower's monthly income.
    Earnings before interest, taxes, depreciation, and amortization 
(EBITDA) means the annual income of a business before expenses for 
interest, taxes, depreciation and amortization are deducted, as 
determined in accordance with GAAP.
    Environmental risk assessment means a process for determining 
whether a property is contaminated or exposed to any condition or 
substance that could result in contamination that has an adverse effect 
on the market value of the property or the realization of the 
collateral value.
    First lien means a lien or encumbrance on property that has 
priority over all other liens or encumbrances on the property.
    Junior lien means a lien or encumbrance on property that is lower 
in priority relative to other liens or encumbrances on the property.
    Leverage ratio means the borrower's total debt divided by the 
borrower's EBITDA.
    Loan-to-value (LTV) ratio means, at the time of origination, the 
principal balance of a first-lien mortgage loan on the property divided 
by:
    (1) For acquisition funding, the lesser of the purchase price or 
the estimated market value of the real property based on an appraisal 
that meets the requirements set forth in Sec.  __.17(a)(2)(ii); or
    (2) For refinancing, the estimated market value of the real 
property based on an appraisal that meets the requirements set forth in 
Sec.  __.17(a)(2)(ii).
    Model year means the year determined by the manufacturer and 
reflected on the vehicle's Motor Vehicle Title as part of the vehicle 
description.
    Net operating income (NOI) refers to the income a CRE property 
generates for the owner after all expenses have been deducted for 
federal income tax purposes, except for depreciation, debt service 
expenses, and federal and state income taxes, and excluding any unusual 
and nonrecurring items of income.
    Operating affiliate means an affiliate of a borrower that is a 
lessor or similar party with respect to the commercial real estate 
securing the loan.
    Payments-in-kind means payments of accrued interest that are not 
paid in cash when due, and instead are paid by increasing the principal 
balance of the loan or by providing equity in the borrowing company.
    Purchase money security interest means a security interest in 
property that secures the obligation of the obligor incurred as all or 
part of the price of the property.
    Purchase price means the amount paid by the borrower for the 
vehicle net of any incentive payments or manufacturer cash rebates.
    Qualified tenant means:
    (1) A tenant with a lease who has satisfied all obligations with 
respect to the property in a timely manner; or
    (2) A tenant who originally had a lease that subsequently expired 
and currently is leasing the property on a month-to-month basis, has 
occupied the property for at least three years prior to the date of 
origination, and has satisfied all obligations with respect to the 
property in a timely manner.
    Qualifying leased CRE loan means a CRE loan secured by commercial 
nonfarm real property, other than a multi-family property or a hotel, 
inn, or similar property:
    (1) That is occupied by one or more qualified tenants pursuant to a 
lease agreement with a term of no less than one (1) month; and
    (2) Where no more than 20 percent of the aggregate gross revenue of 
the property is payable from one or more tenants who:
    (i) Are subject to a lease that will terminate within six months 
following the date of origination; or
    (ii) Are not qualified tenants.
    Qualifying multi-family loan means a CRE loan secured by any 
residential property (excluding a hotel, motel, inn, hospital, nursing 
home, or other similar facility where dwellings are not leased to 
residents):
    (1) That consists of five or more dwelling units (including 
apartment buildings, condominiums, cooperatives and other similar 
structures) primarily for residential use; and
    (2) Where at least 75 percent of the NOI is derived from 
residential rents and tenant amenities (including income from parking 
garages, health or swim clubs, and dry cleaning), and not from other 
commercial uses.
    Rental income means:
    (1) Income derived from a lease or other occupancy agreement 
between the borrower or an operating affiliate of the borrower and a 
party which is not an affiliate of the borrower for the use of real 
property or improvements serving as collateral for the applicable loan; 
and
    (2) Other income derived from hotel, motel, dormitory, nursing 
home, assisted living, mini-storage warehouse or similar properties 
that are used primarily by parties that are not affiliates or employees 
of the borrower or its affiliates.
    Replacement reserve means the monthly capital replacement or 
maintenance amount based on the property type, age, construction and 
condition of the property that is adequate to maintain the physical 
condition and NOI of the property.
    Salvage title means a form of vehicle title branding, which notes 
that the vehicle has been severely damaged and/or deemed a total loss 
and uneconomical to repair by an insurance company that paid a claim on 
the vehicle.
    Total debt, with respect to a borrower, means:
    (1) In the case of an automobile loan, the sum of:
    (i) All monthly housing payments (rent- or mortgage-related, 
including property taxes, insurance and home owners association fees); 
and
    (ii) Any of the following that is dependent upon the borrower's 
income for payment:
    (A) Monthly payments on other debt and lease obligations, such as 
credit card loans or installment loans, including the monthly amount 
due on the automobile loan;
    (B) Estimated monthly amortizing payments for any term debt, debts 
with other than monthly payments and debts

[[Page 77756]]

not in repayment (such as deferred student loans, interest-only loans); 
and
    (C) Any required monthly alimony, child support or court-ordered 
payments; and
    (2) In the case of a commercial loan, the outstanding balance of 
all long-term debt (obligations that have a remaining maturity of more 
than one year) and the current portion of all debt that matures in one 
year or less.
    Total liabilities ratio means the borrower's total liabilities 
divided by the sum of the borrower's total liabilities and equity, less 
the borrower's intangible assets, with each component determined in 
accordance with GAAP.
    Trade-in allowance means the amount a vehicle purchaser is given as 
a credit at the purchase of a vehicle for the fair exchange of the 
borrower's existing vehicle to compensate the dealer for some portion 
of the vehicle purchase price, not to exceed the highest trade-in value 
of the existing vehicle, as determined by a nationally recognized 
automobile pricing agency and based on the manufacturer, year, model, 
features, mileage, and condition of the vehicle, less the payoff 
balance of any outstanding debt collateralized by the existing vehicle.
    Uniform Standards of Professional Appraisal Practice (USPAP) means 
generally accepted standards for professional appraisal practice issued 
by the Appraisal Standards Board of the Appraisal Foundation.


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

    (a) General exception for qualifying assets. Commercial loans, 
commercial real estate loans, and automobile loans that are securitized 
through a securitization transaction shall be subject to a 0 percent 
risk retention requirement under subpart B, provided that the following 
conditions are met:
    (1) The assets meet the underwriting standards set forth in 
Sec. Sec.  _.16 (qualifying commercial loans), _.17 (qualifying CRE 
loans), or _.18 (qualifying automobile loans) of this part, as 
applicable;
    (2) The securitization transaction is collateralized solely by 
loans of the same asset class and by servicing assets;
    (3) The securitization transaction does not permit reinvestment 
periods; and
    (4) The sponsor provides, or causes to be provided, to potential 
investors a reasonable period of time prior to the sale of asset-backed 
securities of the issuing entity, and, upon request, to the Commission, 
and to its appropriate Federal banking agency, if any, in written form 
under the caption ``Credit Risk Retention'', a description of the 
manner in which the sponsor determined the aggregate risk retention 
requirement for the securitization transaction after including 
qualifying commercial loans, qualifying CRE loans, or qualifying 
automobile loans with 0 percent risk retention.
    (b) Risk retention requirement. For any securitization transaction 
described in paragraph (a) of this section, the percentage of risk 
retention required under Sec.  _.3(a) is reduced by the percentage 
evidenced by the ratio of the unpaid principal balance of the 
qualifying commercial loans, qualifying CRE loans, or qualifying 
automobile loans (as applicable) to the total unpaid principal balance 
of commercial loans, CRE loans, or automobile loans (as applicable) 
that are included in the pool of assets collateralizing the asset-
backed securities issued pursuant to the securitization transaction 
(the qualifying asset ratio); provided that:
    (1) The qualifying asset ratio is measured as of the cut-off date 
or similar date for establishing the composition of the securitized 
assets collateralizing the asset-backed securities issued pursuant to 
the securitization transaction;
    (2) If the qualifying asset ratio would exceed 50 percent, the 
qualifying asset ratio shall be deemed to be 50 percent; and
    (3) The disclosure required by paragraph (a)(4) of this section 
also includes descriptions of the qualifying commercial loans, 
qualifying CRE loans, and qualifying automobile loans (qualifying 
assets) and descriptions of the assets that are not qualifying assets, 
and the material differences between the group of qualifying assets and 
the group of assets that are not qualifying assets with respect to the 
composition of each group's loan balances, loan terms, interest rates, 
borrower credit information, and characteristics of any loan 
collateral.
    (c) Exception for securitizations of qualifying assets only. 
Notwithstanding other provisions of this section, the risk retention 
requirements of subpart B of this part shall not apply to 
securitization transactions where the transaction is collateralized 
solely by servicing assets and either qualifying commercial loans, 
qualifying CRE loans, or qualifying automobile loans.
    (d) Record maintenance. A sponsor must retain the disclosures 
required in paragraphs (a) and (b) of this section and the 
certifications required in Sec. Sec.  _.16(a)(8), _.17(a)(10), and 
_.18(a)(8), as applicable, in its records until three years after all 
ABS interests issued in the securitization are no longer outstanding. 
The sponsor must provide the disclosures and certifications upon 
request to the Commission and the sponsor's appropriate Federal banking 
agency, if any.


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

    (a) Underwriting, product and other standards. (1) Prior to 
origination of the commercial loan, the originator:
    (i) Verified and documented the financial condition of the 
borrower:
    (A) As of the end of the borrower's two most recently completed 
fiscal years; and
    (B) During the period, if any, since the end of its most recently 
completed fiscal year;
    (ii) Conducted an analysis of the borrower's ability to service its 
overall debt obligations during the next two years, based on reasonable 
projections;
    (iii) Determined that, based on the previous two years' actual 
performance, the borrower had:
    (A) A total liabilities ratio of 50 percent or less;
    (B) A leverage ratio of 3.0 or less; and
    (C) A DSC ratio of 1.5 or greater;
    (iv) Determined that, based on the two years of projections, which 
include the new debt obligation, following the closing date of the 
loan, the borrower will have:
    (A) A total liabilities ratio of 50 percent or less;
    (B) A leverage ratio of 3.0 or less; and
    (C) A DSC ratio of 1.5 or greater.
    (2) Prior to, upon or promptly following the inception of the loan, 
the originator:
    (i) If the loan is originated on a secured basis, obtains a 
perfected security interest (by filing, title notation or otherwise) 
or, in the case of real property, a recorded lien, on all of the 
property pledged to collateralize the loan; and
    (ii) If the loan documents indicate the purpose of the loan is to 
finance the purchase of tangible or intangible property, or to 
refinance such a loan, obtains a first lien on the property.
    (3) The loan documentation for the commercial loan includes 
covenants that:
    (i) Require the borrower to provide to the servicer of the 
commercial loan the borrower's financial statements and supporting 
schedules on an ongoing basis, but not less frequently than quarterly;
    (ii) Prohibit the borrower from retaining or entering into a debt 
arrangement that permits payments-in-kind;
    (iii) Impose limits on:

[[Page 77757]]

    (A) The creation or existence of any other security interest or 
lien with respect to any of the borrower's property that serves as 
collateral for the loan;
    (B) The transfer of any of the borrower's assets that serve as 
collateral for the loan; and
    (C) Any change to the name, location or organizational structure of 
the borrower, or any other party that pledges collateral for the loan;
    (iv) Require the borrower and any other party that pledges 
collateral for the loan to:
    (A) Maintain insurance that protects against loss on the collateral 
for the commercial loan at least up to the amount of the loan, and that 
names the originator or any subsequent holder of the loan as an 
additional insured or loss payee;
    (B) Pay taxes, charges, fees, and claims, where non-payment might 
give rise to a lien on any collateral;
    (C) Take any action required to perfect or protect the security 
interest and first lien (as applicable) of the originator or any 
subsequent holder of the loan in any collateral for the commercial loan 
or the priority thereof, and to defend any collateral against claims 
adverse to the lender's interest;
    (D) Permit the originator or any subsequent holder of the loan, and 
the servicer of the loan, to inspect any collateral for the commercial 
loan and the books and records of the borrower; and
    (E) Maintain the physical condition of any collateral for the 
commercial loan.
    (4) Loan payments required under the loan agreement are:
    (i) Based on level monthly payments of principal and interest (at 
the fully indexed rate) that fully amortize the debt over a term that 
does not exceed five years from the date of origination; and
    (ii) To be made no less frequently than quarterly over a term that 
does not exceed five years.
    (5) The primary source of repayment for the loan is revenue from 
the business operations of the borrower.
    (6) The loan was funded within the six (6) months prior to the cut-
off date or similar date for establishing the composition of the 
securitized assets collateralizing the asset-backed securities issued 
pursuant to the securitization transaction.
    (7) At the cut-off date or similar date for establishing the 
composition of the securitized assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction, all 
payments due on the loan are contractually current.
    (8)(i) The depositor of the asset-backed security certifies that it 
has evaluated the effectiveness of its internal supervisory controls 
with respect to the process for ensuring that all qualifying commercial 
loans that collateralize the asset-backed security and that reduce the 
sponsor's risk retention requirement under Sec.  _.15 meet all of the 
requirements set forth in paragraphs (a)(1) through (7) of this section 
and has concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (a)(8)(i) of this 
section shall be performed, for each issuance of an asset-backed 
security, as of a date within 60 days of the cut-off date or similar 
date for establishing the composition of the asset pool collateralizing 
such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (a)(8)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any.
    (b) Cure or buy-back requirement. If a sponsor has relied on the 
exception provided in Sec.  _.15 with respect to a qualifying 
commercial loan and it is subsequently determined that the loan did not 
meet all of the requirements set forth in paragraphs (a)(1) through (7) 
of this section, the sponsor shall not lose the benefit of the 
exception with respect to the commercial loan if the depositor complied 
with the certification requirement set forth in paragraph (a)(8) of 
this section and:
    (1) The failure of the loan to meet any of the requirements set 
forth in paragraphs (a)(1) through (7) of this section is not material; 
or
    (2) No later than 90 days after the determination that the loan 
does not meet one or more of the requirements of paragraphs (a)(1) 
through (7) of this section, the sponsor:
    (i) Effectuates cure, establishing conformity of the loan to the 
unmet requirements as of the date of cure; or
    (ii) Repurchases the loan(s) from the issuing entity at a price at 
least equal to the remaining principal balance and accrued interest on 
the loan(s) as of the date of repurchase.
    (3) If the sponsor cures or repurchases pursuant to paragraph 
(b)(2) of this section, the sponsor must promptly notify, or cause to 
be notified, the holders of the asset-backed securities issued in the 
securitization transaction of any loan(s) included in such 
securitization transaction that is required to be cured or repurchased 
by the sponsor pursuant to paragraph (b)(2) of this section, including 
the principal amount of such loan(s) and the cause for such cure or 
repurchase.


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

    (a) Underwriting, product and other standards. (1) The CRE loan 
must be secured by the following:
    (i) An enforceable first lien, documented and recorded 
appropriately pursuant to applicable law, on the commercial real estate 
and improvements;
    (ii)(A) An assignment of:
    (1) Leases and rents and other occupancy agreements related to the 
commercial real estate or improvements or the operation thereof for 
which the borrower or an operating affiliate is a lessor or similar 
party and all payments under such leases and occupancy agreements; and
    (2) All franchise, license and concession agreements related to the 
commercial real estate or improvements or the operation thereof for 
which the borrower or an operating affiliate is a lessor, licensor, 
concession granter or similar party and all payments under such other 
agreements, whether the assignments described in this paragraph 
(a)(1)(ii)(A)(2) are absolute or are stated to be made to the extent 
permitted by the agreements governing the applicable franchise, license 
or concession agreements;
    (B) An assignment of all other payments due to the borrower or due 
to any operating affiliate in connection with the operation of the 
property described in paragraph (a)(1)(i) of this section; and
    (C) The right to enforce the agreements described in paragraph 
(a)(1)(ii)(A) of this section and the agreements under which payments 
under paragraph (a)(1)(ii)(B) of this section are due against, and 
collect amounts due from, each lessee, occupant or other obligor whose 
payments were assigned pursuant to paragraphs (a)(1)(ii)(A) or (B) of 
this section upon a breach by the borrower of any of the terms of, or 
the occurrence of any other event of default (however denominated) 
under, the loan documents relating to such CRE loan; and
    (iii) A security interest:
    (A) In all interests of the borrower and any applicable operating 
affiliate in all tangible and intangible personal property of any kind, 
in or used in the operation of or in connection with,

[[Page 77758]]

pertaining to, arising from, or constituting, any of the collateral 
described in paragraphs (a)(1)(i) or (ii) of this section; and
    (B) In the form of a perfected security interest if the security 
interest in such property can be perfected by the filing of a financing 
statement, fixture filing, or similar document pursuant to the law 
governing the perfection of such security interest;
    (2) Prior to origination of the CRE loan, the originator:
    (i) Verified and documented the current financial condition of the 
borrower and each operating affiliate;
    (ii) Obtained a written appraisal of the real property securing the 
loan that:
    (A) Had an effective date not more than six months prior to the 
origination date of the loan by a competent and appropriately State-
certified or State-licensed appraiser;
    (B) Conforms to generally accepted appraisal standards as evidenced 
by the USPAP and the appraisal requirements \1\ of the Federal banking 
agencies; and
---------------------------------------------------------------------------

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

    (C) Provides an ``as is'' opinion of the market value of the real 
property, which includes an income approach; \2\
---------------------------------------------------------------------------

    \2\ See USPAP, Standard 1.
---------------------------------------------------------------------------

    (iii) Qualified the borrower for the CRE loan based on a monthly 
payment amount derived from level monthly payments consisting of both 
principal and interest (at the fully-indexed rate) over the term of the 
loan, not exceeding 25 years, or 30 years for a qualifying multi-family 
property;
    (iv) Conducted an environmental risk assessment to gain 
environmental information about the property securing the loan and took 
appropriate steps to mitigate any environmental liability determined to 
exist based on this assessment;
    (v) Conducted an analysis of the borrower's ability to service its 
overall debt obligations during the next two years, based on reasonable 
projections (including operating income projections for the property);
    (vi)(A) Determined that based on the two years' actual performance 
immediately preceding the origination of the loan, the borrower would 
have had:
    (1) A DSC ratio of 1.5 or greater, if the loan is a qualifying 
leased CRE loan, net of any income derived from a tenant(s) who is not 
a qualified tenant(s);
    (2) A DSC ratio of 1.25 or greater, if the loan is a qualifying 
multi-family property loan; or
    (3) A DSC ratio of 1.7 or greater, if the loan is any other type of 
CRE loan;
    (B) If the borrower did not own the property for any part of the 
last two years prior to origination, the calculation of the DSC ratio, 
for purposes of paragraph (a)(2)(vi)(A) of this section, shall include 
the property's operating income for any portion of the two-year period 
during which the borrower did not own the property;
    (vii) Determined that, based on two years of projections, which 
include the new debt obligation, following the origination date of the 
loan, the borrower will have:
    (A) A DSC ratio of 1.5 or greater, if the loan is a qualifying 
leased CRE loan, net of any income derived from a tenant(s) who is not 
a qualified tenant(s);
    (B) A DSC ratio of 1.25 or greater, if the loan is a qualifying 
multi-family property loan; or
    (C) A DSC ratio of 1.7 or greater, if the loan is any other type of 
CRE loan.
    (3) The loan documentation for the CRE loan includes covenants 
that:
    (i) Require the borrower to provide the borrower's financial 
statements and supporting schedules to the servicer on an ongoing 
basis, but not less frequently than quarterly, including information on 
existing, maturing and new leasing or rent-roll activity for the 
property securing the loan, as appropriate; and
    (ii) Impose prohibitions on:
    (A) The creation or existence of any other security interest with 
respect to the collateral for the CRE loan described in paragraphs 
(a)(1)(i) and (a)(1)(ii)(A) of this section, except as provided in 
paragraph (a)(4) of this section;
    (B) The transfer of any collateral for the CRE loan described in 
paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section or of any other 
collateral consisting of fixtures, furniture, furnishings, machinery or 
equipment other than any such fixture, furniture, furnishings, 
machinery or equipment that is obsolete or surplus; and
    (C) Any change to the name, location or organizational structure of 
any borrower, operating affiliate or other pledgor unless such 
borrower, operating affiliate or other pledgor shall have given the 
holder of the loan at least 30 days advance notice and, pursuant to 
applicable law governing perfection and priority, the holder of the 
loan is able to take all steps necessary to continue its perfection and 
priority during such 30-day period.
    (iii) Require each borrower and each operating affiliate to:
    (A) Maintain insurance that protects against loss on collateral for 
the CRE loan described in paragraph (a)(1)(i) of this section for an 
amount no less than the replacement cost of the property improvements, 
and names the originator or any subsequent holder of the loan as an 
additional insured or lender loss payee;
    (B) Pay taxes, charges, fees, and claims, where non-payment might 
give rise to a lien on collateral for the CRE loan described in 
paragraphs (a)(1)(i) and (ii) of this section;
    (C) Take any action required to:
    (1) Protect the security interest and the enforceability and 
priority thereof in the collateral described in paragraphs (a)(1)(i) 
and (a)(1)(ii)(A) of this section and defend such collateral against 
claims adverse to the originator's or any subsequent holder's interest; 
and
    (2) Perfect the security interest of the originator or any 
subsequent holder of the loan in any other collateral for the CRE loan 
to the extent that such security interest is required by this section 
to be perfected;
    (D) Permit the originator or any subsequent holder of the loan, and 
the servicer, to inspect any collateral for the CRE loan and the books 
and records of the borrower or other party relating to any collateral 
for the CRE loan;
    (E) Maintain the physical condition of collateral for the CRE loan 
described in paragraph (a)(1)(i) of this section;
    (F) Comply with all environmental, zoning, building code, licensing 
and other laws, regulations, agreements, covenants, use restrictions, 
and proffers applicable to collateral for the CRE loan described in 
paragraph (a)(1)(i) of this section;
    (G) Comply with leases, franchise agreements, condominium 
declarations, and other documents and agreements relating to the 
operation of collateral for the CRE loan described in paragraph 
(a)(1)(i) of this section, and to not modify any material terms and 
conditions of such agreements over the term of the loan without the 
consent of the originator or any subsequent holder of the loan, or the 
servicer; and
    (H) Not materially alter collateral for the CRE loan described in 
paragraph (a)(1)(i) of this section without the consent of the 
originator or any subsequent holder of the loan, or the servicer.
    (4) The loan documentation for the CRE loan prohibits the borrower 
and each operating affiliate from obtaining a loan secured by a junior 
lien on collateral for the CRE loan described in paragraph (a)(1)(i) or 
(a)(1)(ii)(A) of this section, unless:
    (i) The sum of the principal amount of such junior lien loan, plus 
the principal amount of all other loans secured by collateral described 
in paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section, does not 
exceed the applicable CLTV ratio in paragraph (a)(5) of this

[[Page 77759]]

section, based on the appraisal at origination of such junior lien 
loan; or
    (ii) Such loan is a purchase money obligation that financed the 
acquisition of machinery or equipment and the borrower or operating 
affiliate (as applicable) pledges such machinery and equipment as 
additional collateral for the CRE loan.
    (5) At origination, the applicable loan-to-value ratios for the 
loan are:
    (i) LTV less than or equal to 65 percent and CLTV less than or 
equal to 70 percent; or
    (ii) LTV less than or equal to 60 percent and CLTV less than or 
equal to 65 percent, if an appraisal used to meet the requirements set 
forth in paragraph (a)(2)(ii) of this section used a direct 
capitalization rate, and that rate is less than or equal to the sum of:
    (A) The 10-year swap rate, as reported in the Federal Reserve's 
H.15 Report (or any successor report) as of the date concurrent with 
the effective date of such appraisal; and
    (B) 300 basis points.
    (iii) If the appraisal required under paragraph (a)(2)(ii) of this 
section included a direct capitalization method using an overall 
capitalization rate, that rate must be disclosed to potential investors 
in the securitization.
    (6) All loan payments required to be made under the loan agreement 
are:
    (i) Based on level monthly payments of principal and interest (at 
the fully indexed rate) to fully amortize the debt over a term that 
does not exceed 25 years, or 30 years for a qualifying multifamily 
loan; and
    (ii) To be made no less frequently than monthly over a term of at 
least ten years.
    (7) Under the terms of the loan agreement:
    (i) Any maturity of the note occurs no earlier than ten years 
following the date of origination;
    (ii) The borrower is not permitted to defer repayment of principal 
or payment of interest; and
    (iii) The interest rate on the loan is:
    (A) A fixed interest rate;
    (B) An adjustable interest rate and the borrower, prior to or 
concurrently with origination of the CRE loan, obtained a derivative 
that effectively results in a fixed interest rate; or
    (C) An adjustable interest rate and the borrower, prior to or 
concurrently with origination of the CRE loan, obtained a derivative 
that established a cap on the interest rate for the term of the loan, 
and the loan meets the underwriting criteria in paragraphs (a)(2)(vi) 
and (vii) of this section using the maximum interest rate allowable 
under the interest rate cap.
    (8) The originator does not establish an interest reserve at 
origination to fund all or part of a payment on the loan.
    (9) At the cut-off date or similar date for establishing the 
composition of the securitized assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction, all 
payments due on the loan are contractually current.
    (10)(i) The depositor of the asset-backed security certifies that 
it has evaluated the effectiveness of its internal supervisory controls 
with respect to the process for ensuring that all qualifying CRE loans 
that collateralize the asset-backed security and that reduce the 
sponsor's risk retention requirement under Sec.  __.15 meet all of the 
requirements set forth in paragraphs (a)(1) through (9) of this section 
and has concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (a)(10)(i) of 
this section shall be performed, for each issuance of an asset-backed 
security, as of a date within 60 days of the cut-off date or similar 
date for establishing the composition of the asset pool collateralizing 
such asset-backed security;
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (a)(10)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any; and
    (11) Within two weeks of the closing of the CRE loan by its 
originator or, if sooner, prior to the transfer of such CRE loan to the 
issuing entity, the originator shall have obtained a UCC lien search 
from the jurisdiction of organization of the borrower and each 
operating affiliate, that does not report, as of the time that the 
security interest of the originator in the property described in 
paragraph (a)(1)(iii) of this section was perfected, other higher 
priority liens of record on any property described in paragraph 
(a)(1)(iii) of this section, other than purchase money security 
interests.
    (b) Cure or buy-back requirement. If a sponsor has relied on the 
exception provided in Sec.  ___.15 with respect to a qualifying CRE 
loan and it is subsequently determined that the CRE loan did not meet 
all of the requirements set forth in paragraphs (a)(1) through (9) and 
(a)(11) of this section, the sponsor shall not lose the benefit of the 
exception with respect to the CRE loan if the depositor complied with 
the certification requirement set forth in paragraph (a)(10) of this 
section, and:
    (1) The failure of the loan to meet any of the requirements set 
forth in paragraphs (a)(1) through (9) and (a)(11) of this section is 
not material; or;
    (2) No later than 90 days after the determination that the loan 
does not meet one or more of the requirements of paragraphs (a)(1) 
through (9) or (a)(11) of this section, the sponsor:
    (i) Effectuates cure, restoring conformity of the loan to the unmet 
requirements as of the date of cure; or
    (ii) Repurchases the loan(s) from the issuing entity at a price at 
least equal to the remaining principal balance and accrued interest on 
the loan(s) as of the date of repurchase.
    (3) If the sponsor cures or repurchases pursuant to paragraph 
(b)(2) of this section, the sponsor must promptly notify, or cause to 
be notified, the holders of the asset-backed securities issued in the 
securitization transaction of any loan(s) included in such 
securitization transaction that is required to be cured or repurchased 
by the sponsor pursuant to paragraph (b)(2) of this section, including 
the principal amount of such repurchased loan(s) and the cause for such 
cure or repurchase.


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

    (a) Underwriting, product and other standards. (1) Prior to 
origination of the automobile loan, the originator:
    (i) Verified and documented that within 30 days of the date of 
origination:
    (A) The borrower was not currently 30 days or more past due, in 
whole or in part, on any debt obligation;
    (B) Within the previous 24 months, the borrower has not been 60 
days or more past due, in whole or in part, on any debt obligation;
    (C) Within the previous 36 months, the borrower has not:
    (1) Been a debtor in a proceeding commenced under Chapter 7 
(Liquidation), Chapter 11 (Reorganization), Chapter 12 (Family Farmer 
or Family Fisherman plan), or Chapter 13 (Individual Debt Adjustment) 
of the U.S. Bankruptcy Code; or
    (2) Been the subject of any federal or State judicial judgment for 
the collection of any unpaid debt;
    (D) Within the previous 36 months, no one-to-four family property 
owned by the borrower has been the subject of any foreclosure, deed in 
lieu of foreclosure, or short sale; or
    (E) Within the previous 36 months, the borrower has not had any 
personal property repossessed;

[[Page 77760]]

    (ii) Determined and documented that the borrower has at least 24 
months of credit history; and
    (iii) Determined and documented that, upon the origination of the 
loan, the borrower's DTI ratio is less than or equal to 36 percent.
    (A) For the purpose of making the determination under paragraph 
(a)(1)(iii) of this section, the originator must:
    (1) Verify and document all income of the borrower that the 
originator includes in the borrower's effective monthly income (using 
payroll stubs, tax returns, profit and loss statements, or other 
similar documentation); and
    (2) On or after the date of the borrower's written application and 
prior to origination, obtain a credit report regarding the borrower 
from a consumer reporting agency that compiles and maintain files on 
consumers on a nationwide basis (within the meaning of 15 U.S.C. 
1681a(p)) and verify that all outstanding debts reported in the 
borrower's credit report are incorporated into the calculation of the 
borrower's DTI ratio under paragraph (a)(1)(iii) of this section;
    (2) An originator will be deemed to have met the requirements of 
paragraph (a)(1)(i) of this section if:
    (i) The originator, no more than 30 days before the closing of the 
loan, obtains a credit report regarding the borrower from a consumer 
reporting agency that compiles and maintains files on consumers on a 
nationwide basis (within the meaning of 15 U.S.C. 1681a(p));
    (ii) Based on the information in such credit report, the borrower 
meets all of the requirements of paragraph (a)(1)(i) of this section, 
and no information in a credit report subsequently obtained by the 
originator before the closing of the loan contains contrary 
information; and
    (iii) The originator obtains electronic or hard copies of the 
credit report.
    (3) At closing of the automobile loan, the borrower makes a down 
payment from the borrower's personal funds and trade-in allowance, if 
any, that is at least equal to the sum of:
    (i) The full cost of the vehicle title, tax, and registration fees;
    (ii) Any dealer-imposed fees;
    (iii) The full cost of any additional warranties, insurance or 
other products purchased in connection with the purchase of the 
vehicle; and
    (iv) 10 percent of the vehicle purchase price.
    (4) The originator records a first lien securing the loan on the 
purchased vehicle in accordance with State law.
    (5) The terms of the loan agreement provide a maturity date for the 
loan that does not exceed the lesser of:
    (i) Six years from the date of origination; or
    (ii) 10 years minus the difference between the current model year 
and the vehicle's model year.
    (6) The terms of the loan agreement:
    (i) Specify a fixed rate of interest for the life of the loan;
    (ii) Provide for a level monthly payment amount that fully 
amortizes the amount financed over the loan term;
    (iii) Do not permit the borrower to defer repayment of principal or 
payment of interest; and
    (iv) Require the borrower to make the first payment on the 
automobile loan within 45 days of the loan's contract date.
    (7) At the cut-off date or similar date for establishing the 
composition of the securitized assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction, all 
payments due on the loan are contractually current; and
    (8)(i) The depositor of the asset-backed security certifies that it 
has evaluated the effectiveness of its internal supervisory controls 
with respect to the process for ensuring that all qualifying automobile 
loans that collateralize the asset-backed security and that reduce the 
sponsor's risk retention requirement under Sec.  _.15 meet all of the 
requirements set forth in paragraphs (a)(1) through (7) of this section 
and has concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's 
internal supervisory controls referenced in paragraph (a)(8)(i) of this 
section shall be performed, for each issuance of an asset-backed 
security, as of a date within 60 days of the cut-off date or similar 
date for establishing the composition of the asset pool collateralizing 
such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the 
certification described in paragraph (a)(8)(i) of this section to 
potential investors a reasonable period of time prior to the sale of 
asset-backed securities in the issuing entity, and, upon request, to 
its appropriate Federal banking agency, if any.
    (b) Cure or buy-back requirement. If a sponsor has relied on the 
exception provided in Sec.  ___.15 with respect to a qualifying 
automobile loan and it is subsequently determined that the loan did not 
meet all of the requirements set forth in paragraphs (a)(1) through (7) 
of this section, the sponsor shall not lose the benefit of the 
exception with respect to the automobile loan if the depositor complied 
with the certification requirement set forth in paragraph (a)(8) of 
this section, and:
    (1) The failure of the loan to meet any of the requirements set 
forth in paragraphs (a)(1) through (7) of this section is not material; 
or
    (2) No later than ninety (90) days after the determination that the 
loan does not meet one or more of the requirements of paragraphs (a)(1) 
through (7) of this section, the sponsor:
    (i) Effectuates cure, establishing conformity of the loan to the 
unmet requirements as of the date of cure; or
    (ii) Repurchases the loan(s) from the issuing entity at a price at 
least equal to the remaining principal balance and accrued interest on 
the loan(s) as of the date of repurchase.
    (3) If the sponsor cures or repurchases pursuant to paragraph 
(b)(2) of this section, the sponsor must promptly notify, or cause to 
be notified, the holders of the asset-backed securities issued in the 
securitization transaction of any loan(s) included in such 
securitization transaction that is required to be cured or repurchased 
by the sponsor pursuant to paragraph (b)(2) of this section, including 
the principal amount of such loan(s) and the cause for such cure or 
repurchase.


Sec.  __.19  General exemptions.

    (a) Definitions. For purposes of this section, the following 
definitions shall apply:
    Community-focused residential mortgage means a residential mortgage 
exempt from the definition of ``covered transaction'' under Sec.  
1026.43(a)(3)(iv) and (v) of the CFPB's Regulation Z (12 CFR 
1026.43(a)).
    First pay class means a class of ABS interests for which all 
interests in the class are entitled to the same priority of payment and 
that, at the time of closing of the transaction, is entitled to 
repayments of principal and payments of interest prior to or pro-rata 
with all other classes of securities collateralized by the same pool of 
first-lien residential mortgages, until such class has no principal or 
notional balance remaining.
    Inverse floater means an ABS interest issued as part of a 
securitization transaction for which interest or other income is 
payable to the holder based on a rate or formula that varies inversely 
to a reference rate of interest.
    Qualifying three-to-four unit residential mortgage loan means a 
mortgage loan that is:
    (i) Secured by a dwelling (as defined in 12 CFR 1026.2(a)(19)) that 
is owner

[[Page 77761]]

occupied and contains three-to-four housing units;
    (ii) Is deemed to be for business purposes for purposes of 
Regulation Z under 12 CFR part 1026, Supplement I, paragraph 
3(a)(5)(i); and
    (iii) Otherwise meets all of the requirements to qualify as a 
qualified mortgage under Sec.  1026.43(e) and (f) of Regulation Z (12 
CFR 1026.43(e) and (f)) as if the loan were a covered transaction under 
that section.
    (b) This part shall not apply to:
    (1) U.S. Government-backed securitizations. Any securitization 
transaction that:
    (i) Is collateralized solely by residential, multifamily, or health 
care facility mortgage loan assets that are insured or guaranteed (in 
whole or in part) as to the payment of principal and interest by the 
United States or an agency of the United States, and servicing assets; 
or
    (ii) Involves the issuance of asset-backed securities that:
    (A) Are insured or guaranteed as to the payment of principal and 
interest by the United States or an agency of the United States; and
    (B) Are collateralized solely by residential, multifamily, or 
health care facility mortgage loan assets or interests in such assets, 
and servicing assets.
    (2) Certain agricultural loan securitizations. Any securitization 
transaction that is collateralized solely by loans or other assets 
made, insured, guaranteed, or purchased by any institution that is 
subject to the supervision of the Farm Credit Administration, including 
the Federal Agricultural Mortgage Corporation, and servicing assets;
    (3) State and municipal securitizations. Any asset-backed security 
that is a security issued or guaranteed by any State, or by any 
political subdivision of a State, or by any public instrumentality of a 
State that is exempt from the registration requirements of the 
Securities Act of 1933 by reason of section 3(a)(2) of that Act (15 
U.S.C. 77c(a)(2)); and
    (4) Qualified scholarship funding bonds. Any asset-backed security 
that meets the definition of a qualified scholarship funding bond, as 
set forth in section 150(d)(2) of the Internal Revenue Code of 1986 (26 
U.S.C. 150(d)(2)).
    (5) Pass-through resecuritizations. Any securitization transaction 
that:
    (i) Is collateralized solely by servicing assets, and by asset-
backed securities:
    (A) For which credit risk was retained as required under subpart B 
of this part; or
    (B) That were exempted from the credit risk retention requirements 
of this part pursuant to subpart D of this part;
    (ii) Is structured so that it involves the issuance of only a 
single class of ABS interests; and
    (iii) Provides for the pass-through of all principal and interest 
payments received on the underlying asset-backed securities (net of 
expenses of the issuing entity) to the holders of such class.
    (6) First-pay-class securitizations. Any securitization transaction 
that:
    (i) Is collateralized solely by servicing assets, and by first-pay 
classes of asset-backed securities collateralized by first-lien 
residential mortgages on properties located in any state:
    (A) For which credit risk was retained as required under subpart B 
of this part; or
    (B) That were exempted from the credit risk retention requirements 
of this part pursuant to subpart D of this part;
    (ii) Does not provide for any ABS interest issued in the 
securitization transaction to share in realized principal losses other 
than pro rata with all other ABS interests issued in the securitization 
transaction based on the current unpaid principal balance of such ABS 
interests at the time the loss is realized;
    (iii) Is structured to reallocate prepayment risk;
    (iv) Does not reallocate credit risk (other than as a consequence 
of reallocation of prepayment risk); and
    (v) Does not include any inverse floater or similarly structured 
ABS interest.
    (7) Seasoned loans. (i) Any securitization transaction that is 
collateralized solely by servicing assets, and by seasoned loans that 
meet the following requirements:
    (A) The loans have not been modified since origination; and
    (B) None of the loans have been delinquent for 30 days or more.
    (ii) For purposes of this paragraph, a seasoned loan means:
    (A) With respect to asset-backed securities collateralized by 
residential mortgages, a loan that has been outstanding and performing 
for the longer of:
    (1) A period of five years; or
    (2) Until the outstanding principal balance of the loan has been 
reduced to 25 percent of the original principal balance.
    (3) Notwithstanding paragraphs (b)(7)(ii)(A)(1) and (2) of this 
section, any residential mortgage loan that has been outstanding and 
performing for a period of at least seven years shall be deemed a 
seasoned loan.
    (B) With respect to all other classes of asset-backed securities, a 
loan that has been outstanding and performing for the longer of:
    (1) A period of at least two years; or
    (2) Until the outstanding principal balance of the loan has been 
reduced to 33 percent of the original principal balance.
    (8) Certain public utility securitizations. (i) Any securitization 
transaction where the asset-back securities issued in the transaction 
are secured by the intangible property right to collect charges for the 
recovery of specified costs and such other assets, if any, of an 
issuing entity that is wholly owned, directly or indirectly, by an 
investor owned utility company that is subject to the regulatory 
authority of a State public utility commission or other appropriate 
State agency.
    (ii) For purposes of this paragraph:
    (A) Specified cost means any cost identified by a State legislature 
as appropriate for recovery through securitization pursuant to 
specified cost recovery legislation; and
    (B) Specified cost recovery legislation means legislation enacted 
by a State that:
    (1) Authorizes the investor owned utility company to apply for, and 
authorizes the public utility commission or other appropriate State 
agency to issue, a financing order determining the amount of specified 
costs the utility will be allowed to recover;
    (2) Provides that pursuant to a financing order, the utility 
acquires an intangible property right to charge, collect, and receive 
amounts necessary to provide for the full recovery of the specified 
costs determined to be recoverable, and assures that the charges are 
non-bypassable and will be paid by customers within the utility's 
historic service territory who receive utility goods or services 
through the utility's transmission and distribution system, even if 
those customers elect to purchase these goods or services from a third 
party; and
    (3) Guarantees that neither the State nor any of its agencies has 
the authority to rescind or amend the financing order, to revise the 
amount of specified costs, or in any way to reduce or impair the value 
of the intangible property right, except as may be contemplated by 
periodic adjustments authorized by the specified cost recovery 
legislation.
    (c) Exemption for securitizations of assets issued, insured or 
guaranteed by the United States. This part shall not apply to any 
securitization transaction if the asset-backed securities issued in the 
transaction are:
    (1) Collateralized solely by obligations issued by the United 
States or an agency

[[Page 77762]]

of the United States and servicing assets;
    (2) Collateralized solely by assets that are fully insured or 
guaranteed as to the payment of principal and interest by the United 
States or an agency of the United States (other than those referred to 
in paragraph (b)(1)(i) of this section) and servicing assets; or
    (3) Fully guaranteed as to the timely payment of principal and 
interest by the United States or any agency of the United States;
    (d) Federal Deposit Insurance Corporation securitizations. This 
part shall not apply to any securitization transaction that is 
sponsored by the Federal Deposit Insurance Corporation acting as 
conservator or receiver under any provision of the Federal Deposit 
Insurance Act or of Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.
    (e) Reduced requirement for certain student loan securitizations. 
The 5 percent risk retention requirement set forth in Sec.  _.4 shall 
be modified as follows:
    (1) With respect to a securitization transaction that is 
collateralized solely by student loans made under the Federal Family 
Education Loan Program (``FFELP loans'') that are guaranteed as to 100 
percent of defaulted principal and accrued interest, and servicing 
assets, the risk retention requirement shall be 0 percent;
    (2) With respect to a securitization transaction that is 
collateralized solely by FFELP loans that are guaranteed as to at least 
98 percent but less than 100 percent of defaulted principal and accrued 
interest, and servicing assets, the risk retention requirement shall be 
2 percent; and
    (3) With respect to any other securitization transaction that is 
collateralized solely by FFELP loans, and servicing assets, the risk 
retention requirement shall be 3 percent.
    (f) Community-focused lending securitizations. (1) This part shall 
not apply to any securitization transaction if the asset-backed 
securities issued in the transaction are collateralized solely by 
community-focused residential mortgages and servicing assets.
    (2) For any securitization transaction that includes both 
community-focused residential mortgages and residential mortgages that 
are not exempt from risk retention under this part, the percent of risk 
retention required under Sec.  _.4(a) is reduced by the ratio of the 
unpaid principal balance of the community-focused residential mortgages 
to the total unpaid principal balance of residential mortgages that are 
included in the pool of assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction (the 
community-focused residential mortgage asset ratio); provided that:
    (i) The community-focused residential mortgage asset ratio is 
measured as of the cut-off date or similar date for establishing the 
composition of the pool assets collateralizing the asset-backed 
securities issued pursuant to the securitization transaction; and
    (ii) If the community-focused residential mortgage asset ratio 
would exceed 50 percent, the community-focused residential mortgage 
asset ratio shall be deemed to be 50 percent.
    (g) Exemptions for securitizations of certain three-to-four unit 
mortgage loans. A sponsor shall be exempt from the risk retention 
requirements in subpart B of this part with respect to any 
securitization transaction if:
    (1)(i) The asset-backed securities issued in the transaction are 
collateralized solely by qualifying three-to-four unit residential 
mortgage loans and servicing assets; or
    (ii) The asset-backed securities issued in the transaction are 
collateralized solely by qualifying three-to-four unit residential 
mortgage loans, qualified residential mortgages as defined in Sec.  
_.13, and servicing assets.
    (2) The depositor with respect to the securitization provides the 
certifications set forth in Sec.  _.13(b)(4) with respect to the 
process for ensuring that all assets that collateralize the asset-
backed securities issued in the transaction are qualifying three-to-
four unit residential mortgage loans, qualified residential mortgages, 
or servicing assets; and
    (3) The sponsor of the securitization complies with the repurchase 
requirements in Sec.  _.13(c) with respect to a loan if, after closing, 
it is determined that the loan does not meet all of the criteria to be 
either a qualified residential mortgage or a qualifying three-to-four 
unit residential mortgage loan, as appropriate.
    (h) Rule of construction. Securitization transactions involving the 
issuance of asset-backed securities that are either issued, insured, or 
guaranteed by, or are collateralized by obligations issued by, or loans 
that are issued, insured, or guaranteed by, the Federal National 
Mortgage Association, the Federal Home Loan Mortgage Corporation, or a 
Federal home loan bank shall not on that basis qualify for exemption 
under this part.


Sec.  _.20  Safe harbor for certain foreign-related transactions.

    (a) Definitions. For purposes of this section, the following 
definition shall apply:
    U.S. person means:
    (i) Any of the following:
    (A) Any natural person resident in the United States;
    (B) Any partnership, corporation, limited liability company, or 
other organization or entity organized or incorporated under the laws 
of any State or of the United States;
    (C) Any estate of which any executor or administrator is a U.S. 
person (as defined under any other clause of this definition);
    (D) Any trust of which any trustee is a U.S. person (as defined 
under any other clause of this definition);
    (E) Any agency or branch of a foreign entity located in the United 
States;
    (F) Any non-discretionary account or similar account (other than an 
estate or trust) held by a dealer or other fiduciary for the benefit or 
account of a U.S. person (as defined under any other clause of this 
definition);
    (G) Any discretionary account or similar account (other than an 
estate or trust) held by a dealer or other fiduciary organized, 
incorporated, or (if an individual) resident in the United States; and
    (H) Any partnership, corporation, limited liability company, or 
other organization or entity if:
    (1) Organized or incorporated under the laws of any foreign 
jurisdiction; and
    (2) Formed by a U.S. person (as defined under any other clause of 
this definition) principally for the purpose of investing in securities 
not registered under the Act; and
    (ii) ``U.S. person(s)'' does not include:
    (A) Any discretionary account or similar account (other than an 
estate or trust) held for the benefit or account of a person not 
constituting a U.S. person (as defined in paragraph (i) of this 
section) by a dealer or other professional fiduciary organized, 
incorporated, or (if an individual) resident in the United States;
    (B) Any estate of which any professional fiduciary acting as 
executor or administrator is a U.S. person (as defined in paragraph (i) 
of this section) if:
    (1) An executor or administrator of the estate who is not a U.S. 
person (as defined in paragraph (i) of this section) has sole or shared 
investment discretion with respect to the assets of the estate; and
    (2) The estate is governed by foreign law;
    (C) Any trust of which any professional fiduciary acting as trustee 
is a U.S. person (as defined in paragraph (i) of this section), if a 
trustee who is not a U.S. person (as defined in paragraph (i) of this 
section) has sole or shared

[[Page 77763]]

investment discretion with respect to the trust assets, and no 
beneficiary of the trust (and no settlor if the trust is revocable) is 
a U.S. person (as defined in paragraph (i) of this section);
    (D) An employee benefit plan established and administered in 
accordance with the law of a country other than the United States and 
customary practices and documentation of such country;
    (E) Any agency or branch of a U.S. person (as defined in paragraph 
(i) of this section) located outside the United States if:
    (1) The agency or branch operates for valid business reasons; and
    (2) The agency or branch is engaged in the business of insurance or 
banking and is subject to substantive insurance or banking regulation, 
respectively, in the jurisdiction where located;
    (F) The International Monetary Fund, the International Bank for 
Reconstruction and Development, the Inter-American Development Bank, 
the Asian Development Bank, the African Development Bank, the United 
Nations, and their agencies, affiliates and pension plans, and any 
other similar international organizations, their agencies, affiliates 
and pension plans.
    (b) In general. This part shall not apply to a securitization 
transaction if all the following conditions are met:
    (1) The securitization transaction is not required to be and is not 
registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.);
    (2) No more than 10 percent of the dollar value (or equivalent 
amount in the currency in which the ABS interests are issued, as 
applicable) of all classes of ABS interests in the securitization 
transaction are sold or transferred to U.S. persons or for the account 
or benefit of U.S. persons;
    (3) Neither the sponsor of the securitization transaction nor the 
issuing entity is:
    (i) Chartered, incorporated, or organized under the laws of the 
United States or any State;
    (ii) An unincorporated branch or office (wherever located) of an 
entity chartered, incorporated, or organized under the laws of the 
United States or any State; or
    (iii) An unincorporated branch or office located in the United 
States or any State of an entity that is chartered, incorporated, or 
organized under the laws of a jurisdiction other than the United States 
or any State; and
    (4) If the sponsor or issuing entity is chartered, incorporated, or 
organized under the laws of a jurisdiction other than the United States 
or any State, no more than 25 percent (as determined based on unpaid 
principal balance) of the assets that collateralize the ABS interests 
sold in the securitization transaction were acquired by the sponsor or 
issuing entity, directly or indirectly, from:
    (i) A majority-owned affiliate of the sponsor or issuing entity 
that is chartered, incorporated, or organized under the laws of the 
United States or any State; or
    (ii) An unincorporated branch or office of the sponsor or issuing 
entity that is located in the United States or any State.
    (c) Evasions prohibited. In view of the objective of these rules 
and the policies underlying Section 15G of the Exchange Act, the safe 
harbor described in paragraph (b) of this section is not available with 
respect to any transaction or series of transactions that, although in 
technical compliance with paragraphs (a) and (b) of this section, is 
part of a plan or scheme to evade the requirements of section 15G and 
this Part. In such cases, compliance with section 15G and this part is 
required.


Sec.  _.21  Additional exemptions.

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


Sec.  _.22  Periodic review of the QRM definition, exempted three-to-
four unit residential mortgage loans, and community-focused residential 
mortgage exemption

    (a) The Federal banking agencies and the Commission, in 
consultation with the Federal Housing Finance Agency and the Department 
of Housing and Urban Development, shall commence a review of the 
definition of qualified residential mortgage in Sec.  __.13, a review 
of the community-focused residential mortgage exemption in Sec.  
___.19(f), and a review of the exemption for qualifying three-to-four 
unit residential mortgage loans in Sec.  __.19(g):
    (1) No later than four years after the effective date of the rule 
(as it relates to securitizers and originators of asset-backed 
securities collateralized by residential mortgages), five years 
following the completion of such initial review, and every five years 
thereafter; and
    (2) At any time, upon the request of any Federal banking agency, 
the Commission, the Federal Housing Finance Agency or the Department of 
Housing and Urban Development, specifying the reason for such request, 
including as a result of any amendment to the definition of qualified 
mortgage or changes in the residential housing market.
    (b) The Federal banking agencies, the Commission, the Federal 
Housing Finance Agency and the Department of Housing and Urban 
Development shall publish in the Federal Register notice of the 
commencement of a review and, in the case of a review commenced under 
paragraph (a)(2) of this section, the reason an agency is requesting 
such review. After completion of any review, but no later than six 
months after the publication of the notice announcing the review, 
unless extended by the agencies, the agencies shall jointly publish a 
notice disclosing the determination of their review. If the agencies 
determine to amend the definition of qualified residential mortgage, 
the agencies shall complete any required rulemaking within 12 months of 
publication in the Federal Register of such notice disclosing the 
determination of their review, unless extended by the agencies.

End of Common Rule

List of Subjects

12 CFR Part 43

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

12 CFR Part 244

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

[[Page 77764]]

12 CFR Part 373

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

12 CFR Part 1234

    Government sponsored enterprises, Mortgages, Securities.

17 CFR Part 246

    Reporting and recordkeeping requirements, Securities.

24 CFR Part 267

    Mortgages.

Adoption of the Common Rule Text

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

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons stated in the common preamble and under the 
authority of 12 U.S.C. 93a, 1464, 5412(b)(2)(B), and 15 U.S.C. 78o-11, 
the Office of the Comptroller of the Currency is adopting the text of 
the common rule as set forth at the end of the Supplementary 
Information as part 43, chapter I of title 12, Code of Federal 
Regulations, and further amends part 43 as follows:

PART 43--CREDIT RISK RETENTION

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

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


0
2. Section 43.1 is added to read as follows:


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

    (a) Authority. This part is issued under the authority of 12 U.S.C. 
1 et seq., 93a, 161, 1464, 1818, 5412(b)(2)(B), and 15 U.S.C. 78o-11.
    (b) Purpose. (1) This part requires securitizers to retain an 
economic interest in a portion of the credit risk for any asset that 
the securitizer, through the issuance of an asset-backed security, 
transfers, sells, or conveys to a third party. This part specifies the 
permissible types, forms, and amounts of credit risk retention, and it 
establishes certain exemptions for securitizations collateralized by 
assets that meet specified underwriting standards.
    (2) Nothing in this part shall be read to limit the authority of 
the OCC to take supervisory or enforcement action, including action to 
address unsafe or unsound practices or conditions, or violations of 
law.
    (c) Scope. This part applies to any securitizer that is a national 
bank, a Federal savings association, a Federal branch or agency of a 
foreign bank, or a subsidiary thereof.
    (d) Compliance dates. Compliance with this part is required:
    (1) With respect to any securitization transaction collateralized 
by residential mortgages, on and after December 24, 2015; and
    (2) With respect to any other securitization transaction, on and 
after December 24, 2016.

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the Supplementary Information, the 
Board of Governors of the Federal Reserve System is adopting the text 
of the common rule as set forth at the end of the Supplementary 
Information as part 244 to chapter II of title 12, Code of Federal 
Regulations, and further amends part 244 as follows:

PART 244--CREDIT RISK RETENTION (REGULATION RR)

0
3. The authority citation for part 244 is added to read as follows:

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


0
4. The part heading for part 244 is revised to read as set forth above.

0
5. Section 244.1 is added to read as follows:


Sec.  244.1  Authority, purpose, and scope.

    (a) Authority. (1) In general. This part (Regulation RR) is issued 
by the Board of Governors of the Federal Reserve System under section 
15G of the Securities Exchange Act of 1934, as amended (Exchange Act) 
(15 U.S.C. 78o-11), as well as under the Federal Reserve Act, as 
amended (12 U.S.C. 221 et seq.); section 8 of the Federal Deposit 
Insurance Act (FDI Act), as amended (12 U.S.C. 1818); the Bank Holding 
Company Act of 1956, as amended (BHC Act) (12 U.S.C. 1841 et seq.); the 
Home Owners' Loan Act of 1933 (HOLA) (12 U.S.C. 1461 et seq.); section 
165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) (12 U.S.C. 5365); and the International Banking Act of 
1978, as amended (12 U.S.C. 3101 et seq.).
    (2) Nothing in this part shall be read to limit the authority of 
the Board to take action under provisions of law other than 15 U.S.C. 
78o-11, including action to address unsafe or unsound practices or 
conditions, or violations of law or regulation, under section 8 of the 
FDI Act.
    (b) Purpose. This part requires any securitizer to retain an 
economic interest in a portion of the credit risk for any asset that 
the securitizer, through the issuance of an asset-backed security, 
transfers, sells, or conveys to a third party in a transaction within 
the scope of section 15G of the Exchange Act. This part specifies the 
permissible types, forms, and amounts of credit risk retention, and 
establishes certain exemptions for securitizations collateralized by 
assets that meet specified underwriting standards or that otherwise 
qualify for an exemption.
    (c) Scope. (1) This part applies to any securitizer that is:
    (i) A state member bank (as defined in 12 CFR 208.2(g)); or
    (ii) Any subsidiary of a state member bank.
    (2) Section 15G of the Exchange Act and the rules issued thereunder 
apply to any securitizer that is:
    (i) A bank holding company (as defined in 12 U.S.C. 1842);
    (ii) A foreign banking organization (as defined in 12 CFR 
211.21(o));
    (iii) An Edge or agreement corporation (as defined in 12 CFR 
211.1(c)(2) and (3));
    (iv) A nonbank financial company that the Financial Stability 
Oversight Council has determined under section 113 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (12 
U.S.C. 5323) shall be supervised by the Board and for which such 
determination is still in effect; or
    (v) A savings and loan holding company (as defined in 12 U.S.C. 
1467a); and
    (vi) Any subsidiary of the foregoing.
    (3) Compliance with this part is required:
    (i) With respect to any securitization transaction collateralized 
by residential mortgages on December 24, 2015; and
    (ii) With respect to any other securitization transaction on 
December 24, 2016.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the Supplementary Information, the 
Federal

[[Page 77765]]

Deposit Insurance Corporation adds the text of the common rule as set 
forth at the end of the Supplementary Information as part 373 to 
chapter III of title 12, Code of Federal Regulations, and further 
amends part 373 as follows:

PART 373--CREDIT RISK RETENTION

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

    Authority: 12 U.S.C. 1811 et seq. and 3103 et seq., and 15 
U.S.C. 78o-11.


0
7. Section 373.1 is added to read as follows:


Sec.  373.1  Purpose and scope.

    (a) Authority. (1) In general. This part is issued by the Federal 
Deposit Insurance Corporation (FDIC) under section 15G of the 
Securities Exchange Act of 1934, as amended (Exchange Act) (15 U.S.C. 
78o-11), as well as the Federal Deposit Insurance Act (12 U.S.C. 1811 
et seq.) and the International Banking Act of 1978, as amended (12 
U.S.C. 3101 et seq.).
    (2) Nothing in this part shall be read to limit the authority of 
the FDIC to take action under provisions of law other than 15 U.S.C. 
78o-11, including to address unsafe or unsound practices or conditions, 
or violations of law or regulation under section 8 of the Federal 
Deposit Insurance Act (12 U.S.C. 1818).
    (b) Purpose. This part requires securitizers to retain an economic 
interest in a portion of the credit risk for any asset that the 
securitizer, through the issuance of an asset-backed security, 
transfers, sells, or conveys to a third party in a transaction within 
the scope of section 15G of the Exchange Act. This part specifies the 
permissible types, forms, and amounts of credit risk retention, and it 
establishes certain exemptions for securitizations collateralized by 
assets that meet specified underwriting standards or that otherwise 
qualify for an exemption.
    (c) Scope. This part applies to any securitizer that is:
    (1) A state nonmember bank (as defined in 12 U.S.C. 1813(e)(2));
    (2) An insured state branch of a foreign bank (as defined in 12 CFR 
347.202);
    (3) A state savings association (as defined in 12 U.S.C. 
1813(b)(3)); or
    (4) Any subsidiary of an entity described in paragraph (c)(1), (2), 
or (3) of this section.

Federal Housing Finance Agency

12 CFR Chapter XII

Authority and Issuance

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

PART 1234--CREDIT RISK RETENTION

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

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


0
9. Section 1234.1 is added to read as follows:


Sec.  1234.1  Purpose, scope and reservation of authority.

    (a) Purpose. This part requires securitizers to retain an economic 
interest in a portion of the credit risk for any residential mortgage 
asset that the securitizer, through the issuance of an asset-backed 
security, transfers, sells, or conveys to a third party in a 
transaction within the scope of section 15G of the Exchange Act. This 
part specifies the permissible types, forms, and amounts of credit risk 
retention, and it establishes certain exemptions for securitizations 
collateralized by assets that meet specified underwriting standards or 
that otherwise qualify for an exemption.
    (b) Scope. (1) Effective December 24, 2015, this part will apply to 
any securitizer that is an entity regulated by the Federal Housing 
Finance Agency with respect to a securitization transaction 
collateralized by residential mortgages.
    (2) Effective December 24, 2016, this part will apply to any 
securitizer that is an entity regulated by the Federal Housing Finance 
Agency with respect to a securitization transaction collateralized by 
assets other than residential mortgages.
    (c) Reservation of authority. Nothing in this part shall be read to 
limit the authority of the Director of the Federal Housing Finance 
Agency to take supervisory or enforcement action, including action to 
address unsafe or unsound practices or conditions, or violations of 
law.

0
10. Amend Sec.  1234.14 as follows:
0
a. Revise the section heading;
0
b. In the introductory text, remove the reference ``Sec. Sec.  1234.15 
through 1234.18'' and add in its place the reference ``Sec. Sec.  
1234.15 and 1234.17'';
0
c. Remove the definitions of ``Automobile loan'', ``Commercial loan'', 
``Debt to income (DTI) ratio'', ``Earnings before interest, taxes, 
depreciation, and amortization (EBITDA)'', ``Leverage Ratio'', ``Model 
year'', ``Payments-in-kind'', ``Purchase price'', ``Salvage title'', 
``Total debt'', ``Total liabilities ratio'', and ``Trade-in 
allowance''; and
0
d. Revise the definition of ``Debt service coverage (DSC) ratio''.
    The revisions read as follows:


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

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

0
11. Revise Sec.  1234.15 to read as follows:


Sec.  1234.15  Qualifying commercial real estate loans.

    (a) General exception. Commercial real estate loans that are 
securitized through a securitization transaction shall be subject to a 
0 percent risk retention requirement under subpart B of this part, 
provided that the following conditions are met:
    (1) The CRE assets meet the underwriting standards set forth in 
Sec.  1234.17;
    (2) The securitization transaction is collateralized solely by CRE 
loans and by servicing assets;
    (3) The securitization transaction does not permit reinvestment 
periods; and
    (4) The sponsor provides, or causes to be provided, to potential 
investors a reasonable period of time prior to the sale of asset-backed 
securities of the issuing entity, and, upon request, to the Commission, 
and to the FHFA, in written form under the caption ``Credit Risk 
Retention'' a description of the manner in which the sponsor determined 
the aggregate risk retention requirement for the securitization 
transaction after including qualifying CRE loans with 0 percent risk 
retention.
    (b) Risk retention requirement. For any securitization transaction 
described in paragraph (a) of this section, the percentage of risk 
retention required under Sec.  1234.3(a) is reduced by the percentage 
evidenced by the ratio of the unpaid principal balance of the 
qualifying CRE loans to the total unpaid principal balance of CRE loans 
that are included in the pool of assets collateralizing the asset-
backed securities issued pursuant to the securitization transaction 
(the qualifying asset ratio); provided that;

[[Page 77766]]

    (1) The qualifying asset ratio is measured as of the cut-off date 
or similar date for establishing the composition of the securitized 
assets collateralizing the asset-backed securities issued pursuant to 
the securitization transaction;
    (2) If the qualifying asset ratio would exceed 50 percent, the 
qualifying asset ratio shall be deemed to be 50 percent; and
    (3) The disclosure required by paragraph (a)(4) of this section 
also includes descriptions of the qualifying CRE loans and descriptions 
of the CRE loans that are not qualifying CRE loans, and the material 
differences between the group of qualifying CRE loans and CRE loans 
that are not qualifying loans with respect to the composition of each 
group's loan balances, loan terms, interest rates, borrower credit 
information, and characteristics of any loan collateral.
    (c) Exception for securitizations of qualifying CRE only. 
Notwithstanding other provisions of this section, the risk retention 
requirements of subpart B of this part shall not apply to 
securitization transactions where the transaction is collateralized 
solely by servicing assets and qualifying CRE loans.
    (d) Record maintenance. A regulated entity must retain the 
disclosures required in paragraphs (a) and (b) of this section and the 
certification required in Sec.  1234.17(a)(10) of this part, in its 
records until three years after all ABS interests issued in the 
securitization are no longer outstanding. The regulated entity must 
provide the disclosures and certifications upon request to the 
Commission and the FHFA.


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

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

Securities and Exchange Commission

17 CFR Chapter II

Authority and Issuance

    For the reasons stated in the Supplementary Information, the 
Securities and Exchange Commission is adopting the text of the common 
rule as set forth at the end of the Supplementary Information as part 
246, title 17, chapter II of the Code of Federal Regulations, under the 
authority set forth in Sections 7, 10, 19(a), and 28 of the Securities 
Act and Sections 3, 13, 15, 15G, 23 and 36 of the Exchange Act, and 
further amends part 246 as follows:

PART 246--CREDIT RISK RETENTION

0
13. The authority citation for part 246 is added to read as follows:

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


0
14. Section 246.1 is added to read as follows:


Sec.  246.1  Purpose, scope, and authority.

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

Department of Housing and Urban Development

24 CFR Chapter II

Authority and Issuance

    For the reasons stated in the preamble, HUD is adopting the text of 
the common rule as set forth at the end of the Supplementary 
Information as 24 CFR part 267, and further amends part 267 as follows:

PART 267--CREDIT RISK RETENTION

0
15. The authority citation for part 267 is added to read as follows:

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


0
16. Section 267.1 is added to read as follows:


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

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

    Dated: October 21, 2014.
Thomas J. Curry,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, October 23, 2014.
Robert deV. Frierson,
Secretary of the Board.
    Dated at Washington, DC, this 21st day of October, 2014.

    By order of the Board of Directors.

    Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: October 22, 2014.

    By the Securities and Exchange Commission.
Kevin M. O'Neill,
Deputy Secretary.
    Dated: October 21, 2014.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
    By the Department of Housing and Urban Development.
Juli[aacute]n Castro,
Secretary.
[FR Doc. 2014-29256 Filed 12-23-14; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 8010-01-P; 8070-01-P


