disadvantages of aligning the QRM and QM definitions as the market
evolves to ensure the rule best meets the statutory objectives of
section 15G of the Exchange Act.
Request for Comment
    89(a). Is the agencies' approach to considering the QRM definition,
as described above, appropriate? 89(b). Why or why not? 89(c). What
other factors or circumstances should the agencies take into
consideration in defining QRM?

C. Proposed Definition of QRM

    As noted above, Section 15G of the Exchange Act requires, among
other things, that the definition of QRM be no broader than the
definition of QM. The Final QM Rule is effective January 10, 2014.\161\
The external parameters of what may constitute a QRM may continue to
evolve as the CFPB clarifies, modifies or adjusts the QM rules.\162\
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    \161\ See Final QM Rule.
    \162\ For example, the CFPB recently finalized rules to further
clarify when a loan is eligible for purchase, insurance or guarantee
by an Enterprise or applicable federal agency for purposes of
determining whether a loan is a QM. See Amendments to the 2013
Mortgage Rules under the Real Estate Settlement Procedures Act
(Regulation X) and the Truth in Lending Act (Regulation Z), 78 FR
44686 (July 24, 2013). The CFPB also recently proposed rules that
further address what amounts should be included as loan originator
compensation in certain cases (i.e., manufactured home loans) for
purposes of calculating the 3 percent points and fees threshold
under the QM rules. See Amendments to the 2013 Mortgage Rules under
the Equal Credit Opportunity Act (Regulation B), Real Estate
Settlement Procedures Act (Regulation X), and the Truth in Lending
Act (Regulation Z), 78 FR 39902 (July 2, 2013).
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    Because the definition of QRM incorporates QM by reference, the
proposed QRM definition would expressly exclude home-equity lines of
credit (HELOCs), reverse mortgages, timeshares, and temporary loans or
``bridge'' loans of 12 months or less, consistent with the original
proposal of QRM.\163\ It would also expand the types of loans eligible
as QRMs.\164\ Under the original proposal, a QRM was limited to closed-
end, first-lien mortgages used to purchase or refinance a one-to-four
family property, at least one unit of which is the principal dwelling
of the borrower. By proposing to align the QRM definition to the QM
definition, the scope of loans eligible to qualify as a QRM would be
expanded to include any closed-end loan secured by any dwelling (e.g.,
home purchase, refinances, home equity lines, and second or vacation
homes).\165\ Accordingly, the proposed scope of the QRM definition
would differ from the original proposal because it would include loans
secured by any dwelling (consistent with the definition of QM), not
only loans secured by principal dwellings. In addition, if a
subordinate lien meets the definition of a QM, then it would also be
eligible to qualify as a QRM, whereas under the original proposal QRM-
eligibility was limited to first-liens. The agencies believe the
expansion to permit loans secured by any dwelling, as well as
subordinate liens, is appropriate to preserve credit access and
simplicity in incorporating the QM definition into QRM.
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    \163\ Also excluded would be most loan modifications, unless the
transaction meets the definition of refinancing set forth in section
1026.20(a) of the Final QM rule, and credit extended by certain
community based lending programs, down payment assistance providers,
certain non-profits, and Housing Finance Agencies, as defined under
24 CFR 266.5. For a complete list, see 12 CFR 1026.43(a).
    \164\ See 12 CFR 1026.43(e)(2), which provides that QM is a
covered transaction that meets the criteria set forth in Sec. Sec.
1026.43(e)(2), (4), (5), (6) or (f). A ``covered transaction'' is
defined to mean ``a consumer credit transaction that is secured by a
dwelling, as defined in Sec.  1026.2(a)(19), including any real
property attached to a dwelling, other than a transaction exempt
from coverage under [Sec.  1026.43(a)].''
    \165\ See 12 CFR 1026.43(a).
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    The CFPB regulations implementing the rules for a QM provide
several definitions of a QM. The agencies propose that a QRM would be a
loan that meets any of the QM definitions.\166\
---------------------------------------------------------------------------

    \166\ See 12 CFR 1026.43(e)(2), (e)(4), (e)(5), or (e)(6) or
(f).
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    These include the general QM definition, which provide that a loan
must have:
     Regular periodic payments that are substantially equal;

     No negative amortization, interest only, or balloon
features;
     A maximum loan term of 30 years;
     Total points and fees that do not exceed 3 percent of the
total loan amount, or the applicable amounts specified in the Final QM
Rule, for small loans up to $100,000;
     Payments underwritten using the maximum interest rate that
may apply during the first five years after the date on which the first
regular periodic payment is due;
     Consideration and verification of the consumer's income
and assets, including employment status if relied upon, and current
debt obligations, mortgage-related obligations, alimony and child
support; and
     Total debt-to-income ratio that does not exceed 43
percent.
    In recognition of the current mortgage market conditions and
expressed concerns over credit availability, the CFPB also finalized a
second temporary QM definition.\167\ The agencies propose that a QRM
would also include a residential mortgage loan that meets this second
temporary QM definition. This temporary QM definition provides that a
loan must have:
---------------------------------------------------------------------------

    \167\ 12 CFR 1026.43(e)(4).
---------------------------------------------------------------------------

     Regular periodic payments that are substantially equal;
     No negative amortization, interest only, or balloon
features;
     A maximum loan term of 30 years;
     Total points and fees, that do not exceed 3 percent of the
total loan amount, or the applicable amounts specified for small loans
up to $100,000; and
     Be eligible for purchase, guarantee or insurance by an
Enterprise, HUD, the Veterans Administration, U.S. Department of
Agriculture, or Rural Housing Service.\168\
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    \168\ See 12 CFR 1206.43(e)(4)(ii).
---------------------------------------------------------------------------

    Lenders that make a QM have a presumption of compliance with the
ability-to-repay requirement under 129C(a) of TILA, as implemented by
Sec.  1026.43(c) of Regulation Z, and therefore obtain some protection
from such potential liability.\169\ However, there are different levels
of protection from TILA liability \170\ depending on whether a QM is
higher-priced or not.\171\ QMs that are not higher-priced loans
received a legal safe harbor for compliance with the ability-to-repay
requirement, whereas QMs that are higher-priced covered transactions
received a rebuttable presumption of compliance.\172\ Both non-higher
priced and higher-priced QMs would be eligible as QRMs without
distinction, and could be pooled together in the same securitization.
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    \169\ See section 129C(b)(1) of TILA, 15 U.S.C. 1639c(b)(1).
    \170\ Lenders that violate the ability-to-repay requirement may
be liable for actual and statutory damages, plus court and attorney
fees. Consumers can bring a claim for damages within three years
against a creditor. Consumers can also raise a claim for these
damages at any time in a foreclosure action taken by the creditor or
an assignee. The damages are capped to limit the lender's liability.
See sections 130(a), (e), and (k) of TILA, 15 U.S.C. 1640. However,
the level of protection afforded differs depending on the loan's
price. For a detailed discussion of the safe harbor and presumption
of compliance, see 78 FR at 6510-6514.
    \171\ For the definition of higher-priced covered transaction,
see 12 CFR 1026.43(b)(4) and accompanying commentary.
    \172\ For a detailed discussion of the safe harbor and
presumption of compliance, see 78 FR at 6510-6514.
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    The temporary QM definition for loans eligible for purchase or
guarantee by an Enterprise expires once the Enterprise exits
conservatorship.\173\ In addition, the FHA, the U.S. Department of
Veteran Affairs, the U.S. Department of Agriculture, and the Rural
Housing Service each have authority under the Dodd-Frank Act to define
QM for their own loans.\174\ The temporary QM definition for loans
eligible to be insured or guaranteed by one of these federal agencies
expires once the relevant federal agency issues its own QM rules.\175\
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    \173\ See 12 CFR 1026.43(e)(4)(iii).
    \174\ See section 129C(b)(3)(B)(ii) of TILA; 15 U.S.C. 1639c.
    \175\ See 12 CFR 1026.43(e)(4)(iii).
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    Finally, the CFPB provided several additional QM definitions to
facilitate credit offered by certain small creditors. The agencies
propose that a QRM would be a QM that meets any of these three special
QM definitions.\176\ The Final QM Rule allows small creditors to
originate loans as QMs with greater underwriting flexibility (e.g., no
quantitative DTI threshold applies) than under the general QM
definition.\177\ However, this third QM definition is available only to
small creditors that meet certain asset and threshold criteria \178\
and hold the QM loans in portfolio for at least three years, with
certain exceptions (e.g., transfer of a loan to another qualifying
small creditor, supervisory sales, and merger and acquisitions).\179\
Accordingly, loans meeting this third ``small creditor'' QM definition
would generally be ineligible as QRMs for three years following
consummation because they could not be sold.
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    \176\ See 12 CFR 1026.43(e)(5), 12 CFR 1026.43(e)(6), and 12 CFR
1026.43(f).
    \177\ See 12 CFR 1026.43(e)(5).
    \178\ An entity qualifies as a ``small creditor'' if it does not
exceed $2 billion in total assets; originates 500 or fewer first-
lien covered transactions in the prior calendar year (including all
affiliates); and holds the QMs in portfolio for at least three
years, with certain exceptions. See 12 CFR 1026.43(e)(5)(i)(D),
discussed in detail in 78 FR at 35480-88 (June 12, 2013).
    \179\ See 12 CFR 1026.43(e)(5)(ii).
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    The Final QM Rule also provides these eligible small creditors with
a two-year transition period during which they can originate balloon
loans that are generally held in portfolio, and meet certain criteria,
as QMs.\180\ This two-year transition period expires January 10, 2016.
Again, loans meeting this fourth QM definition would generally be
ineligible as QRMs for three years following consummation. Last, the
Final QM Rule allows eligible small creditors that operate
predominantly in rural or underserved areas to originate balloon-
payment loans as QMs if they are generally held in portfolio, and meet
certain other QM criteria.\181\ Loans meeting this third QM definition
would also generally be ineligible for securitization for three years
following consummation because they cannot be sold.
---------------------------------------------------------------------------

    \180\ See 12 CFR 1026.43(e)(6), discussed in detail at 78 FR at
35488.
    \181\ See 12 CFR 1026.43(f).
---------------------------------------------------------------------------

    For the reasons discussed above, the agencies are not proposing to
incorporate either an LTV ratio requirement or standards related to a
borrower's credit history into the definition of QRM.\182\ Furthermore,
the agencies are not proposing any written appraisal requirement or
assumability requirement as part of QRM. In response to comments, and
as part of the simplification of the QRM exemption from the original
proposal, the agencies are not proposing any servicing standards as
part of QRM.
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    \182\ The agencies continue to believe that both LTV and
borrower credit history are important aspects of prudent
underwriting and safe and sound banking.
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Request for Comment
    The agencies invite comment on all aspects of the proposal to
equate QRM with QM. In particular,
    90. Does the proposal reasonably balance the goals of helping
ensure high quality underwriting and appropriate risk management, on
the one hand, and the public interest in continuing access to credit by
creditworthy borrowers, on the other?
    91. Will the proposal, if adopted, likely have a significant effect
on the availability of credit? Please provide data supporting the
proffered view.
    92(a). Is the proposed scope of the definition of QRM, which would
include loans secured by subordinate liens, appropriate? 92(b). Why or
why not? 92(c). To what extent do concerns

about the availability and cost of credit affect your answer?
    93(a). Should the definition of QRM be limited to loans that
qualify for certain QM standards in the final QM Rule? 93(b). For
example, should the agencies limit QRMs to those QMs that could qualify
for a safe harbor under 12 CFR 1026.43(e)(1)? Provide justification for
your answer.

D. Exemption for QRMs

    In order for a QRM to be exempted from the risk retention
requirement, the proposal includes evaluation and certification
conditions related to QRM status, consistent with statutory
requirements. For a securitization transaction to qualify for the QRM
exemption, each QRM collateralizing the ABS would be required to be
currently performing (i.e., the borrower is not 30 days or more past
due, in whole or in part, on the mortgage) at the closing of the
securitization transaction. Also, the depositor for the securitization
would be required to certify that it evaluated the effectiveness of its
internal supervisory controls to ensure that all of the assets that
collateralize the securities issued out of the transaction are QRMs,
and that it has determined that its internal supervisory controls are
effective. This evaluation would be performed as of a date within 60
days prior to the cut-off date (or similar date) for establishing the
composition of the collateral pool. The sponsor also would be required
to provide, or cause to be provided, a copy of this certification to
potential investors a reasonable period of time prior to the sale of
the securities and, upon request, to the Commission and its appropriate
Federal banking agency, if any.
Request for Comment
    94(a). Are the proposed certification requirements appropriate?
94(b). Why or why not?

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

    The original proposal provided that, if after the closing of a QRM
securitization transaction, it was discovered that a mortgage did not
meet all of the criteria to be a QRM due to inadvertent error, the
sponsor would have to repurchase the mortgage. The agencies received a
few comments regarding this requirement. Some commenters were
supportive of the proposed requirement, while other commenters
suggested that the agencies allow substitution of mortgages failing to
meet the QRM definition.
    The agencies are again proposing a buyback requirement for
mortgages that are determined to not meet the QRM definition by
inadvertent error after the closing of the securitization transaction,
provided that the conditions set forth in section 12 of the proposed
rules are met.\183\ These conditions are intended to provide a sponsor
with the opportunity to correct inadvertent errors by promptly
repurchasing any non-qualifying mortgage loans from the pool. In
addition, this proposed requirement would help ensure that sponsors
have a strong economic incentive to ensure that all mortgages backing a
QRM securitization satisfy all of the conditions applicable to QRMs
prior to closing of the transactions. Subsequent performance of the
loan, absent any failure to meet the QRM requirements at the closing of
the securitization transaction, however, would not trigger the proposed
buyback requirement.
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    \183\ Sponsors may choose to repurchase a loan from securitized
pools even if there is no determination that the loan is not a QRM.
The agencies would not view such repurchases as determinative of
whether or not a loan meets the QRM standard.
---------------------------------------------------------------------------

Request for Comment
    95(a). What difficulties may occur with the proposed repurchase
requirement under the QRM exemption? 95(b). Are there alternative
approaches that would be more effective? 95(c). Provide details and
supporting justification.

E. Request for Comment on Alternative QRM Approach

    Although the agencies believe that the proposed approach of
aligning QRM with QM is soundly based, from both a policy and a legal
standpoint, the agencies are seeking public input on its merits. The
agencies are also seeking input on an alternative approach, described
below, that was considered by the agencies, but ultimately not selected
as the preferred approach. The alternative approach would take the QM
criteria as a starting point for the QRM definition, and then
incorporate additional standards that were selected to reduce the risk
of default. Under this approach, significantly fewer loans likely would
qualify as a QRM and, therefore, be exempt from risk retention.
1. Description of Alternative Approach
    The alternative approach, referred to as ``QM-plus'' would begin
with the core QM criteria adopted by the CFPB, and then add four
additional factors. Under this ``QM-plus'' approach:
     Core QM criteria. A QRM would be required to meet the
CFPB's core criteria for QM, including the requirements for product
type,\184\ loan term,\185\ points and fees,\186\ underwriting,\187\
income and debt verification,\188\ and DTI.\189\ For loans meeting
these requirements, the QM-plus approach would draw no distinction
between those mortgages that fall within the CFPB's ``safe harbor''
versus those that fall within the CFPB's ``presumption of compliance
for higher-priced'' mortgages.\190\ Under QM-plus, either type of
mortgage that meets the CFPB's core criteria for QM would pass this
element of the QM-plus test. Loans that are QM because they meet the
CFPB's provisions for GSE-eligible covered transactions, small creditor
exceptions, or balloon loan provisions would, however, not be
considered QRMs under the QM-plus approach.
---------------------------------------------------------------------------

    \184\ 12 CFR 1026.43(e)(2)(i).
    \185\ 12 CFR 1026.43(e)(2)(ii).
    \186\ 12 CFR 1026.43(e)(2)(iii); 12 CFR 1026.43(e)(3).
    \187\ 12 CFR 1026.43(e)(2)(iv).
    \188\ 12 CFR 1026.43(e)(2)(v).
    \189\ 12 CFR 1026.43(e)(2)(vi).
    \190\ Cf. 12 CFR 1026.43(e)(1)(i) with 12 CFR 1026.43(e)(1)(ii).
---------------------------------------------------------------------------

     One-to-four family principal dwelling. In addition, QRM
treatment would only be available for loans secured by one-to-four
family real properties that constitute the principal dwelling of the
borrower.\191\ Other types of loans eligible for QM status, such as
loans secured by a boat used as a residence, or loans secured by a
consumer's vacation home, would not be eligible under the QM-plus
approach.
---------------------------------------------------------------------------

    \191\ The scope of properties that fall within the meaning of
``one-to-four family property'' and ``principal dwelling'' would be
consistent with the definitions used in the agencies' original QRM
proposal in Sec.  --.15(a), including consistent application of the
meaning of the term ``principal dwelling'' as it is used in TILA
(see 12 CFR 1026.2(a)(24) and Official Staff Interpretations to the
Bureau's Regulation Z, comment 2(a)(24)-3).
---------------------------------------------------------------------------

     Lien requirements. All QRMs would be required to be first-
lien mortgages. For purchase QRMs, the QM-plus approach excludes so-
called ``piggyback'' loans; no other recorded or perfected liens on the
property could exist at closing to the knowledge of the originator. For
refinance QRMs, junior liens would not be prohibited, but would be
included in the LTV calculations described below.\192\
---------------------------------------------------------------------------

    \192\ These requirements are similar to those in the agencies'
original QRM proposal in Sec.  --.15. See Sec.  --.15(a)
(definitions of ``combined loan to value ratio'' and ``loan to value
ratio'') and Sec.  --.15(d)(2) (subordinate liens).
---------------------------------------------------------------------------

     Credit history. To be eligible for QRM status, the
originator would be required to determine the borrower was not
currently 30 or more days past due on any debt obligation, and the
borrower had not been 60 or more days

past due on any debt obligations within the preceding 24 months.
Further, the borrower must not have, within the preceding 36 months,
been a debtor in a bankruptcy proceeding or been subject to a judgment
for collection of an unpaid debt; had personal property repossessed;
had any one-to-four family property foreclosed upon; or engaged in a
short sale or deed in lieu of foreclosure.\193\
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    \193\ These credit history criteria would be the same as the one
used in the agencies' original QRM proposal in Sec.  --.15(d)(5),
including the safe harbor allowing the originator to make the
required determination by reference to two credit reports.
---------------------------------------------------------------------------

     Loan to value ratio. To be eligible for QRM status, the
LTV at closing could not exceed 70 percent. Junior liens, which would
only be permitted for non-purchase QRMs as noted above, must be
included in the LTV calculation if known to the originator at the time
of closing, and if the lien secures a HELOC or similar credit plan,
must be included as if fully drawn.\194\ Property value would be
determined by an appraisal, but for purchase QRMs, if the contract
price at closing for the property was lower than the appraised value,
the contract price would be used as the value.\195\
---------------------------------------------------------------------------

    \194\ These requirements would be consistent with the approach
used in the agencies' original QRM proposal in Sec. Sec.  --.15(a)
and ----.15(d)(9), except the same LTV would be used for purchases,
refinancings, and cash-out refinancings. As the agencies discussed
in the original proposal, there is data to suggest that refinance
loans are more sensitive to LTV level. See Original Proposal at
section IV.B.4. This single LTV approach in the QM-plus is
equivalent to the most conservative LTV level (for cash-out
refinancings) included in the original proposal.
    \195\ As in the agencies' original proposal, the appraisal would
be required to be a written estimate of the property's market value,
and be performed not more than 90 days prior to the closing of the
mortgage transaction by an appropriately state-certified or state-
licensed appraiser that conforms to generally accepted appraisal
standards as evidenced by the Uniform Standards of Professional
Appraisal Practice promulgated by the Appraisal Standards Board of
the Appraisal Foundation, the appraisal requirements of the Federal
banking agencies, and applicable laws.
---------------------------------------------------------------------------

    As discussed elsewhere in this Supplementary Information, the
agencies' analysis of mortgage market data led the agencies to conclude
that an approach that aligns QRM with QM covers most of the present
mortgage market, and a significant portion of the historical market,
putting aside non-traditional mortgages related primarily to subprime
lending and lending with little documentation. This QM-plus approach
would cover a significantly smaller portion of the mortgage market.
Securitizers would be required to retain risk for QMs that do not meet
the four factors above.
Request for Comment
    96(a). As documented in the initial proposal, academic research and
the agencies' own analyses show that credit history and loan-to-value
ratio are key determinants of mortgage default, along with the product
type factors that are included in the QM definition.\196\ If QRM
criteria do not address credit history and loan-to-value, would
securitizers packaging QRM-eligible mortgages into RMBS have any
financial incentive to be concerned with these factors in selecting
mortgages for inclusion in the RMBS pool? 96(b). Is the incentive that
would be provided by risk retention unnecessary in light of the
securitizer incentives and investor disclosures under an approach that
aligns QRM with QM as described in the previous section of this
Supplementary Information?
---------------------------------------------------------------------------

    \196\ Original Proposal, section IV.B.2; section IV.B.3; section
IV.B. 4; section IV.B.5; Appendix A to the SUPPLEMENTARY
INFORMATION.
---------------------------------------------------------------------------

    97(a). Does the QM-plus approach have benefits that exceed the
benefits of the approach discussed above that aligns QRM with QM? For
example, would the QM-plus approach favorably alter the balance of
incentives for extending credit that may not be met by the QM
definition approach or the QRM approach previously proposed? 97(b).
Would the QM-plus approach have benefits for financial stability?
    98. Would the QM-plus approach have greater costs, for example in
decreased access to mortgage credit, higher priced credit, or increased
regulatory burden?
    99. Other than the different incentives described above, what other
benefits might be obtained under the QM-plus approach?
2. Mortgage Availability and Cost
    As discussed above, the overwhelming majority of commenters,
including securitization sponsors, housing industry groups, mortgage
bankers, lenders, consumer groups, and legislators opposed the
agencies' original QRM proposal, recommending instead that almost all
mortgages without features such as negative amortization, balloon
payments, or teaser rates should qualify for an exemption from risk
retention.\197\ The basis for these commenters' objections was a
unified concern that the proposal would result in a decrease in the
availability of non-QRM mortgages and an increase in their cost. The
other strong element of concern was that the original proposal's 20
percent purchase down payment requirement may have become a de facto
market-wide standard, with harsh consequences for borrowers in economic
circumstances that make it extremely difficult to save such sums.
---------------------------------------------------------------------------

    \197\ Some commenters expressed support for additional factors,
such as less stringent LTV restrictions, reliance on private
mortgage insurance for loans with LTVs in excess of such
restrictions, and different approaches to the agencies' proposed
credit quality restrictions.
---------------------------------------------------------------------------

    In developing QRM criteria under section 15G, the agencies have
balanced the benefits, including the public interest, with the cost and
the other considerations. To the extent risk retention would impose any
direct restriction on credit availability and price, the agencies
proposed an approach that aligns QRM with QM, which directly reflects
this concern.
    There may be concerns, however, that the effect of aligning QRM
with QM could ultimately decrease credit availability as lenders, and
consequently securitizers, would be very reluctant to transact in non-
QM loans. Since the QM criteria have been issued (and even before),
many lenders have indicated they would not make any non-QM mortgages,
expressing concern that they are uncertain of their potential liability
under the TILA ability-to-repay requirements.
Request for Comment
    100(a). Would setting the QRM criteria to be the same as QM
criteria give originators additional reasons to have reservations about
lending outside the QM criteria? 100(b). Would the QM-plus approach,
which confers a distinction on a much smaller share of the market than
the approach that aligns QRM with QM, have a different effect?
    Numerous commenters on the original QRM proposal asserted that
lenders may charge significantly higher interest rates on non-QRM
loans, with estimates ranging from 75 to 300 basis points. A limited
number of these commenters described or referred to an underlying
analysis of this cost estimate. The agencies take note that a
significant portion of the costs were typically ascribed to provisions
of the risk retention requirements that the agencies have eliminated
from the proposal. As discussed in the previous section of this
Supplementary Information, the agencies are considering the factors
that will drive the incremental cost of risk retention. If the non-QRM
market is small relative to the QRM market, investors might demand a
liquidity premium for holding securities collateralized by non-QRMs.
Investors might also demand a risk premium for holding these securities
if non-QRMs are perceived to be lower-quality mortgages. If the scope
of the non-QRM

market is sufficiently broad to avoid these types of premiums, the
factors impacting cost will be the amount of additional risk retention
that would be required under the rule, above current market practice,
and the cost to the securitizer of funding and carrying that additional
risk retention asset, reduced by the expected yield on that asset.
There are a significant number of financial institutions that possess
securitization expertise and infrastructure, and that also have
management expertise in carrying the same type of ABS interests they
would be required to retain under the rule; in fact, they have long
carried large volumes of them as part of their business model. They
also compete for securitization business and compete on mortgage
pricing.
Request for Comment
    101. In light of these factors, the agencies seek comment on
whether the QM-plus approach would encourage a broader non-QRM market
and thus mitigate concerns about the types of costs associated with a
narrow QRM approach described above. Considering the number of
institutions in the market with securitization capacity and expertise
that already hold RMBS interests presenting the same types of risks as
the RMBS interests the proposed rule now establishes as permissible
forms of risk retention, would the requirement to retain risk in a
greater number of securitizations under the QM-plus approach act as a
restraint on the amount and cost of mortgage credit available in the
market?
3. Private Securitization Activity
    In structuring the risk retention rules, the agencies have sought
to minimize impediments to private securitization activity as a source
of market liquidity for lending activity, and this principle has not
been overlooked in the RMBS asset class. To the extent risk retention
would impose any impediment to private securitization activity, the
agencies proposed an approach that aligns QRM with QM to address that
concern.
    In response to the agencies' original QRM proposal, comments from
RMBS investors generally supported the kinds of loan-to-value, credit
history, and debt-to-income factors the agencies proposed.\198\ While
there were some investors who expressed concern as to the exact
calibration of the QRM requirements, on balance, these commenters
expressed support for an approach that made risk retention the rule,
not the exception.
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    \198\ For example, one such investor stated that the proposed
QRM criteria were appropriate to maintain the proper balance between
incentives for securitizers and mortgage credit availability. SIFMA
Asset Management. Another expressed concern that broadening the QRM
definition will give securitizers less ``skin in the game'' and
increase investors' risk exposure, which is contrary to investors'
long-term interests. Vanguard.
---------------------------------------------------------------------------

    Additionally, commenters recommended that the agencies examine data
from the private securitization market in addition to the GSE data that
was considered in the original proposal.
    The agencies conducted two such analyses.\199\ The first analysis
was based on all securitized subprime and Alt-A loans originated from
2005 to 2008.\200\ That analysis indicated that of such mortgages that
did not meet the QM criteria, 52 percent experienced a serious
delinquency by the end of 2012, where serious delinquency is defined as
90 or more days delinquent or in foreclosure. In contrast, 42 percent
of such mortgages that met the QM criteria experienced a serious
delinquency by the end of 2012.\201\ If the set of QM-eligible
mortgages were limited to those with a loan-to-value ratio of 70
percent or less, the serious delinquency rate falls to 27 percent. As
discussed earlier in this Supplementary Information, these
extraordinarily high delinquency rates reflect the sharp drop in house
prices and surge in unemployment that occurred after the loans were
originated, as well as lax underwriting practices. In addition, Alt-A
and subprime loans are not reflective of the overall market and had
many features that would exclude them from the QM definition, but data
regarding these features were not always captured in the data sets.
---------------------------------------------------------------------------

    \199\ The two analyses are not perfectly comparable. The first
analysis included some loans with less than full documentation and
the second analysis excluded no documentation loans. The second
analysis used data with cumulative loan-to-value data while the
first did not, and the second analysis used a credit overlay while
the first did not.
    \200\ These data are a subset of the same data referenced in
Part VI.B.1 of this Supplementary Information.
    \201\ These data do not include information on points and fees
or full information on whether the loan met the QM documentation
requirements. If these factors were taken into account, the
delinquency rate on QM-eligible loans might be lower.
---------------------------------------------------------------------------

    The second analysis was based on all types of privately securitized
loans originated from 1997 to 2009.\202\ Although these data cover a
broader range of loan types and years than the first analysis, subprime
and Alt-A loans originated towards the end of the housing boom
represent the bulk of all issuance during this period. That analysis
indicated that 48 percent of mortgages that did not meet the QM
criteria experienced a serious delinquency by the end of 2012, compared
with 34 percent of mortgages that met the QM criteria. Limiting the set
of QM-eligible mortgages to those with a loan-to-value ratio of 70
percent or less and a minimum FICO score of 690 resulted in a 12
percent serious delinquency rate, and when that set was further limited
to a combined loan-to-value ratio of 70 percent or less, it resulted in
a 6.4 percent serious delinquency rate.
---------------------------------------------------------------------------

    \202\ See Part VIII.C.7.c, infra (Commission's Economic
Analysis).
---------------------------------------------------------------------------

    The agencies also analyzed GSE data to compare delinquency rates of
loans that would have met QM criteria with those of loans that would
have met criteria approximating the QM-plus criteria--those with loan-
to-value ratios of 70 percent or less, minimum FICO scores of 690, and
debt-to-income ratios of no more than 43 percent. Those meeting the
tighter criteria and originated in 2001-2004 had ever 90-day
delinquency rates of 1.1 percent, compared with 3.9 percent for all QM
loans. For loans originated in 2005-2008, the rates were 3.8 percent
and 13.9 percent, respectively.
Request for Comment
    102. How would the QM-plus approach influence investors' decisions
about whether or not to invest in private RMBS transactions?
    Another factor in investor willingness to invest in private label
RMBS, as well as the willingness of originators to sell mortgages to
private securitizers, concerns the presence of the Enterprises in the
market, operating as they are under the conservatorship of the FHFA and
with capital support by the U.S. Treasury.\203\ Currently, the vast
majority of residential mortgage securitization activity is performed
by the Enterprises, who retain 100 percent of the risk of the mortgages
they securitize.\204\
---------------------------------------------------------------------------

    \203\ Groups representing securitizers and mortgage originators
have recently expressed the view that restarting the private
securitization market for conforming mortgages is dependent upon
sweeping reform to the current role of the Enterprises. See, e.g.,
American Securitization Forum, White Paper: Policy Proposals to
Increase Private Capital in the U.S. Housing Finance System (April
23, 2013); Mortgage Bankers Association, Key Steps on the Road to
GSE Reform (August 8, 2013).
    \204\ Ginnie Mae plays the next largest role.
---------------------------------------------------------------------------

Request for Comment
    103. How would the QM-plus approach affect or not affect investor
appetite for investing in private label RMBS as opposed to
securitizations guaranteed by the Enterprises?
    The agencies note that the proposed requirements for risk retention
have

been significantly revised in response to commenter concerns about the
original proposal. With respect to the costs of risk retention for
sponsors and the possible effect that a QM-plus approach could have on
their willingness to participate in the securitization market, the
agencies request comment on whether risk retention could be unduly
burdensome for sponsors or whether it would provide meaningful
alignment of incentives between sponsors and investors.
Request for Comment
    104. Since more RMBS transactions would be subject to risk
retention under the QM-plus approach, how would the proposed forms of
risk retention affect sponsors' willingness to participate in the
market?
4. Request for Comment About the Terms of the QM-Plus Approach
    In addition, to the questions posed above, the agencies request
public comment on a few specific aspects of the QM-plus approach, as
follows.
a. Core QM Criteria
    The QM-plus approach would only include mortgages that fall within
the QM safe harbor or presumption of compliance under the core QM
requirements. If a mortgage achieved QM status only by relying on the
CFPB's provisions for GSE-eligible covered transactions, small
creditors, or balloon loans, it would not be eligible for QRM
status.\205\
---------------------------------------------------------------------------

    \205\ Specifically, the QRM would need to be eligible for the
safe harbor or presumption of compliance for a ``qualified
mortgage,'' as defined in regulations codified at 12 CFR 1026.43(e)
and the associated Official Interpretations published in Supplement
I to Part 1026, without regard to the special rules at 12 CFR
1026.43(e)(4)-(6) or 12 CFR 1026.43(f).
---------------------------------------------------------------------------

Request for Comment
    105. The agencies request comment whether the QM-plus approach
should also include mortgages that fall within QM status only in
reliance on the CFPB's provisions for GSE-eligible covered
transactions, small creditors, or balloon loans. For all but the GSE-
eligible covered transactions, the CFPB's rules make the mortgages
ineligible for QM status if the originator sells them into the
secondary market within three years of origination. For GSE-eligible
loans, it appears sale to the GSEs may remain the best execution
alternative for small originators (although the agencies are seeking
comment on this point). The agencies request commenters advocating
inclusion of these non-core QMs under the QM-plus approach to address
specifically how inclusion would improve market liquidity for such
loans.
b. Piggyback Loans
    For purchase QRMs, the QM-plus approach excludes so-called
``piggyback'' loans; no other recorded or perfected liens on the
property could exist at closing of the purchase mortgage, to the
knowledge of the originator at closing. The CFPB's QM requirements do
not prohibit piggyback loans, but the creditor's evaluation of the
borrower's ability to repay must include consideration of the
obligation on the junior lien (similar to the treatment the QM-plus
approach incorporates for junior liens on refinancing transactions). As
the agencies discussed in the original proposal, the economic
literature concludes that, controlling for other factors, including
combined LTV ratios, the use of junior liens at origination of purchase
mortgages to reduce down payments significantly increases the risk of
default.\206\
---------------------------------------------------------------------------

    \206\ See Original Proposal at note 132 and accompanying text.
---------------------------------------------------------------------------

Request for Comment
    106. The agencies request comment whether, notwithstanding the
agencies' concern about this additional risk of default, the agencies
should remove the outright prohibition on piggyback loans from the QM-
plus approach.
    107(a). Commenters, including one group representing RMBS
investors, expressed concern that excluding loans to a borrower that is
30 days past due on any obligation at the time of closing from the
definition of QRM would be too conservative.\207\ The QM-plus approach
is based on the view that these 30-day credit derogatories are
typically errors, or oversights by borrowers, that are identified to
borrowers and eliminated during the underwriting process. Thus a 30-day
derogatory that cannot be resolved before closing is an indication of a
borrower who, as he or she approaches closing, is not meeting his or
her obligations in a timely way. The agencies request comments from
originators as to this premise. 107(b). The agencies also request
comment on whether the QM-plus approach should permit a borrower to
have a single 60-day plus past-due at the time of closing, but not two.
107(c). The agencies further request comment on whether this approach
should be included if the borrower's single 60-day past-due is on a
mortgage obligation.
---------------------------------------------------------------------------

    \207\ ASF Investors.
---------------------------------------------------------------------------

    In connection with the agencies' discussion elsewhere in this
Supplementary Information notice of underwriting criteria for
commercial loans, commercial mortgages, and auto loans, the agencies
have requested comment about permitting blended pools of qualifying and
non-qualifying assets, with proportional reductions in risk
retention.\208\ Commenters are referred to an invitation to comment on
blended pools with respect to residential mortgage securitizations that
appears at the end of that discussion.
---------------------------------------------------------------------------

    \208\ See Part V.D of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

VII. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, sec.
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking
agencies to use plain language in all proposed and final rules
published after January 1, 2000. The Federal banking agencies invite
your comments on how to make this proposal easier to understand. For
example:
     Have the agencies organized the material to suit your
needs? If not, how could this material be better organized?
     Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be more clearly stated?
     Does the proposed regulation contain language or jargon
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand?
     What else could the agencies do to make the regulation
easier to understand?

VIII. Administrative Law Matters

A. Regulatory Flexibility Act

    OCC: The Regulatory Flexibility Act (RFA) generally requires that,
in connection with a notice of proposed rulemaking, an agency prepare
and make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small
entities.\209\ However, the regulatory flexibility analysis otherwise
required under the RFA is not required if an agency certifies that the
rule will not have a significant economic impact on a substantial
number of small entities (defined in regulations promulgated by the
Small Business Administration to include banking organizations with
total assets of less than or equal to $500

million) and publishes its certification and a short, explanatory
statement in the Federal Register together with the rule.
---------------------------------------------------------------------------

    \209\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    As discussed in the SUPPLEMENTARY INFORMATION above, section 941 of
the Dodd-Frank Act \210\ generally requires the Federal banking
agencies and the Commission, and, in the case of the securitization of
any residential mortgage asset, together with HUD and FHFA, to jointly
prescribe regulations, that (i) require a securitizer to retain not
less than 5 percent of the credit risk of any asset that the
securitizer, through the issuance of an asset-backed security (ABS),
transfers, sells, or conveys to a third party; and (ii) prohibit a
securitizer from directly or indirectly hedging or otherwise
transferring the credit risk that the securitizer is required to retain
under section 15G. Although the proposed rule would apply directly only
to securitizers, subject to a certain considerations, section 15G
authorizes the agencies to permit securitizers to allocate at least a
portion of the risk retention requirement to the originator(s) of the
securitized assets.
---------------------------------------------------------------------------

    \210\ Codified at section 15G of the Exchange Act, 17 U.S.C.
78o-11.
---------------------------------------------------------------------------

    Section 15G provides a total exemption from the risk retention
requirements for securitizers of certain securitization transactions,
such as an ABS issuance collateralized exclusively by QRMs, and further
authorizes the agencies to establish a lower risk retention requirement
for securitizers of ABS issuances collateralized by other asset types,
such as commercial, commercial real estate (CRE), and automobile loans,
which satisfy underwriting standards established by the Federal banking
agencies.
    The risk retention requirements of section 15G apply generally to a
``securitizer'' of ABS, where securitizer is defined to mean (i) an
issuer of an ABS; or (ii) a person who organizes and initiates an
asset-backed transaction by selling or transferring assets, either
directly or indirectly, including through an affiliate, to the issuer.
Section 15G also defines an ``originator'' as a person who (i) through
the extension of credit or otherwise, creates a financial asset that
collateralizes an asset-backed security; and (ii) sells an asset
directly or indirectly to a securitizer.
    The proposed rule implements the credit risk retention requirements
of section 15G. Section 15G requires the agencies to establish risk
retention requirements for ``securitizers.'' The proposal would, as a
general matter, require that a ``sponsor'' of a securitization
transaction retain the credit risk of the securitized assets in the
form and amount required by the proposed rule. The agencies believe
that imposing the risk retention requirement on the sponsor of the
ABS--as permitted 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.
Under the proposed rule a sponsor may offset the risk retention
requirement by the amount of any eligible vertical risk retention
interest or eligible horizontal residual interest acquired by an
originator of one or more securitized assets if certain requirements
are satisfied, including, the originator must originate at least 20
percent of the securitized assets, as measured by the aggregate unpaid
principal balance of the asset pool.
    In determining whether the allocation provisions of the proposal
would have a significant economic impact on a substantial number of
small banking organizations, the Federal banking agencies reviewed
December 31, 2012 Call Report data to evaluate the origination and
securitization activity of small banking organizations that potentially
could retain credit risk directly through their own securitization
activity or indirectly under allocation provisions of the
proposal.\211\
---------------------------------------------------------------------------

    \211\ Call Report Schedule RC-S provides information on the
servicing, securitization, and asset sale activities of banking
organizations. For purposes of the RFA analysis, the agencies
gathered and evaluated data regarding (1) net securitization income,
(2) the outstanding principal balance of assets sold and securitized
by the reporting entity with servicing retained or with recourse or
other seller-provided credit enhancements, and (3) assets sold with
recourse or other seller-provided credit enhancements and not
securitized by the reporting bank.
---------------------------------------------------------------------------

    As of December 31, 2012, there were approximately 1,291 small
national banks and Federal savings associations that would be subject
to this rule. The Call Report data indicates that approximately 140
small national banks and Federal savings associations, originate loans
to securitize themselves or sell to other entities for securitization,
predominately through ABS issuances collateralized by one-to-four
family residential mortgages. This number reflects conservative
assumptions, as few small entities sponsor securitizations, and few
originate a sufficient number of loans for securitization to meet the
minimum 20 percent share for the allocation to originator provisions
under the proposed rule. As the OCC regulates approximately 1,291 small
entities, and 140 of those entities could be subject to this proposed
rule, the proposed rule could impact a substantial number of small
national banks and Federal savings associations.
    The vast majority of securitization activity by small entities is
in the residential mortgage sector. The majority of these originators
sell their loans either to Fannie Mae or Freddie Mac, which retain
credit risk through agency guarantees and would not be able to allocate
credit risk to originators under this proposed rule. For those loans
not sold to the Enterprises, most would likely meet the QRM exemption.
The QM rule, on which the QRM proposal is based, also includes
exceptions for small creditors, which may be utilized by many of these
small entities to meet the requirements and thus not need to hold risk
retention on those assets. For these reasons, the OCC believes the
proposed rule would not have a substantial economic effect on small
entities.
    Therefore, the OCC concludes that the proposed rule would not have
a significant impact on a substantial number of small entities. The OCC
seeks comments on whether the proposed rule, if adopted in final form,
would impose undue burdens, or have unintended consequences for, small
national banks and Federal savings associations and whether there are
ways such potential burdens or consequences could be minimized in a
manner consistent with section 15G of the Exchange Act.
    Board: The Regulatory Flexibility Act (5 U.S.C. 603(b)) generally
requires that, in connection with a notice of proposed rulemaking, an
agency prepare and make available for public comment an initial
regulatory flexibility analysis that describes the impact of a proposed
rule on small entities.\212\ Under regulations promulgated by the Small
Business Administration, a small entity includes a commercial bank or
bank holding company with assets of $500 million or less (each, a small
banking organization).\213\ The Board has considered the potential
impact of the proposed rules on small banking organizations supervised
by the Board in accordance with the Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \212\ See 5 U.S.C. 601 et seq.
    \213\ 13 CFR 121.201.
---------------------------------------------------------------------------

    For the reasons discussed in Part II of this Supplementary
Information, the proposed rules define a securitizer as a ``sponsor''
in a manner consistent with the definition of that term in the
Commission's Regulation AB and provide that the sponsor of a

securitization transaction is generally responsible for complying with
the risk retention requirements established under section 15G. The
Board is unaware of any small banking organization under the
supervision of the Board that has acted as a sponsor of a
securitization transaction \214\ (based on December 31, 2012
data).\215\ As of December 31, 2012, there were approximately 5,135
small banking organizations supervised by the Board, which includes
4,092 bank holding companies, 297 savings and loan holding companies,
632 state member banks, 22 Edge and agreement corporations and 92 U.S.
offices of foreign banking organizations.
---------------------------------------------------------------------------

    \214\ For purposes of the proposed rules, this would include a
small bank holding company; savings and loan holding company; state
member bank; Edge corporation; agreement corporation; foreign
banking organization; and any subsidiary of the foregoing.
    \215\ Call Report Schedule RC-S; Data based on the Reporting
Form FR 2866b; Structure Data for the U.S. Offices of Foreign
Banking Organizations; and Aggregate Data on Assets and Liabilities
of U.S. Branches and agencies of Foreign Banks based on the
quarterly form FFIEC 002.
---------------------------------------------------------------------------

    The proposed rules permit, but do not require, a sponsor to
allocate a portion of its risk retention requirement to one or more
originators of the securitized assets, subject to certain conditions
being met. In particular, a sponsor may offset the risk retention
requirement by the amount of any eligible vertical risk retention
interest or eligible horizontal residual interest acquired by an
originator of one or more securitized assets if certain requirements
are satisfied, including, the originator must originate at least 20
percent of the securitized assets, as measured by the aggregate unpaid
principal balance of the asset pool.\216\ A sponsor using this risk
retention option remains responsible for ensuring that the originator
has satisfied the risk retention requirements. In light of this option,
the Board has considered the impact of the proposed rules on
originators that are small banking organizations.
---------------------------------------------------------------------------

    \216\ With respect to an open market CLO transaction, the risk
retention retained by the originator must be at least 20 percent of
the aggregate principal balance at origination of a CLO-eligible
loan tranche.
---------------------------------------------------------------------------

    The December 31, 2012 regulatory report data \217\ indicates that
approximately 723 small banking organizations, 87 of which are small
banking organizations that are supervised by the Board, originate loans
for securitization, namely ABS issuances collateralized by one-to-four
family residential mortgages. The majority of these originators sell
their loans either to Fannie Mae or Freddie Mac, which retain credit
risk through agency guarantees and would not be able to allocate credit
risk to originators under this proposed rule. Additionally, based on
publicly-available market data, it appears that most residential
mortgage-backed securities offerings are collateralized by a pool of
mortgages with an unpaid aggregate principal balance of at least $500
million.\218\ Accordingly, under the proposed rule a sponsor could
potentially allocate a portion of the risk retention requirement to a
small banking organization only if such organization originated at
least 20 percent ($100 million) of the securitized mortgages. As of
December 31, 2012, only one small banking organization supervised by
the Board reported an outstanding principal balance of assets sold and
securitized of $100 million or more.\219\
---------------------------------------------------------------------------

    \217\ Call Report Schedule RC-S provides information on the
servicing, securitization, and asset sale activities of banking
organizations. For purposes of the RFA analysis, the agencies
gathered and evaluated data regarding (1) the outstanding principal
balance of assets sold and securitized by the reporting entity with
servicing retained or with recourse or other seller-provided credit
enhancements, and (2) assets sold with recourse or other seller-
provided credit enhancements and not securitized by the reporting
bank.
    \218\ Based on the data provided in Table 1, page 29 of the
Board's ``Report to the Congress on Risk Retention,'' it appears
that the average MBS issuance is collateralized by a pool of
approximately $620 million in mortgage loans (for prime MBS
issuances) or approximately $690 million in mortgage loans (for
subprime MBS issuances). For purposes of the RFA analysis, the
agencies used an average asset pool size $500 million to account for
reductions in mortgage securitization activity following 2007, and
to add an element of conservatism to the analysis.
    \219\ The FDIC notes that this finding assumes that no portion
of the assets originated by small banking organizations were sold to
securitizations that qualify for an exemption from the risk
retention requirements under the proposed rule.
---------------------------------------------------------------------------

    In light of the foregoing, the proposed rules would not appear to
have a significant economic impact on sponsors or originators
supervised by the Board. The Board seeks comment on whether the
proposed rules would impose undue burdens on, or have unintended
consequences for, small banking organizations, and whether there are
ways such potential burdens or consequences could be minimized in a
manner consistent with section 15G of the Exchange Act.
    FDIC: The Regulatory Flexibility Act (RFA) generally requires that,
in connection with a notice of proposed rulemaking, an agency prepare
and make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small
entities.\220\ However, a regulatory flexibility analysis is not
required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities
(defined in regulations promulgated by the Small Business
Administration to include banking organizations with total assets of
less than or equal to $500 million) and publishes its certification and
a short, explanatory statement in the Federal Register together with
the rule.
---------------------------------------------------------------------------

    \220\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    As of March 31, 2013, there were approximately 3,711 small FDIC-
supervised institutions, which include 3,398 state nonmember banks and
313 state-chartered savings banks. For the reasons provided below, the
FDIC certifies that the proposed rule, if adopted in final form, would
not have a significant economic impact on a substantial number of small
entities. Accordingly, a regulatory flexibility analysis is not
required.
    As discussed in the SUPPLEMENTARY INFORMATION above, section 941 of
the Dodd-Frank Act \221\ generally requires the Federal banking
agencies and the Commission, and, in the case of the securitization of
any residential mortgage asset, together with HUD and FHFA, to jointly
prescribe regulations, that (i) require a securitizer to retain not
less than 5 percent of the credit risk of any asset that the
securitizer, through the issuance of an asset-backed security (ABS),
transfers, sells, or conveys to a third party; and (ii) prohibit a
securitizer from directly or indirectly hedging or otherwise
transferring the credit risk that the securitizer is required to retain
under section 15G. Although the proposed rule would apply directly only
to securitizers, subject to a certain considerations, section 15G
authorizes the agencies to permit securitizers to allocate at least a
portion of the risk retention requirement to the originator(s) of the
securitized assets.
---------------------------------------------------------------------------

    \221\ Codified at section 15G of the Exchange Act, 17 U.S.C.
78o-11.
---------------------------------------------------------------------------

    Section 15G provides a total exemption from the risk retention
requirements for securitizers of certain securitization transactions,
such as an ABS issuance collateralized exclusively by QRMs, and further
authorizes the agencies to establish a lower risk retention requirement
for securitizers of ABS issuances collateralized by other asset types,
such as commercial, commercial real estate (CRE), and automobile loans,
which satisfy underwriting standards established by the Federal banking
agencies.
    The risk retention requirements of section 15G apply generally to a
``securitizer'' of ABS, where securitizer is defined to mean (i) an
issuer of an ABS; or (ii) a person who organizes and

initiates an asset-backed transaction by selling or transferring
assets, either directly or indirectly, including through an affiliate,
to the issuer. Section 15G also defines an ``originator'' as a person
who (i) through the extension of credit or otherwise, creates a
financial asset that collateralizes an asset-backed security; and (ii)
sells an asset directly or indirectly to a securitizer.
    The proposed rule implements the credit risk retention requirements
of section 15G. The proposal would, as a general matter, require that a
``sponsor'' of a securitization transaction retain the credit risk of
the securitized assets in the form and amount required by the proposed
rule. The agencies believe that imposing the risk retention requirement
on the sponsor of the ABS--as permitted by section 15G--is appropriate
in view of the active and direct role that a sponsor typically has in
arranging a securitization transaction and selecting the assets to be
securitized. The FDIC is aware of only 40 small banking organizations
that currently sponsor securitizations (two of which are national
banks, seven are state member banks, 23 are state nonmember banks, and
eight are savings associations, based on March 31, 2013 information)
and, therefore, the risk retention requirements of the proposed rule,
as generally applicable to sponsors, would not have a significant
economic impact on a substantial number of small state nonmember banks.
    Under the proposed rule a sponsor may offset the risk retention
requirement by the amount of any eligible vertical risk retention or
eligible horizontal residual interest acquired by an originator of one
or more securitized assets if certain requirements are satisfied,
including, the originator must originate at least 20 percent of the
securitized assets, as measured by the aggregate unpaid principal
balance of the asset pool.\222\ In determining whether the allocation
provisions of the proposal would have a significant economic impact on
a substantial number of small banking organizations, the Federal
banking agencies reviewed March 31, 2013 Call Report data to evaluate
the securitization activity and approximate the number of small banking
organizations that potentially could retain credit risk under
allocation provisions of the proposal.\223\
---------------------------------------------------------------------------

    \222\ With respect to an open market CLO transaction, the risk
retention retained by the originator must be at least 20 percent of
the aggregate principal balance at origination of a CLO-eligible
loan tranche.
    \223\ Call Report Schedule RC-S provides information on the
servicing, securitization, and asset sale activities of banking
organizations. For purposes of the RFA analysis, the agencies
gathered and evaluated data regarding (1) the outstanding principal
balance of assets sold and securitized by the reporting entity with
servicing retained or with recourse or other seller-provided credit
enhancements, and (2) assets sold with recourse or other seller-
provided credit enhancements and not securitized by the reporting
bank.
---------------------------------------------------------------------------

    The Call Report data indicates that approximately 703 small banking
organizations, 456 of which are state nonmember banks, originate loans
for securitization, namely ABS issuances collateralized by one-to-four
family residential mortgages. The majority of these originators sell
their loans either to Fannie Mae or Freddie Mac, which retain credit
risk through agency guarantees, and therefore would not be allocated
credit risk under the proposed rule. Additionally, based on publicly-
available market data, it appears that most residential mortgage-backed
securities offerings are collateralized by a pool of mortgages with an
unpaid aggregate principal balance of at least $500 million.\224\
Accordingly, under the proposed rule a sponsor could potentially
allocate a portion of the risk retention requirement to a small banking
organization only if such organization originated at least 20 percent
($100 million) of the securitized mortgages. As of March 31, 2013, only
two small banking organizations reported an outstanding principal
balance of assets sold and securitized of $100 million or more.\225\
---------------------------------------------------------------------------

    \224\ Based on the data provided in Table 1, page 29 of the
Board's ``Report to the Congress on Risk Retention,'' it appears
that the average MBS issuance is collateralized by a pool of
approximately $620 million in mortgage loans (for prime MBS
issuances) or approximately $690 million in mortgage loans (for
subprime MBS issuances). For purposes of the RFA analysis, the
agencies used an average asset pool size $500 million to account for
reductions in mortgage securitization activity following 2007, and
to add an element of conservatism to the analysis.
    \225\ The FDIC notes that this finding assumes that no portion
of the assets originated by small banking organizations were sold to
securitizations that qualify for an exemption from the risk
retention requirements under the proposed rule.
---------------------------------------------------------------------------

    The FDIC seeks comment on whether the proposed rule, if adopted in
final form, would impose undue burdens, or have unintended consequences
for, small state nonmember banks and whether there are ways such
potential burdens or consequences could be minimized in a manner
consistent with section 15G of the Exchange Act.
    Commission: The Commission hereby certifies, pursuant to 5 U.S.C.
605(b), that the proposed rule, if adopted, would not have a
significant economic impact on a substantial number of small entities.
The proposed rule implements the risk retention requirements of section
15G of the Exchange Act, which, in general, requires the securitizer of
asset-backed securities (ABS) to retain not less than 5 percent of the
credit risk of the assets collateralizing the ABS.\226\ Under the
proposed rule, the risk retention requirements would apply to
``sponsors,'' as defined in the proposed rule. Based on our data, we
found only one sponsor that would meet the definition of a small
broker-dealer for purposes of the Regulatory Flexibility Act.\227\
Accordingly, the Commission does not believe that the proposed rule, if
adopted, would have a significant economic impact on a substantial
number of small entities.
---------------------------------------------------------------------------

    \226\ See 17 U.S.C. 78o-11.
    \227\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    A few commenters on the original proposal indicated that the
proposed risk retention requirements could indirectly affect the
availability of credit to small businesses and lead to contractions in
the secondary mortgage market, with a corresponding reduction in
mortgage originations. The Regulatory Flexibility Act only requires an
agency to consider regulatory alternatives for those small entities
subject to the proposed rules. The Commission has considered the
broader economic impact of the proposed rules, including their
potential effect on efficiency, competition and capital formation, in
the Commission's Economic Analysis below.
    The Commission encourages written comments regarding this
certification. The Commission requests, in particular, that commenters
describe the nature of any direct impact on small entities and provide
empirical data to support the extent of the impact.
    FHFA: Pursuant to section 605(b) of the Regulatory Flexibility Act,
FHFA hereby certifies that the proposed rule will not have a
significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

1. Request for Comment on Proposed Information Collection
    Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501-3521. In accordance
with the requirements of the PRA, the agencies may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The information collection
requirements contained in this joint notice of proposed rulemaking

have been submitted by the FDIC, OCC, and the Commission to OMB for
approval under section 3507(d) of the PRA and section 1320.11 of OMB's
implementing regulations (5 CFR part 1320). The Board reviewed the
proposed rule under the authority delegated to the Board by OMB.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used;
    (c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
    (d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Commenters may
submit comments on aspects of this notice that may affect disclosure
requirements and burden estimates at the addresses listed in the
ADDRESSES section of this Supplementary Information. A copy of the
comments may also be submitted to the OMB desk officer for the
agencies: By mail to U.S. Office of Management and Budget, 725 17th
Street NW., 10235, Washington, DC 20503, by facsimile to 202-
395-6974, or by email to<EMAIL_ADDRESS>Attention,
Commission and Federal Banking Agency Desk Officer.
2. Proposed Information Collection
    Title of Information Collection: Credit Risk Retention.
    Frequency of response: Event generated; annual, monthly.
    Affected Public: \228\
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    \228\ The affected public of the FDIC, OCC, and Board is
assigned generally in accordance with the entities covered by the
scope and authority section of their respective proposed rule. The
affected public of the Commission is based on those entities not
already accounted for by the FDIC, OCC, and Board.
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    FDIC: Insured state non-member banks, insured state branches of
foreign banks, state savings associations, and certain subsidiaries of
these entities.
    OCC: National banks, Federal savings associations, Federal branches
or agencies of foreign banks, or any operating subsidiary thereof.
    Board: Insured state member banks, bank holding companies, savings
and loan holding companies, Edge and agreement corporations, foreign
banking organizations, nonbank financial companies supervised by the
Board, and any subsidiary thereof.
    Commission: All entities other than those assigned to the FDIC,
OCC, or Board.
    Abstract: The notice sets forth permissible forms of risk retention
for securitizations that involve issuance of asset-backed securities.
The proposed rule contains requirements subject to the PRA. The
information requirements in the joint regulations proposed by the three
Federal banking agencies and the Commission are found in sections --.4,
-- .5, -- .6, --.7, --.8, --.9, --.10, --.11, --.13, --.15, --.16,
--.17, and --.18. The agencies believe that the disclosure and
recordkeeping requirements associated with the various forms of risk
retention will enhance market discipline, help ensure the quality of
the assets underlying a securitization transaction, and assist
investors in evaluating transactions. Compliance with the information
collections would be mandatory. Responses to the information
collections would not be kept confidential and, except for the
recordkeeping requirements set forth in sections -- .4(e) and --
.5(g)(2), there would be no mandatory retention period for the proposed
collections of information.
Section-by-Section Analysis
    Section --.4 sets forth the conditions that must be met by sponsors
electing to use the standard risk retention option, which may consist
of an eligible vertical interest or an eligible horizontal residual
interest, or any combination thereof. Sections -- .4(d)(1) and
--.4(d)(2) specify the disclosures required with respect to eligible
horizontal residual interests and eligible vertical interests,
respectively.
    A sponsor retaining any eligible horizontal residual interest (or
funding a horizontal cash reserve account) is required to calculate the
Closing Date Projected Cash Flow Rate and Closing Date Projected
Principal Repayment Rate for each payment date, and certify to
investors that it has performed such calculations and that the Closing
Date Projected Cash Flow Rate on any payment date does not exceed the
Closing Date Projected Principal Repayment Rate on such payment date
(Sec.  --.4(b)(2)).
    Additionally, the sponsor is required to disclose: the fair value
of the eligible horizontal residual interest retained by the sponsor
and the fair value of the eligible horizontal residual interest
required to be retained (Sec.  --.4(d)(1)(i)); the material terms of
the eligible horizontal residual interest (Sec.  --.4(d)(1)(ii)); the
methodology used to calculate the fair value of all classes of ABS
interests (Sec.  --.4(d)(1)(iii)); the key inputs and assumptions used
in measuring the total fair value of all classes of ABS interests, and
the fair value of the eligible horizontal residual interest retained by
the sponsor (Sec.  --.4(d)(1)(iv)); the reference data set or other
historical information used to develop the key inputs and assumptions
(Sec.  --.4(d)(1)(v)); the number of securitization transactions
securitized by the sponsor during the previous five-year period in
which the sponsor retained an eligible horizontal residual interest
pursuant to this section, and the number (if any) of payment dates in
each such securitization on which actual payments to the sponsor with
respect to the eligible horizontal residual interest exceeded the cash
flow projected to be paid to the sponsor on such payment date in
determining the Closing Date Projected Cash Flow Rate (Sec.
--.4(d)(1)(vi)); and the amount placed by the sponsor in the horizontal
cash reserve account at closing, the fair value of the eligible
horizontal residual interest that the sponsor is required to fund
through such account, and a description of such account (Sec.
--.4(d)(1)(vii)).
    For eligible vertical interests, the sponsor is required to
disclose: whether the sponsor retains the eligible vertical interest as
a single vertical security or as a separate proportional interest in
each class of ABS interests in the issuing entity issued as part of the
securitization transaction (Sec.  --.4(d)(2)(i)); for eligible vertical
interests retained as a single vertical security, the fair value amount
of the single vertical security retained at the closing of the
securitization transaction and the fair value amount required to be
retained, and the percentage of each class of ABS interests in the
issuing entity underlying the single vertical security at the closing
of the securitization transaction and the percentage of each class of
ABS interests in the issuing entity that would have been required to be
retained if the eligible vertical interest was held as a separate
proportional interest (Sec.  --.4(d)(2)(ii)); for eligible vertical
interests retained as a separate proportional interest in each class of
ABS interests in the issuing entity, the percentage of each class of
ABS interests in the issuing entity retained at the closing of the
securitization transaction and the percentage of each class of ABS

interests required to be retained (Sec.  --.4(d)(2)(iii)); and
information with respect to the measurement of the fair value of the
ABS interests in the issuing entity (Sec.  --.4(d)(2)(iv)).
    Section --.4(e) requires a sponsor to retain the certifications and
disclosures required in paragraphs (b) and (d) of this section in
written form in its records and must provide the disclosure upon
request to the Commission and its appropriate Federal banking agency,
if any, until three years after all ABS interests are no longer
outstanding.
    Section --.5 requires sponsors relying on the revolving master
trust risk retention option to disclose: The value of the seller's
interest retained by the sponsor, the fair value of any horizontal risk
retention retained by the sponsor under Sec.  --.5(f), and the unpaid
principal balance value or fair value, as applicable, the sponsor is
required to retain (Sec.  --.5(g)(1)(i)); the material terms of the
seller's interest and of any horizontal risk retention retained by the
sponsor under Sec.  --.5(f) (Sec.  --.5(g)(1)(ii)); and if the sponsor
retains any horizontal risk retention under Sec.  --.5(f), the same
information as is required to be disclosed by sponsors retaining
horizontal interests (Sec.  --.5(g)(1)(iii)). Additionally, a sponsor
must retain the disclosures required in Sec.  --.5(g)(1) in written
form in its records and must provide the disclosure upon request to the
Commission and its appropriate Federal banking agency, if any, until
three years after all ABS interests are no longer outstanding (Sec.
--.5(g)(2)).
    Section --.6 addresses the requirements for sponsors utilizing the
eligible ABCP conduit risk retention option. The requirements for the
eligible ABCP conduit risk retention option include disclosure to each
purchaser of ABCP and periodically to each holder of commercial paper
issued by the ABCP conduit of the name and form of organization of the
regulated liquidity provider that provides liquidity coverage to the
eligible ABCP conduit, including a description of the form, amount, and
nature of such liquidity coverage, and notice of any failure to fund;
and with respect to each ABS interest held by the ABCP conduit, the
asset class or brief description of the underlying receivables, the
standard industrial category code for the originator-seller or
majority-owned OS affiliate that retains an interest in the
securitization transaction, and a description of the form, fair value,
and nature of such interest (Sec.  --.6(d)). An ABCP conduit sponsor
relying upon this section shall provide, upon request, to the
Commission and its appropriate Federal banking agency, if any, the
information required under Sec.  --.6(d), in addition to the name and
form of organization of each originator-seller or majority-owned OS
affiliate that retains an interest in the securitization transaction
(Sec.  --.6(e)).
    A sponsor relying on the eligible ABCP conduit risk retention
option shall maintain and adhere to policies and procedures to monitor
compliance by each originator-seller or majority-owned OS affiliate
(Sec.  --.6(f)(2)(i)). If the ABCP conduit sponsor determines that an
originator-seller or majority-owned OS affiliate is no longer in
compliance, the sponsor must promptly notify the holders of the ABCP,
the Commission and its appropriate Federal banking agency, in writing
of the name and form of organization of any originator-seller or
majority-owned OS affiliate that fails to retain and the amount of
asset-backed securities issued by an intermediate SPV of such
originator-seller and held by the ABCP conduit, the name and form of
organization of any originator-seller or majority-owned OS affiliate
that hedges, directly or indirectly through an intermediate SPV, their
risk retention in violation and the amount of asset-backed securities
issued by an intermediate SPV of such originator-seller or majority-
owned OS affiliate and held by the ABCP conduit, and any remedial
actions taken by the ABCP conduit sponsor or other party with respect
to such asset-backed securities (Sec.  --.6(f)(2)(ii)).
    Section --.7 sets forth the requirements for sponsors relying on
the commercial mortgage-backed securities risk retention option, and
includes disclosures of: The name and form of organization of each
third-party purchaser (Sec.  --.7(a)(7)(i)); each initial third-party
purchaser's experience in investing in commercial mortgage-backed
securities (Sec.  --.7(a)(7)(ii)); other material information (Sec.
--.7(a)(7)(iii)); the fair value of the eligible horizontal residual
interest retained by each third-party purchaser, the purchase price
paid, and the fair value of the eligible horizontal residual interest
that the sponsor would have retained if the sponsor had relied on
retaining an eligible horizontal residual interest under the standard
risk retention option (Sec.  --.7(a)(7)(iv) and (v)); a description of
the material terms of the eligible horizontal residual interest
retained by each initial third-party purchaser, including the same
information as is required to be disclosed by sponsors retaining
horizontal interests pursuant to Sec.  --.4 (Sec.  --.7(a)(7)(vi)); the
material terms of the applicable transaction documents with respect to
the Operating Advisor (Sec.  --.7(a)(7)(vii); and representations and
warranties concerning the securitized assets, a schedule of any
securitized assets that are determined not to comply with such
representations and warranties, and the factors used to determine such
securitized assets should be included in the pool notwithstanding that
they did not comply with the representations and warranties (Sec.
--.7(a)(7)(viii)). A sponsor relying on the commercial mortgage-backed
securities risk retention option shall provide in the underlying
securitization transaction documents certain provisions related to the
Operating Advisor (Sec.  --.7(a)(6)), maintain and adhere to policies
and procedures to monitor compliance by third-party purchasers with
regulatory requirements (Sec.  --.7(b)(2)(A)), and notify the holders
of the ABS interests in the event of noncompliance by a third-party
purchaser with such regulatory requirements (Sec.  --.7(b)(2)(B)).
    Section --.8 requires that a sponsor relying on the Federal
National Mortgage Association and Federal Home Loan Mortgage
Corporation ABS risk retention option must disclose a description of
the manner in which it has met the credit risk retention requirements
(Sec.  --.8(c)).
    Section --.9 sets forth the requirements for sponsors relying on
the open market CLO risk retention option, and includes disclosures of
a complete list of, and certain information related to, every asset
held by an open market CLO (Sec.  --.9(d)(1)), and the full legal name
and form of organization of the CLO manager (Sec.  --.9(d)(2).
    Section --.10 sets forth the requirements for sponsors relying on
the qualified tender option bond risk retention option, and includes
disclosures of the name and form of organization of the Qualified
Tender Option Bond Entity, and a description of the form, fair value
(expressed as a percentage of the fair value of all of the ABS
interests issued in the securitization transaction and as a dollar
amount), and nature of such interest in accordance with the disclosure
obligations in section --.4(d) (Sec.  --.10(e)).
    Section --.11 sets forth the conditions that apply when the sponsor
of a securitization allocates to originators of securitized assets a
portion of the credit risk it is required to retain, including
disclosure of the name and form of organization of any originator that
acquires and retains an interest in the transaction, a description of
the form, amount and nature of such interest, and the method of payment
for such interest (Sec.  --.11(a)(2)). A sponsor relying on this
section shall maintain and adhere to

policies and procedures that are reasonably designed to monitor
originator compliance with retention amount and hedging, transferring
and pledging requirements (Sec.  --.11(b)(2)(A)) and shall promptly
notify the holders of the ABS interests in the transaction in the event
of originator noncompliance with such regulatory requirements (Sec.
--.11(b)(2)(B)).
    Section --.13 provides an exemption from the risk retention
requirements for qualified residential mortgages that meet certain
specified criteria, including that the depositor of the asset-backed
security certify that it has evaluated the effectiveness of its
internal supervisory controls and concluded that the controls are
effective (Sec.  --.13(b)(4)(i)), and that the sponsor provide a copy
of the certification to potential investors prior to sale of asset-
backed securities (Sec.  --.13(b)(4)(iii)). In addition, Sec.
--.13(c)(3) provides that a sponsor that has relied upon the exemption
shall not lose the exemption if it complies with certain specified
requirements, including prompt notice to the holders of the asset-
backed securities of any loan repurchased by the sponsor.
    Section --.15 provides exemptions from the risk retention
requirements for qualifying commercial loans that meet the criteria
specified in Section --.16, qualifying CRE loans that meet the criteria
specified in Section --.17, and qualifying automobile loans that meet
the criteria specified in Section --.18. Section --.15 also requires
the sponsor to disclose a description of the manner in which the
sponsor determined the aggregate risk retention requirement for the
securitization transaction after including qualifying commercial loans,
qualifying CRE loans, or qualifying automobile loans with 0 percent
risk retention, and descriptions of the qualifying commercial loans,
qualifying CRE loans, and qualifying automobile loans (``qualifying
assets'') and descriptions of the assets that are not qualifying
assets, and the material differences between the group of qualifying
assets and the group of assets that are not qualifying assets with
respect to the composition of each group's loan balances, loan terms,
interest rates, borrower credit information, and characteristics of any
loan collateral (Sec.  --.15(a)(4)).
    Sections --.16, --.17 and --.18 each require that: The depositor of
the asset-backed security certify that it has evaluated the
effectiveness of its internal supervisory controls and concluded that
its internal supervisory controls are effective (Sec. Sec.
--.16(b)(8)(i), --.17(b)(10)(i), and --.18(b)(8)(i)); the sponsor
provide a copy of the certification to potential investors prior to the
sale of asset-backed securities (Sec. Sec.  --.16(b)(8)(iii),
--.17(b)(10)(iii), and --.18(b)(8)(iii)); and the sponsor promptly
notify the holders of the securities of any loan included in the
transaction that is required to be cured or repurchased by the sponsor,
including the principal amount of such loan(s) and the cause for such
cure or repurchase (Sec. Sec.  --.16(c)(3), --.17(c)(3), and
--.18(c)(3)).

Estimated Paperwork Burden

    Estimated Burden per Response:

Sec.  --.4--Standard risk retention: Horizontal interests:
Recordkeeping--0.5 hours, disclosures--3.0 hours, payment date
disclosures--1.0 hour with a monthly frequency; vertical interests:
Recordkeeping--0.5 hours, disclosures--2.5 hours; combined horizontal
and vertical interests: Recordkeeping--0.5 hours, disclosures--4.0
hours, payment date disclosures--1.0 hour with a monthly frequency.
Sec.  --.5--Revolving master trusts: Recordkeeping--0.5 hours;
disclosures--4.0 hours.
Sec.  --.6--Eligible ABCP conduits: Recordkeeping--20.0 hours;
disclosures--3.0 hours.
Sec.  --.7--Commercial mortgage-backed securities: Recordkeeping--30.0
hours; disclosures--20.75 hours.
Sec.  --.8--Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation ABS: Disclosures--1.5 hours.
Sec.  --.9--Open market CLOs: Disclosures--20.25 hours.
Sec.  --.10--Qualified tender option bonds: Disclosures--4.0 hours.
Sec.  --.11--Allocation of risk retention to an originator:
Recordkeeping 20.0 hours; disclosures 2.5 hours.
Sec.  --.13--Exemption for qualified residential mortgages:
Recordkeeping--40.0 hours; disclosures 1.25 hours.
Sec.  --.15--Exemption for qualifying commercial loans, commercial real
estate loans, and automobile loans: Disclosure--20.0 hours.
Sec.  --.16--Underwriting standards for qualifying commercial loans:
Recordkeeping--40.0 hours; disclosures--1.25 hours.
Sec.  --.17- Underwriting standards for qualifying CRE loans:
Recordkeeping--40.0 hours; disclosures--1.25 hours.
Sec.  --.18--Underwriting standards for qualifying automobile loans:
Recordkeeping--40.0 hours; disclosures--1.25 hours.
FDIC
    Estimated Number of Respondents: 92 sponsors; 494 annual offerings
per year.
    Total Estimated Annual Burden: 10,726 hours.
OCC
    Estimated Number of Respondents: 30 sponsors; 160 annual offerings
per year.
    Total Estimated Annual Burden: 3,549 hours.
Board
    Estimated Number of Respondents: 20 sponsors; 107 annual offerings
per year.
    Total Estimated Annual Burden: 2,361 hours.
Commission
    Estimated Number of Respondents: 107 sponsors; 574 annual offerings
per year.
    Total Estimated Annual Burden: 12,355 hours.
    Commission's explanation of the calculation:
    To determine the total paperwork burden for the requirements
contained in this proposed rule the agencies first estimated the
universe of sponsors that would be required to comply with the proposed
disclosure and recordkeeping requirements. The agencies estimate that
approximately 249 unique sponsors conduct ABS offerings per year. This
estimate was based on the average number of ABS offerings from 2004
through 2012 reported by the ABS database AB Alert for all non-CMBS
transactions and by Securities Data Corporation for all CMBS
transactions. Of the 249 sponsors, the agencies have assigned 8 percent
of these sponsors to the Board, 12 percent to the OCC, 37 percent to
the FDIC, and 43 percent to the Commission.
    Next, the agencies estimated the burden per response that would be
associated with each disclosure and recordkeeping requirement, and then
estimated how frequently the entities would make the required
disclosure by estimating the proportionate amount of offerings per year
for each agency. In making this determination, the estimate was based
on the average number of ABS offerings from 2004 through 2012, and
therefore, we estimate the total number of annual offerings per year to
be 1,334.\229\ We also made the following additional estimates:
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    \229\ We use the ABS issuance data from Asset-Backed Alert on
the initial terms of offerings, and we supplement that data with
information from Securities Data Corporation (SDC). This estimate
includes registered offerings, offerings made under Securities Act
Rule 144A, and traditional private placements. We also note that
this estimate is for offerings that are not exempted under
Sec. Sec.  --.19 and --.20 of the proposed rule.

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     12 offerings per year will be subject to disclosure and
recordkeeping requirements under section Sec.  --.11, which are divided
equally among the four agencies (i.e., 3 offerings per year per
agency);
     100 offerings per year will be subject to disclosure and
recordkeeping requirements under section Sec.  ----.13, which are
divided proportionately among the agencies based on the entity
percentages described above (i.e., 8 offerings per year subject to
Sec.  --.13 for the Board; 12 offerings per year subject to Sec.  --.13
for the OCC; 37 offerings per year subject to Sec.  --.13 for the FDIC;
and 43 offerings per year subject to Sec.  --.13 for the Commission);
and
     120 offerings per year will be subject to the disclosure
requirements under Sec.  --.15, which are divided proportionately among
the agencies based on the entity percentages described above (i.e., 10
offerings per year subject to Sec.  --.15 for the Board, 14 offerings
per year subject to Sec.  --.15 for the OCC; 44 offerings per year
subject to Sec.  --.15 for the FDIC, and 52 offerings per year subject
to Sec.  --.15 for the Commission. Of these 120 offerings per year, 40
offerings per year will be subject to disclosure and recordkeeping
requirements under Sec. Sec.  --.16, --.17, and --.18, respectively,
which are divided proportionately among the agencies based on the
entity percentages described above (i.e., 3 offerings per year subject
to each section for the Board, 5 offerings per year subject to each
section for the OCC; 15 offerings per year subject to each section for
the FDIC, and 17 offerings per year subject to each section for the
Commission).
    To obtain the estimated number of responses (equal to the number of
offerings) for each option in subpart B of the proposed rule, the
agencies multiplied the number of offerings estimated to be subject to
the base risk retention requirements (i.e., 1,114) \230\ by the sponsor
percentages described above. The result was the number of base risk
retention offerings per year per agency. For the Commission, this was
calculated by multiplying 1,114 offerings per year by 43 percent, which
equals 479 offerings per year. This number was then divided by the
number of base risk retention options under subpart B of the proposed
rule (i.e., nine) \231\ to arrive at the estimate of the number of
offerings per year per agency per base risk retention option. For the
Commission, this was calculated by dividing 479 offerings per year by
nine options, resulting in 53 offerings per year per base risk
retention option.
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    \230\ Estimate of 1,334 offerings per year minus the estimate of
the number of offerings qualifying for an exemption under Sec. Sec.
--.13 and --.15 (220 total).
    \231\ For purposes of this calculation, the horizontal,
vertical, and combined horizontal and vertical risk retention
methods under the standard risk retention option are each counted as
a separate option under subpart B of the proposed rule.
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    The total estimated annual burden for each agency was then
calculated by multiplying the number of offerings per year per section
for such agency by the number of burden hours estimated for the
respective section, then adding these subtotals together. For example,
under Sec.  --.10, the Commission multiplied the estimated number of
offerings per year for Sec.  --.10 (i.e., 53 offerings per year) by the
estimated annual frequency of the response for Sec.  --.10 of one
response, and then by the disclosure burden hour estimate for Sec.
--.10 of 4.0 hours. Thus, the estimated annual burden hours for
respondents to which the Commission accounts for the burden hours under
Sec.  --.10 is 212 hours (53 * 1 * 4.0 hours = 212 hours). The reason
for this is that the agencies considered it possible that sponsors may
establish these policies and procedures during the year independent on
whether an offering was conducted, with a corresponding agreed upon
procedures report obtained from a public accounting firm each time such
policies and procedures are established.
    For disclosures made at the time of the securitization
transaction,\232\ the Commission allocates 25 percent of these hours
(1,070 hours) to internal burden for all sponsors. For the remaining 75
percent of these hours, (3,211 hours), the Commission uses an estimate
of $400 per hour for external costs for retaining outside professionals
totaling $1,284,400. For disclosures made after the time of sale in a
securitization transaction,\233\ the Commission allocated 75 percent of
the total estimated burden hours (1,911 hours) to internal burden for
all sponsors. For the remaining 25 percent of these hours (637 hours),
the Commission uses an estimate of $400 per hour for external costs for
retaining outside professionals totaling $254,800.
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    \232\ These are the disclosures required by Sec.  --.4(d)(1) and
(2) (as applicable to horizontal interests, vertical interests, or
any combination of horizontal and vertical interests); Sec. Sec.
--.5(g)(1) through (3); --.6(d) and (e); --.7(a)(7)(i) through
(viii); --.8(c); --.9(d); --10(e); --.11(a)(2); --.13(b)(4)(iii);
--.15(a)(4); --.16(b)(8)(iii); --.17(b)(10)(iii); and
--.18(b)(8)(iii).
    \233\ These are the disclosures required by Sec. Sec.
--.4(b)(2); --.6(f)(2)(ii); --.7(b)(2)(B); --.9(d); --.11(b)(2)(B);
--13(c)(3); --.16(c)(3); --17(c)(3); and --.18(c)(3).
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    FHFA: The proposed regulation does not contain any FHFA information
collection requirement that requires the approval of OMB under the
Paperwork Reduction Act.
    HUD: The proposed regulation does not contain any HUD information
collection requirement that requires the approval of OMB under the
Paperwork Reduction Act.

C. Commission Economic Analysis

1. Introduction
    As discussed above, Section 15G of the Exchange Act, as added by
Section 941(b) of the Dodd-Frank Act, generally requires the agencies
to jointly prescribe regulations, that (i) require a sponsor to retain
not less than 5 percent of the credit risk of any asset that the
sponsor, through the issuance of an asset-backed security (ABS),
transfers, sells, or conveys to a third party, and (ii) prohibit a
sponsor from directly or indirectly hedging or otherwise transferring
the credit risk that the sponsor is required to retain under Section
15G and the agencies' implementing rules.\234\
---------------------------------------------------------------------------

    \234\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
---------------------------------------------------------------------------

    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 sponsor 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 by the
sponsor, if all of the assets that collateralize the ABS are qualified
residential mortgages (QRMs), as that term is jointly defined by the
agencies.\235\ In addition, Section 15G states that the agencies must
permit a sponsor to 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 by the
sponsor if the loans meet underwriting standards established by the
Federal banking agencies.\236\
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    \235\ See id. at section 78o-11(c)(1)(C)(iii), (4)(A) and (B).
    \236\ See id. at section 78o-11(c)(1)(B)(ii) and (2).
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    Section 15G requires the agencies to prescribe risk retention
requirements for ``securitizers,'' which the agencies interpret as
depositors or sponsors of ABS. The proposal would require that a
``sponsor'' of a securitization transaction retain the credit risk of
the securitized assets in the form and amount required by the proposed
rule. The agencies believe that imposing the risk retention requirement
on the sponsor of the ABS 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.
    In developing the proposed rules, the agencies have taken into
account the diversity of assets that are securitized, the structures
historically used in securitizations, and the manner in which sponsors
may have retained exposure to the credit risk of the assets they
securitize. Moreover, the agencies have sought to ensure that the
amount of credit risk retained is meaningful--consistent with the
purposes of Section 15G--while reducing the potential for the proposed
rules to negatively affect the availability and costs of credit to
consumers and businesses.
    As required by Section 15G, the proposed rules provide a complete
exemption from the risk retention requirements for ABS collateralized
solely by QRMs and establish the terms and conditions under which a
residential mortgage would qualify as a QRM. In developing the proposed
definition of a QRM, the agencies carefully considered the terms and
purposes of Section 15G, public input, and the potential impact of a
broad or narrow definition of QRM on the housing and housing finance
markets.
    The Commission is sensitive to the economic impacts, including the
costs and benefits, of its rules. The discussion below addresses the
economic effects of the proposed rules, including the likely benefits
and costs of the rules as well as their effects on efficiency,
competition and capital formation. Some of the economic effects stem
from the statutory mandate of Section 15G, whereas others are affected
by the discretion the agencies have exercised in implementing this
mandate. These two types of costs and benefits may not be entirely
separable to the extent that the agencies' discretion is exercised to
realize the benefits that they believe were intended by Section 15G.
    Section 23(a)(2) of the Exchange Act requires the Commission, when
making rules under the Exchange Act, to consider the impact on
competition that the rules would have, and prohibits the Commission
from adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the Exchange Act.\237\
Further, Section 3(f) of the Exchange Act requires the Commission,\238\
when engaging in rulemaking where it is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition and capital
formation.
---------------------------------------------------------------------------

    \237\ 15 U.S.C. 78w(a).
    \238\ 17 U.S.C. 78c(f).
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2. Background
a. Historical Background
    Asset-backed securitizations, or the pooling of consumer and
business loans into financial instruments that trade in the financial
markets, play an important role in the creation of credit for the U.S.
economy. Benefits of securitization may include reduced cost of credit
for borrowers, expanded availability of credit, and increased secondary
market liquidity for loans.\239\ The securitization process generally
involves the participation of multiple parties, each of whom has
varying amounts of information and differing economic incentives. For
example, the entity establishing and enforcing underwriting standards
and credit decisions (i.e., the originator) and the entity responsible
for structuring the securitization (i.e., the securitizer) are not
required to bear any credit risk. By contrast, the ultimate holders of
the securitized assets (i.e., the investors) bear considerable credit
risk and yet typically have minimal influence over underwriting
standards and decisions and limited information about the
characteristics of the borrower.
---------------------------------------------------------------------------

    \239\ See, e.g., Board of Governors of the Federal Reserve
System, ``Report to the Congress on Risk Retention'', (October 2010)
and Financial Stability Oversight Committee, ``Macroeconomic Effects
of Risk Retention Requirements'', (January 2011).
---------------------------------------------------------------------------

    A considerable amount of literature has emerged that supports the
view that, during the early to mid-2000s, residential mortgage-backed
securitizations (RMBSs) contributed to a significant decline in
underwriting standards for residential mortgage loans.\240\ Much of the
initial securitization issuance focused primarily on mortgages, which
had guarantees from the Government National Mortgage Association
(Ginnie Mae) or the Government Sponsored Enterprises (Enterprises),
which included the Federal National Mortgage Association, also known as
Fannie Mae, and the Federal Home Loan Mortgage Corporation, also known
as Freddie Mac. Based on the initial success of these pass through
securitizations \241\ and investor demand and acceptance of these
instruments, asset-backed securitizations subsequently expanded to
include other asset classes (e.g., car loans, student loans, credit
card receivables, corporate loans and commercial mortgages). Over the
years, securitizers began creating increasingly complex structures,
including credit tranching and resecuritizations. As a result,
securitizations increased over time in a variety of asset classes,
providing investors with relatively attractive risk-return investment
choices.
---------------------------------------------------------------------------

    \240\ Keys, Mukherjee, Seru and Vig, ``Did Securitization Lead
to Lax Screening? Evidence From Subprime Loans'' (February 2010) and
Nadauld and Sherlund, ``The Impact of Securitization on the
Expansion of Subprime Credit'', (2013).
    \241\ Pass through securitization is considered the simplest and
least complex way to securitize an asset. In this structure,
investors receive a direct participation in the cash flows from a
pool of assets. Payments on the securities are made in essentially
the same manner as payments on the underlying loans. Principal and
interest are collected on the underlying assets and `passed through'
to investors without any tranching or structuring or
reprioritization of the cash flows.
---------------------------------------------------------------------------

    In the early 2000s, as securitizers sought additional assets to
securitize, originators turned to a formerly lightly-tapped segment of
the residential home market, known as the sub-prime market.\242\ This
segment serves the mortgage needs of individuals that are less credit
worthy, generally for reasons related to income, assets and/or
employment. The securitization of subprime loans facilitated the
extension of credit to this segment of the market, which allowed
securitizers to generate more collateral for the securitization market
and led to a significant increase in the availability of low credit
quality mortgage loans for purposes of meeting the relatively high
demand for securitized investment products. This high volume of lending
contributed to higher residential property prices.\243\ A contributing
factor to the increase in housing prices was the unrealistically high
ratings provided by credit rating agencies on residential mortgage-
backed securities.\244\ Many investors may not have performed
independent credit assessments, either due to a lack of transparency
into the characteristics of the underlying assets or an undue reliance
on credit rating agencies that provided third-party credit evaluations.
This situation persisted until a high

number of defaults and an increase in interest rates led to subsequent
declines in housing prices. The ``originate-to-distribute'' model was
blamed by many for these events, as the originators and securitizers
were compensated on the basis of volume rather than quality of
underwriting. Because lenders often did not expect to bear the risk of
borrower default in connection with those loans that were securitized
and sold to third-party investors, the lenders had little ongoing
economic interest in the performance of the securitization.\245\
---------------------------------------------------------------------------

    \242\ Dell'Ariccia, Deniz and Laeven, ``Credit Booms and Lending
Standards: Evidence From the Subprime Mortgage Market'', (2008);
Mian and Sufi, ``The Consequences of Mortgage Credit Expansion:
Evidence from the 2007 Mortgage Default Crisis'', (2008);
Puranandam, ``Originate-to-Distribute Model and the Sub-Prime
Mortgage Crisis'', (2008).
    \243\ Board of Governors of the Federal Reserve, ``Report to the
Congress on Risk Retention'', (October 2010).
    \244\ See, e.g., Benmelech and Dlugosz, 2010, The Credit Rating
Crisis, Chapter 3 of NBER Macroeconomics Annual 2009, Vol. 24, pp.
161-207, Acemoglu, Rogoff and Woodford, eds., University of Chicago
Press; Bolton, Freixas and Shapiro, ``The Credit Ratings Game''
Journal of Finance (February 2012); Griffin and Tang, ``Did
Subjectivity Play a Role in CDO Credit Ratings'', Working paper
(2010).
    \245\ Dell'Ariccia, Deniz and Laeven, ``Credit Booms and Lending
Standards: Evidence From the Subprime Mortgage Market'', (2008),
Mian and Sufi, ``The Consequences of Mortgage Credit Expansion:
Evidence from the 2007 Mortgage Default Crisis'', (2008),
Puranandam, ``Originate-to-Distribute Model and the Sub-Prime
Mortgage Crisis'', (2008), Keys, Mukherjee, Seru and Vig, ``Did
Securitization Lead to Lax Screening? Evidence from Subprime Loans''
(February 2010) and Nadauld and Sherlund, ``The Impact of
Securitization on the Expansion of Subprime Credit'', (2013).
---------------------------------------------------------------------------

b. Broad Economic Considerations
    While securitization can redistribute financial risks in ways that
provide significant economic benefits, certain market practices related
to its implementation can potentially undermine the efficiency of the
market. In particular, securitization removes key features of the
classic borrower-lender relationship, which relies on borrower and
lender performance incentives generated from repeated interactions, as
well as the ongoing communication of proprietary information between
the borrower and the lender. The separation between the borrower and
the ultimate provider of credit in securitization markets can introduce
significant informational asymmetries and misaligned incentives between
the originators and the ultimate investors. In particular, the
originator has more information about the credit quality and other
relevant characteristics of the borrower than the ultimate investors,
which could introduce a moral hazard problem--the situation where one
party (e.g., the loan originator) may have a tendency to incur risks
because another party (e.g., investors) will bear the costs or burdens
of these risks. Hence, when there are inadequate processes in place to
encourage (or require) sufficient transparency to overcome concerns
about informational differences, the securitization process could lead
certain participants to maximize their own welfare and interests at the
expense of other participants.
    For example, in the RMBS market, mortgage originators generally
have more information regarding a borrower's ability to repay a loan
obligation than the investors that ultimately own the economic
interest, as the originator collects and evaluates information to
initiate the mortgage. In a securitization, since ABS investors
typically do not participate in this process, they likely have less
information about expected loan performance than the originators.
Disclosures to investors may not be sufficiently detailed regarding the
quality of the underlying assets to adequately evaluate the assets
backing the security. In addition, in a securitization the underlying
pool is comprised of hundreds or thousands of loans, each requiring
time to evaluate. Thus, such information asymmetry may have an adverse
impact on investors, especially in the case when the originator and
securitizer receive full compensation before the time when investors
ultimately learn about loan quality. Consequently, the originator may
have incentive to approve and fund a loan that they would not
otherwise. In other words, the originator may be less diligent in
solving the adverse selection problem since the consequences are
transferred to the investors.
    The securitization process removes (or lessens) the consequences of
poor loan performance from the loan originators, whose compensation
depends primarily on the fees generated during the origination process.
This provides economic incentive to produce as many loans as possible
because loan origination, structuring, and underwriting fees for
securitizations reward transaction volume. Without the requirement by
the market to bear any of the risk associated with subsequent defaults,
this can result in potentially misaligned incentives between the
originators and the ultimate investors.\246\ Through the securitization
process, risk is transferred from the originators to investors, who in
the absence of transparency into the composition of the underlying
assets, may rely too readily on credit rating agency assessments of the
underlying loans and credit enhancement supporting the securitization.
In the years preceding the financial crisis, these incentives may have
motivated originators to structure mortgage securitizations with little
or no credit enhancement and extend credit to less creditworthy
borrowers, whose subsequent defaults ultimately helped to trigger the
crisis.
---------------------------------------------------------------------------

    \246\ As an example, Ashcraft and Schuermann (2008) identify at
least seven different frictions in the residential mortgage
securitization chain that can cause agency and adverse selection
problems in a securitization transaction. The main point of their
analysis is that there are many different parties in a
securitization transaction, each with differing economic interests
and incentives. Hence, there are multiple opportunities for
conflicts of interest to arise in such structures.

                                                                          Table 1--Rating Performance of Prime RMBS (%)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                All                  AAA                Investment grade        Speculative grade        Likely to default
                             Year                                  Issues    -------------------------------------------------------------------------------------------------------------------
                                                                                Up      Down    Share    Up      Down    Share    Up      Down    Share    Up      Down    Share    Up     Down
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2004..........................................................       15,512      3.5     0.0     80.9     0.0     0.0     14.3    23.3     0.0      4.4     4.6     0.1      0.2     0.0     0.0
2005..........................................................       14,474      4.6     0.1     72.1     0.0     0.0     18.6    20.9     0.1      8.9     7.4     0.7      0.2     0.0     0.0
2006..........................................................       16,859      3.1     0.1     71.0     0.0     0.0     18.7    13.8     0.1      9.9     5.8     0.8      0.2     0.0    14.3
2007..........................................................       18,452      1.8     0.2     72.1     0.0     0.0     17.9     8.5     0.3      9.7     2.6     1.1      0.2     0.0    21.4
2008..........................................................       20,924      0.5    12.4     73.7     0.0     9.9     16.8     2.5    13.0      9.3     1.4    31.1      0.2     0.0    45.0
2009..........................................................       20,475      0.0    46.4     65.6     0.0    32.0     21.2     0.0    69.0      9.5     0.0    81.7      3.7     0.0    91.2
2010..........................................................       19,700      0.1    29.0     42.5     0.0    12.8     16.3     0.2    44.8     12.9     0.0    64.4     28.3     0.1    34.3
2011..........................................................       18,338      0.3    36.7     36.9     0.0    14.4     14.2     0.6    62.3     10.8     0.9    81.3     38.1     0.5    49.4
2012..........................................................       16,886      0.2    16.3     27.4     0.0     3.6     10.7     0.0    31.3     10.8     0.6    24.7     51.1     0.4    27.8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: The numbers in the table were calculated by Division of Economic and Risk Analysis (DERA) staff using the Standard & Poor's (S&P) RatingsXpress data. These statistics are for securities
  issued by U.S. entities in U.S. dollars, carrying a local currency rating, and having a rating on the scale of AAA to D. Each security is assigned to an asset class based on the collateral
  type information provided by S&P. Securities backed by collateral that mixes multiple types of assets are not included. ``Issues'' is the total number of RMBS issuances outstanding as of
  January 1 for each year. ``Share'' is the share of each rating category among all rated RMBS. Upgrades and downgrades are expressed as a percentage of all rated securitizations in a
  specified year and in a specified rating class. ``Investment Grade'' (IG) are ratings from AA+ to BBB-, ``Speculative'' are from BB+ to B-, and ``Likely to Default'' are CCC+ and below.

    Evidence of the credit worthiness of borrowers during this period
is illustrated in Table 1, which shows that 9.9 percent of presumably
low-risk securities, such as AAA-rated non-agency RMBS, outstanding in
2008 were downgraded during 2008. More significantly 32.0 percent of
these securities outstanding in 2009 were downgraded during the year.
Thus, almost one third of the outstanding RMBS securities with the
highest possible credit rating were downgraded during 2009, suggesting
that the credit quality of the underlying collateral and underlying
credit enhancement for AAA notes was far poorer than originally rated
by the credit rating agencies.
    The downgrades serve to illustrate the extent to which misaligned
incentives between originators/sponsors of ABS and the ultimate
investors may have manifested in the form of lax lending standards and
relaxed credit enhancement standards during the period before the
financial crisis. Risk retention is one possible response to this
problem. Requiring securitizers to share the same risks as the
investors that purchase these products seeks to mitigate the problems
caused by misaligned incentives. By retaining loss exposure to the
securitized assets, securitizers are considered to have ``skin in the
game'' and thus are economically motivated to be more judicious in
their selection of the underlying pool of assets, thereby helping to
produce higher quality (i.e., lower probability of default) securities.
    Currently, sponsors who do not retain 5 percent of the
securitization likely deploy those funds to other uses, such as
repaying lines of credit used to fund securitized loans, holding other
assets or making new loans, which may earn a different interest rate
and have a different risk exposure. Therefore, a risk retention
requirement could impose costs to those sponsors who do not currently
hold risk, in the form of the opportunity costs of those newly tied-up
funds, or could limit the volume of securitizations that they can
perform. These costs will likely be passed onto borrowers, either in
terms of borrowing costs or access to capital. In particular, borrowers
whose loans do not meet the eligibility requirements or qualify for an
exemption (i.e., those that require risk retention when securitized by
the ABS originator/sponsor) will face increased borrowing costs, or be
priced out of the loan market, thus restricting their access to
capital. As a result, there could be a negative impact on capital
formation.
    Hence, there are significant potential costs to the implementation
of risk retention requirements in the securitization market. The
Commission notes that the costs will also be impacted by any returns
and timing of the returns of any retained interest. If the costs are
deemed by sponsors to be onerous enough that they would no longer be
able to earn a sufficiently high expected return by sponsoring
securitizations, this form of supplying capital to the underlying asset
markets would decline. Fewer asset securitizations would require other
forms of funding to emerge in order to serve the needs of borrowers and
lenders. Given the historically large dollar volumes in the
securitization markets, this could reduce capital flows into the
underlying asset markets, thereby reducing the amount of capital
available for lending and possibly adversely impacting efficiency.
    The net impact of this outcome depends on the availability of
alternative arrangements for transferring capital to the underlying
assets markets and the costs of transferring capital to sponsors. For
example, the impact of the potential decrease in the use of
securitizations in the residential home mortgage market would depend on
the cost and availability of alternative mortgage funding sources, and
the willingness of these originators to retain the full burden of the
associated risks. To the extent there are alternatives, and these
alternatives can provide funding on terms similar to those available in
the securitization markets, the impact of the substitution of these
alternatives for securitizations would likely be minimal. To the extent
that securitizers can find sources of capital at costs similar to the
returns paid on retained interests, the impact of risk retention
requirements would likely be minimal. Currently, however, there is