risk retention on sponsors should still have the effect of improving
underwriting standards. Sponsors would have strong incentives to
monitor the lending practices of originators and consider these
practices when acquiring pool assets. This likely will align
originators' interests with those of sponsors, whose interests would
now be aligned with those of investors through risk retention.
    The proposed rules allow sponsors to allocate some of their risk
retention responsibilities to originators, which would provide
additional flexibility in complying with the requirements. However, the
proposed rules do not allow the allocation of risk to an originator
contributing a small share of assets to the securitized pool. Thus, the
proposed allocation of risk retention is likely to benefit small loan
originators by not allowing sponsors to pass onto them their own risk
retention costs.
    The Agencies are also proposing to allow risk retention allocation
to a third-party purchaser in the securitization of commercial real
estate loans. It has been a common market practice for a third-party
purchaser to retain the first-loss position in commercial mortgage-
backed transactions. This third-party buyer, also known as ``B-piece
buyer,'' is typically involved in the securitization early on and thus
can significantly affect pool asset selection. The B-piece buyer
reviews the loans and corresponding mortgage properties, and may ask
for loans to be removed from the pool if underwriting issues are
uncovered. Thus, the Agencies' decision to allow a B-piece buyer to
meet a sponsor's risk retention obligations under Section 15G of the
Exchange Act, will likely benefit both sponsors and investors. It
accommodates existing market practices, thus minimizing sponsors'
compliance costs while aligning the interests of investors with those
of parties performing due diligence on the pool assets. In this way,
the proposal should provide incentives for good underwriting and
origination practices. Since a sponsor's risk retention obligation can
be met by a B-piece buyer only under certain conditions described
earlier, these conditions may increase B-piece buyers' cost of
participating in CMBS transactions. B-piece buyers may be able to pass
these costs to borrowers with an adverse effect on capital formation.
However, the Commission preliminary believes that the conditions help
ensure that the B-piece buyer's risk retention is consistent with the
intent of Section 15G and would benefit investors, and ultimately
facilitating capital formation.
    As noted earlier, the B-piece buyer in CMBS transactions often acts
in the

capacity of a special servicer, which can create conflicts of interest
between the B-piece buyer and senior tranche holders. To mitigate these
conflicts of interest, the Agencies are proposing to have an operating
adviser oversee the servicing activities of the B-piece buyer when the
B-piece buyer acts in a capacity of a special servicer. While such a
requirement would increase compliance costs, it should have the benefit
of minimizing B-piece buyers' ability to manipulate cash flows through
special servicing and by limiting B-piece buyers' ability to offset the
consequences of poor underwriting through special servicing. In
addition, it should incentivize B-piece buyers to avoid adding into the
pool poorly underwritten or originated assets. This would be consistent
with the purpose of Section 15G and would benefit investors, thus
facilitating capital formation.
    The Agencies are proposing yet another option for risk retention
allocation, which is specifically designed for asset-backed commercial
paper (``ABCP'') conduits. This option takes into account the special
structures through which this type of ABS is typically issued, as well
as the manner in which exposure to the credit risk of the underlying
assets is typically retained.
    Although the proposal would allow the originator-sellers (rather
than the sponsor) to retain the required eligible horizontal residual
interest, the proposal also imposes certain obligations directly on the
sponsor in recognition of the key role the sponsor plays in organizing
and operating an eligible ABCP conduit. Most importantly, the proposal
provides that the sponsor of an eligible ABCP conduit that issues ABCP
in reliance on this option would be the securitization party ultimately
responsible for compliance with the risk retention requirements of
Section 15G of the Exchange Act. The proposal allows for an ABCP
sponsor to be in compliance if each originator-seller retains a five-
percent horizontal residual interest in each intermediate SPV
established by or on behalf of that originator-seller for purposes of
issuing interests to an eligible ABCP conduit. Since eligible ABCP
conduits also provide full liquidity guarantees to commercial-paper
investors by regulated liquidity providers, the flexibility allowed by
the proposed rule benefits ABCP sponsors by allowing them to avoid
costly duplicative risk retention and should have the effect of
promoting capital formation in this important segment of the
securitization market.
    Further, the proposed rule avoids an outcome in which one
originator-seller would have to be exposed to risks underwritten by
other originator-sellers. Each originator-seller would be required to
retain credit exposure only to its own receivables, thus properly
aligning its incentives with those of ABCP investors.
5. Hedging Prohibitions
    Hedging helps sponsors manage and mitigate their exposure to
unwanted risks. For example, a securitizer may want to mitigate the
interest rate risk of its ABS portfolio. Hedging is also a beneficial
activity from a systemic risk perspective because it helps market
participants redistribute risk. Given the benefits from hedging, the
proposed rule aims to implement the risk retention mandate of Section
15G without unduly limiting a sponsor's risk management activities.
This is accomplished by prohibiting hedging only to the extent that
hedging would result in a sponsor no longer being exposed to the risk
required to be retained by Section 15G of the Exchange Act.
    The ability to hedge interest rate risk and similar risks increases
economic efficiency and facilitates capital formation, because it
allows securitizers to direct their capital and efforts towards
activities of comparative advantage. For instance, a securitizer might
have a superior ability of assessing the credit risk of residential
mortgages, but be less skilled in forecasting interest-rate changes.
Such a securitizer might find it more efficient to hedge the interest-
rate risk of the residential mortgages collateralizing an RMBS rather
than invest resources in improving its ability to understand and price
this interest-rate risk. Furthermore, since interest-rate fluctuations
are unrelated to underwriting deficiencies in the loan origination
process, allowing a securitizer to hedge interest-rate risk will not
compromise the incentive alignment contemplated by the Act. The ability
to hedge also may help competition, because by hedging less diversified
companies may be able to compete with more diversified companies that
have weaker hedging incentives. Therefore, the proposed rules are
designed to promote efficiency, competition and capital formation.
6. Treatment of Government-Sponsored Enterprises
    The proposed rules, which allows the guarantees of Fannie Mae and
Freddie Mac to satisfy the risk retention requirements while they are
operating under the conservatorship or receivership of FHFA with
capital support from the United States, as well as for any limited-life
regulated entity succeeding to the charter and also operating with such
capital support, avoid unnecessary costs to be incurred by sponsors
until the statutory and regulatory framework for the Enterprises
becomes clearer. The Commission believes that the capital support
provided by the United States government makes additional risk
retention unnecessary because as a result of the support investors in
GSE ABS are not exposed to any credit losses. Thus, there would be no
incremental benefit to be gained by requiring GSEs to retain risk.
7. Resecuritization Transactions
    The Agencies have identified certain resecuritizations where
duplicative risk retention requirements would provide no added benefit.
Resecuritizations collateralized only by existing 15G-compliant ABS and
financed through the issuance of a single class of securities so that
all principal and interest payments received are evenly distributed to
all security holders, are a unique category of resecuritizations. For
them, the resecuritization process would neither increase nor
reallocate the credit risk of the underlying ABS. Therefore, there
would be no cost to investors from incentive misalignment with the
securitizing sponsor. Furthermore, because this type of
resecuritization may be used to aggregate 15G-compliant ABS backed by
small asset pools, the exemption for this type of resecuritization
could improve access to credit at reasonable terms to consumers and
businesses by allowing for the creation of an additional investment
vehicle for these smaller asset pools. The exemption would allow the
creation of ABS that may be backed by more geographically diverse pools
than those that can be achieved by the pooling of individual assets as
part of the issuance of the underlying 15G-compliant ABS. Again, this
will likely improve access to credit on reasonable terms.
    Under the proposed rule, sponsors of resecuritizations that do not
have the structure described above would not be exempted from risk
retention. Resecuritization transactions, which re-tranche the credit
risk of the underlying ABS, would be subject to risk retention
requirements in addition to the risk retention requirement imposed on
the underlying ABS. In such transactions, there is the possibility of
incentive misalignment between investors and sponsors just as when
structuring the underlying ABS. For such

resecuritizations, the proposed rule seeks to ensure that this
misalignment is addressed by not granting these resecuritizations with
an exemption from risk retention. However, the proposed rules may have
an adverse impact on capital formation and efficiency if they make some
types of resecuritization transactions costlier or infeasible to
conduct as a result of risk retention costs.

D. Executive Order 12866 Determination

    The Office of Management and Budget (OMB) reviewed this proposed
rule as it relates to programs and activities of the Department of
Housing and Urban Development (HUD) under Executive Order 12866
(entitled ``Regulatory Planning and Review''), and determined the rule
as it relates to HUD to be an economically significant regulatory
action, as provided in section 3(f)(1) of the Order. The docket file is
available for public inspection in the Regulations Division, Office of
General Counsel, Department of Housing and Urban Development, 451 7th
Street, SW., Room 10276 Washington, DC 20410-0500. Due to security
measures at the HUD Headquarters building, please schedule an
appointment to review the docket file by calling the Regulations
Division at<PHONE_NUMBER> (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>.

E. OCC Unfunded Mandates Reform Act of 1995 Determination

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million (adjusted for inflation) or more in any one year. The current
inflation-adjusted expenditure threshold is $126.4 million. If a
budgetary impact statement is required, section 205 of the UMRA also
requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule.
    Based on current and historical supervisory data on national bank
securitization activity, the OCC estimates that, pursuant to the
proposed rule, national banks would be required to retain approximately
$2.8 billion of credit risk, after taking into consideration the
proposed exemptions for qualified residential mortgages and other
qualified assets. The cost of retaining this risk amount has two
components. The first is the loss of origination and servicing fees on
the reduced amount of origination activity necessitated by the need to
hold the $2.8 billion retention amount on the bank's balance sheet.
Typical origination fees are 1 percent and typical servicing fees are
another half of a percentage point. To capture any additional lost
fees, the OCC conservatively estimated that the total cost of lost fees
to be two percent of the retained amount, or approximately $56 million.
The second component of the retention cost is the opportunity cost of
earning the return on these retained assets versus the return that the
bank would earn if these funds were put to other use. Because of the
variety of assets and returns on the securitized assets, the OCC
assumes that this interest opportunity cost nets to zero. In addition
to the cost of retaining the assets under the proposed rule, the
overall cost of the proposed rule includes the administrative costs
associated with implementing the rule and providing required
disclosures. The OCC estimates that implementation and disclosure will
require approximately 480 hours per institution, or at $100 per hour,
approximately $48,000 per institution. The OCC estimates that the rule
will apply to approximately 25 national banking organizations. Thus,
the estimate of the total administrative cost of the proposed rule is
approximately $1.2 million. Thus, the estimated total cost of the
proposed rule applied to ABS is $57.2 million.
    The OCC has determined that its portion of the final rules will not
result in expenditures by State, local, and tribal governments, or by
the private sector, of $126.4 million or more. Accordingly, the OCC has
not prepared a budgetary impact statement or specifically addressed the
regulatory alternatives considered.

F. Commission: Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \237\ the Commission solicits data to
determine whether the proposal constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in:
---------------------------------------------------------------------------

    \237\ 5 U.S.C. 603.
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment or
innovation.
    We request comment on the potential impact of the proposal on the
U.S. economy on an annual basis, any potential increase in costs or
prices for consumers or individual industries, and any potential effect
on competition, investment or innovation. Commenters are requested to
provide empirical data and other factual support for their views if
possible.

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

    Section 1313 of the Federal Housing Enterprises Financial Safety
and Soundness Act of 1992 requires the Director of FHFA, when
promulgating regulations relating to the Federal Home Loan Banks
(Banks), to consider the following differences between the Banks and
the Enterprises (Fannie Mae and Freddie Mac): cooperative ownership
structure; mission of providing liquidity to members; affordable
housing and community development mission; capital structure; and joint
and several liability.\238\ The Director also may consider any other
differences that are deemed appropriate. In preparing the portions of
this proposed rule over which FHFA has joint rulemaking authority, the
Director considered the differences between the Banks and the
Enterprises as they relate to the above factors. FHFA requests comments
from the public about whether differences related to these factors
should result in any revisions to the proposal.
---------------------------------------------------------------------------

    \238\ See 12 U.S.C. 4513.
---------------------------------------------------------------------------

Text of the Proposed Common Rules (All Agencies)

    The text of the proposed common rules appears below:

Part ------Credit Risk Retention

Subpart A--Authority, Purpose, Scope and Definitions

Sec.

----.1 [Reserved]
----.2 Definitions.

Subpart B--Credit Risk Retention

----.3 Base risk retention requirement.
----.4 Vertical risk retention.
----.5 Horizontal risk retention.
----.6 L-Shaped risk retention.
----.7 Revolving asset master trusts.
----.8 Representative sample.
----.9 Eligible ABCP conduits.
----.10 Commercial mortgage-backed securities.

----.11 Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation ABS.
----.12 Premium capture cash reserve account.

Subpart C--Transfer of Risk Retention

----.13 Allocation of risk retention to an originator.
----.14 Hedging, transfer and financing prohibitions.

Subpart D--Exceptions and Exemptions

----.15 Exemption for qualified residential mortgages.
----.16 Definitions applicable to qualifying commercial loans,
commercial mortgages, and auto loans.
----.17 Exceptions for qualifying commercial loans, commercial
mortgages, and auto loans.
----.18 Underwriting standards for qualifying commercial loans.
----.19 Underwriting standards for qualifying CRE loans.
----.20 Underwriting standards for qualifying auto loans.
----.21 General exemptions.
----.22 Safe harbor for certain foreign-related transactions.
----.23 Additional exemptions.
Appendix A to Part -------- Additional QRM Standards; Standards for
Determining Acceptable Sources of Borrower Funds, Borrower's Monthly
Gross Income, Monthly Housing Debt, and Total Monthly Debt

Subpart A--Authority, Purpose, Scope and Definitions

Sec.  ----.1 [Reserved]

Sec.  ----.2 Definitions.

    For purposes of this part, the following definitions apply:
    ABCP means asset-backed commercial paper that has a maturity at the
time of issuance not exceeding nine months, exclusive of days of grace,
or any renewal thereof the maturity of which is likewise limited.
    ABS interest:
    (1) Includes any type of interest or obligation issued by an
issuing entity, whether or not in certificated form, including a
security, obligation, beneficial interest or residual interest,
payments on which are primarily dependent on the cash flows of the
collateral owned or held by the issuing entity; and
    (2) Does not include common or preferred stock, limited liability
interests, partnership interests, trust certificates, or similar
interests that:
    (i) Are issued primarily to evidence ownership of the issuing
entity; and
    (ii) The payments, if any, on which are not primarily dependent on
the cash flows of the collateral held by the issuing entity.
    Affiliate. An affiliate of, or a person affiliated with, a
specified person means a person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under
common control with, the person specified.
    Appropriate Federal banking agency has the same meaning as in
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
    Asset means a self-liquidating financial asset (including but not
limited to a loan, lease, mortgage, or receivable).
    Asset-backed security has the same meaning as in section 3(a)(77)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)).
    Collateral with respect to any issuance of ABS interests means the
assets or other property that provide the cash flow (including cash
flow from the foreclosure or sale of the assets or property) for the
ABS interests irrespective of the legal structure of issuance,
including security interests in assets or other property of the issuing
entity, fractional undivided property interests in the assets or other
property of the issuing entity, or any other property interest in such
assets or other property.
    Collateralize. Assets or other property collateralize an issuance
of ABS interests if the assets or property serve as collateral for such
issuance.
    Commercial real estate loan has the same meaning as in Sec.  --.16
of this part.
    Commission means the Securities and Exchange Commission.
    Consolidated affiliate means, with respect to a sponsor, an entity
(other than the issuing entity) the financial statements of which are
consolidated with those of:
    (1) The sponsor under applicable accounting standards; or
    (2) Another entity the financial statements of which are
consolidated with those of the sponsor under applicable accounting
standards.
    Control including the terms ``controlling,'' ``controlled by'' and
``under common control with''
    (1) Means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by
contract, or otherwise.
    (2) Without limiting the foregoing, a person shall be considered to
control a company if the person:
    (i) Owns, controls or holds with power to vote 25 percent or more
of any class of voting securities of the company; or
    (ii) Controls in any manner the election of a majority of the
directors, trustees or persons performing similar functions of the
company.
    Credit risk means:
    (1) The risk of loss that could result from the failure of the
borrower in the case of a securitized asset, or the issuing entity in
the case of an ABS interest in the issuing entity, to make required
payments of principal or interest on the asset or ABS interest on a
timely basis;
    (2) The risk of loss that could result from bankruptcy, insolvency,
or a similar proceeding with respect to the borrower or issuing entity,
as appropriate; or
    (3) The effect that significant changes in the underlying credit
quality of the asset or ABS interest may have on the market value of
the asset or ABS interest.
    Depositor means:
    (1) The person that receives or purchases and transfers or sells
the securitized assets to the issuing entity;
    (2) The sponsor, in the case of a securitization transaction where
there is not an intermediate transfer of the assets from the sponsor to
the issuing entity; or
    (3) The person that receives or purchases and transfers or sells
the securitized assets to the issuing entity in the case of a
securitization transaction where the person transferring or selling the
securitized assets directly to the issuing entity is itself a trust.
    Eligible ABCP conduit means an issuing entity that issues ABCP
provided that:
    (1) The issuing entity is bankruptcy remote or otherwise isolated
for insolvency purposes from the sponsor of the issuing entity and from
any intermediate SPV;
    (2) The interests issued by an intermediate SPV to the issuing
entity are collateralized solely by the assets originated by a single
originator-seller;
    (3) All of the interests issued by an intermediate SPV are
transferred to one or more ABCP conduits or retained by the originator-
seller; and
    (4) A regulated liquidity provider has entered into a legally
binding commitment to provide 100 percent liquidity coverage (in the
form of a lending facility, an asset purchase agreement, a repurchase
agreement, or other similar arrangement) to all the ABCP issued by the
issuing entity by lending to, or purchasing assets from, the issuing
entity in the event that funds are required to repay maturing ABCP
issued by the issuing entity.
    Eligible horizontal residual interest means, with respect to any
securitization transaction, an ABS interest in the issuing entity that:

    (1) Is allocated all losses on the securitized assets (other than
losses that are first absorbed through the release of funds from a
premium capture cash reserve account, if such an account is required to
be established under Sec.  --.12 of this part) until the par value of
such ABS interest is reduced to zero;
    (2) Has the most subordinated claim to payments of both principal
and interest by the issuing entity; and
    (3) Until all other ABS interests in the issuing entity are paid in
full, is not entitled to receive any payments of principal made on a
securitized asset, provided, however, an eligible horizontal residual
interest may receive its current proportionate share of scheduled
payments of principal received on the securitized assets in accordance
with the transaction documents.
    Federal banking agencies means the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, and the
Federal Deposit Insurance Corporation.
    Intermediate SPV means, with respect to an originator-seller, a
special purpose vehicle that:
    (1) Is bankruptcy remote or otherwise isolated for insolvency
purposes from the originator-seller;
    (2) Purchases assets from the originator-seller; and
    (3) Issues interests collateralized by such assets to one or more
ABCP conduits.
    Issuing entity means, with respect to a securitization transaction,
the trust or other entity:
    (1) That is created at the direction of the sponsor;
    (2) That owns or holds the pool of assets to be securitized; and
    (3) In whose name the asset-backed securities are issued.
    Originator means a person who:
    (1) Through an extension of credit or otherwise, creates an asset
that collateralizes an asset-backed security; and
    (2) Sells the asset directly or indirectly to a securitizer.
    Originator-seller means an entity that creates assets through one
or more extensions of credit and sells those assets (and no other
assets) to an intermediate SPV, which in turn sells interests
collateralized by those assets to one or more ABCP conduits.
    Regulated liquidity provider means:
    (1) A depository institution (as defined in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813));
    (2) A bank holding company (as defined in 12 U.S.C. 1841), or a
subsidiary thereof;
    (3) A savings and loan holding company (as defined in 12 U.S.C.
1467a), provided all or substantially all of the holding company's
activities are permissible for a financial holding company under 12
U.S.C. 1843(k), or a subsidiary thereof; or
    (4) A foreign bank whose home country supervisor (as defined in
Sec.  211.21 of the Federal Reserve Board's Regulation K (12 CFR
211.21)) has adopted capital standards consistent with the Capital
Accord of the Basel Committee on Banking Supervision, as amended, and
that is subject to such standards, or a subsidiary thereof.
    Retaining sponsor means, with respect to a securitization
transaction, the sponsor that has retained or caused to be retained an
economic interest in the credit risk of the securitized assets pursuant
to subpart B of this part.
    Revolving asset master trust means an issuing entity that is:
    (1) A master trust; and
    (2) Established to issue more than one series of asset-backed
securities all of which are collateralized by a single pool of
revolving securitized assets that are expected to change in composition
over time.
    Securitization transaction means a transaction involving the offer
and sale of asset-backed securities by an issuing entity.
    Securitized asset means an asset that:
    (1) Is transferred, sold, or conveyed to an issuing entity; and
    (2) Collateralizes the ABS interests issued by the issuing entity.
    Securitizer with respect to a securitization transaction shall mean
either:
    (1) The depositor of the asset-backed securities; or
    (2) A sponsor of the asset-backed securities.
    Seller's interest means an ABS interest:
    (1) In all of the assets that:
    (i) Are owned or held by the issuing entity; and
    (ii) Do not collateralize any other ABS interests issued by the
issuing entity;
    (2) 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
    (3) That adjusts for fluctuations in the outstanding principal
balances of the securitized assets.
    Servicer means any person responsible for the management or
collection of the securitized assets or making allocations or
distributions to holders of the ABS interests, but does not include a
trustee for the issuing entity or the asset-backed securities that
makes allocations or distributions to holders of the ABS interests if
the trustee receives such allocations or distributions from a servicer
and the trustee does not otherwise perform the functions of a servicer.
    Sponsor means a person who organizes and initiates a securitization
transaction by selling or transferring assets, either directly or
indirectly, including through an affiliate, to the issuing entity.
    U.S. person:
    (1) Means--
    (i) Any natural person resident in the United States;
    (ii) Any partnership, corporation, limited liability company, or
other organization or entity organized or incorporated under the laws
of the United States;
    (iii) Any estate of which any executor or administrator is a U.S.
person;
    (iv) Any trust of which any trustee is a U.S. person;
    (v) Any agency or branch of a foreign entity located in the United
States;
    (vi) Any non-discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary for the benefit
or account of a U.S. person;
    (vii) Any discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the United States; and
    (viii) Any partnership, corporation, limited liability company, or
other organization or entity if:
    (A) Organized or incorporated under the laws of any foreign
jurisdiction; and
    (B) Formed by a U.S. person principally for the purpose of
investing in securities not registered under the Act.
    (2) Does not include--
    (i) Any discretionary account or similar account (other than an
estate or trust) held for the benefit or account of a non-U.S. person
by a dealer or other professional fiduciary organized, incorporated, or
(if an individual) resident in the United States;
    (ii) Any estate of which any professional fiduciary acting as
executor or administrator is a U.S. person if:
    (A) An executor or administrator of the estate who is not a U.S.
person has sole or shared investment discretion with respect to the
assets of the estate; and
    (B) The estate is governed by foreign law;
    (iii) Any trust of which any professional fiduciary acting as
trustee is a U.S. person, if a trustee who is not a U.S. person has
sole or shared investment discretion with respect to

the trust assets, and no beneficiary of the trust (and no settlor if
the trust is revocable) is a U.S. person;
    (iv) An employee benefit plan established and administered in
accordance with the law of a country other than the United States and
customary practices and documentation of such country;
    (v) Any agency or branch of a U.S. person located outside the
United States if:
    (A) The agency or branch operates for valid business reasons; and
    (B) The agency or branch is engaged in the business of insurance or
banking and is subject to substantive insurance or banking regulation,
respectively, in the jurisdiction where located;
    (vi) The International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the United
Nations, and their agencies, affiliates and pension plans, and any
other similar international organizations, their agencies, affiliates
and pension plans.
    (3) For purposes of the definition of a U.S. person, the term
United States means the United States of America, its territories and
possessions, any State of the United States, and the District of
Columbia.

Subpart B--Credit Risk Retention

Sec.  ----.3 Base risk retention requirement.

    (a) Base risk retention requirement. Except as otherwise provided
in this part, the sponsor of a securitization transaction shall retain
an economic interest in the credit risk of the securitized assets in
accordance with any one of Sec.  ----.4 through Sec.  ----.11 of this
part.
    (b) Multiple sponsors. If there is more than one sponsor of a
securitization transaction, it shall be the responsibility of each
sponsor to ensure that at least one of the sponsors of the
securitization transaction retains an economic interest in the credit
risk of the securitized assets in accordance with any one of Sec.  --
--.4 through Sec.  ----.11 of this part.

Sec.  ----.4 Vertical risk retention.

    (a) In general. At the closing of the securitization transaction,
the sponsor retains not less than five percent of each class of ABS
interests in the issuing entity issued as part of the securitization
transaction.
    (b) Disclosures. A sponsor utilizing this section shall provide, or
cause to be provided, to potential investors a reasonable period of
time prior to the sale of the asset-backed securities in the
securitization transaction and, upon request, to the Commission and to
its appropriate Federal banking agency, if any, the following
disclosure in written form under the caption ``Credit Risk Retention'':
    (1) The amount (expressed as a percentage and dollar amount) of
each class of ABS interests in the issuing entity that the sponsor will
retain (or did retain) at the closing of the securitization transaction
and the amount (expressed as a percentage and dollar amount) of each
class of ABS interests in the issuing entity that the sponsor is
required to retain under this section; and
    (2) 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.

Sec.  ----.5 Horizontal risk retention.

    (a) General requirement. At the closing of the securitization
transaction, the sponsor retains an eligible horizontal residual
interest in an amount that is equal to at least five percent of the par
value of all ABS interests in the issuing entity issued as part of the
securitization transaction.
    (b) Option to hold base amount in horizontal cash reserve account.
In lieu of retaining an eligible horizontal residual interest in the
amount required by paragraph (a) of this section, the sponsor may, at
closing of the securitization transaction, cause to be established and
funded, in cash, a horizontal cash reserve account in the amount
specified in paragraph (a), provided that the account meets all of the
following conditions:
    (1) The account is held by the trustee (or person performing
similar functions) in the name and for the benefit of the issuing
entity;
    (2) Amounts in the account are invested only in:
    (i) United States Treasury securities with maturities of 1 year or
less; or
    (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; and
    (3) Until all ABS interests in the issuing entity are paid in full
or the issuing entity is dissolved:
    (i) Amounts in the account shall be released to satisfy payments on
ABS interests in the issuing entity on any payment date on which the
issuing entity has insufficient funds from any source (including any
premium capture cash reserve account established pursuant to Sec.  --
--.12 of this part) to satisfy an amount due on any ABS interest; and
    (ii) No other amounts may be withdrawn or distributed from the
account except that:
    (A) Amounts in the account may be released to the sponsor or any
other person due to the 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 account
on any date does not exceed the product of:
    (1) The amount of scheduled payments of principal received by the
issuing entity and for which the release is being made; and
    (2) 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; and
    (B) Interest on investments made in accordance with paragraph
(b)(2) may be released once received by the account.
    (c) Disclosures. A sponsor utilizing this section shall provide, or
cause to be provided, to potential investors a reasonable period of
time prior to the sale of the asset-backed securities in the
securitization transaction and, upon request, to the Commission and its
appropriate Federal banking agency, if any, the following disclosure in
written form under the caption ``Credit Risk Retention'':
    (1) If the sponsor retains risk through an eligible horizontal
residual interest:
    (i) The amount (expressed as a percentage and dollar amount) of the
eligible horizontal residual interest the sponsor will retain (or did
retain) at the closing of the securitization transaction, and the
amount (expressed as a percentage and dollar amount) of the eligible
horizontal residual interest that the sponsor is required to retain
under this section; and
    (ii) A description of the material terms of the eligible horizontal
residual interest to be retained by the sponsor;
    (2) If the sponsor retains risk through the funding of a horizontal
cash reserve account:
    (i) The dollar amount to be placed (or placed) by the sponsor in
the horizontal cash reserve account and the dollar amount the sponsor
is required to place in such an account pursuant to this section; and
    (ii) A description of the material terms of the horizontal cash
reserve account; and

    (3) 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.

Sec.  ----.6 L-Shaped risk retention.

    (a) General requirement. At the closing of the securitization
transaction, the sponsor:
    (1) Retains not less than 2.5 percent of each class of ABS
interests in the issuing entity issued as part of the securitization
transaction; and
    (2) Retains an eligible horizontal residual interest in the issuing
entity, or establishes and funds in cash a horizontal cash reserve
account that meets all of the requirements of Sec.  ----.5(b) of this
part, in an amount that in either case is 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 any portion
of such ABS interests that the sponsor is required to retain pursuant
to paragraph (a)(1) of this section.
    (b) Disclosure requirements. A sponsor utilizing this section shall
comply with all of the disclosure requirements set forth in Sec.  --
--.4(b) and Sec.  ----.5(c) of this part.

Sec.  ----.7 Revolving asset master trusts.

    (a) General requirement. At the closing of the securitization
transaction and until all ABS interests in the issuing entity are paid
in full, the sponsor retains a seller's interest of not less than five
percent of the unpaid principal balance of all the assets owned or held
by the issuing entity provided that:
    (1) The issuing entity is a revolving asset master trust; and
    (2) All of the securitized assets are loans or other extensions of
credit that arise under revolving accounts.
    (b) Disclosures. A sponsor utilizing this section shall provide, or
cause to be provided, to potential investors a reasonable period of
time prior to the sale of the asset-backed securities in the
securitization transaction and, upon request, to the Commission and its
appropriate Federal banking agency, if any, the following disclosure in
written form under the caption ``Credit Risk Retention'':
    (1) The amount (expressed as a percentage and dollar amount) of the
seller's interest that the sponsor will retain (or did retain) at the
closing of the securitization transaction and the amount (expressed as
a percentage and dollar amount) that the sponsor is required to retain
pursuant to this section;
    (2) A description of the material terms of the seller's interest;
and
    (3) 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.

Sec.  ----.8 Representative sample.

    (a) In general. At the closing of the securitization transaction,
the sponsor retains ownership of a representative sample of the pool of
assets that are designated for securitization in the securitization
transaction and draws from such pool all of the securitized assets for
the securitization transaction, provided that:
    (1) At the time of issuance of asset-backed securities by the
issuing entity, the unpaid principal balance of the assets comprising
the representative sample retained by the sponsor is equal to at least
5.264 percent of the unpaid principal balance of all the securitized
assets in the securitization transaction; and
    (2) The sponsor complies with paragraphs (b) through (g) of this
section.
    (b) Construction of representative sample--(1) Designated pool.
Prior to the sale of the asset-backed securities as part of the
securitization transaction, the sponsor identifies a designated pool
(the ``designated pool'') of assets:
    (i) That consists of a minimum of 1000 separate assets;
    (ii) From which the securitized assets and the assets comprising
the representative sample are exclusively drawn; and
    (iii) That contains no assets other than those described in
paragraph (b)(1)(ii) of this section.
    (2) Random selection from designated pool. (i) Prior to the sale of
the asset-backed securities as part of the securitization transaction,
the sponsor selects from the assets that comprise the designated pool a
sample of such assets using a random selection process that does not
take account of any characteristic of the assets other than the unpaid
principal balance of the assets.
    (ii) The unpaid principal balance of the assets selected through
the random selection process described in paragraph (b)(2)(i) of this
section must represent at least 5 percent of the aggregate unpaid
principal balance of all the assets that comprise the designated pool.
    (3) Equivalent risk determination. Prior to the sale of the asset-
backed securities as part of the securitization transaction, the
sponsor determines, using a statistically valid methodology, that for
each material characteristic of the assets in the designated pool,
including the average unpaid principal balance of all the assets, that
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 pursuant to paragraph (b)(2)
of this section is within a 95 percent two-tailed confidence interval
of the mean or proportion, respectively, of the same characteristic of
the assets in the designated pool.
    (c) Sponsor policies, procedures and documentation. (1) The sponsor
has in place, and adheres to, policies and procedures for:
    (i) Identifying and documenting the material characteristics of
assets included in the designated pool;
    (ii) Selecting assets randomly in accordance with paragraph (b)(2)
of this section;
    (iii) Testing the randomly-selected sample of assets for compliance
with paragraph (b)(3) of this section;
    (iv) Maintaining, until all ABS interests are paid in full,
documentation that clearly identifies the assets included in the
representative sample established under paragraphs (b)(2) and (3) of
this section; 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.
    (2) The sponsor maintains documentation that clearly identifies the
assets in the representative sample established under paragraphs (b)(2)
and (3) of this section.
    (d) Agreed upon procedures report. (1) Prior to the sale of the
asset-backed securities as part of the securitization transaction, the
sponsor has obtained an agreed upon procedures report that satisfies
the requirements of paragraph (d)(2) of this section from an
independent public accounting firm.
    (2) The independent public accounting firm providing the agreed
upon procedures report required by paragraph (d)(1) of this section
must at a minimum report on whether the sponsor has:
    (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 paragraph
(b)(1) of this section;
    (ii) Policies and procedures that require the sponsor to select
assets randomly in accordance with paragraph (b)(2) of this section;

    (iii) Policies and procedures that require the sponsor to test the
randomly-selected sample of assets in accordance with paragraph (b)(3)
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 under paragraphs
(b)(2) and (3) of this section; 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.
    (e) Servicing. Until such time as all ABS interests in the issuing
entity have been fully paid or the issuing entity has been dissolved:
    (1) 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; and
    (2) The individuals responsible for servicing the assets included
in the representative sample or the securitized assets must not be able
to determine whether an asset is owned or held by the sponsor or owned
or held by the issuing entity.
    (f) Sale, hedging or pledging prohibited. Until such time as all
ABS interests in the issuing entity have been fully paid or the issuing
entity has been dissolved, the sponsor:
    (1) Shall comply with the restrictions in Sec.  ----.14 of this
part with respect to the assets in the representative sample;
    (2) Shall not remove any assets from the representative sample; and
    (3) Shall not cause or permit any assets in the representative
sample to be included in any designated pool or representative sample
established in connection with any other issuance of asset-backed
securities.
    (g) Disclosures--(1) Disclosure prior to sale. A sponsor utilizing
this section shall provide, or cause to be provided, to potential
investors a reasonable period of time prior to the sale of the asset-
backed securities as part of the securitization transaction and, upon
request, to the Commission and its appropriate Federal banking agency,
if any, the following disclosure with respect to the securitization
transaction in written form under the caption ``Credit Risk
Retention'':
    (i) The amount (expressed as a percentage of the designated pool
and dollar amount) of assets included in the representative sample and
to be retained (or retained) by the sponsor, and 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 pursuant to this section;
    (ii) A description of the material characteristics of the
designated pool, including, but not limited to, the average unpaid
principal balance of all the assets, the means of the quantitative
characteristics and the proportions of categorical characteristics of
the assets, appropriate introductory and explanatory information to
introduce the characteristics, the methodology used in determining or
calculating the characteristics, and any terms or abbreviations used;
    (iii) A description of the policies and procedures that the sponsor
used for ensuring that the process for identifying the representative
sample complies with paragraph (b)(2) of this section and that the
representative sample has equivalent material characteristics as
required by paragraph (b)(3) of this section;
    (iv) Confirmation that an agreed upon procedures report was
obtained pursuant to paragraph (d) of this section; and
    (v) 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.
    (2) Disclosure after sale. A sponsor utilizing this section shall
provide, or cause to be provided, to the holders of the asset-backed
securities issued as part of the securitization transaction and, upon
request, provide, or cause to be provided, to the Commission and its
appropriate Federal banking agency, if any, at the end of each
distribution period, as specified in the governing documents for such
asset-backed securities, a comparison of the performance of the pool of
securitized assets included in the securitization transaction for the
related distribution period with the performance of the assets in the
representative sample for the related distribution period.
    (3) Conforming disclosure of representative sample. A sponsor
utilizing this section shall provide, or cause to be provided, to
holders of the asset-backed securities issued as part of the
securitization transaction and, upon request, provide to the Commission
and its appropriate Federal banking agency, if any, 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.

Sec.  ----.9 Eligible ABCP conduits.

    (a) In general. A sponsor satisfies the risk retention requirement
of Sec.  ----.3 of this part with respect to the issuance of ABCP by an
eligible ABCP conduit in a securitization transaction if:
    (1) Each originator-seller of the ABCP conduit:
    (i) Retains an eligible horizontal residual interest in each
intermediate SPV established by or on behalf of that originator-seller
for purposes of issuing interests collateralized by assets of such
intermediate SPV to the eligible ABCP conduit in the same form, amount,
and manner as would be required under Sec.  ----.5(a) of this part if
the originator-seller was the only sponsor of the intermediate SPV; and
    (ii) Complies with the provisions of Sec.  ----.14 of this part
with respect to the eligible horizontal residual interest retained
pursuant to paragraph (a)(1)(i) of this section as if it were a
retaining sponsor with respect to such interest;
    (2) The sponsor:
    (i) Establishes the eligible ABCP conduit;
    (ii) Approves each originator-seller permitted to sell or transfer
assets, indirectly through an intermediate SPV, to the eligible ABCP
conduit;
    (iii) Establishes criteria governing the assets that the
originator-sellers referred to in paragraph (a)(2)(ii) of this section
are permitted to sell or transfer to an intermediate SPV;
    (iv) Approves all interests in an intermediate SPV to be purchased
by the eligible ABCP conduit;
    (v) Administers the eligible ABCP conduit by monitoring the
interests in any intermediate SPV acquired by the conduit and the
assets collateralizing those interests, arranging for debt placement,
compiling monthly reports, and ensuring compliance with the conduit
documents and with the conduit's credit and investment policy; and
    (vi) Maintains and adheres to policies and procedures for ensuring
that the conditions in this paragraph (a) have been met.
    (b) Disclosures. A sponsor utilizing this section shall provide, or
cause to be provided, to potential investors a reasonable period of
time prior to the sale of any ABCP by the eligible ABCP conduit as part
of the securitization transaction and, upon request, to the Commission
and its appropriate Federal banking agency, if any, in written form
under the caption ``Credit Risk Retention'', the name and form of
organization of:
    (1) Each originator-seller that will retain (or has retained) an
eligible

horizontal residual interest in the securitization transaction pursuant
to this section, including a description of the form, amount (expressed
as a percentage and as a dollar amount), and nature of such interest;
and
    (2) Each regulated liquidity provider that provides liquidity
support to the eligible ABCP conduit, including a description of the
form, amount, and nature of such liquidity coverage.
    (c) Duty to comply.
    (1) The retaining sponsor shall be responsible for compliance with
this section.
    (2) A retaining sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures that are
reasonably designed to monitor compliance by each originator-seller of
the eligible ABCP conduit with the requirements of paragraph (a)(1) of
this section; and
    (ii) In the event that the sponsor determines that an originator-
seller no longer complies with the requirements of paragraph (a)(1) of
this section, shall promptly notify the holders of the ABS interests
issued in the securitization transaction of such noncompliance by such
originator-seller.

Sec.  ----.10 Commercial mortgage-backed securities.

    (a) Third-Party Purchaser. A sponsor satisfies the risk retention
requirements of Sec.  ----.3 of this part with respect to a
securitization transaction if a third party purchases an eligible
horizontal residual interest in the issuing entity in the same form,
amount, and manner as would be required of the sponsor under Sec.  --
--.5(a) of this part and all of the following conditions are met:
    (1) Composition of collateral. At the closing of the securitization
transaction, at least 95 percent of the total unpaid principal balance
of the securitized assets in the securitization transaction are
commercial real estate loans.
    (2) Source of funds. The third-party purchaser:
    (i) Pays for the eligible horizontal residual interest in cash at
the closing of the securitization transaction; and
    (ii) Does not obtain financing, directly or indirectly, for the
purchase of such interest from any other person that is a party to the
securitization transaction (including, but not limited to, the sponsor,
depositor, or an unaffiliated servicer), other than a person that is a
party to the transaction solely by reason of being an investor.
    (3) Third-party review. The third-party purchaser conducts a review
of the credit risk of each securitized asset prior to the sale of the
asset-backed securities in the securitization transaction that
includes, at a minimum, a review of the underwriting standards,
collateral, and expected cash flows of each commercial real estate loan
that is collateral for the asset-backed securities.
    (4) Affiliation and control rights. (i) Except as provided in
paragraphs (a)(4)(ii) or (iii) of this section:
    (A) The third-party purchaser is not affiliated with any party to
the securitization transaction (including, but not limited to, the
sponsor, depositor, or servicer) other than investors in the
securitization transaction; and
    (B) The third-party purchaser or an affiliate of such third-party
purchaser does not have control rights in connection with the
securitization transaction (including, but not limited to, acting as a
servicer for the securitized assets) that are not collectively shared
with all other investors in the securitization.
    (ii) Notwithstanding paragraph (a)(4)(i)(A) of this section, the
third-party purchaser may be affiliated with one or more originators of
the securitized assets so long as the assets originated by the
affiliated originator or originators collectively comprise less than 10
percent of the unpaid principal balance of the securitized assets
included in the securitization transaction at closing of the
securitization transaction.
    (iii) Paragraph (a)(4)(i) of this section shall not prevent the
third-party purchaser from acting as, or being an affiliate of, a
servicer for any of the securitized assets, and having such controls
rights that are related to such servicing, if the underlying
securitization transaction documents provide for the following:
    (A) The appointment of an operating advisor (the ``Operating
Advisor'') that:
    (1) Is not affiliated with other parties to the securitization
transaction;
    (2) Does not directly or indirectly have any financial interest in
the securitization transaction other than in fees from its role as
Operating Advisor; and
    (3) Is required to act in the best interest of, and for the benefit
of, investors as a collective whole.
    (B) Any servicer for the securitized assets that is, or is
affiliated with, the third-party purchaser must consult with the
Operating Advisor in connection with, and prior to, any major decision
in connection with the servicing of the securitized assets, including,
without limitation:
    (1) Any material modification of, or waiver with respect to, any
provision of a loan agreement (including a mortgage, deed of trust, or
other security agreement);
    (2) Foreclosure upon or comparable conversion of the ownership of a
property; or
    (3) Any acquisition of a property.
    (C) The Operating Advisor shall be responsible for reviewing the
actions of any servicer that is, or is affiliated with, the third-party
purchaser and for issuing a report to investors and the issuing entity
on a periodic basis concerning:
    (1) Whether the Operating Advisor believes, in its sole discretion
exercised in good faith, that such servicer is operating in compliance
with any standard required of the servicer as provided in the
applicable transaction documents; and
    (2) What, if any, standard(s) the Operating Advisor believes, in
its sole discretion exercised in good faith, with which such servicer
has failed to comply;
    (D) The Operating Advisor shall have the authority to recommend
that a servicer that is, or is affiliated with, a third-party purchaser
be replaced by a successor servicer if the Operating Advisor
determines, in its sole discretion exercised in good faith, that:
    (1) The servicer that is, or is affiliated with, the third-party
purchaser has failed to comply with a standard required of the servicer
as provided in the transaction documents; and
    (2) Such replacement would be in the best interest of the investors
as a collective whole; and
    (E) If a recommendation described in paragraph (a)(4)(iii)(D) of
this section is made, the servicer that is, or is affiliated with, the
third-party purchaser must be replaced unless a majority of each class
of ABS interests in the issuing entity eligible to vote on the matter
votes to retain the servicer.
    (5) Disclosures. The sponsor provides, or causes to be provided, to
potential investors a reasonable period of time prior to the sale of
the asset-backed securities as part of the securitization transaction
and, upon request, to the Commission and its appropriate Federal
banking agency, if any, the following disclosure in written form, and,
with respect to paragraphs (a)(5)(i) through (vii) of this section,
under the caption ``Credit Risk Retention'':
    (i) The name and form of organization of the third-party purchaser;
    (ii) A description of the third-party purchaser's experience in
investing in commercial mortgage-backed securities;
    (iii) Any other information regarding the third-party purchaser or
the third-party purchaser's retention of the eligible horizontal
residual interest that is material to investors in light of the

circumstances of the particular securitization transaction;
    (iv) A description of the amount (expressed as a percentage and
dollar amount) of the eligible horizontal residual interest that will
be retained (or was retained) by the third-party purchaser, as well as
the amount of the purchase price paid by the third-party purchaser for
such interest;
    (v) The amount (expressed as a percentage and dollar amount) of the
eligible horizontal residual interest in the securitization transaction
that the sponsor would have been required to retain pursuant to Sec.
----.5(a) of this part if the sponsor had relied on such section to
meet the requirements of Sec.  ----.3 of this part with respect to the
transaction;
    (vi) A description of the material terms of the eligible residual
horizontal interest retained by the third-party purchaser;
    (vii) The material assumptions and methodology used in determining
the aggregate 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; and
    (viii) The representations and warranties concerning the
securitized assets, a schedule of any securitized assets that are
determined do not comply with such representations and warranties, and
what factors were used to make the determination that such securitized
assets should be included in the pool notwithstanding that the
securitized assets did not comply with such representations and
warranties, such as compensating factors or a determination that the
exceptions were not material.
    (6) Hedging, transfer and pledging. The third-party purchaser
complies with the hedging and other restrictions in Sec.  ----.14 of
this part as if it were the retaining sponsor with respect to the
securitization transaction and had acquired the eligible horizontal
residual interest pursuant to Sec.  ----.5 of this part.
    (b) Duty to comply. (1) The retaining sponsor shall be responsible
for compliance with this section.
    (2) A retaining sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures to monitor
the third-party purchaser's compliance with the requirements in
paragraph (a) of this section (other than paragraphs (a)(1) and
(a)(5)); and
    (ii) In the event that the sponsor determines that the third-party
purchaser no longer complies with any of the requirements of paragraph
(a) of this section (other than paragraphs (a)(1) and (a)(5)), shall
promptly notify, or cause to be notified, the holders of the ABS
interests issued in the securitization transaction of such
noncompliance by the third-party purchaser.

Sec.  ----.11 Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation ABS.

    (a) In general. The sponsor fully guarantees the timely payment of
principal and interest on all ABS interests issued by the issuing
entity in the securitization transaction and is:
    (1) The Federal National Mortgage Association or the Federal Home
Loan Mortgage Corporation operating under the conservatorship or
receivership of the Federal Housing Finance Agency pursuant to section
1367 of the Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 (12 U.S.C. 4617) with capital support from the United
States; or
    (2) Any limited-life regulated entity succeeding to the charter of
either the Federal National Mortgage Association or the Federal Home
Loan Mortgage Corporation pursuant to section 1367(i) of the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992 (12
U.S.C. 4617(i)), provided that the entity is operating with capital
support from the United States.
    (b) Certain provisions not applicable. The provisions of Sec.  --
--.12 and Sec.  ----.14(b), (c), and (d) of this part shall not apply
to a sponsor described in paragraph (a)(1) or (2) of this section, its
affiliates, or the issuing entity with respect to a securitization
transaction for which the sponsor has retained credit risk in
accordance with the requirements of this section.
    (c) Disclosure. A sponsor utilizing this section shall provide to
investors, in written form under the caption ``Credit Risk Retention''
and, upon request, to the Federal Housing Finance Agency and the
Commission, a description of the manner in which it has met the credit
risk retention requirements of this part.

Sec.  ----.12 Premium capture cash reserve account.

    (a) When creation of a premium capture cash reserve account is
required and calculation of amount. In addition to the economic
interest in the credit risk that a retaining sponsor is required to
retain, or cause to be retained under Sec.  ----.3 of this part, the
retaining sponsor shall, at closing of the securitization transaction,
cause to be established and funded, in cash, a premium capture cash
reserve account (as defined in paragraph (b) of this section) in an
amount equal to the difference, if a positive amount, between:
    (1) The gross proceeds, net of closing costs paid by the sponsor(s)
or issuing entity to unaffiliated parties, received by the issuing
entity from the sale of ABS interests in the issuing entity to persons
other than the retaining sponsor; and
    (2)(i) If the retaining sponsor has relied on Sec.  ----.4, Sec.
----.5, Sec.  ----.6, or Sec.  ----.7 of this part with respect to the
securitization transaction, 95 percent of the par value of all ABS
interests in the issuing entity issued as part of the securitization
transaction; or
    (ii) If the retaining sponsor has relied on Sec.  ----.8, Sec.  --
--.9, or Sec.  ----.10 of this part with respect to the securitization
transaction, 100 percent of the par value of all ABS interests in the
issuing entity issued as part of the securitization transaction.
    (b) Operation of premium capture cash reserve account. For purposes
of this section, a premium capture cash reserve account means an
account that meets all of the following conditions:
    (1) The account is held by the trustee (or person performing
similar functions) in the name and for the benefit of the issuing
entity;
    (2) Amounts in the account may be invested only in:
    (i) United States Treasury securities with 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; and
    (3) Until all ABS interests in the issuing entity are paid in full
or the issuing entity is dissolved, no funds may be withdrawn or
distributed from the account except as follows:
    (i) Amounts in the account shall be released to satisfy payments on
ABS interests in the issuing entity on any payment date on which the
issuing entity has insufficient funds to satisfy an amount due on an
ABS interest prior to the allocation of any losses to:
    (A) An eligible horizontal residual interest held pursuant to Sec.
----.5, Sec.  ----.6, Sec.  ----.9, Sec.  ----.10, or Sec.  ----.13 of
this part, if any; or
    (B) If an eligible horizontal residual interest in the issuing
entity is not held pursuant to Sec.  ----.5, Sec.  ----.6, Sec.  --
--.9, Sec.  ----.10, or Sec.  ----.13 of this part, the class of ABS
interests in the issuing entity that:
    (1) Is allocated losses before other classes; or
    (2) If the contractual terms of the securitization transaction do
not provide for the allocation of losses by class, the class of ABS
interests that has the most subordinate claim to payment

of principal or interest by the issuing entity; and
    (ii) Interest on investments made in accordance with paragraph
(b)(2) of this section may be released to any person once received by
the account.
    (c) Calculation of gross proceeds received by issuing entity--(1)
Anti-evasion provision for certain resales and senior excess spread
tranches. For purposes of paragraph (a)(1) of this section, the gross
proceeds received by the issuing entity from the sale of ABS interests
to persons other than the retaining sponsor shall include the par
value, or if an ABS interest does not have a par value, the fair value,
of any ABS interest in the issuing entity that is directly or
indirectly transferred to the retaining sponsor in connection with the
closing of the securitization transaction and that:
    (i) The retaining sponsor does not intend to hold to maturity; or
    (ii) Represents a contractual right to receive some or all of the
interest and no more than a minimal amount of principal payments
received by the issuing entity and that has priority of payment of
interest (or principal, if any) senior to the most subordinated class
of ABS interests in the issuing entity, provided, however, this
paragraph (c)(1)(ii) shall not apply to any ABS interest that:
    (A) Does not have a par value;
    (B) Is held by a sponsor that is relying on Sec.  ----.4 or Sec.
----.6 of this part with respect to the securitization transaction; and
    (C) The sponsor is required to retain pursuant to Sec.  ----.4 or
Sec.  ----.6(a)(1) of this part.
    (d) Disclosures. A sponsor that is required to establish and fund a
premium capture cash reserve account pursuant to this section shall
provide, or cause to be provided, to potential investors a reasonable
period of time prior to the sale of the asset-backed securities as part
of the securitization transaction and, upon request, to the Commission
and its appropriate Federal banking agency, if any, the following
disclosure in written form under the caption ``Credit Risk Retention'':
    (1) The dollar amount required to be placed in the account pursuant
to this section and any other amounts the sponsor will place (or has
placed) in the account in connection with the securitization
transaction; and
    (2) The material assumptions and methodology used in determining
the fair value of any ABS interest in the issuing entity that does not
have a par value and that was used in calculating the amount required
for the premium capture cash reserve account pursuant to paragraph (c)
of this section.

Subpart C--Transfer of Risk Retention

Sec.  ----.13 Allocation of risk retention to an originator

    (a) In general. A sponsor choosing to retain a portion of each
class of ABS interests in the issuing entity under the vertical risk
retention option in Sec.  ----.4 of this part or an eligible horizontal
residual interest pursuant to Sec.  ----.5(a) of this part with respect
to a securitization transaction may offset the amount of its risk
retention requirements under Sec.  ----.4 or Sec.  ----.5(a) of this
part, as applicable, by the amount of the ABS interests or eligible
horizontal residual interest, respectively, acquired by an originator
of one or more of the securitized assets if:
    (1) Amount of retention. At the closing of the securitization
transaction:
    (i) The originator acquires and retains the ABS interests or
eligible horizontal residual interest from the sponsor in the same
manner as would have been retained by the sponsor under Sec.  ----.4 or
Sec.  ----.5(a) of this part, as applicable;
    (ii) The ratio of the dollar amount of ABS interests or eligible
horizontal residual interest acquired and retained by the originator to
the total dollar amount of ABS interests or eligible horizontal
residual interest otherwise required to be retained by the sponsor
pursuant to Sec.  ----.4 or Sec.  ----.5(a) of this part, as
applicable, does not exceed the ratio of:
    (A) The unpaid principal balance of all the securitized assets
originated by the originator; to
    (B) The unpaid principal balance of all the securitized assets in
the securitization transaction;
    (iii) The originator acquires and retains at least 20 percent of
the aggregate risk retention amount otherwise required to be retained
by the sponsor pursuant to Sec.  ----.4 or Sec.  ----.5(a) of this
part, as applicable; and
    (iv) The originator purchases the ABS interests or eligible
horizontal residual interest from the sponsor at a price that is equal,
on a dollar-for-dollar basis, to the amount by which the sponsor's
required risk retention is reduced in accordance with this section, by
payment to the sponsor in the form of:
    (A) Cash; or
    (B) A reduction in the price received by the originator from the
sponsor or depositor for the assets sold by the originator to the
sponsor or depositor for inclusion in the pool of securitized assets.
    (2) Disclosures. In addition to the disclosures required pursuant
to Sec.  ----.4(b) or Sec.  ----.5(c) of this part, the sponsor
provides, or causes to be provided, to potential investors a reasonable
period of time prior to the sale of the asset-backed securities as part
of the securitization transaction and, upon request, to the Commission
and its appropriate Federal banking agency, if any, in written form
under the caption ``Credit Risk Retention'', the name and form of
organization of any originator that will acquire and retain (or has
acquired and retained) an interest in the transaction pursuant to this
section, including a description of the form, amount (expressed as a
percentage and dollar amount), and nature of the interest, as well as
the method of payment for such interest under paragraph (a)(1)(iv).
    (3) Hedging, transferring and pledging. The originator complies
with the hedging and other restrictions in Sec.  ----.14 of this part
with respect to the interests retained by the originator pursuant to
this section as if it were the retaining sponsor and was required to
retain the interest under subpart B of this part.
    (b) Duty to comply. (1) The retaining sponsor shall be responsible
for compliance with this section.
    (2) A retaining sponsor relying on this section:
    (i) Shall maintain and adhere to policies and procedures that are
reasonably designed to monitor the compliance by each originator that
is allocated a portion of the sponsor's risk retention obligations with
the requirements in paragraphs (a)(1) and (a)(3) of this section; and
    (ii) In the event the sponsor determines that any such originator
no longer complies with any of the requirements in paragraphs (a)(1)
and (a)(3) of this section, shall promptly notify, or cause to be
notified, the holders of the ABS interests issued in the securitization
transaction of such noncompliance by such originator.

Sec.  ----.14. Hedging, transfer and financing prohibitions.

    (a) Transfer. A retaining sponsor may not sell or otherwise
transfer any interest or assets that the sponsor is required to retain
pursuant to subpart B of this part to any person other than an entity
that is and remains a consolidated affiliate.
    (b) Prohibited hedging by sponsor and affiliates. A retaining
sponsor and its consolidated affiliates may not purchase or sell a
security, or other financial instrument, or enter into an agreement,
derivative or other position, with any other person if:

    (1) Payments on the security or other financial instrument or under
the agreement, derivative, or position are materially related to the
credit risk of one or more particular ABS interests, assets, or
securitized assets that the retaining sponsor is required to retain
with respect to a securitization transaction pursuant to subpart B of
this part or one or more of the particular securitized assets that
collateralize the asset-backed securities issued in the securitization
transaction; and
    (2) The security, instrument, agreement, derivative, or position in
any way reduces or limits the financial exposure of the sponsor to the
credit risk of one or more of the particular ABS interests, assets, or
securitized assets that the retaining sponsor is required to retain
with respect to a securitization transaction pursuant to subpart B of
this part or one or more of the particular securitized assets that
collateralize the asset-backed securities issued in the securitization
transaction.
    (c) Prohibited hedging by issuing entity. The issuing entity in a
securitization transaction may not purchase or sell a security or other
financial instrument, or enter into an agreement, derivative or
position, with any other person if:
    (1) Payments on the security or other financial instrument or under
the agreement, derivative or position are materially related to the
credit risk of one or more particular interests, assets, or securitized
assets that the retaining sponsor for the transaction is required to
retain with respect to the securitization transaction pursuant to
subpart B of this part; and
    (2) The security, instrument, agreement, derivative, or position in
any way reduces or limits the financial exposure of the retaining
sponsor to the credit risk of one or more of the particular interests
or assets that the sponsor is required to retain pursuant to subpart B
of this part.
    (d) Permitted hedging activities. The following activities shall
not be considered prohibited hedging activities by a retaining sponsor,
a consolidated affiliate or an issuing entity under paragraph (b) or
(c) of this section:
    (1) Hedging the interest rate risk (which does not include the
specific interest rate risk, known as spread risk, associated with the
ABS interest that is otherwise considered part of the credit risk) or
foreign exchange risk arising from one or more of the particular ABS
interests, assets, or securitized assets required to be retained by the
sponsor under subpart B of this part or one or more of the particular
securitized assets that underlie the asset-backed securities issued in
the securitization transaction; or
    (2) Purchasing or selling a security or other financial instrument
or entering into an agreement, derivative, or other position with any
third party where payments on the security or other financial
instrument or under the agreement, derivative, or position are based,
directly or indirectly, on an index of instruments that includes asset-
backed securities if:
    (i) Any class of ABS interests in the issuing entity that were
issued in connection with the securitization transaction and that are
included in the index represents no more than 10 percent of the dollar-
weighted average of all instruments included in the index; and
    (ii) All classes of ABS interests in all issuing entities that were
issued in connection with any securitization transaction in which the
sponsor was required to retain an interest pursuant to subpart B of
this part and that are included in the index represent, in the
aggregate, no more than 20 percent of the dollar-weighted average of
all instruments included in the index.
    (e) Prohibited non-recourse financing. Neither a retaining sponsor
nor any of its consolidated affiliates may pledge as collateral for any
obligation (including a loan, repurchase agreement, or other financing
transaction) any interest or asset that the sponsor is required to
retain with respect to a securitization transaction pursuant to subpart
B of this part unless such obligation is with full recourse to the
sponsor or consolidated affiliate, respectively.

Subpart D--Exceptions and Exemptions

Sec.  ------.15 Exemption for qualified residential mortgages.

    (a) Definitions. For purposes of this section, the following
definitions shall apply:
    Borrower includes any co-borrower, unless the context otherwise
requires.
    Borrower funds means funds:
    (1) Derived from one or more sources identified as acceptable
sources of funds in the Additional QRM Standards Appendix to this part;
and
    (2) That are verified in accordance with the requirements set forth
in the Additional QRM Standards Appendix to this part.
    Cash-out refinancing means a refinancing transaction in a principal
amount that exceeds the sum of the amount used to:
    (1) Fully repay the balance outstanding on the borrower's existing
first-lien mortgage that is secured by the one-to-four family property
being refinanced;
    (2) Fully repay the balance outstanding as of the date of the
mortgage transaction on any subordinate-lien mortgage that was used in
its entirety to purchase such one-to-four family property;
    (3) Pay closing or settlement charges required to be included on
the related HUD-1 or HUD-1A Settlement Statement or a successor form in
accordance with 24 CFR Part 3500 or a successor regulation; and
    (4) Disburse up to $500 of cash to the borrower or any other payee.
    Closed-end credit means any consumer credit extended by a creditor
other than open-end credit.
    Combined loan-to-value ratio means, with respect to a first-lien
refinancing transaction on a one-to-four family property, the ratio
(expressed as a percentage) of:
    (1) The sum of:
    (i) The principal amount of the first-lien mortgage transaction at
the closing of the transaction;
    (ii) The unpaid principal amount of any other closed-end credit
transaction that to the creditor's knowledge would exist at the closing
of the refinancing transaction and that is or would be secured by the
same one-to-four family property; and
    (iii) The face amount (as if fully drawn) of any open-end credit
transaction that to the creditor's knowledge would exist at the closing
of the refinancing transaction and that is or would be secured by the
same one-to-four family property; to
    (2) The estimated market value of the one-to-four family property
as determined by a qualifying appraisal.
    Consumer credit means credit offered or extended to a borrower
primarily for personal, family, or household purposes.
    Consumer reporting agency that compiles and maintains files on
consumers on a nationwide basis has the same meaning as in 15 U.S.C.
1681a(p).
    Creditor has the same meaning as in 15 U.S.C. 1602(f).
    Currently performing means the borrower in the mortgage transaction
is not currently thirty (30) days past due, in whole or in part, on the
mortgage transaction.
    Loan-to-value ratio means, with respect to a mortgage transaction
to purchase a one-to-four family property, the ratio (expressed as a
percentage) of:
    (1) The principal amount of the first-lien mortgage transaction at
the closing of the mortgage transaction; to
    (2) The lesser of:
    (i) The estimated market value of the one-to-four family property
as

determined by a qualifying appraisal; and
    (ii) The purchase price of the one-to-four family property to be
paid in connection with the mortgage transaction.
    Mortgage originator has the same meaning as in 15 U.S.C.
1602(cc)(2) and the regulations issued thereunder.
    Mortgage transaction means a closed-end credit transaction to
purchase or refinance a one-to-four family property at least one unit
of which is the borrower's principal dwelling.
    One-to-four family property means real property that is held in fee
simple, on leasehold under a lease for not less than 99 years which is
renewable, or under a lease having a period of not less than 10 years
to run beyond the maturity date of the mortgage and that is improved by
a residential structure that contains one to four units, including but
not limited to:
    (1) An individual condominium;
    (2) An individual cooperative unit; or
    (3) An individual manufactured home that is constructed in
conformance with the National Manufactured Home Construction and Safety
Standards, as evidenced by a certification label affixed to the
exterior of the home, and that is erected on or that otherwise is
affixed to a foundation in accordance with requirements established by
the Federal Housing Administration.
    Open-end credit means any consumer credit extended by a creditor
under a plan in which:
    (1) The creditor reasonably contemplates repeated consumer credit
transactions;
    (2) The creditor may impose a finance charge from time to time on
an outstanding unpaid balance; and
    (3) The amount of credit that may be extended to the borrower
during the term of the plan (up to any limit set by the creditor) is
generally made available to the extent that any outstanding balance is
repaid.
    Points and fees means:
    (1) All items considered to be a finance charge under 12 CFR
226.4(a) and 226.4(b), except:
    (i) Interest or the time-price differential; and
    (ii) Items excluded from the finance charge under 12 CFR 226.4(c),
226.4(d) and 226.4(e), unless included in paragraphs (2) through (5) of
this definition;
    (2) All compensation paid directly or indirectly by the borrower or
creditor to a mortgage originator, including a mortgage originator that
is also the creditor in a table-funded transaction;
    (3) All items (other than amounts held for future payment of taxes)
listed in 12 CFR 226.4(c)(7) unless:
    (i) The charge is bona fide and reasonable;
    (ii) The creditor and mortgage originator receive no direct or
indirect compensation in connection with the charge; and
    (iii) The charge is not paid to an affiliate of the creditor or
mortgage originator;
    (4) Premiums or other charges payable at or before closing for any
credit life, credit disability, credit unemployment, or credit property
insurance, or any other accident, loss-of-income, life or health
insurance, or any payments directly or indirectly for any debt
cancellation or suspension agreement or contract; and
    (5) If the mortgage transaction refinances a previous loan made or
currently held by the same creditor or an affiliate of the same
creditor, all prepayment fees or penalties that are incurred by the
consumer in connection with the payment of the previous loan.
    Prepayment penalty means a penalty imposed solely because the
mortgage obligation is prepaid in full or in part. For purposes of this
definition, a prepayment penalty does not include, for example, fees
imposed for preparing and providing documents in connection with
prepayment, such as a loan payoff statement, a reconveyance, or other
document releasing the creditor's security interest in the one-to-four
family property securing the loan.
    Principal dwelling means a one-to-four family property, or unit
thereof, that is occupied or will be occupied by at least one borrower
as a principal residence. For purposes of this definition, a borrower
can only have one principal dwelling at a time; however, if a borrower
buys a new dwelling that will become the borrower's principal dwelling
within a year or upon the completion of construction, the new dwelling
is considered the principal dwelling for purposes of applying this
definition to a credit transaction to purchase the new dwelling.
    Qualifying appraisal means an appraisal that meets the requirements
of Sec.  ----.15(d)(11) of this part.
    Rate and term refinancing means a refinancing transaction that is
not a cash-out refinancing.
    Refinancing transaction means:
    (1) A closed-end credit transaction secured by a one-to-four family
property that is entered into by the borrower that satisfies and
replaces an existing credit transaction that was entered into by the
same borrower and that is secured by the same one-to-four family
property; or
    (2) A closed-end credit transaction secured by the borrower's
principal dwelling on which there are no existing liens.
    Reverse mortgage means a nonrecourse consumer credit transaction in
which:
    (1) A mortgage, deed of trust, or equivalent consensual security
interest securing one or more advances is created in the borrower's
principal dwelling; and
    (2) Any principal, interest, or shared appreciation or equity is
due and payable (other than in the case of default) only after:
    (i) The borrower dies;
    (ii) The dwelling is transferred; or
    (iii) The borrower ceases to occupy the one-to-four family property
as a principal dwelling.
    Total loan amount means the amount financed, as determined
according to 12 CFR 226.18(b), less any cost listed in paragraphs (3),
(4) and (5) of the definition of ``points of fees'' that is both
included in the definition of points and fees and financed by the
creditor.
    (b) Exemption. A sponsor shall be exempt from the risk retention
requirements in subpart B of this part with respect to any
securitization transaction, if:
    (1) All of the securitized assets that collateralize the asset-
backed securities are qualified residential mortgages;
    (2) None of the securitized assets that collateralize the asset-
backed securities are other asset-backed securities;
    (3) At the closing of the securitization transaction, each
qualified residential mortgage collateralizing the asset-backed
securities is currently performing; and
    (4)(i) The depositor of the asset-backed security certifies that it
has evaluated the effectiveness of its internal supervisory controls
with respect to the process for ensuring that all assets that
collateralize the asset-backed security are qualified residential
mortgages and has concluded that its internal supervisory controls are
effective;
    (ii) The evaluation of the effectiveness of the depositor's
internal supervisory controls referenced in paragraph (b)(4)(i) of this
section shall be performed, for each issuance of an asset-backed
security in reliance on this section, as of a date within 60 days of
the cut-off date or similar date for establishing the composition of
the asset pool collateralizing such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the
certification described in paragraph (b)(4)(i) of this section to
potential investors a reasonable period of time prior to the sale of
asset-backed

securities in the issuing entity, and, upon request, to the Commission
and its appropriate Federal banking agency, if any.
    (c) Qualified residential mortgage. The term ``qualified
residential mortgage'' means a closed-end credit transaction to
purchase or refinance a one-to-four family property at least one unit
of which is the principal dwelling of a borrower that:
    (1) Meets all of the criteria in paragraph (d) of this section; and
    (2) Is not:
    (i) Made to finance the initial construction of a dwelling;
    (ii) A reverse mortgage;
    (iii) A temporary or ``bridge'' loan with a term of twelve months
or less, such as a loan to purchase a new dwelling where the borrower
plans to sell a current dwelling within twelve months; or
    (iv) A timeshare plan described in 11 U.S.C. 101(53D).
    (d) Eligibility criteria--(1) First-lien required. The mortgage
transaction is secured by a first lien:
    (i) On the one-to-four family property to be purchased or
refinanced; and
    (ii) That is perfected in accordance with applicable law.
    (2) Subordinate liens. If the mortgage transaction is to purchase a
one-to-four family property, no other recorded or perfected liens on
the one-to-four family property would exist, to the creditor's
knowledge at the time of the closing of the mortgage transaction, upon
the closing of that transaction.
    (3) Original maturity. At the closing of the mortgage transaction,
the maturity date of the mortgage transaction does not exceed 30 years.
    (4) Written Application. The borrower completed and submitted to
the creditor a written application for the mortgage transaction that,
as supplemented or amended prior to closing, includes an
acknowledgement by the borrower that the information provided in the
application is true and correct as of the date executed by the borrower
and that any intentional or negligent misrepresentation of the
information provided in the application may result in civil liability
and/or criminal penalties under 18 U.S.C. 1001.
    (5) Credit history--(i) In general. The creditor has verified and
documented that within ninety (90) days prior to the closing of the
mortgage transaction:
    (A) The borrower is not currently 30 days or more past due, in
whole or in part, on any debt obligation;
    (B) Within the previous twenty-four (24) months, the borrower has
not been 60 days or more past due, in whole or in part, on any debt
obligation; and
    (C) Within the previous thirty-six (36) months:
    (1) The borrower has not been a debtor in a case commenced under
Chapter 7, Chapter 12, or Chapter 13 of Title 11, United States Code,
or been the subject of any Federal or State judicial judgment for the
collection of any unpaid debt;
    (2) The borrower has not had any personal property repossessed; and
    (3) No one-to-four family property owned by the borrower has been
the subject of any foreclosure, deed-in-lieu of foreclosure, or short
sale.
    (ii) Safe harbor. A creditor will be deemed to have met the
requirements of paragraph (d)(5)(i) of this section if:
    (A) The creditor, no more than 90 days before the closing of the
mortgage transaction, obtains a credit report regarding the borrower
from at least two consumer reporting agencies that compile and maintain
files on consumers on a nationwide basis;
    (B) Based on the information in such credit reports, the borrower
meets all of the requirements of paragraph (d)(5)(i) of this section,
and no information in a credit report subsequently obtained by the
creditor before the closing of the mortgage transaction contains
contrary information; and
    (C) The creditor maintains copies of such credit reports in the
loan file for the mortgage transaction.
    (6) Payment terms. Based on the terms of the mortgage transaction
at the closing of the transaction:
    (i) The regularly scheduled principal and interest payments on the
mortgage transaction:
    (A) Would not result in an increase of the principal balance of the
mortgage transaction; and
    (B) Do not allow the borrower to defer payment of interest or
repayment of principal;
    (ii) No scheduled payment of principal and interest would be more
than twice as large as any earlier scheduled payment of principal and
interest;
    (iii) If the rate of interest applicable to the mortgage
transaction may increase after the closing of the mortgage transaction,
any such increase may not exceed:
    (A) 2 percent (200 basis points) in any twelve month period; and
    (B) 6 percent (600 basis points) over the life of the mortgage
transaction; and
    (iv) The mortgage transaction does not include or provide for any
prepayment penalty.
    (7) Points and fees. The total points and fees payable by the
borrower in connection with the mortgage transaction shall not exceed
three percent of the total loan amount.
    (8) Debt-to-income ratios--(i) In general. The creditor has
determined that, as of a date that is no more than 60 days prior to the
closing of the mortgage transaction, the ratio of:
    (A) The borrower's monthly housing debt to the borrower's monthly
gross income does not exceed 28 percent; and
    (B) The borrower's total monthly debt to the borrower's monthly
gross income does not exceed 36 percent.
    (ii) Applicable standards. For purposes of determining the
borrower's compliance with the ratios set forth in paragraph (d)(8)(i)
of this section, the creditor shall:
    (A) Verify, document, and determine the borrower's monthly gross
income in accordance with the effective income standards established in
the Additional QRM Standards Appendix to this part; and
    (B) Except as provided in paragraph (d)(8)(iii) of this section,
verify, document, and determine the borrower's monthly housing debt and
total monthly debt in accordance with the standards established in the
Additional QRM Standards Appendix to this part.
    (iii) Housing debt. Notwithstanding paragraph (d)(8)(ii)(B) of this
section, for purposes of determining the borrower's compliance with the
ratios set forth in paragraph (d)(8)(i) of this section, the creditor
shall:
    (A) Determine the borrower's monthly periodic payment for principal
and interest on the mortgage transaction and, if the mortgage
transaction is a refinancing transaction, any other credit transaction
(including any open-end credit transaction as if fully drawn) that to
the creditor's knowledge would exist at the closing of the refinancing
transaction and that would be secured by the one-to-four family
property being refinanced, based on:
    (1) The maximum interest rate that is permitted or required under
any feature (including any conversion or other feature that allows a
variable interest rate to convert to a fixed interest rate) of the
relevant credit transaction documents during the first five years after
the date on which the first regular periodic payment will be due; and
    (2) A payment schedule that fully amortizes the mortgage
transaction over the term of the mortgage transaction; and
    (B) Include in the borrower's monthly housing debt and total
monthly debt the monthly pro rata amount of the following, as
applicable, with respect to the one-to-four family property being
purchased or refinanced:
    (1) Real estate taxes;

    (2) Hazard insurance, flood insurance, mortgage guarantee
insurance, and any other required insurance;
    (3) Homeowners' and condominium association dues;
    (4) Ground rent or leasehold payments; and
    (5) Special assessments.
    (9) Loan-to-value ratio--(i) Purchase mortgages. If the mortgage
transaction is to purchase a one-to-four family property, at the
closing of the mortgage transaction, the loan-to-value ratio of the
mortgage transaction does not exceed 80 percent.
    (ii) Rate and term refinancings. If the mortgage transaction is a
rate and term refinancing, at the closing of the mortgage transaction,
the combined loan-to-value ratio of the mortgage transaction does not
exceed 75 percent.
    (iii) Cash-out refinancings. If the mortgage transaction is a cash-
out refinancing, at the closing of the mortgage transaction, the
combined loan-to-value ratio of the mortgage transaction does not
exceed 70 percent.
    (10) Down payment. If the mortgage transaction is for the purchase
of a one-to-four family property:
    (i) The borrower provides, at closing, a cash down payment in an
amount equal to at least the sum of:
    (A) The closing costs payable by the borrower in connection with
the mortgage transaction;
    (B) 20 percent of the lesser of:
    (1) The estimated market value of the one-to-four family property
as determined by a qualifying appraisal; and
    (2) The purchase price of the one-to-four family property to be
paid in connection with the mortgage transaction; and
    (C) The difference, if a positive amount, between:
    (1) The purchase price of the one-to-four family property to be
paid in connection with the mortgage transaction; and
    (2) The estimated market value of the one-to-four family property
as determined by a qualifying appraisal;
    (ii) The funds used by the borrower to satisfy the down payment
required by paragraph (d)(10)(i) of this section:
    (A) Must come solely from borrower funds;
    (B) May not be subject to any contractual obligation by the
borrower to repay; and
    (C) May not have been obtained by the borrower from a person or
entity with an interest in the sale of the property (other than the
borrower); and
    (iii) The creditor shall verify and document the borrower's
compliance with the conditions set forth in paragraphs (d)(10)(i) and
(d)(10)(ii) of this section.
    (11) Appraisal. The creditor obtained a written appraisal of the
property securing the mortgage that was performed not more than 90 days
prior to the closing of the mortgage transaction by an appropriately
state-certified or state-licensed appraiser that conforms to generally
accepted appraisal standards as evidenced by the Uniform Standards of
Professional Appraisal Practice (USPAP) promulgated by the Appraisal
Standards Board (ASB) of the Appraisal Foundation, the appraisal
requirements of the Federal banking agencies, and applicable laws.
    (12) Assumability. The mortgage transaction is not assumable by any
person that was not a borrower under the mortgage transaction at
closing.
    (13) Default mitigation. The mortgage originator--
    (i) Includes terms in the mortgage transaction documents under
which the creditor commits to have servicing policies and procedures
under which the creditor shall--
    (A) Mitigate risk of default on the mortgage loan by taking loss
mitigation actions, such as loan modification or other loss mitigation
alternative, in the event the estimated resulting net present value of
such action exceeds the estimated net present value of recovery through
foreclosure, without regard to whether the particular action benefits
the interests of a particular class of investors in a securitization;
    (B) Take into account the borrower's ability to repay and other
appropriate underwriting criteria in such loss mitigation actions;
    (C) Initiate loss mitigation activities within 90 days after the
mortgage loan becomes delinquent (if the delinquency has not been
cured);
    (D) Implement or maintain servicing compensation arrangements
consistent with the obligations under paragraphs (d)(13)(i)(A), (B),
and (C) of this section;
    (E) Implement procedures for addressing any whole loan owned by the
creditor (or any of its affiliates) and secured by a subordinate lien
on the same property that secures the first mortgage loan if the
borrower becomes more than 90 days past due on the first mortgage loan;
    (F) If the first mortgage loan will collateralize any asset-backed
securities, disclose or require to be disclosed to potential investors
within a reasonable period of time prior to the sale of the asset-
backed securities a description of the procedures to be implemented
pursuant to paragraph (d)(13)(i)(E) of this section; and
    (G) Not sell, transfer or assign servicing rights for the mortgage
loan unless the agreement requires the purchaser, transferee or
assignee servicer to abide by the default mitigation commitments of the
creditor under this paragraph (d)(13)(i) as if the purchaser,
transferee or assignee were the creditor under this section.
    (ii) Provides disclosure of the foregoing default mitigation
commitments to the borrower at or prior to the closing of the mortgage
transaction.
    (e) Repurchase of loans subsequently determined to be non-qualified
after closing. A sponsor that has relied on the exemption provided in
paragraph (b) of this section with respect to a securitization
transaction shall not lose such exemption with respect to such
transaction if, after closing of the securitization transaction, it is
determined that one or more of the residential mortgage loans
collateralizing the asset-backed securities does not meet all of the
criteria to be a qualified residential mortgage provided that:
    (1) The depositor complied with the certification requirement set
forth in paragraph (b)(4) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at
a price at least equal to the remaining aggregate unpaid principal
balance and accrued interest on the loan(s) no later than 90 days after
the determination that the loans do not satisfy the requirements to be
a qualified residential mortgage; and
    (3) The sponsor promptly notifies, or causes to be notified, the
holders of the asset-backed securities issued in the securitization
transaction of any loan(s) included in such securitization transaction
that is (or are) required to be repurchased by the sponsor pursuant to
paragraph (e)(2) of this section, including the amount of such
repurchased loan(s) and the cause for such repurchase.

Sec.  ----.16 Definitions applicable to qualifying commercial
mortgages, commercial loans, and auto loans.

    The following definitions apply for purposes of Sec. Sec.  ----.17
through ----.20 of this part:
    Appraisal Standards Board means the board of the Appraisal
Foundation that establishes generally accepted standards for the
appraisal profession.
    Automobile loan:
    (1) Means any loan to an individual to finance the purchase of, and
is secured by a first lien on, a passenger car or other passenger
vehicle, such as a minivan, van, sport-utility vehicle,

pickup truck, or similar light truck for personal, family, or household
use; and
    (2) Does not include any:
    (i) Loan to finance fleet sales;
    (ii) Personal cash loan secured by a previously purchased
automobile;
    (iii) Loan to finance the purchase of a commercial vehicle or farm
equipment that is not used for personal, family, or household purposes;
    (iv) Lease financing; or
    (v) Loan to finance the purchase of a vehicle with a salvage title.
    Combined loan-to-value (CLTV) ratio means, at the time of
origination, the sum of the principal balance of a first-lien mortgage
loan on the property, plus the principal balance of any junior-lien
mortgage loan that, to the creditor's knowledge, would exist at the
closing of the transaction and that is secured by the same property,
divided by:
    (1) For acquisition funding, the lesser of the purchase price or
the estimated market value of the real property based on an appraisal
that meets the requirements set forth in Sec.  ----.19(b)(2)(ii) of
this part; or
    (2) For refinancing, the estimated market value of the real
property based on an appraisal that meets the requirements set forth in
Sec.  ----.19(b)(2)(ii) of this part.
    Commercial loan means a secured or unsecured loan to a company or
an individual for business purposes, other than any:
    (1) Loan to purchase or refinance a one-to-four family residential
property;
    (2) Loan for the purpose of financing agricultural production; or
    (3) Loan for which the primary source (fifty (50) percent or more)
of repayment is expected to be derived from rents collected from
persons or firms that are not affiliates of the borrower.
    Commercial real estate (CRE) loan:
    (1) Means a loan secured by a property with five or more single
family units, or by nonfarm nonresidential real property, the primary
source (fifty (50) percent or more) of repayment for which is expected
to be derived from:
    (i) The proceeds of the sale, refinancing, or permanent financing
of the property; or
    (ii) Rental income associated with the property other than rental
income derived from any affiliate of the borrower; and
    (2) Does not include:
    (i) A land development and construction loan (including 1- to 4-
family residential or commercial construction loans);
    (ii) Any other land loan;
    (iii) A loan to a real estate investment trusts (REITs); or
    (iv) An unsecured loan to a developer.
    Debt service coverage (DSC) ratio means:
    (1) For qualifying leased CRE loans, qualifying multi-family loans,
and other CRE loans, the ratio of:
    (i) The annual NOI less the annual replacement reserve of the CRE
property at the time of origination of the CRE loans; to
    (ii) The sum of the borrower's annual payments for principal and
interest on any debt obligation.
    (2) For commercial loans, the ratio of:
    (i) The borrower's EBITDA as of the most recently completed fiscal
year; to
    (ii) The sum of the borrower's annual payments for principal and
interest on any debt obligation.
    Debt to income (DTI) ratio means the ratio of:
    (1) The borrower's total debt (for automobile loans), including the
monthly amount due on the automobile loan; to
    (2) The borrower's monthly income.
    Earnings before interest, taxes, depreciation, and amortization
(EBITDA) means the annual income of a business before expenses for
interest, taxes, depreciation and amortization, as determined in
accordance with U.S. Generally Accepted Accounting Principles (GAAP).
    Environmental risk assessment means a process for determining
whether a property is contaminated or exposed to any condition or
substance that could result in contamination that has an adverse effect
on the market value of the property or the realization of the
collateral value.
    First lien means a lien or encumbrance on property that has
priority over all other liens or encumbrances on the property.
    Junior lien means a lien or encumbrance on property that is lower
in priority relative to other liens or encumbrances on the property.
    Leverage ratio means the ratio of:
    (1) The borrower's total debt (for commercial loans); to
    (2) The borrower's EBITDA.
    Machinery and equipment (M&E) collateral means collateral for a
commercial loan that consists of machinery and equipment that is
identifiable by make, model, and serial number.
    Model year means the year determined by the manufacturer and
reflected on the vehicle's Motor Vehicle Title as part of the vehicle
description.
    Net operating income (NOI) refers to the income a CRE property
generates after all expenses have been deducted for federal income tax
purposes, except for depreciation, debt service expenses, and federal
and state income taxes, and excluding any unusual and nonrecurring
items of income.
    New vehicle means any vehicle that:
    (1) Is not a used vehicle; and
    (2) Has not been previously sold to an end user.
    Payment-in-kind (PIK) means payments of principal or accrued
interest that are not paid in cash when due, and instead are paid by
increasing the principal or by providing shares or stock in the
borrowing company. A PIK loan is a type of loan that typically does not
provide for any cash payments of principal or interest from the
borrower to the lender between the drawdown date and the maturity or
refinancing date.
    Purchase price means:
    (1) For a new vehicle, the amount paid by the borrower for the new
vehicle net of any incentive payments or manufacturer cash rebates; and
    (2) For a vehicle other than a new vehicle, the lesser of:
    (i) The purchase price as would be determined for a new vehicle; or
    (ii) The retail value of the used vehicle, as determined by a
nationally recognized automobile pricing agency and based on the
manufacturer, year, model, features, and condition of the vehicle.
    Qualified tenant means
    (1) A tenant with a triple net lease who has satisfied all
obligations with respect to the property in a timely manner; or
    (2) A tenant who originally had a triple net lease that
subsequently expired and currently is leasing the property on a month-
to-month basis, has occupied the property for at least three years
prior to the date of origination, and has satisfied all obligations
with respect to the property in a timely manner.
    Qualifying leased CRE loan means a CRE loan secured by commercial
nonfarm real property, other than a multi-family property or a hotel,
inn, or similar property:
    (1) That is occupied by one or more qualified tenants pursuant to a
lease agreement with a term of no less than one (1) month; and
    (2) Where no more than 20 percent of the aggregate gross revenue of
the property is payable from one or more tenants who:
    (i) Are subject to a lease that will terminate within six months
following the date of origination; or
    (ii) Are not qualified tenants.
    Qualifying multi-family loan:
    (1) Means a CRE loan secured by any residential property (other
than a hotel, motel, inn, hospital, nursing home, or other similar
facility where dwellings are not leased to residents):

    (i) That consists of five or more dwelling units (including
apartment buildings, condominiums, cooperatives and other similar
structures) primarily for residential use; and
    (ii) Where at least seventy-five (75) percent of the NOI is derived
from residential rents and tenant amenities (including income from
parking garages, health or swim clubs, and dry cleaning), and not from
other commercial uses.
    Replacement reserve means the monthly capital replacement or
maintenance amount based on the property type, age, construction and
condition of the property that is adequate to maintain the physical
condition and NOI of the property.
    Salvage title means a form of vehicle title branding, which notes
that the vehicle has been severely damaged and/or deemed a total loss
and uneconomical to repair by an insurance company that paid a claim on
the vehicle.
    Total debt, with respect to a borrower, means:
    (1) In the case of an automobile loan, the sum of:
    (i) All monthly housing payments (rent- or mortgage-related,
including property taxes, insurance and home owners association fees);
and
    (ii) Any of the following that are dependent upon the borrower's
income for payment:
    (A) Monthly payments on other debt and lease obligations, such as
credit card loans or installment loans, including the monthly amount
due on the automobile loan;
    (B) Estimated monthly amortizing payments for any term debt, debts
with other than monthly payments and debts not in repayment (such as
deferred student loans, interest-only loans); and
    (C) Any required monthly alimony, child support or court-ordered
payments; and
    (2) In the case of a commercial loan, the outstanding balance of
all long-term debt (obligations that have a remaining maturity of more
than one year) and the current portion of all debt that matures in one
year or less.
    Total liabilities ratio means the ratio of:
    (1) The borrower's total liabilities, determined in accordance with
U.S. GAAP; to
    (2) The sum of the borrower's total liabilities and equity, less
the borrower's intangible assets, with each component determined in
accordance with U.S. GAAP.
    Trade-in allowance means the amount a vehicle purchaser is given as
a credit at the purchase of a vehicle for the fair exchange of the
borrower's existing vehicle to compensate the dealer for some portion
of the vehicle purchase price, except that such amount shall not exceed
the trade-in value of the used vehicle, as determined by a nationally
recognized automobile pricing agency and based on the manufacturer,
year, model, features, and condition of the vehicle.
    Triple net lease means a lease pursuant to which the lessee is
required to pay rent as well as all taxes, insurance, and maintenance
expenses associated with the property.
    Uniform Standards of Professional Appraisal Practice (USPAP) means
the standards issued by the Appraisal Standards Board for the
performance of an appraisal, an appraisal review, or an appraisal
consulting assignment.
    Used vehicle:
    (1) Means any vehicle driven more than the limited use necessary in
transporting or road testing the vehicle prior to the initial sale of
the vehicle; and
    (2) Does not include any vehicle sold only for scrap or parts
(title documents surrendered to the State and a salvage certificate
issued).

Sec.  ----.17 Exceptions for qualifying commercial loans, commercial
mortgages, and auto loans.

    The risk retention requirements in subpart B of this part shall not
apply to securitization transactions that satisfy the standards
provided in Sec. Sec.  ----.18, ----.19, or ----.20 of this part.

Sec.  ----.18 Underwriting standards for qualifying commercial loans.

    (a) General. The securitization transaction--
    (1) Is collateralized solely (excluding cash and cash equivalents)
by one or more commercial loans, each of which meets all of the
requirements of paragraph (b) of this section; and
    (2) Does not permit reinvestment periods.
    (b) Underwriting, product and other standards. (1) Prior to
origination of the commercial loan, the originator:
    (i) Verified and documented the financial condition of the
borrower:
    (A) As of the end of the borrower's two most recently completed
fiscal years; and
    (B) During the period, if any, since the end of its most recently
completed fiscal year;
    (ii) Conducted an analysis of the borrower's ability to service its
overall debt obligations during the next two years, based on reasonable
projections;
    (iii) Determined that, based on the previous two years' actual
performance, the borrower had:
    (A) A total liabilities ratio of 50 percent or less;
    (B) A leverage ratio of 3.0 or less; and
    (C) A DSC ratio of 1.5 or greater;
    (iv) Determined that, based on the two years of projections, which
include the new debt obligation, following the closing date of the
loan, the borrower will have:
    (A) A total liabilities ratio of 50 percent or less;
    (B) A leverage ratio of 3.0 or less;
    (C) A DSC ratio of 1.5 or greater; and
    (v) If the loan is originated on a secured basis, obtained a first-
lien security interest on all of the property pledged to collateralize
the loan.
    (2) The loan documentation for the commercial loan includes
covenants that:
    (i) Require the borrower to provide to the originator or subsequent
holder, and the servicer, of the commercial loan the borrower's
financial statements and supporting schedules on an ongoing basis, but
not less frequently than quarterly;
    (ii) Prohibit the borrower from retaining or entering into a debt
arrangement that permits payments-in-kind;
    (iii) Impose limits on:
    (A) The creation or existence of any other security interest with
respect to any of the borrower's property;
    (B) The transfer of any of the borrower's assets; and
    (C) Any change to the name, location or organizational structure of
the borrower, or any other party that pledges collateral for the loan;
    (iv) Require the borrower and any other party that pledges
collateral for the loan to:
    (A) Maintain insurance that protects against loss on any collateral
for the commercial loan at least up to the amount of the loan, and that
names the originator or any subsequent holder of the loan as an
additional insured or loss payee;
    (B) Pay taxes, charges, fees, and claims, where non-payment might
give rise to a lien on any collateral;
    (C) Take any action required to perfect or protect the security
interest of the originator or any subsequent holder of the loan in the
collateral for the commercial loan or the priority thereof, and to
defend the collateral against claims adverse to the lender's interest;
    (D) Permit the originator or any subsequent holder of the loan, and
the servicer of the loan, to inspect the collateral for the commercial
loan and the books and records of the borrower; and
    (E) Maintain the physical condition of any collateral for the
commercial loan.

    (3) Loan payments required under the loan agreement are:
    (i) Based on straight-line amortization of principal and interest
that fully amortize the debt over a term that does not exceed five
years from the date of origination; and
    (ii) To be made no less frequently than quarterly over a term that
does not exceed five years.
    (4) The primary source of repayment for the loan is revenue from
the business operations of the borrower.
    (5) The loan was funded within the six (6) months prior to the
closing of the securitization transaction.
    (6) At the closing of the securitization transaction, all payments
due on the loan are contractually current.
    (7) (i) The depositor of the asset-backed security certifies that
it has evaluated the effectiveness of its internal supervisory controls
with respect to the process for ensuring that all assets that
collateralize the asset-backed security meet all of the requirements
set forth in paragraphs (b)(1) through (b)(6) of this section and has
concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's
internal supervisory controls referenced in paragraph (b)(7)(i) of this
section shall be performed, for each issuance of an asset-backed
security, as of a date within 60 days of the cut-off date or similar
date for establishing the composition of the asset pool collateralizing
such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the
certification described in paragraph (b)(7)(i) of this section to
potential investors a reasonable period of time prior to the sale of
asset-backed securities in the issuing entity, and, upon request, to
its appropriate Federal banking agency, if any.
    (c) Buy-back requirement. A sponsor that has relied on the
exception provided in paragraph (a) of this section with respect to a
securitization transaction shall not lose such exception with respect
to such transaction if, after the closing of the securitization
transaction, it is determined that one or more of the loans
collateralizing the asset-backed securities did not meet all of the
requirements set forth in paragraphs (b)(1) through (b)(6) of this
section provided that:
    (1) The depositor complied with the certification requirement set
forth in paragraph (b)(7) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at
a price at least equal to the remaining principal balance and accrued
interest on the loan(s) no later than ninety (90) days after the
determination that the loans do not satisfy all of the requirements of
paragraphs (b)(1) through (b)(6) of this section; and
    (3) The sponsor promptly notifies, or causes to be notified, the
holders of the asset-backed securities issued in the securitization
transaction of any loan(s) included in such securitization transaction
that is required to be repurchased by the sponsor pursuant to paragraph
(c)(2) of this section, including the principal amount of such
repurchased loan(s) and the cause for such repurchase.

Sec.  ----.19 Underwriting standards for qualifying CRE loans.

    (a) General. The securitization transaction is collateralized
solely (excluding cash and cash equivalents) by one or more CRE loans,
each of which meets all of the requirements of paragraph (b) of this
section.
    (b) Underwriting, product and other standards.(1) The CRE loan must
be secured by a first lien on the commercial real estate.
    (2) Prior to origination of the CRE loan, the originator:
    (i) Verified and documented the current financial condition of the
borrower;
    (ii) Obtained a written appraisal of the real property securing the
loan that:
    (A) Was performed not more than six months from the origination
date of the loan by an appropriately state-certified or state-licensed
appraiser;
    (B) Conforms to generally accepted appraisal standards as evidenced
by the Uniform Standards of Professional Appraisal Practice (USPAP)
promulgated by the Appraisal Standards Board and the appraisal
requirements of the Federal banking agencies (OCC: 12 CFR part 34,
subpart C; FRB: 12 CFR part 208, subpart E, and 12 CFR part 225,
subpart G; and FDIC: 12 CFR part 323); and
    (C) Provides an ``as is'' opinion of the market value of the real
property, which includes an income valuation approach that uses a
discounted cash flow analysis;
    (iii) Qualified the borrower for the CRE loan based on a monthly
payment amount derived from a straight-line amortization of principal
and interest over the term of the loan (but not exceeding 20 years);
    (iv) Conducted an environmental risk assessment to gain
environmental information about the property securing the loan and took
appropriate steps to mitigate any environmental liability determined to
exist based on this assessment;
    (v) Conducted an analysis of the borrower's ability to service its
overall debt obligations during the next two years, based on reasonable
projections;
    (vi) Determined that, based on the previous two years' actual
performance, the borrower had:
    (A) A DSC ratio of 1.5 or greater, if the loan is a qualifying
leased CRE loan, net of any income derived from a tenant(s) who is not
a qualified tenant(s);
    (B) A DSC ratio of 1.5 or greater, if the loan is a qualifying
multi-family property loan; or
    (C) A DSC ratio of 1.7 or greater, if the loan is any other type of
CRE loan;
    (vii) Determined that, based on two years of projections, which
include the new debt obligation, following the origination date of the
loan, the borrower will have:
    (A) A DSC ratio of 1.5 or greater, if the loan is a qualifying
leased CRE loan, net of any income derived from a tenant(s) who is not
a qualified tenant(s);
    (B) A DSC ratio of 1.5 or greater, if the loan is a qualifying
multi-family property loan; or
    (C) A DSC ratio of 1.7 or greater, if the loan is any other type of
CRE loan.
    (3) The loan documentation for the CRE loan includes covenants
that:
    (i) Require the borrower to provide to the originator and any
subsequent holder of the commercial loan, and the servicer, the
borrower's financial statements and supporting schedules on an ongoing
basis, but not less frequently than quarterly, including information on
existing, maturing and new leasing or rent-roll activity for the
property securing the loan, as appropriate; and
    (ii) Impose prohibitions on:
    (A) The creation or existence of any other security interest with
respect to any collateral for the CRE loan;
    (B) The transfer of any collateral pledged to support the CRE loan;
and
    (C) Any change to the name, location or organizational structure of
the borrower, or any other party that pledges collateral for the loan;
    (iii) Require the borrower and any other party that pledges
collateral for the loan to:
    (A) Maintain insurance that protects against loss on any collateral
for the CRE loan, at least up to the amount of the loan, and names the
originator or any subsequent holder of the loan as an additional
insured or loss payee;
    (B) Pay taxes, charges, fees, and claims, where non-payment might