Credit Risk Retention: Final Rule
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FDIC Financial Institution Letters › Credit Risk Retention: Final Rule
Text
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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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.
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)
ent
(HUD).
ACTION: Final rule.
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,
0 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,
cial 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
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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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).
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).
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), (c)(1)(A) and
(c)(1)(B)(ii).
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).
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).
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
Continued
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
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
securitiz
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.
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
of the rule (or
similar references to the date on which
the rule becomes effective) are to the
date on which compliance is required.
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
Section 15G allocates the authority for
writing rules to implement its
provisions among the agencies in
various ways
rcent 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
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.
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)
s 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.
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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
from the requirements of the final rule, HUD does
not codify the rule into its title of the Code of
Federal Regulations.
11 Credit Risk Retention; Proposed Rule, 76 FR
24090 (April 29, 2011).
12 Credit Risk Retention; Proposed Rule, 78 FR
57928 (September 20, 2013).
13 15 U.S.C. 1639c.
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
n, 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).
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.
agency’s rule identifies the entities or
transactions subject to such agency’s
rule.
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
er, 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.
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
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.
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
w 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
nesses, 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.
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
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
uality of the instruments collateralized
by such loans and ultimately the health
of the financial markets and their
participants.20
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
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21 See 15 U.S.C. 78o–11(c)(1)(B)(ii), (e)(1)–(2).
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).
28 See Original Proposal, 76 FR at 24117–24129
and 24164–24167.
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’’).
30 See Revised Proposal, 78 FR 57928.
underlying a securitization transaction,
and, thus, help align the interests of the
securitizer with the interests of
investors
oposal, 76 FR at 24117–24129
and 24164–24167.
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’’).
30 See Revised Proposal, 78 FR 57928.
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
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
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
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
es 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.
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
s 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
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
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
ion 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
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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).
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
amended
by 78 FR 35429 (June 12, 2013) and 78 FR 44686
(July 24, 2013).
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
tion 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
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
tion 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.
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
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
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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
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33 15 U.S.C. 1639c.
34 See Final QM rule.
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
mment,
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
plementing 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.
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
ed 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
, 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 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
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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.
36 See 17 CFR 229.1100 through 17 CFR 229.1123.
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.’’).
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
exemptions for government-related
transactions and certain
resecuritizations from the revised
proposal
n 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
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
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.
II
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.
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.
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
e
applied to securitizers of offerings of
asset-backed securities regardless of
whether the offering was registered with
the Commission under the Securities
Act.
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.
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
efinition of
that term in the Commission’s
Regulation AB.
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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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)
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.
42 See 15 U.S.C. 78o–11(a)(3)(B) and section 2 of
the final rule, infra.
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
ked
securities.
42 See 15 U.S.C. 78o–11(a)(3)(B) and section 2 of
the final rule, infra.
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
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
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 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
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
h 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.
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
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eaning 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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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).
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
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
s 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
ansferred 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
uld 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.
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
uctures 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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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.
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)
ntion
rules since non-economic residual interests usually
have a negative value.
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.
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.
III. General Risk Retention
Requirement
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.
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
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
s 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
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.
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
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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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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.
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
, 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
fy 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).
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
ould 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
cipation 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
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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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
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.
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.
55 See Revised Proposal, 78 FR 57939.
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
t 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 securi
l 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.
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
etention, 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.
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
y 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
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 resul
tal residual interest.55
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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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.
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
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
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
t
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.
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
ounts 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
on 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
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
he 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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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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.
58 See section 2 of the final rule (definition of
‘‘eligible horizontal residual interest’’).
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
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
ty 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
ith 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.
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
t (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
nt 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
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ligible 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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
59 Cf. Financial Accounting Standards Board,
Accounting Standards Codification Topic 820—Fair
Value Measurement.
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
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
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
sors 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
he 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
erence 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
or 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
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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Rules and Regulations
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.
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
ion
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
ve 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
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