[Federal Register Volume 76, Number 83 (Friday, April 29, 2011)]
[Proposed Rules]
[Pages 24090-24186]
[FR Doc No: 2011-8364]

Vol. 76

Friday,

No. 83

April 29, 2011

Part II

Department of the Treasury
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Office of the Comptroller of the Currency

12 CFR Part 43

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Federal Reserve System
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12 CFR Part 244

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Federal Deposit Insurance Corporation
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12 CFR Part 373

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Federal Housing Finance Agency
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12 CFR Part 1234

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Securities and Exchange Commission
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17 CFR Part 246

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Department of Housing and Urban Development
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24 CFR Part 267

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Credit Risk Retention; Proposed Rule

Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 /
Proposed Rules

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 43

[Docket No. OCC-2011-0002]
RIN 1557-AD40
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FEDERAL RESERVE SYSTEM

12 CFR Part 244

[Docket No. 2011-1411]
RIN 7100-AD-70
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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 373

RIN 3064-AD74
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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1234

RIN 2590-AA43
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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 246

[Release No. 34-64148; File No. S7-14-11]
RIN 3235-AK96
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 267

RIN 2501-AD53

Credit Risk Retention

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

ACTION: Proposed rule.

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SUMMARY: The OCC, Board, FDIC, Commission, FHFA, and HUD (the Agencies)
are proposing rules to implement the credit risk retention requirements
of section 15G of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
11), as added by section 941 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Section 15G generally requires the securitizer
of asset-backed securities to retain not less than five percent of the
credit risk of the assets collateralizing the asset-backed securities.
Section 15G includes a variety of exemptions from these requirements,
including an exemption for asset-backed securities that are
collateralized exclusively by residential mortgages that qualify as
``qualified residential mortgages,'' as such term is defined by the
Agencies by rule.

DATES: Comments must be received by June 10, 2011.

ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the Agencies. Commenters are encouraged to use the
title ``Credit Risk Retention'' to facilitate the organization and
distribution of comments among the Agencies. Commenters are also
encouraged to identify the number of the specific request for comment
to which they are responding.
    Office of the Comptroller of the Currency: Because paper mail in
the Washington, DC, area and at the OCC is subject to delay, commenters
are encouraged to submit comments by the Federal eRulemaking Portal or
e-mail, if possible. Please use the title ``Credit Risk Retention'' to
facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to
http://www.regulations.gov, under the ``More Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Comptroller of the Currency'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2011-0002''
to submit or view public comments and to view supporting and related
materials for this proposed rule. The ``How to Use This Site'' link on
the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
     E-mail<EMAIL_ADDRESS>     Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 2-3, Washington, DC 20219.
     Fax:<PHONE_NUMBER>.
     Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3,
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and
``Docket Number OCC-2011-0002'' in your comment. In general, OCC will
enter all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, e-mail addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to
this proposed rulemaking by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov, under the ``More Search Options'' tab click next
to the ``Advanced Document Search'' option where indicated, select
``Comptroller of the Currency'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2011-0002''
to view public comments for this rulemaking action.
     Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect and photocopy comments.
     Docket: You may also view or request available background
documents and project summaries using the methods described above.
    Board of Governors of the Federal Reserve System: You may submit
comments, identified by Docket No. R-1411, by any of the following
methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
     E-mail<EMAIL_ADDRESS>Include the
docket number in the subject line of the message.
     Fax:<PHONE_NUMBER> or<PHONE_NUMBER>.
     Mail: Address to Jennifer J. Johnson, Secretary, Board of
Governors of the

Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551.
    All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between
9 a.m. and 5 p.m. on weekdays.
    Federal Deposit Insurance Corporation: You may submit comments,
identified by RIN number, by any of the following methods:
     Agency Web Site: http://www.FDIC.gov/regulations/laws/federal/notices.html. Follow instructions for submitting comments on
the Agency Web Site.
     E-mail<EMAIL_ADDRESS>Include the RIN number on the
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
     Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
    Instructions: All comments received must include the agency name
and RIN for this rulemaking and will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html, including any
personal information provided.
    Securities and Exchange Commission: You may submit comments by the
following method:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-14-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
     All submissions should refer to File Number S7-14-11. This
file number should be included on the subject line if e-mail is used.
To help us process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change; we
do not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
    Federal Housing Finance Agency: You may submit your written
comments on the proposed rulemaking, identified by RIN number 2590-
AA43, by any of the following methods:
     E-mail: Comments to Alfred M. Pollard, General Counsel,
may be sent by e-mail at<EMAIL_ADDRESS>Please include ``RIN
2590-AA43'' in the subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at<EMAIL_ADDRESS>to ensure timely receipt by the
Agency. Please include ``RIN 2590-AA43'' in the subject line of the
message.
     U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA43, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington,
DC 20552.
     Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA43,
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552. A hand-delivered package should be logged at the
Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.
    All comments received by the deadline will be posted for public
inspection without change, including any personal information you
provide, such as your name and address, on the FHFA website at http://www.fhfa.gov. Copies of all comments timely received will be available
for public inspection and copying at the address above on government-
business days between the hours of 10 a.m. and 3 p.m. To make an
appointment to inspect comments please call the Office of General
Counsel at<PHONE_NUMBER>.
    Department of Housing and Urban Development: Interested persons are
invited to submit comments regarding this rule to the Regulations
Division, Office of General Counsel, Department of Housing and Urban
Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-
0500. Communications must refer to the following docket number [FR-
5504-P-01] and title of this rule. There are two methods for submitting
public comments. All submissions must refer to the above docket number
and title.
     Submission of Comments by Mail. Comments may be submitted
by mail to the Regulations Division, Office of General Counsel,
Department of Housing and Urban Development, 451 7th Street, SW., Room
10276, Washington, DC 20410-0500.
     Electronic Submission of Comments. Interested persons may
submit comments electronically through the Federal eRulemaking Portal
at www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt by HUD, and enables HUD to make them immediately available to
the public. Comments submitted electronically through the
www.regulations.gov website can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
     Note: To receive consideration as public comments,
comments must be submitted through one of the two methods specified
above. Again, all submissions must refer to the docket number and title
of the rule.
     No Facsimile Comments. Facsimile (FAX) comments are not
acceptable.
     Public Inspection of Public Comments. All properly
submitted comments and communications submitted to HUD will be
available for public inspection and copying between 8 a.m. and 5 p.m.
weekdays at the above address. Due to security measures at the HUD
Headquarters building, an appointment to review the public comments
must be scheduled in advance by calling the Regulations Division at
202-708-3055 (this is not a toll-free number). Individuals with speech
or hearing impairments may access this number via TTY by calling the
Federal Information Relay Service at<PHONE_NUMBER>. Copies of all
comments submitted are available for inspection and downloading at
http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: OCC: Chris Downey, Risk Specialist,
Financial Markets Group,<PHONE_NUMBER>; Kevin Russell, Director,
Retail Credit Risk,<PHONE_NUMBER>; Darrin Benhart, Director,
Commercial Credit Risk,<PHONE_NUMBER>; or Jamey Basham, Assistant
Director, or Carl Kaminski, Senior Attorney, Legislative and Regulatory
Activities Division,<PHONE_NUMBER>, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219.
    Board: Benjamin W. McDonough, Counsel,<PHONE_NUMBER>; April C.
Snyder, Counsel,<PHONE_NUMBER>; Sebastian R. Astrada, Attorney, (202)
452-3594; or Flora H. Ahn, Attorney,<PHONE_NUMBER>, Legal Division;
Thomas R. Boemio, Manager,<PHONE_NUMBER>; Donald N. Gabbai, Senior
Supervisory Financial Analyst,<PHONE_NUMBER>; or Sviatlana A. Phelan,
Financial Analyst,<PHONE_NUMBER>, Division of Banking Supervision and
Regulation; Andreas Lehnert, Deputy Director, Office of Financial
Stability Policy and Research,<PHONE_NUMBER>; or Brent Lattin,
Counsel,<PHONE_NUMBER>, Division of Consumer and Community Affairs,
Board of Governors of the Federal Reserve System, 20th and C Streets,
NW., Washington, DC 20551.
    FDIC: Beverlea S. Gardner, Special Assistant to the Chairman, (202)
898-3640; Mark L. Handzlik, Counsel,<PHONE_NUMBER>; Phillip E. Sloan,
Counsel,<PHONE_NUMBER>; or Petrina R. Dawson, Counsel,<PHONE_NUMBER>,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
    Commission: Jay Knight, Attorney-Advisor in the Office of
Rulemaking, or Katherine Hsu, Chief of the Office of Structured
Finance, Division of Corporation Finance, at<PHONE_NUMBER>, U.S.
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-3628.
    FHFA: Patrick J. Lawler, Associate Director and Chief Economist,
<EMAIL_ADDRESS>(202) 414-3746; Austin Kelly, Associate
Director for Housing Finance Research<EMAIL_ADDRESS>(202)
343-1336; Phillip Millman, Principal Capital Markets Specialist,
<EMAIL_ADDRESS>(202) 343-1507; or Thomas E. Joseph, Senior
Attorney Advisor<EMAIL_ADDRESS>(202) 414-3095; Federal
Housing Finance Agency, Third Floor, 1700 G Street, NW., Washington, DC
20552. The telephone number for the Telecommunications Device for the
Hearing Impaired is<PHONE_NUMBER>.
    HUD: Robert C. Ryan, Deputy Assistant Secretary for Risk Management
and Regulatory Affairs, Office of Housing, Department of Housing and
Urban Development, 451 7th Street, SW., Room 9106, Washington, DC
20410; telephone number<PHONE_NUMBER> (this is not a toll-free number).
Persons with hearing or speech impairments may access this number
through TTY by calling the toll-free Federal Information Relay Service
at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. General Definitions and Scope
    A. Asset-Backed Securities, Securitization Transaction and ABS
Interests
    B. Securitizer, Sponsor, and Depositor
    C. Originator
III. General Risk Retention Requirement
    A. Minimum 5 Percent Risk Retention Required
    B. Permissible Forms of Risk Retention
    1. Vertical Risk Retention
    2. Horizontal Risk Retention
    3. L-Shaped Risk Retention
    4. Revolving Asset Master Trusts (Seller's Interest)
    5. Representative Sample
    6. Asset-Backed Commercial Paper Conduits
    7. Commercial Mortgage-Backed Securities
    8. Treatment of Government-Sponsored Enterprises
    9. Premium Capture Cash Reserve Account
    C. Allocation to the Originator
    D. Hedging, Transfer, and Financing Restrictions
IV. Qualified Residential Mortgages
    A. Overall Approach to Defining Qualified Residential Mortgages
    B. Exemption for QRMs
    C. Eligibility Criteria
    1. Eligible Loans, First Lien, No Subordinate Liens, Original
Maturity and Written Application Requirements
    2. Borrower Credit History
    3. Payment Terms
    4. Loan-to-Value Ratio
    5. Down Payment
    6. Qualifying Appraisal
    7. Ability To Repay
    8. Points and Fees
    9. Assumability Prohibition
    D. Repurchase of Loans Subsequently Determined To Be Non-
Qualified After Closing
    E. Request for Comment on Possible Alternative Approach
V. Reduced Risk Retention Requirements for ABS Backed by Qualifying
Commercial Real Estate, Commercial, or Automobile Loans
    A. Asset Classes
    B. ABS Collateralized Exclusively by Qualifying CRE Loans,
Commercial Loans, or Automobile Loans
    C. Qualifying Commercial Loans
    1. Ability To Repay
    2. Risk Management and Monitoring Requirements
    D. Qualifying CRE Loans
    1. Ability To Repay
    2. Loan-to-Value Requirement
    3. Valuation of the Collateral
    4. Risk Management and Monitoring Requirements
    E. Qualifying Automobile Loans
    1. Ability to Repay
    2. Loan Terms
    3. Reviewing Credit History
    4. Loan-to-Value
    F. Buy-Back Requirements for ABS Issuances Collateralized by
Qualifying Commercial, CRE or Automobile Loans
VI. General Exemptions
    A. Exemption for Federally Insured or Guaranteed Residential,
Multifamily and Health Care Mortgage Assets
    B. Other Exemptions
    C. Exemption for Certain Resecuritization Transactions
    D. Additional Exemptions
    E. Safe Harbor for Certain Foreign-Related Transactions
VII. Solicitation of Comments on Use of Plain Language
VIII. Administrative Law Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Commission Economic Analysis
    D. Executive Order 12866 Determination
    E. OCC Unfunded Mandates Reform Act of 1995 Determination
    F. Commission: Small Business Regulatory Enforcement Fairness
Act
    G. FHFA: Considerations of Differences Between the Federal Home
Loan Banks and the Enterprises

I. Introduction

    The Agencies are requesting comment on proposed rules (proposal or
proposed rules) to implement the requirements of section 941(b) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act, or
Dodd-Frank Act),\1\ which is codified as new section 15G of the
Securities Exchange Act of 1934 (the Exchange Act).\2\ Section 15G of
the Exchange Act, as added by section 941(b) of the Dodd-Frank Act,
generally requires the Board, the FDIC, the OCC (collectively, referred
to as the Federal banking agencies), the Commission, and, in the case
of the securitization of any ``residential mortgage asset,'' together
with HUD and FHFA, to jointly prescribe regulations that (i) require a
securitizer to retain not less than five percent of the credit risk of
any asset that the securitizer, through the issuance of an asset-backed
security (ABS), transfers, sells, or conveys to a third party, and (ii)
prohibit a securitizer from directly or indirectly hedging or otherwise
transferring the credit risk that the securitizer is required to retain
under section 15G and the Agencies' implementing rules.\3\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 15 U.S.C. 78o-11.
    \3\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).

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    Section 15G of the Exchange Act exempts certain types of
securitization transactions from these risk retention requirements and
authorizes the Agencies to exempt or establish a lower risk retention
requirement for other types of securitization transactions. For
example, section 15G specifically provides that a securitizer shall not
be required to retain any part of the credit risk for an asset that is
transferred, sold, or conveyed through the issuance of ABS by the
securitizer, if all of the assets that collateralize the ABS are
qualified residential mortgages (QRMs), as that term is jointly defined
by the Agencies.\4\ In addition, section 15G states that the Agencies
must permit a securitizer to retain less than five 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 securitizer if the loans meet underwriting standards
established by the Federal banking agencies.\5\
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    \4\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B).
    \5\ See id. at sec. 78o-11(c)(1)(B)(ii) and (2).
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    As shown in tables A, B, C, and D below, the securitization markets
are an important source of credit to U.S. households and businesses and
state and local governments.\6\
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    \6\ Data are through September 2010. All data from Asset Backed
Alert except: CMBS data from Commercial Mortgage Alert, CLO data
from Securities Industry and Financial Markets Association. The
tables do not include any data on securities issued or guaranteed by
the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation.
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BILLING CODE 4810-33-P

[GRAPHIC] [TIFF OMITTED] TP29AP11.000

[GRAPHIC] [TIFF OMITTED] TP29AP11.001

BILLING CODE 4810-33-C

                                      Table D--Total U.S. Asset and Mortgage Backed Securitizations Issued per Year
                                                                  [Dollars in millions]
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                                                                                Total 2002
                                              2002      2003       2004        2005        2006        2007       2008      2009      2010       3Q2010
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Auto......................................    95,484    86,350      72,881     103,717      82,000      66,773    35,469    53,944    43,104     639,724
CLO.......................................    30,388    22,584      32,192      69,441     171,906     138,827    27,489     2,033  ........     494,860
CMBS......................................    89,900   107,354     136,986     245,883     305,714     319,863    33,583    38,750    27,297   1,305,329
Credit Cards..............................    73,004    67,385      51,188      62,916      72,518      94,470    61,628    46,581     6,149     535,839
Equipment.................................     7,062     9,022       6,288       9,030       8,404       6,066     3,014     7,240     5,010      61,137
Floorplan.................................     3,000     6,315      11,848      12,670      12,173       6,925     1,000     4,959     8,619      67,510
Other.....................................   135,384   196,769     330,161     444,137     516,175     165,515    19,872    10,652    24,936   1,843,601
RMBS......................................   287,916   396,288     503,911     724,115     723,257     641,808    28,612    48,082    39,830   3,393,819
Student Loan..............................    25,367    40,067      45,759      62,212      65,745   5,812,212    28,199    20,839    13,899     360,210
                                           -------------------------------------------------------------------------------------------------------------
    Total.................................   747,506   932,134   1,191,216   1,734,122   1,957,891   1,498,370   238,868   233,079   168,843  ..........
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Note: 2010 Data are through the month of September.

    When properly structured, securitization provides economic benefits
that lower the cost of credit to households and businesses.\7\ However,
when incentives are not properly aligned and there is a lack of
discipline in the origination process, securitization can result in
harm to investors, consumers, financial institutions, and the financial
system. During the financial crisis, securitization displayed
significant vulnerabilities to informational and incentive problems
among various parties involved in the process.\8\
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    \7\ Securitization may reduce the cost of funding, which is
accomplished through several different mechanisms. For example,
firms that specialize in originating new loans and that have
difficulty funding existing loans may use securitization to access
more liquid capital markets for funding. In addition, securitization
can create opportunities for more efficient management of the asset-
liability duration mismatch generally associated with the funding of
long-term loans, for example, with short-term bank deposits.
Securitization also allows the structuring of securities with
differing maturity and credit risk profiles that may appeal to a
broad range of investors from a single pool of assets. Moreover,
securitization that involves the transfer of credit risk allows
financial institutions that primarily originate loans to particular
classes of borrowers, or in particular geographic areas, to limit
concentrated exposure to these idiosyncratic risks on their balance
sheets. See generally Report to the Congress on Risk Retention,
Board of Governors of the Federal Reserve System, at 8 (October
2010), available at http://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf (Board Report).
    \8\ See Board Report at 8-9.
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    For example, as noted in the legislative history of section 15G,
under the ``originate to distribute'' model, loans were made expressly
to be sold into securitization pools, with lenders often not expecting
to bear the credit risk of borrower default.\9\ In addition,
participants in the securitization chain may be able to affect the
value of the ABS in opaque ways, both before and after the sale of the
securities, particularly if those assets are resecuritized into complex
instruments

such as collateralized debt obligations (CDOs) and CDOs-squared.\10\
Moreover, some lenders using an ``originate-to-distribute'' business
model loosened their underwriting standards knowing that the loans
could be sold through a securitization and retained little or no
continuing exposure to the quality of those assets.\11\
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    \9\ See S. Rep. No. 111-176, at 128 (2010).
    \10\ See id.
    \11\ See id.
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    The risk retention requirements added by section 15G are intended
to help address problems in the securitization markets by requiring
that securitizers, as a general matter, retain an economic interest in
the credit risk of the assets they securitize. As indicated in the
legislative history of section 15G, ``When securitizers retain a
material amount of risk, they have `skin in the game,' aligning their
economic interest with those of investors in asset-backed securities.''
\12\ By requiring that the securitizer retain a portion of the credit
risk of the assets being securitized, section 15G provides securitizers
an incentive to monitor and ensure the quality of the assets underlying
a securitization transaction, and thereby helps align the interests of
the securitizer with the interests of investors. Additionally, in
circumstances where the assets collateralizing the ABS meet
underwriting and other standards that should ensure the assets pose low
credit risk, the statute provides or permits an exemption.\13\
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    \12\ See id. at 129.
    \13\ See 15 U.S.C. 78o-11(c)(1)(B)(ii), (e)(1)-(2).
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    The credit risk retention requirements of section 15G are an
important part of the legislative and regulatory efforts to address
weaknesses and failures in the securitization process and the
securitization markets. Section 15G complements other parts of the
Dodd-Frank Act intended to improve the securitization markets. These
include, among others, provisions that strengthen the regulation and
supervision of nationally recognized statistical rating agencies
(NRSROs) and improve the transparency of credit ratings; \14\ provide
for issuers of registered ABS offerings to perform a review of the
assets underlying the ABS and disclose the nature of the review; \15\
and require issuers of ABS to disclose the history of the repurchase
requests they received and repurchases they made related to their
outstanding ABS.\16\
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    \14\ See, e.g., sections 932, 935, 936, 938, and 943 of the
Dodd-Frank Act.
    \15\ See section 945 of the Dodd-Frank Act.
    \16\ See section 943 of the Dodd-Frank Act.
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    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
securitizers may have retained exposure to the credit risk of the
assets they securitize.\17\ As described in detail below, the proposed
rules provide several options securitizers may choose from in meeting
the risk retention requirements of section 15G, including, but not
limited to, retention of a five percent ``vertical'' slice of each
class of interests issued in the securitization or retention of a five
percent ``horizontal'' first-loss interest in the securitization, as
well as other risk retention options that take into account the manners
in which risk retention often has occurred in credit card receivable
and automobile loan and lease securitizations and in connection with
the issuance of asset-backed commercial paper. The proposed rules also
include a special ``premium capture'' mechanism designed to prevent a
securitizer from structuring an ABS transaction in a manner that would
allow the securitizer to effectively negate or reduce its retained
economic exposure to the securitized assets by immediately monetizing
the excess spread created by the securitization transaction.\18\ In
designing these options and the proposed rules in general, 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.
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    \17\ Both the language and legislative history of section 15G
indicate that Congress expected the agencies to be mindful of the
heterogeneity of securitization markets. See, e.g., 15 U.S.C. 78o-
11(c)(1)(E), (c)(2), (e); S. Rep. No. 111-76, at 130 (2010) (``The
Committee believes that implementation of risk retention obligations
should recognize the differences in securitization practices for
various asset classes.'')
    \18\ ``Excess spread'' is the difference between the gross yield
on the pool of securitized assets less the cost of financing those
assets (weighted average coupon paid on the investor certificates),
charge-offs, servicing costs, and any other trust expenses (such as
insurance premiums, if any).
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    As required by section 15G, the proposed rules provide a complete
exemption from the risk retention requirements for ABS that are
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 QRMs on the housing
and housing finance markets.
    As discussed in greater detail in Part V of this Supplementary
Information, the proposed rules would generally prohibit QRMs from
having product features that contributed significantly to the high
levels of delinquencies and foreclosures since 2007--such as terms
permitting negative amortization, interest-only payments, or
significant interest rate increases--and also would establish
underwriting standards designed to ensure that QRMs are of very high
credit quality consistent with their exemption from risk retention
requirements. These underwriting standards include, among other things,
maximum front-end and back-end debt-to-income ratios of 28 percent and
36 percent, respectively; \19\ a maximum loan-to-value (LTV) ratio of
80 percent in the case of a purchase transaction (with a lesser
combined LTV permitted for refinance transactions); a 20 percent down
payment requirement in the case of a purchase transaction; and credit
history restrictions.
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    \19\ A front-end debt-to-income ratio measures how much of the
borrower's gross (pretax) monthly income is represented by the
borrower's required payment on the first-lien mortgage, including
real estate taxes and insurance. A back-end debt-to-income ratio
measures how much of a borrower's gross (pretax) monthly income
would go toward monthly mortgage and nonmortgage debt service
obligations.
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    The proposed rules also would not require a securitizer to retain
any portion of the credit risk associated with a securitization
transaction if the ABS issued are exclusively collateralized by
commercial loans, commercial mortgages, or automobile loans that meet
underwriting standards included in the proposed rules for the
individual asset class. As for QRMs, these underwriting standards are
designed to be robust and ensure that the loans backing the ABS are of
very low credit risk. In this Supplementary Information, the Agencies
refer to these assets (including QRMs) as ``qualified assets.''
    The Agencies recognize that many prudently underwritten residential
and mortgage loans, commercial loans, and automobile loans may not
satisfy all the underwriting and other criteria in the proposed rules
for qualified assets. Securitizers of ABS backed by such prudently
underwritten loans would, as a general matter, be required to retain
credit risk under the rule. However, as noted above, the Agencies have
sought to structure the proposed risk retention requirements in a
flexible manner that would allow the securitization markets for non-
qualified assets to function in a

manner that both facilitates the flow of credit to consumers and
businesses on economically viable terms and is consistent with the
protection of investors.
    Section 15G allocates the authority for writing rules to implement
its provisions among the Agencies in various ways. As a general matter,
the Agencies collectively are responsible for adopting joint rules to
implement the risk retention requirements of section 15G for
securitizations that are backed by residential mortgage assets and for
defining what constitutes a QRM for purposes of the exemption for QRM-
backed ABS.\20\ The Federal banking agencies and the Commission,
however, are responsible for adopting joint rules that implement
section 15G for securitizations backed by all other types of
assets,\21\ and also are the agencies authorized to adopt rules in
several specific areas under section 15G.\22\ In addition, the Federal
banking agencies are responsible for establishing, by rule, the
underwriting standards for non-QRM residential mortgages, commercial
mortgages, commercial loans and automobile loans that would qualify ABS
backed by these types of loans for a less than five percent risk
retention requirement.\23\ Accordingly, when used in this proposal, the
term ``Agencies'' shall be deemed to refer to the appropriate Agencies
that have rulewriting authority with respect to the asset class,
securitization transaction, or other matter discussed. The Secretary of
the Treasury, as Chairperson of the Financial Stability Oversight
Council, coordinated the development of these joint proposed rules in
accordance with the requirements of section 15G.\24\
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    \20\ See id. at sec. 78o-11(b)(2), (e)(4)(A) and (B).
    \21\ See id. at sec. 78o-11(b)(1).
    \22\ See, e.g. id. at sec. 78o-11(b)(1)(E) (relating to the risk
retention requirements for ABS collateralized by commercial
mortgages); (b)(1)(G)(ii) (relating to additional exemptions for
assets issued or guaranteed by the United States or an agency of the
United States); (d) (relating to the allocation of risk retention
obligations between a securitizer and an originator); and (e)(1)
(relating to additional exemptions, exceptions or adjustments for
classes of institutions or assets).
    \23\ See id. at sec. 78o-11(b)(2)(B). Therefore, pursuant to
section 15G, only the Federal banking agencies are proposing the
underwriting definitions in Sec.  --.16 (except the asset class
definitions of automobile loan, commercial loan, and commercial real
estate loan, which are being proposed by the Federal banking
agencies and the Commission), and the underwriting standards in
Sec. Sec.  --.18(b)(1)-(6), --.19(b)(1)-(9), and --.20(b)(1)-(8) of
the proposed rules. At the final rule stage, FHFA proposes to adopt
only those provisions of the common rules that address the types of
asset securitization transactions in which its regulated entities
could be authorized to engage under existing law. The remaining
provisions, such as those addressing underwriting standards for non-
residential commercial loans and auto loans, would be designated as
[reserved], and the provisions adopted would be numbered and
otherwise designated so as to correspond to the equivalent
provisions appearing in the regulations of the other Agencies.
    \24\ See id. at 78o-11(h).
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    For ease of reference, the proposed rules of the Agencies are
referenced using a common designation of Sec.  --.1 to Sec.  --.23
(excluding the title and part designations for each Agency). With the
exception of HUD, each Agency will codify the rules, when adopted in
final form, within each of their respective titles of the Code of
Federal Regulations.\25\ Section --.1 of each Agency's proposed rules
identifies the entities or transactions that would be subject to such
Agency's rules.\26\
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    \25\ Specifically, the agencies propose to codify the rules as
follows: 12 CFR part 43 (OCC); 12 CFR part 244 (Regulation RR)
(Board); 12 CFR part 373 (FDIC); 17 CFR part 246 (Commission); 12
CFR part 1234 (FHFA). As required by section 15G, HUD has jointly
prescribed the proposed rules for a securitization that is backed by
any residential mortgage asset and for purposes of defining a
qualified residential mortgage. HUD's codification in 24 CFR part
267 indicates that the proposed rules include exceptions and
exemptions in Subpart D of each of these rules for certain
transactions involving programs and entities under the jurisdiction
of HUD.
    \26\ The joint proposed rules being adopted by the Agencies
would apply to all sponsors that fall within the scope of 15G,
including state and federal savings associations and savings and
loan holding companies. These entities are currently regulated and
supervised by the Office of Thrift Supervision (OTS), which is not
among the Federal banking agencies with rulemaking authority under
section 15G. Authority of the OTS under the Home Owners' Loan Act
(12 U.S.C. 1461 et seq.) with respect to such entities will transfer
from the OTS to the Board, FDIC, and OCC on the transfer date
provided in section 311 of the Dodd-Frank Act. This transfer will
take place well before the effective date of the Federal banking
agencies' final rules under section 15G. Accordingly, the final
rules issued by the appropriate Federal banking agency would include
the relevant set of these entities in the agency's Purpose,
Authority, and Scope section (Sec.  --.1).
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    In light of the joint nature of the Agencies' rulewriting authority
under section 15G, the appropriate Agencies will jointly approve any
written interpretations, written responses to requests for no-action
letters and legal opinions, or other written interpretive guidance
concerning the scope or terms of section 15G and the final rules issued
thereunder that are intended to be relied on by the public
generally.\27\ Similarly, the appropriate Agencies will jointly approve
any exemptions, exceptions, or adjustments to the final rules.\28\ For
these purposes, the phrase ``appropriate Agencies'' refers to the
Agencies with rulewriting authority for the asset class, securitization
transaction, or other matter addressed by the interpretation, guidance,
exemption, exceptions, or adjustments. The Agencies expect to
coordinate with each other to facilitate the processing, review and
action on requests for such written interpretations or guidance, or
additional exemptions, exceptions or adjustments.
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    \27\ These items would not include staff comment letters and
informal written guidance provided to specific institutions or
matters raised in a report of examination or inspection of a
supervised institution, which are not intended to be relied on by
the public generally.
    \28\ See 15 U.S.C. 78o-11(c)(1)(G)(i) and (e)(1); proposed rules
at Sec.  --.22.
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II. General Definitions and Scope

    Section --.2 of the proposed rules defines terms used throughout
the proposed rules. Certain of these definitions are discussed in this
part of the Supplementary Information. Other terms are discussed
together with the section of the proposed rules where they are used.
For example, certain definitions that relate solely to the exemptions
for securitizations based on QRMs and certain qualifying commercial,
commercial real estate, and automobile loans, are contained in, and are
discussed in the context of, those sections (see subpart C of the
proposed rules).

A. Asset-Backed Securities, Securitization Transaction and ABS
Interests

    The proposed risk retention rules would apply to securitizers in
securitizations that involve the issuance of ``asset-backed
securities'' as defined in section 3(a)(77) of the Exchange Act, which
also was added to the Exchange Act by section 941 of the Dodd-Frank
Act.\29\ Section 3(a)(77) of the Exchange Act generally defines an
``asset-backed security'' to mean ``a fixed-income or other security
collateralized by any type of self-liquidating financial asset
(including a loan, lease, mortgage, or other secured or unsecured
receivable) that allows the holder of the security to receive payments
that depend primarily on cash flow from the asset.'' \30\ The proposed
rules incorporate by reference this definition of asset-backed security
from the Exchange Act.\31\ Consistent with this definition, the
proposed rules also define the term ``asset'' to mean a self-
liquidating financial asset, including loans, leases, or other

receivables.\32\ The proposal defines the term ``securitized asset'' to
mean an asset that is transferred, sold, or conveyed to an issuing
entity and that collateralizes the ABS interests issued by the issuing
entity.\33\
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    \29\ See section 941(a) of the Dodd-Frank Act.
    \30\ See 15 U.S.C. Sec.  78c(a)(77). The term also (i) includes
any other security that the Commission, by rule, determines to be an
asset-backed security for purposes of section 15G of the Exchange
Act; and (ii) does not include a security that is issued by a
finance subsidiary and held by the parent company of the finance
subsidiary or a company that is controlled by such parent company
provided that none of the securities issued by the finance
subsidiary are held by an entity that is not controlled by the
parent company.
    \31\ See proposed rules at Sec.  --.2 (definition of ``asset-
backed security'').
    \32\ See proposed rules at Sec.  --.2 (definition of ``asset'').
Because the term ``asset-backed security'' for purposes of section
15G includes only those securities that are collateralized by self-
liquidating financial assets, ``synthetic'' securitizations are not
within the scope of the proposed rules.
    \33\ See proposed rules at Sec.  --.2. Assets or other property
collateralize an issuance of ABS interests if the assets or property
serves as collateral for such issuance. Assets or other property
serve as collateral for an ABS issuance if they provide the cash
flow for the ABS interests issued by the issuing entity (regardless
of the legal structure of the issuance), and may include security
interests in assets or other property of the issuing entity,
fractional undivided property interests in the assets or other
property of the issuing entity, or any other property interest in
such assets or other property. The term collateral includes leases
that may convert to cash proceeds from the disposition of the
physical property underlying the assets. The cash flow from an asset
includes any proceeds of a foreclosure on, or sale of, the asset.
See proposed rules at Sec.  --.2 (definition of ``collateral'' for
an ABS transaction).
---------------------------------------------------------------------------

    Section 15G does not appear to distinguish between transactions
that are registered with the Commission under the Securities Act of
1933 (the ``Securities Act'') and those that are exempt from
registration under the Securities Act. For example, section 15G
provides authority for exempting from the risk retention requirements
certain securities that are exempt from registration under the
Securities Act.\34\ In addition, the statutory definition of asset-
backed security is broader than the definition of asset-backed security
in the Commission's Regulation AB,\35\ which governs the disclosure
requirements for ABS offerings that are registered under the Securities
Act.\36\ The definition of asset-backed security for purposes of
section 15G also includes securities that are typically sold in
transactions that are exempt from registration under the Securities
Act, such as CDOs, as well as securities issued or guaranteed by a
government sponsored entity (GSE), such as the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac). In light of the foregoing, the proposed risk
retention requirements would apply to securitizers of ABS offerings
whether or not the offering is registered with the Commission under the
Securities Act.
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    \34\ See, e.g., 15 U.S.C. 78o-11(c)(1)(G) (authorizing
exemptions from the risk retention requirements certain transactions
that are typically exempt from Securities Act registration); 15
U.S.C. 78o-11(e)(3)(B)(providing for certain exemptions for certain
assets, or securitizations based on assets, which are insured or
guaranteed by the United States).
    \35\ 17 CFR 229.1100 through 17 CFR 229.1123.
    \36\ See 15 U.S.C. 78b.
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    As discussed further below, the proposed rules generally apply the
risk retention requirements to the securitizer in each ``securitization
transaction,'' which is defined as a transaction involving the offer
and sale of ABS by an issuing entity.\37\ Applying the risk retention
requirements to the securitizer of each issuance of ABS ensures that
the requirements apply in the aggregate to all ABS issued by an issuing
entity, including an issuing entity--such as a master trust--that
issues ABS periodically.
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    \37\ An ``issuing entity'' is defined to mean, with respect to a
securitization transaction, the trust or other entity created at the
direction of the sponsor that owns or holds the pool of assets to be
securitized, and in whose name the ABS are issued. See proposed
rules at Sec.  --.2.
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    The proposed rules use the term ``ABS interest'' to refer to all
types of interests or obligations issued by an issuing entity, whether
or not in certificated form, including a security, obligation,
beneficial interest or residual interest, the payments on which are
primarily dependent on the cash flows on the collateral held by the
issuing entity. The term, however, does not include common or preferred
stock, limited liability interests, partnership interests, trust
certificates, or similar interests in an issuing entity that are issued
primarily to evidence ownership of the issuing entity, and the
payments, if any, on which are not primarily dependent on the cash
flows of the collateral held by the issuing entity.\38\
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    \38\ See proposed rules at Sec.  --.2. In securitization
transactions where ABS interests are issued and some or all of the
cash proceeds of the transaction are retained by the issuing entity
to purchase, during a limited time period after the closing of the
securitization, self-liquidating financial assets to support the
securitization, the terms ``asset,'' ``collateral,'' and
``securitized assets'' should be construed to include such cash
proceeds as well as the assets purchased with such proceeds and any
assets transferred to the issuing entity on the closing date.
Accordingly, the terms ``asset-backed security'' and ``ABS
interest'' should also be construed to include securities and other
interests backed by such proceeds. Such securitization transactions
are commonly referred to as including a ``pre-funding account.''
---------------------------------------------------------------------------

B. Securitizer, Sponsor, and Depositor

    Section 15G generally provides for the Agencies to apply the risk
retention requirements of the statute to a ``securitizer'' of ABS.
Section 15G(a)(3) in turn provides that the term ``securitizer'' with
respect to an issuance of ABS includes both ``(A) an issuer of an
asset-backed security; or (B) a person who organizes and initiates an
asset-backed securities transaction by selling or transferring assets,
either directly or indirectly, including through an affiliate, to the
issuer.''\39\
---------------------------------------------------------------------------

    \39\ See 15 U.S.C. 78o-11(a)(3).
---------------------------------------------------------------------------

    The Agencies note that the second prong of this definition (i.e.,
the person who organizes and initiates the ABS transaction by selling
or transferring assets, either directly or indirectly, including
through an affiliate, to the issuer) is substantially identical to the
definition of a ``sponsor'' of a securitization transaction in the
Commission's Regulation AB governing disclosures for ABS offerings
registered under the Securities Act.\40\ In light of this, the proposed
rules provide that a ``sponsor'' of an ABS transaction is a
``securitizer'' for the purposes of section 15G, and define the term
``sponsor'' in a manner consistent with the definition of that term in
the Commission's Regulation AB.\41\
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    \40\ See Item 1101 of the Commission's Regulation AB (17 CFR
229.1101) (defining a sponsor as ``a person who organizes and
initiates an asset-backed securities transaction by selling or
transferring assets, either directly or indirectly, including
through an affiliate, to the issuing entity.'')
    \41\ See proposed rules at Sec.  ----.2. Consistent with the
Commission's definition of sponsor, the Agencies interpret the term
``issuer'' as used in section 15G(a)(3)(B) to refer to the issuing
entity that issues the ABS.
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    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 rules. The
Agencies believe that proposing to apply the risk retention requirement
to 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.\42\ In circumstances where two or more entities each meet
the definition of sponsor for a single securitization transaction, the
proposed rules would require that one of the sponsors retain a portion
of the credit risk of the underlying assets in accordance with the
requirements of this proposal.\43\ Each sponsor in the transaction,
however, would remain responsible for ensuring that at least one

sponsor complied with the requirements.
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    \42\ For example, in the context of collateralized loan
obligations (CLOs), the CLO manager generally acts as the sponsor by
selecting the commercial loans to be purchased by an agent bank for
inclusion in the CLO collateral pool, and then manages the
securitized assets once deposited in the CLO structure.
    \43\ See proposed rules at Sec.  --.3(a). Because the term
sponsor is used throughout the proposed rules, the term is
separately defined in Sec.  --.2 of the proposed rules. The
definition of ``sponsor'' in Sec.  --.2 is identical to the sponsor
part of the proposed rules' definition of a ``securitizer.''
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    As noted above, the definition of ``securitizer'' in section
15G(a)(3)(A) includes the ``issuer of an asset-backed security.'' The
term ``issuer'' when used in the federal securities laws may have
different meanings depending on the context in which it is used. For
example, for several purposes under the federal securities laws,
including the Securities Act \44\ and the Exchange Act \45\ and the
rules promulgated under these Acts,\46\ the term ``issuer'' when used
with respect to an ABS transaction is defined to mean the entity--the
depositor--that deposits the assets that collateralize the ABS with the
issuing entity. The Agencies interpret the reference in section
15G(a)(3)(A) to an ``issuer of an asset-backed security'' as referring
to the ``depositor'' of the ABS, consistent with how that term has been
defined and used under the federal securities laws in connection with
ABS.\47\ As noted above, the proposed rules generally would apply the
risk retention requirements of section 15G to a sponsor of a
securitization transaction (and not the depositor for the
securitization transaction).
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    \44\ Section 2(a)(4) of Securities Act (15 U.S.C. 77b(a)(4))
defines the term ``issuer'' in part to include every person who
issues or proposes to issue any security, except that with respect
to certificates of deposit, voting-trust certificates, or collateral
trust certificates, or with respect to certificates of interest or
shares in an unincorporated investment trust not having a board of
directors (or persons performing similar functions), the term issuer
means the person or persons performing the acts and assuming the
duties of depositor or manager pursuant to the provisions of the
trust or other agreement or instrument under which the securities
are issued.
    \45\ See Exchange Act sec. 3(a)(8) (15 U.S.C. 78c(a)(8)
(defining ``issuer'' under the Exchange Act).
    \46\ See, e.g., Securities Act Rule 191 (17 CFR 230.191) and
Exchange Act Rule 3b-19 (17 CFR 240.3b-19).
    \47\ For asset-backed securities transactions where there is not
an intermediate transfer of the assets from the sponsor to the
issuing entity, the term depositor refers to the sponsor. For asset-
backed securities transactions where the person transferring or
selling the pool assets is itself a trust (such as in an issuance
trust structure), the depositor of the issuing entity is the
depositor of that trust. See proposed rules at Sec.  --.2.
Securities Act Rule 191 and Exchange Act Rule 3b-19 also note that
the person acting as the depositor in its capacity as depositor to
the issuing entity is a different ``issuer'' from that person in
respect of its own securities in order to make clear--for example--
that any applicable exemptions from Securities Act registration that
person may have with respect to its own securities are not
applicable to the asset-backed securities. That distinction does not
appear relevant here.
---------------------------------------------------------------------------

C. Originator

    As permitted by section 15G, Sec.  --.13 of the proposed rules
permit a sponsor to allocate its risk retention obligations to the
originator(s) of the securitized assets in certain circumstances and
subject to certain conditions. The proposed rules define the term
originator in the same manner as section 15G, that is, as a person who,
through the extension of credit or otherwise, creates a financial asset
that collateralizes an asset-backed security, and sells the asset
directly or indirectly to a securitizer (i.e., a sponsor or depositor).
Because this definition refers to the person that ``creates'' a loan or
other receivable, only the original creditor under a loan or
receivable--and not a subsequent purchaser or transferee--is an
``originator'' of the loan or receivable for purposes of section
15G.\48\
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    \48\ See 15 U.S.C. 78o-11(a)(3).
---------------------------------------------------------------------------

Request for Comment
    1. Do the proposed rules appropriately implement the terms
``securitizer'' and ``originator'' as used in section 15G and
consistent with its purpose?
    2. Are there other terms, beyond those defined in Sec.  --.2 of the
proposed rules, that the Agencies should define?
    3(a). As a general matter, is it appropriate to impose the risk
retention requirements on the sponsor of an ABS transaction, rather
than the depositor for the transaction? 3(b). If not, why?
    4(a). With respect to the terms defined, would you define any of
the terms differently? 4(b). If so, which ones would you define
differently, and how would you define them? For example, credit risk is
defined to mean, among other things, the risk of loss that could result
from failure of the issuing entity to make required payments or from
bankruptcy of the issuing entity.
    5. Is it appropriate for the definition of credit risk to include
risk of non-payment by the issuing entity unrelated to the assets, such
as risk that the issuing entity is not bankruptcy remote?
    6. Are all of the definitions in Sec.  --.2 of the proposed rules
necessary? For instance, is a definition of ``asset'' necessary?
    7(a). As proposed, where two or more entities each meet the
definition of sponsor for a single securitization transaction, the
proposed rules would require that one of the sponsors retain a portion
of the credit risk of the underlying assets in accordance with the
requirements of the rules. Is this the best approach to take when there
are multiple sponsors in a single securitization transaction? 7(b). If
not, what is a better approach and why? For example, should all
sponsors be required to retain credit risk in some proportional amount,
should the sponsor selling the greatest number of assets or with a
particular attribute be required to retain the risk, or should the
proposed rules only allow a sponsor that has transferred a minimum
percentage (e.g., 10 percent, 20 percent, or 50 percent) of the total
assets into the trust to retain the risk?
    8(a). Should the proposed rules allow for allocation of risk to a
sponsor (among multiple sponsors in a single transaction) similar to
the proposed rules' parameters for allocation of risk among multiple
originators? 8(b). Why or why not?
    9. A securitization transaction is proposed to be defined as a
transaction involving the offer and sale of asset-backed securities by
an issuing entity. In a single securitization transaction, there may be
intermediate steps; however, the proposed rules would only require the
sponsor to retain risk for the securitization transaction as a
whole.\49\ Should the rules provide additional guidance for when a
transaction with intermediate steps constitutes one or more
securitization transactions that each should be subject to the rules'
risk retention requirements?
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    \49\ For example, in auto lease securitizations, the auto leases
and car titles are originated in the name of a separate trust to
avoid the administrative expenses of retitling the physical property
underlying the leases. The separate trust will issue to the issuing
entity for the asset-backed security a collateral certificate, often
called a ``special unit of beneficial interest'' (SUBI). The issuing
entity will then issue the asset-backed securities backed by the
SUBI certificate.
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III. General Risk Retention Requirement

A. Minimum 5 Percent Risk Retention Required

    Section 15G of the Exchange Act generally requires that the
Agencies jointly prescribe regulations that require a securitizer to
retain not less than five percent of the credit risk for any asset that
the securitizer, through the issuance of an ABS, transfers, sells, or
conveys to a third party, unless an exemption from the risk retention
requirements for the securities or transaction is otherwise available
(e.g., if the ABS is collateralized exclusively by QRMs). Consistent
with the statute, the proposed rules generally would require that a
sponsor retain an economic interest equal to at least five percent of
the aggregate credit risk of the assets collateralizing an issuance of
ABS (the ``base'' risk retention requirement).\50\

This exposure should provide a sponsor with an incentive to monitor and
control the quality of the assets being securitized and help align the
interests of the sponsor with those of investors in the ABS. As
discussed in Part III.D of this Supplementary Information, the sponsor
also would be prohibited from hedging or otherwise transferring this
retained interest.
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    \50\ See proposed rules at Sec.  --.3 through Sec.  --.11. We
note that the proposed rules, in some instances, permit a sponsor to
allow another person to retain the required amount of credit risk
(e.g., originators, third-party purchasers in commercial mortgage-
backed securities transactions, and originator-sellers in asset-
backed commercial paper conduit securitizations). However, in such
circumstances the proposal includes limitations and conditions
designed to ensure that the purposes of section 15G continue to be
fulfilled. Further, we note that even when a sponsor would be
permitted to allow another person to retain risk, the sponsor would
still remain responsible under the rule for compliance with the risk
retention requirements.
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    As required by section 15G, the proposed risk retention
requirements would apply to all ABS transactions that are within the
scope of section 15G, regardless of whether the sponsor is an insured
depository institution, a bank holding company or subsidiary thereof, a
registered broker-dealer, or other type of federally supervised
financial institution. Thus, for example, it would apply to
securitization transactions by any nonbank entity that is not an
insured depository institution (such as an independent mortgage firm),
as well as by Fannie Mae and Freddie Mac.
    The Agencies note that the five percent risk retention requirement
established by the proposed rules would be a regulatory minimum. The
sponsor, originator, or other party to a securitization may retain, or
be required to retain, additional exposure to the credit risk of assets
that the sponsor, originator, or other party helps securitize beyond
that required by the proposed rules, either on its own initiative or in
response to the demands of private market participants. Moreover, the
proposed rules would require that a sponsor, in certain circumstances,
fund a premium capture cash reserve account in connection with a
securitization transaction (see Part III.B.9 of this Supplementary
Information). Any amount a sponsor might be required to place in a
premium capture cash reserve account would be in addition to the five
percent ``base'' risk retention requirement of the proposed rules.
Request for Comment
    10. The Agencies request comment on whether the minimum five
percent risk retention requirement established by the proposed rules
for non-exempt ABS transactions is appropriate, or whether a higher
risk retention requirement should be established for all non-exempt ABS
transactions or for any particular classes or types of non-exempt ABS.
    11. If a higher minimum requirement should be established, what
minimum should be established and what factors should the Agencies take
into account in determining that higher minimum? For example, should
the amount of credit risk be based on expected losses, or a market-
based test based on the interest rate spread relative to a benchmark
index?
    12(a). Would the minimum five percent risk retention requirement,
as proposed to be implemented, have a significant adverse effect on
liquidity or pricing in the securitization markets for certain types of
assets (such as, for example, prudently underwritten residential
mortgage loans that do not satisfy all of the requirements to be a
QRM)? 12(b). If so, what markets would be adversely affected and how?
What adjustments to the proposed rules (e.g., the minimum risk
retention amount, the manner in which credit exposure is measured for
purposes of applying the risk retention requirement, or the form of
risk retention) could be made to the proposed rules to address these
concerns in a manner consistent with the purposes of section 15G?
Please provide details and supporting data.

B. Permissible Forms of Risk Retention

    As recognized in recent studies and reports on securitization and
risk retention that have examined historical market practices, there
are several ways in which a sponsor or other entity may have retained
exposure to the credit risk of securitized assets.\51\ These include
(i) a ``vertical'' slice of the ABS interests, whereby the sponsor or
other entity retains a specified pro rata piece of every class of
interests issued in the transaction; (ii) a ``horizontal'' first-loss
position, whereby the sponsor or other entity retains a subordinate
interest in the issuing entity that bears losses on the assets before
any other classes of interests; (iii) a ``seller's interest'' in
securitizations structured using a master trust collateralized by
revolving assets whereby the sponsor or other entity holds a separate
interest that is pari passu with the investors' interest in the pool of
receivables (unless and until the occurrence of an early amortization
event); or (iv) a representative sample, whereby the sponsor retains a
representative sample of the assets to be securitized that exposes the
sponsor to credit risk that is equivalent to that of the securitized
assets. These examples are not exclusive.
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    \51\ See Board Report; see also Macroeconomic Effects of Risk
Retention Requirements, Chairman of the Financial Stability
Oversight Counsel (January 2011), available at http://www.treasury.gov/initiatives/wsr/Documents/Section 946 Risk
Retention Study (FINAL).pdf.
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    The various forms of risk retention have developed, in part, due to
the diversity of assets that are securitized and the structures
commonly used in securitizing different types of assets. For example,
due to the revolving nature of credit card accounts and the fact that
multiple series of ABS collateralized by credit card receivables
typically are issued using a single master trust structure, sponsors of
ABS transactions collateralized by credit card receivables often have
maintained exposure to the credit risk of the underlying loans through
use of a seller's interest. On the other hand, sponsors of ABS backed
by automobile loans where the originator of the loan is often a finance
company affiliated with the sponsor will often retain a portion of the
loans that would ordinarily be securitized, thus providing the sponsor
some continuing exposure to the credit risk of those loans. In
connection with the securitization of commercial mortgage-backed
securities (``CMBS''), a form of horizontal risk retention often has
been employed, with the horizontal first-loss position being initially
held by a third-party purchaser that specifically negotiates for the
purchase of the first-loss position and conducts its own credit
analysis of each commercial loan backing the CMBS.\52\ Sponsors across
a wide range of asset classes may initially hold a horizontal piece of
the securitization (such as a residual interest). Different forms of
risk retention also may have different accounting implications for a
sponsor or other entity.\53\ Historically, whether or

how a sponsor retained exposure to the credit risk of the assets it
securitized was determined by a variety of factors including the rating
requirements of the NRSROs, investor preferences or demands, accounting
considerations, and whether there was a market for the type of interest
that might ordinarily be retained (at least initially by the sponsor).
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    \52\ Section 15G(c)(1)(E) allows the Federal banking agencies
and the Commission to determine that with respect to CMBS, a form of
retention that satisfies the requirements includes retention of a
first-loss position by a third-party purchaser that meets certain
criteria. See 15 U.S.C. 78o-11(c)(1)(E).
    \53\ The determination whether a legal entity established to
issue ABS must be included in the consolidated financial statements
of the sponsor or another participant in the securitization chain is
primarily addressed by the following generally accepted accounting
principles issued by the Financial Accounting Standards Board
(FASB): Accounting Standards Codification Topic 860, Transfers and
Servicing (ASC 860, commonly called FAS 166); and FASB Accounting
Standards Codification Topic 810, Consolidation (ASC 810, commonly
called FAS 167). ASC 860 addresses whether securitizations and other
transfers of financial assets are treated as sales or financings.
ASC 810 addresses whether legal entities often used in
securitization and other structured finance transactions should be
included in the consolidated financial statements of any one of the
parties involved in the transaction. Together, this guidance
determines the extent to which an originator, sponsor, or another
company is required to maintain securitized assets and corresponding
liabilities on their balance sheets.
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    Section 15G expressly provides the Agencies the authority to
determine the permissible forms through which the required amount of
risk retention must be held.\54\ Consistent with this flexibility,
Subpart B of the proposed rules would provide sponsors with multiple
options to satisfy the risk retention requirements of section 15G. The
options in the proposed rules are designed to take into account the
heterogeneity of securitization markets and practices, and to reduce
the potential for the proposed rules to negatively affect the
availability and costs of credit to consumers and businesses. However,
importantly, each of the permitted forms of risk retention included in
the proposed rules is subject to terms and conditions that are intended
to help ensure that the sponsor (or other eligible entity) retains an
economic exposure equivalent to at least five percent of the credit
risk of the securitized assets. Thus, the forms of risk retention would
help to ensure that the purposes of section 15G are fulfilled. In
addition, as discussed further in Part III.D of this Supplementary
Information below, the proposed rules would prohibit a sponsor from
transferring, selling or hedging the risk that the sponsor is required
to retain, thereby preventing sponsors from circumventing the
requirements of the rules by selling or transferring the risk after the
securitization transaction has been completed. The proposed rules also
include disclosure requirements that are an integral part of and
specifically tailored to each of the permissible forms of risk
retention. The disclosure requirements are integral to the proposed
rules because they would provide investors with material information
concerning the sponsor's retained interests in a securitization
transaction, such as the amount and form of interest retained by
sponsors, and the assumptions used in determining the aggregate value
of ABS to be issued (which generally affects the amount of risk
required to be retained). Further, the disclosures are also integral to
the rule because they would provide investors and the Agencies with an
efficient mechanism to monitor compliance with the risk retention
requirements of the proposed rules.\55\
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    \54\ See 15 U.S.C. 78o-11(c)(1)(C)(i); see also S. Rep. No. 111-
176, at 130 (2010) (``The Committee [on Banking, Housing, and Urban
Affairs] believes that implementation of risk retention obligations
should recognize the differences in securitization practices for
various asset classes.'').
    \55\ The Agencies note that a variation of the vertical,
horizontal, seller's interest and representative sample options
described below are forms of eligible risk retention in the proposed
European Union capital requirement directive relating to
securitizations. See ``Call for Technical Advice on the
Effectiveness of a Minimum Retention Requirement for
Securitizations,'' Committee of European Bank Supervisors (October
30, 2009) (CEBS proposal).
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Request for Comment
    13. Is the proposed menu of options approach to risk retention,
which would allow a sponsor to choose the form of risk retention
(subject to all applicable terms and conditions), appropriate?
    14(a). Should the Agencies mandate that sponsors use a particular
form of risk retention (e.g., a vertical slice or a horizontal slice)
for all or specific types of asset classes or specific types of
transactions? 14(b). If so, which forms should be required for with
which asset classes and why?
    15. Does the proposed menu approach achieve the objectives of the
statute to provide securitizers an incentive to monitor and control the
underwriting quality of securitized assets and help align incentives
among originators, sponsors, and investors?
    16. Is each of the proposed forms of risk retention appropriate? In
particular, the Agencies seek comment on the potential effectiveness of
the proposed forms of risk retention in achieving the purposes of
section 15G, their potential effect on securitization markets, and any
operational or other problems these forms may present.
    17. Are there any kinds of securitizations for which a particular
form of risk retention is not appropriate?
    18. How effective would each of the proposed risk retention options
be in creating incentives to monitor and control the quality of assets
that are securitized and in aligning the interests among the parties in
a securitization transaction?
    19(a). Are there other forms of risk retention that the Agencies
should permit? 19(b). If so, please provide a detailed description of
the form(s), how such form(s) could be implemented, and whether such
form(s) would be appropriate for all, or just certain, classes of
assets.
    20. Should the proposed rules require disclosure as to why the
sponsor chose a particular risk retention option?
    21(a). Are there ways that sponsors could avoid the risk retention
requirements in an effort to reduce or eliminate their risk retention
requirements? 21(b). If so, how should we modify the proposed rules to
address this potential?
    22. Are the methodologies proposed for calculating the required
five percent exposure under each of the options appropriate?
    23(a). Are there other ways that the minimum five percent
requirement should be calculated? 23(b). Would such calculation methods
be difficult to enforce? 23(c). If so, how can we address those
difficulties? 23(d). Are there other alternatives?
1. Vertical Risk Retention
    As proposed, a sponsor may satisfy its risk retention requirements
with respect to a securitization transaction by retaining at least five
percent of each class of ABS interests issued as part of the
securitization transaction.\56\ A sponsor using this approach must
retain at least five percent of each class of ABS interests issued in
the securitization transaction regardless of the nature of the class of
ABS interests (e.g., senior or subordinated) and regardless of whether
the class of interests has a par value, was issued in certificated
form, or was sold to unaffiliated investors. For example, if four
classes of ABS interests were issued by an issuing entity as part of a
securitization--a senior AAA-rated class, a subordinated class, an
interest-only class, and a residual interest--a sponsor using this
approach with respect to the transaction would have to retain at least
five percent of each such class or interest.\57\ The proposed rules do
not specify a method of measuring the amount of each class, because the
amount retained, regardless of method of measurement, should equal at
least five percent of the par value (if any), fair value, and number of
shares or units of each class.
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    \56\ See proposed rules at Sec.  --.4.
    \57\ As noted previously, the proposed definition of ABS
interests does not include common or preferred stock, limited
liability interests, partnership interests, trust certificates or
similar interests that are issued primarily to evidence ownership of
the issuing entity and the payments, if any, on which are not
primarily dependent on the cash flows of the assets of the issuing
entity. See proposed rules at Sec.  --.2 (definition of ``ABS
interests'').
---------------------------------------------------------------------------

    Under the vertical risk retention option, by holding a five percent
vertical slice in an ABS issuance, a sponsor is exposed to five percent
of the credit risk that each class of investors has to the underlying
collateral. This provides the sponsor an interest in the entire
structure of the securitization transaction.

    Under the proposed rules, a sponsor that elects to retain risk
through the vertical slice option would be required to provide, or
cause to be provided, to potential investors a reasonable time prior to
the sale of the asset-backed securities in the securitization
transaction and, upon request, to the Commission and to its appropriate
Federal banking agency (if any), the amount (expressed as a percentage
and a dollar amount) of each class of ABS interests in the issuing
entity that the sponsor will retain (or did retain) at closing as well
as the amount (expressed, again, as a percentage and dollar amount)
that the sponsor is required to retain under the proposed rules. This
disclosure would allow investors to know what risk the sponsor will
actually retain in the transaction and compare this amount to the risk
that the sponsor is required to retain under the proposed rules. In
addition, the proposed rules would require a sponsor to disclose, or
cause to be disclosed, the material assumptions and methodologies it
used to determine the aggregate dollar amount of ABS interests issued
by the issuing entity in the securitization transaction, including
those pertaining to any estimated cash flows and the discount rate
used. Disclosure of these assumptions and methodologies should help
investors and the Agencies monitor the sponsor's compliance with its
risk retention requirements because the five percent risk retention
requirement is based on the aggregate amount of each class of ABS
interests issued as part of the transaction.\58\
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    \58\ For similar reasons, disclosure of such assumptions and
methodologies would be required under the other risk retention
options where the amount of the sponsor's required amount of risk
retention is based on the amount of interests issued by the issuing
entity or the amount of the collateral underlying such interests.
Depending on the circumstances, a sponsor may have an incentive to
inflate the value of the underlying collateral and the ABS supported
by such collateral (for example, to increase the proceeds from the
securitization transaction) or to underestimate the value of such
collateral and ABS (for example, to reduce the sponsor's risk
retention requirement). The material assumptions relating to
estimated cash flows likely would include those relating to the
estimated default rate, prepayment rate, the time between default
and recoveries on the underlying assets, as well as interest rate
projections for assets with variable interest rates.
---------------------------------------------------------------------------

Request for Comment
    24. Are the disclosures proposed sufficient to provide investors
with all material information concerning the sponsor's retained
interest in a securitization transaction, as well as to enable
investors and the Agencies to monitor the sponsor's compliance with the
rule?
    25(a). Should additional disclosures be required? 25(b). If so,
what should be required and why?
    26. Are there any additional factors, such as cost considerations,
that the Agencies should consider in formulating an appropriate
vertical risk retention option?
2. Horizontal Risk Retention
    As proposed, the second risk retention option permits a sponsor to
satisfy its risk retention obligations by retaining an ``eligible
horizontal residual interest'' in the issuing entity in an amount that
is equal to at least five percent of the par value of all ABS interests
in the issuing entity that are issued as part of the securitization
transaction.\59\ As discussed below, the eligible horizontal residual
interest would expose the sponsor to a five percent first-loss exposure
to the credit risk of the entire pool of securitized assets.
---------------------------------------------------------------------------

    \59\ See proposed rules at Sec.  --.4.
---------------------------------------------------------------------------

    The proposed rules include a number of terms and conditions
governing the structure of an eligible horizontal residual interest in
order to ensure that the interest would be a ``first-loss''
position,\60\ and could not be reduced in principal amount (other than
through the absorption of losses) more quickly than more senior
interests and, thus, would remain available to absorb losses on the
securitized assets. Specifically, an interest qualifies as an
``eligible horizontal residual interest'' under the proposed rules only
if it is an ABS interest that is allocated all losses on the
securitized assets until the par value of the class is reduced to zero
and has the most subordinated claim to payments of both principal and
interest by the issuing entity.\61\
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    \60\ As discussed in Part III.B.9 of this Supplemental
Information, if a sponsor is required to establish and fund a
premium capture cash reserve account in connection with a
securitization transaction, such account would first bear losses on
the securitized assets (even before an eligible horizontal residual
interest) until the account was depleted.
    \61\ See proposed rules at Sec.  --.2 (definition of ``eligible
horizontal residual interest'').
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    Moreover, until all other ABS interests in the issuing entity are
paid in full, the eligible horizontal residual interest generally
cannot receive any payments of principal made on a securitized asset.
However, the interest may receive its proportionate share of scheduled
payments of principal received on the securitized assets in accordance
with the relevant transaction documents. For example, so long as any
other ABS interests are outstanding, a sponsor, through its ownership
of the eligible horizontal residual interest, would be prohibited from
receiving any prepayments of principal made on the underlying assets
because these are, by definition, unscheduled payments. This sponsor
also would be prohibited from receiving principal payments made on the
underlying assets derived from proceeds from the sale of, or
foreclosure on, an underlying asset. The prohibition of unscheduled
payments to the eligible horizontal residual interest is designed to
ensure that unscheduled payments would not accelerate the payoff of the
eligible horizontal residual interest before other ABS interests. Such
acceleration would reduce the capacity of the eligible horizontal
residual interest to absorb losses on the securitized assets as well as
the duration of the sponsor's interest in the securitized assets. The
proposed rules would, however, permit the eligible horizontal residual
interest to receive its pro rata share of scheduled principal payments
on the underlying assets.\62\
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    \62\ Thus, an eligible horizontal residual interest with a par
value of five percent of the aggregate par value of all ABS
interests could, subject to its most subordinate place in the
payments waterfall, (i) initially be entitled to receive up to five
percent of scheduled principal payments received on the securitized
assets, and (ii) if losses reduced the par value of the interest to
three percent, receive no more than three percent of scheduled
principal payments received on the securitized assets.
---------------------------------------------------------------------------

    Similar to the vertical slice risk retention option, under the
proposed rules, a sponsor using the horizontal risk retention option
would be required to provide, or cause to be provided, to potential
investors a reasonable period of time prior to the sale of ABS
interests in the issuing entity and, upon request, to the Commission
and its appropriate Federal banking agency (if any): the amount
(expressed as a percentage and dollar amount) of the eligible
horizontal residual interest that will be retained (or was retained) by
the sponsor at closing, and the amount (expressed as a percentage and
dollar amount) of the eligible horizontal residual interest required to
be retained by the sponsor in connection with the securitization
transaction; a description of the material terms of the eligible
horizontal residual interest, such as when such interest is allocated
losses or may receive payments; and the material assumptions and
methodologies used in determining the aggregate dollar amount of ABS
interests issued by the issuing entity in the securitization
transaction, including those pertaining to any estimated cash flows and
the discount rate used.
    In lieu of holding an eligible horizontal residual interest, the
proposed rules would allow a sponsor to cause to be established and
funded, in cash, a reserve account at closing

(horizontal cash reserve account) in an amount equal to at least five
percent of the par value of all the ABS interests issued as part of the
transaction (i.e., the same dollar amount as would be required if the
sponsor held an eligible horizontal residual interest).\63\ This
horizontal cash reserve account would have to be held by the trustee
(or person performing functions similar to a trustee) for the benefit
of the issuing entity. The proposed rules include several important
restrictions and limitations on such a horizontal cash reserve account.
These limitations and restrictions are intended to ensure that a
sponsor that establishes a horizontal cash reserve account would be
exposed to the same amount and type of first-loss credit risk on the
underlying assets as would be the case if the sponsor held an eligible
horizontal residual interest.
---------------------------------------------------------------------------

    \63\ See proposed rules at Sec.  --.4(b).
---------------------------------------------------------------------------

    Specifically, the proposed rules would provide that, until all ABS
interests in the issuing entity are paid in full or the issuing entity
is dissolved, the horizontal cash reserve account must be used to
satisfy payments on ABS interests on any payment date when the issuing
entity has insufficient funds from any source (including any premium
capture cash reserve account established under Sec.  --.12 of the
proposed rules) to satisfy an amount due on any ABS interest.\64\ Thus,
the amounts in the account would bear first loss on the securitized
assets in the same way as an eligible horizontal residual interest. In
addition, until all ABS interests in the issuing entity are paid in
full or the issuing entity is dissolved, the proposed rules would
prohibit any other amounts from being withdrawn or distributed from the
account, with only two exceptions. The first exception would allow
amounts in the account to be released to the sponsor (or any other
person) due to receipt by the issuing entity of scheduled payments of
principal on the securitized assets, provided that the issuing entity
distributes such payments of principal in accordance with the
transaction documents and the amount released from the horizontal cash
reserve account on any date does not exceed the product of: (i) The
amount of scheduled payments of principal on the securitized assets
received by the issuing entity and for which the release is being made;
and (ii) the ratio of the current balance in the horizontal cash
reserve account to the aggregate remaining principal balance of all ABS
interests in the issuing entity. This limitation is intended to ensure
that, like an eligible horizontal residual interest, a horizontal cash
reserve account would not be depleted by unscheduled payments of
principal on the underlying assets. The second exception would be that
the sponsor would be permitted to receive interest payments (but not
principal payments) received by the horizontal cash reserve account on
its permitted investments.\65\
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    \64\ See proposed rules at Sec.  --.4(b)(3)(i).
    \65\ Under the proposed rules, amounts in a horizontal cash
reserve account may only be invested in (i) United States Treasury
securities with remaining maturities of 1 year or less; and (ii)
deposits in one or more insured depository institutions (as defined
in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813))
that are fully insured by federal deposit insurance. See proposed
rules at Sec.  --.4(b)(2).
---------------------------------------------------------------------------

    A sponsor electing to establish and fund a horizontal cash reserve
account would be required to provide disclosures similar to those
required with respect to an eligible horizontal residual interest,
except that these disclosures have been modified to reflect the
different nature of the account.
Request for Comment
    27. Do the conditions and limitations in the proposed rules
effectively limit the ability of the sponsor to structure away its risk
exposure?
    28(a). Is the restriction on certain payments to the sponsor with
respect to the eligible horizontal residual interest appropriate and
sufficient? 28(b). Why or why not?
    29(a). Is the proposed approach to measuring the size of horizontal
risk retention (five percent of the par value of all ABS interests in
the issuing entity that are issued as part of the securitization
transaction) appropriate? 29(b). Would a different measurement be
better? Please provide details and data supporting any alternative
measurements.
    30. Are the disclosures proposed sufficient to provide investors
with all material information concerning the sponsor's retained
interest in a securitization transaction, as well as enable investors
and the Agencies to monitor whether the sponsor has complied with the
rule?
    31(a). Should additional disclosures be required? 31(b). If so,
what should be required and why?
    32. Are there any additional factors, such as accounting or cost
considerations that the Agencies should consider with respect to
horizontal risk retention?
    33. Should a sponsor be prohibited from utilizing the horizontal
risk retention option if the sponsor (or an affiliate) acts as servicer
for the securitized assets?
    34. Are the terms and conditions of the horizontal cash reserve
account appropriate?
    35. Do the terms and conditions ensure that such an account will
expose the sponsor to the same type and amount of credit risk and have
the same incentive effects as an eligible horizontal residual interest?
    36(a). Should the eligible horizontal residual interest be required
to be structured as a ``Z bond'' such that it pays no interest while
principal is being paid down on more senior interests? 36(b). Why or
why not?
3. L-Shaped Risk Retention
    The next risk retention option in the proposed rules would allow a
sponsor, subject to certain conditions, to use an equal combination of
vertical risk retention and horizontal risk retention as a means of
retaining the required five percent exposure to the credit risk of the
securitized assets. This form of risk retention is referred to as an
``L-Shaped'' form of risk retention because it combines both vertical
and horizontal forms. Specifically, Sec.  --.6 of the proposed rules
would allow a sponsor to meet its risk retention obligations under the
rules by retaining:
    (i) Not less than 2.5 percent of each class of ABS interests in the
issuing entity issued as part of the securitization transaction (the
vertical component); and
    (ii) An eligible horizontal residual interest in the issuing entity
in an amount equal to at least 2.564 percent of the par value of all
ABS interests in the issuing entity issued as part of the
securitization transaction, other than those interests required to be
retained as part of the vertical component (the horizontal
component).\66\
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    \66\ As under the horizontal risk retention option itself, a
sponsor would have the option of establishing and funding, in cash,
a horizontal cash reserve account at the closing of the
securitization transaction in this amount rather than holding an
eligible horizontal residual interest. See proposed rules at Sec.
--.4(b). Any such horizontal cash reserve account would be subject
to the same restrictions and limitations as under the horizontal
risk retention option.
---------------------------------------------------------------------------

    The amount of the horizontal component is calibrated to avoid
double counting that portion of an eligible horizontal residual
interest that the sponsor is required to hold as part of the vertical
component. This calibration also ensures that the combined amount of
the vertical component and the horizontal component would be five
percent of the aggregate transaction. For example, in a securitization
transaction structured with three classes of interests: A certificated
senior class whose par value is equal to $950, an

uncertificated subordinated class of $24 and an uncertificated eligible
horizontal residual interest whose par value is equal to $26, a sponsor
would be required to retain $23.75 of the senior class ($950*2.5%),
$0.60 of the subordinated class ($24*2.5%) and $25.65 of the eligible
horizontal residual interest (($26*2.5%) + ($1000 - ($23.75 + $0.60 +
$0.65))*2.564%) for a total of $50 in risk retention requirements.
Because the required size of the sponsor's retained eligible horizontal
residual interest ($25.65) is less than the amount of the eligible
horizontal residual interest, retention of the entire horizontal
residual interest by the sponsor complies with the minimum L-shape
retention requirements for the securitization.\67\
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    \67\ This example is provided for simple illustration only.
---------------------------------------------------------------------------

    The proposal would require that a sponsor hold 50 percent of its
required risk retention amount in the form of a vertical component and
50 percent in the form of a horizontal component in order to help
ensure that each component is large enough to affect the sponsor's
incentives and to help align the incentives of the sponsor and
investors. In addition, requiring that each component represent 50
percent of the total minimum risk retention requirement should assist
investors and the Agencies with monitoring compliance with the proposed
rules.
    Because a sponsor using the L-shape risk retention option would
retain both a vertical and a horizontal component, the proposed rules
would require that the sponsor provide the disclosures required under
the vertical risk retention option, as well as those required under the
horizontal risk retention option.
Request for Comment
    37. Are the disclosures proposed sufficient to provide investors
with all material information concerning the sponsor's retained
interest in a securitization transaction, as well as enable investors
and the Agencies to monitor whether the sponsor has complied with the
rule?
    38(a). Should additional disclosures be required? 38(b). If so,
what should be required and why?
    39. Are there any additional factors, such as cost considerations,
that the Agencies should consider with respect to L-shape risk
retention?
    40(a). Should the Agencies permit or require that a higher
proportion of the risk retention held by a sponsor under this option be
composed of a vertical component or a horizontal component? 40(b). What
implications might such changes have on the effectiveness of the option
in helping achieving the purposes of section 15G?
4. Revolving Asset Master Trusts (Seller's Interest)
    Securitizations backed by revolving lines of credit, such as credit
card accounts or dealer floorplan loans, often are structured using a
revolving master trust, which allows the trust to issue more than one
series of ABS backed by a single pool of the revolving assets.\68\ In
these types of transactions, the sponsor typically holds an interest
known as a ``seller's interest.'' This interest is pari passu with the
investors' interest in the receivables backing the ABS interests of the
issuing entity until the occurrence of an early amortization event. A
seller's interest is a direct, shared interest with all of the
investors in the performance of the underlying assets and, thus,
exposes the sponsor to the credit risk of the pool or receivables.
---------------------------------------------------------------------------

    \68\ In a master trust securitization, assets (e.g., credit card
receivables or dealer floorplan financings) may be added to the pool
in connection with future issuances of the securities backed by the
pool.
---------------------------------------------------------------------------

    In light of and to accommodate those types of securitizations, the
proposed rules would allow a sponsor of a revolving asset master trust
that is collateralized by loans or other extensions of credit that
arise under revolving accounts to meet its base risk retention
requirement by retaining a seller's interest in an amount not less than
five percent of the unpaid principal balance of all the assets held by
the issuing entity.\69\ The proposed rules define a ``revolving asset
master trust'' as an issuing entity that (i) is a master trust; and
(ii) is established to issue more than one series of ABS, all of which
are collateralized by a single pool of revolving securitized assets
that are expected to change in composition over time. The proposed
rules also define a ``seller's interest'' as an ABS interest (i) in all
of the assets that are held by the issuing entity and that do not
collateralize any other ABS interests issued by the entity; (ii) that
is pari passu with all other ABS interests issued by the issuing entity
with respect to the allocation of all payments and losses prior to an
early amortization event (as defined in the transaction documents); and
(iii) that adjusts for fluctuations in the outstanding principal
balances of the securitized assets. The definitions of a seller's
interest and a revolving asset master trust are intended to be
consistent with market practices and, with respect to seller's
interest, designed to ensure that any seller's interest retained by a
sponsor under the proposal would expose the sponsor to the credit risk
of the underlying assets.
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    \69\ See proposed rules at Sec.  --.7.
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    Under the proposed rules, a sponsor using the seller's interest
option would be required to provide, or cause to be provided, in
writing to potential investors a reasonable period of time prior to the
sale of the asset-backed securities in the securitization transaction
and, upon request, to the Commission and its appropriate Federal
banking agency (if any) the amount (expressed as a percentage and
dollar amount) of the seller's interest that the sponsor will retain
(or has retained) in the transaction at closing and the amount
(expressed as a percentage and dollar amount) that the sponsor is
required to retain pursuant to Sec.  --.7 of the rule; a description of
the material terms of the seller's interest; and the material
assumptions and methodology used in determining the aggregate dollar
amount of ABS interests issued by the issuing entity in the
securitization transaction, including those pertaining to any estimated
cash flows and the discount rate used.
Request for Comment
    41(a). Should a sponsor of a revolving asset master trust be
permitted to satisfy its base risk retention requirement by retaining
the seller's interest, as proposed? 41(b). Why or why not?
    42(a). Are there additional or different conditions that should be
placed on this option? 42(b). If so, please explain in detail what
other conditions would be appropriate.
    43. Are there alternative methods of structuring risk retention for
revolving asset master trust securitization transactions that should be
permitted? Provide detailed descriptions and data or other support for
any alternatives.
    44. Are the proposed disclosures sufficient to provide investors
with all material information concerning the sponsor's retained
interest in a securitization transaction, as well as enable investors
and the Agencies to monitor whether the sponsor has complied with the
rule?
    45(a). Should additional disclosures be required? 45(b). If so,
what should be required and why?
    46. Should a seller's interest form of risk retention be applied to
any other types of securitization transactions? If so, explain in
detail and provide data or other support for application to other types
of securitization transactions.
5. Representative Sample
    The next proposed risk retention option permits a sponsor of a

securitization transaction to meet its risk retention requirements by
retaining a randomly selected representative sample of assets that is
equivalent, in all material respects, to the assets that are
transferred to the issuing entity and securitized, subject to certain
conditions.\70\ This method of risk retention has been used in
connection with securitizations involving automobile loans where the
underlying loans are not originated purely for distribution, but are
securitized by the sponsor as part of a broader funding strategy. By
retaining a randomly selected representative sample of assets, the
sponsor retains exposure to substantially the same type of credit risk
as investors in the ABS. Therefore, this structure provides a sponsor
incentives to monitor and control the quality of the underwriting of
the securitized assets and helps align the sponsor's incentives with
those of investors in the ABS.
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    \70\ See proposed rules at Sec.  --.8.
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    Consistent with other risk retention options, a sponsor using the
representative sample approach would be required to retain at least
five percent of the credit risk of the assets the sponsor identifies
for securitization. Therefore, the unpaid principal balance of all the
assets in the representative sample would be required to equal at least
five percent of the aggregate unpaid principal balance of all the
assets in the pool of assets initially identified for securitization
(including those that end up in the representative sample). For
example, if the assets that are identified for securitization have an
aggregate unpaid principal balance of $100 million, the aggregate
unpaid principal balance of the assets in the representative sample
would be required to equal at least $5 million.\71\
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    \71\ Stated otherwise, the unpaid principal balance of the
assets comprising the representative sample must be no less than 5/
95ths (5.264 percent) of the aggregate unpaid principal balance of
all the assets that ultimately are securitized in the securitization
transaction. The proposed rules use this approach to defining the
minimum size of a representative sample. See proposed rules at Sec.
--.8(b)(1)(i).
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    To ensure that a sponsor that retains a representative sample
remains exposed to substantially the same aggregate credit risks as
investors in the ABS, the proposal would require the sponsor to
construct a representative sample according to a specific process. As
an initial step, the sponsor would need to designate a pool of at least
1,000 separate assets for securitization (the ``designated pool''). The
representative sample would be required to be drawn exclusively from
the designated pool. Also, the designated pool would be prohibited from
containing any assets other than those that are either securitized or
selected for the representative sample. In the second step, the sponsor
must use a random selection process to identify those loans from within
the designated pool that will be included in the representative sample.
This random selection process may not take account of any
characteristic of the assets other than their unpaid principal balance.
    After the sponsor randomly selects a representative sample from the
designated pool, it would be required to assess that sample to ensure
that, for each material characteristic of the assets, including the
average unpaid principal balance, in the designated pool the mean of
any quantitative characteristic, and the proportion of any
characteristic that is categorical in nature, of the sample of assets
randomly selected from the designated pool is within a 95 percent two-
tailed confidence interval of the mean or proportion, respectively, of
the same characteristic of all the assets in the designated pool.\72\
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    \72\ Depending on the type of assets involved in the
securitization, the material characteristics other than the unpaid
principal balance of the assets might include, for example, the
geographical location of the property securing the loan, the debt-
to-income ratio(s) of the borrower (DTI ratio), and the interest
rate payable on the loan. Characteristics such as the DTI ratio and
the interest rate payable on the loan would be considered
quantitative characteristics, and characteristics such as the
geographic location of the property securing the loan would be
considered categorical characteristics. Assuming the factors above
are material, a sponsor using the representative sample option would
be required to test the mean of the DTI ratio of loans in the
representative sample against the mean of the DTI ratio of all
assets in the designated pool (including the ones selected for the
random sample). In addition, the sponsor would be required to test
the proportion of the number of assets from one geographic location
in the representative sample to the total number of assets in the
representative sample against the proportion of the number of assets
from the same geographic location in the designated pool to the
total number of assets in the designated pool.
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    Without these statistical tests, a sample could be biased towards,
for example, assets with a larger dollar value or assets with a lower
expected risk of default. In summary, this process is designed to
ensure that the assets randomly selected from the designated pool are,
in fact, representative of the securitized pool. If this process does
not produce a sample with equivalent material characteristics (as
measured by the required two-tailed confidence level), the sponsor must
repeat it as necessary in order to achieve an equivalent result or rely
on another permissible option for retaining credit risk. The proposal
permits this re-selection and testing process.
    The proposal contains a variety of safeguards to ensure that the
sponsor has constructed the representative sample in conformance with
the requirements described above. For example, the sponsor would be
required to have in place, and adhere to, policies and procedures for
(i) identifying and documenting the material characteristics of the
assets in the designated pool; (ii) selecting assets randomly from the
designated pool for inclusion in the representative sample; (iii)
testing the randomly selected sample of assets in the designated pool;
(iv) maintaining, until all ABS interests are paid in full,
documentation that clearly identifies the assets included in the
representative sample; and (v) prohibiting, until all ABS interests are
paid in full, assets in the representative sample from being included
in the designated pool of any other securitization transaction.
    In addition, prior to the sale of the asset-backed securities as
part of the securitization transaction, the sponsor would be required
to obtain an agreed upon procedures report from an independent, public
accounting firm. At a minimum, the independent, public accounting firm
must report on whether the sponsor has the policies and procedures
mentioned above.\73\ Once an acceptable agreed upon procedures report
has been obtained, the sponsor may rely on such report for subsequent
securitizations. However, if the sponsor's policies and procedures
change in any material respect, a new agreed upon procedures report
would be required. Under the proposal, the independent public
accounting firm providing the agreed upon procedures report must report
on the following minimum items:
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    \73\ See proposed rules at Sec.  --.8(d)(2)(i)-(v).
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    (i) Policies and procedures that require the sponsor to identify
and document the material characteristics of assets included in a
designated pool of assets that meets the requirements of the proposal;
    (ii) Policies and procedures that require the sponsor to select
assets randomly in accordance with the proposal;
    (iii) Policies and procedures that require the sponsor to test the
randomly-selected sample of assets in accordance with the proposal of
this section;
    (iv) Policies and procedures that require the sponsor to maintain,
until all ABS interests are paid in full, documentation that identifies
the assets in the representative sample established in accordance with
the proposal; and

    (v) Policies and procedures that require the sponsor to prohibit,
until all ABS interests are paid in full, assets in the representative
sample from being included in the designated pool of any other
securitization transaction.
    Because the performance of the assets included in the
representative sample could differ from the performance of the
securitized assets if the two sets of assets were serviced under
different standards or procedures, the proposal provides that, until
such time as all ABS interests in the issuing entity have been fully
paid or the issuing entity has been dissolved, servicing of the assets
included in the representative sample must be conducted by the same
entity and under the same contractual standards as the servicing of the
securitized assets. In addition, the individuals responsible for
servicing the assets comprising the representative sample or the
securitized assets must not be able to determine whether an asset is
held by the sponsor or held by the issuing entity.
    A sponsor would also be required to comply with the hedging,
transfer and sale restrictions in section --.14 with respect to the
assets in the representative sample. Additionally, the sponsor would be
prohibited from removing any assets from the representative sample and,
until all ABS interests are repaid, causing or permitting the assets in
the representative sample to be included in any other designated pool
or representative sample established in connection with any other
securitization transaction.\74\
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    \74\ See proposed rules at Sec.  --.8(f).
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    To help ensure that potential investors and the Agencies can
monitor and assess the sponsor's compliance with these requirements,
the proposal would require the sponsor to provide, or cause to be
provided, the following disclosures to potential investors a reasonable
period of time prior to the sale of asset-backed securities as part of
the securitization transaction and to provide, or cause to be provided,
the same information, upon request, to the Commission and its
appropriate Federal banking agency (if any):
    (i) The amount (expressed as a percentage of the designated pool
and dollar amount) of assets included in the representative sample to
be retained by the sponsor;
    (ii) The amount (expressed as a percentage of the designated pool
and dollar amount) of assets required to be included in the
representative sample and retained by the sponsor;
    (iii) A description of the material characteristics of the
designated pool and the representative sample, including, but not
limited to, the average unpaid principal balance of the assets in the
designated pool and the representative sample, the means of the
quantitative characteristics and proportions of characteristics that
are categorical in nature with respect to each of the material
characteristics of the assets in the designated pool and the
representative sample, of appropriate introductory and explanatory
information to introduce the characteristics, the methodology used in
determining or calculating the characteristics, and any terms or
abbreviations used; \75\
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    \75\ See, e.g., disclosure of pool characteristics required in
registered transactions in the Commission's Regulation AB, Item
1111(b).
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    (iv) A description of the policies and procedures that the sponsor
used for ensuring that the process for identifying the representative
sample complies with the proposal and that the representative sample
has equivalent material characteristics to those of the pool of
securitized assets;
    (v) Confirmation that an agreed upon procedures report was obtained
as required by the proposal; and
    (vi) The material assumptions and methodology used in determining
the aggregate dollar amount of ABS interests issued by the issuing
entity in the securitization transaction, including those pertaining to
any estimated cash flows and the discount rate used.
    Further, after the sale of the ABS, the sponsor would be required
to provide, or cause to be provided, to investors at the end of each
distribution period (as specified in the governing transaction
documents) a comparison of the performance of the pool of securitized
assets for the related distribution period with the performance of the
assets in the representative sample for the related distribution
period. A sponsor selecting the representative sample option also would
be required to provide investors disclosure concerning the assets in
the representative sample in the same form, level, and manner as it
provides, pursuant to rule or otherwise, concerning the securitized
assets. Therefore, if loan-level disclosure concerning the securitized
assets was required, by rule or otherwise, to be provided to investors,
the same level of disclosure would also be required concerning the
representative sample.
Request for Comment
    47. Should we include the representative sample alternative as a
risk retention option?
    48. Are the mechanisms that we have proposed adequate to ensure
monitoring of the randomization process if such an alternative were
permitted?
    49. Is the requirement that the designated pool contain at least
1000 assets appropriate, or should a greater number of assets be
required or a lesser number be permitted?
    50. Are there material characteristics other than the average
unpaid principal balance of all the assets that should be identified in
the rule for purposes of the equivalent risk determination and
disclosure requirements?
    51. Are there any better ways to ensure an adequate randomization
process and the equivalence of the representative sample to the pool of
securitized assets? For example, would it be appropriate and sufficient
if the sponsor were required to use a third party to conduct the random
selection with no subsequent testing to determine if the sample
constructed has material characteristics equivalent to those of the
securitized assets?
    52(a). Alternatively, would it be adequate if the sponsor was
required to provide a third-party opinion that the selection process
was random and that retained exposures are equivalent (i.e., share a
similar risk profile) to the securitized exposures? 52(b). Would this
opinion resemble a credit rating, thereby raising concerns about undue
reliance on credit ratings? 52(c). If this approach were adopted,
should the Agencies impose any standards of performance to be followed
by such a third party, or that such third party have certain
characteristics?
    53. If the Agencies adopt a representative sample option, should
the same disclosures be required regarding the securitized assets
subject to risk retention that are required for the assets in the pool
at the time of securitization and on an ongoing basis?
    54. Should the retained exposures, as proposed, be subject to the
same servicing standards as the securitized exposures?
    55. Are the disclosures proposed sufficient to provide investors
with all material information concerning the sponsor's retained
interest in a securitization transaction, as well as enable investors
and the Agencies to monitor whether the sponsor has complied with the
rule?
    56(a). Should additional disclosures be required? 56(b). If so,
what should be required and why?

    57(a). Is the condition that a sponsor obtain an agreed upon
procedures report from an independent, public accounting firm
appropriate? 57(b). If not, is there another mechanism that should be
included in the option that helps ensure that the sponsor has
constructed the representative sample in conformance with the
requirements of the rule?
    58(a). Is the requirement that the sponsor determine equivalency
with a 95 percent two-tailed confidence appropriate? 58(b). If not,
what measurement of equivalency do you recommend and why?
6. Asset-Backed Commercial Paper Conduits
    The next risk retention option under the proposed rules is an
option specifically designed for structures involving asset-backed
commercial paper (ABCP) that is supported by receivables originated by
one or more originators and that is issued by a conduit that meets
certain conditions.\76\ This option is designed to take account of the
special structures through which this type of ABCP typically is issued,
as well as the manner in which exposure to the credit risk of the
underlying assets typically is retained by participants in the
securitization chain for this type of ABCP.
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    \76\ See proposed rules at Sec.  --.9.
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    ABCP is a type of liability that is typically issued by a special
purpose vehicle (or conduit) sponsored by a financial institution or
other sponsor. The commercial paper issued by the conduit is
collateralized by a pool of assets, which may change over the life of
the entity. Depending on the type of ABCP program being conducted, the