[Federal Register Volume 78, Number 183 (Friday, September 20, 2013)]
[Proposed Rules]
[Pages 57927-58048]
[FR Doc No: 2013-21677]

Vol. 78

Friday,

No. 183

September 20, 2013

Part II

Department of the Treasury

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 Office of the Comptroller of the Currency

Federal Reserve System

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Federal Deposit Insurance Corporation

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Federal Housing Finance Agency

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Securities and Exchange Commission

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Department of Housing and Urban Development

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12 CFR Parts 43, 244, 373, et al.

17 CFR Part 246

24 CFR Part 267

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 Credit Risk Retention; Proposed Rule

Federal Register / Vol. 78 , No. 183 / Friday, September 20, 2013 /
Proposed Rules

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 43

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

FEDERAL RESERVE SYSTEM

12 CFR Part 244

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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 373

RIN 3064-AD74

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1234

RIN 2590-AA43

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 246

[Release Nos. 34-70277]
RIN 3235-AK96

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 267

RIN 2501-AD53

Credit Risk Retention

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

ACTION: Proposed rule.

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SUMMARY: The OCC, Board, FDIC, Commission, FHFA, and HUD (the agencies)
are seeking comment on a joint proposed rule (the proposed rule, or the
proposal) to revise the proposed rule the agencies published in the
Federal Register on April 29, 2011, and to implement the credit risk
retention requirements of section 15G of the Securities Exchange Act of
1934 (15. U.S.C. 78o-11), as added by section 941 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
Section 15G generally requires the securitizer of asset-backed
securities to retain not less than 5 percent of the credit risk of the
assets collateralizing the asset-backed securities. Section 15G
includes a variety of exemptions from these requirements, including an
exemption for asset-backed securities that are collateralized
exclusively by residential mortgages that qualify as ``qualified
residential mortgages,'' as such term is defined by the agencies by
rule.

DATES: Comments must be received by October 30, 2013.

ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the agencies. Commenters are encouraged to use the
title ``Credit Risk Retention'' to facilitate the organization and
distribution of comments among the agencies. Commenters are also
encouraged to identify the number of the specific request for comment
to which they are responding.
    Office of the Comptroller of the Currency: Because paper mail in
the Washington, DC area and at the OCC is subject to delay, commenters
are encouraged to submit comments by the Federal eRulemaking Portal or
email, if possible. Please use the title ``Credit Risk Retention'' to
facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to
http://www.regulations.gov. Enter ``Docket ID OCC-2013-0010'' in the
Search Box and click ``Search''. Results can be filtered using the
filtering tools on the left side of the screen. Click on ``Comment
Now'' to submit public comments. Click on the ``Help'' tab on the
Regulations.gov home page to get information on using Regulations.gov.
     Email<EMAIL_ADDRESS>     Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
     Fax:<PHONE_NUMBER>.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and
``Docket Number OCC-2013-0010'' in your comment. In general, OCC will
enter all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to
this proposed rulemaking by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov. Enter ``Docket ID OCC-2013-0010'' in the Search
box and click ``Search''. Comments can be filtered by agency using the
filtering tools on the left side of the screen. Click on the ``Help''
tab on the Regulations.gov home page to get information on using
Regulations.gov, including instructions for viewing public comments,
viewing other supporting and related materials, and viewing the docket
after the close of the comment period.
     Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect and photocopy comments.
     Docket: You may also view or request available background
documents and project summaries using the methods described above.
    Board of Governors of the Federal Reserve System: You may submit
comments, identified by Docket No. R-1411, by any of the following
methods:
     Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
     Email<EMAIL_ADDRESS>Include the
docket number in the subject line of the message.
     Fax:<PHONE_NUMBER> or<PHONE_NUMBER>.
     Mail: Address to Robert deV. Frierson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue NW., Washington, DC 20551.

    All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW) between
9:00 a.m. and 5:00 p.m. on weekdays.
    Federal Deposit Insurance Corporation: You may submit comments,
identified by RIN number, by any of the following methods:
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal. Follow instructions for submitting comments on the agency Web
site.
     Email<EMAIL_ADDRESS>Include RIN 3064-AD74 in the
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW.,
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7:00 a.m. and 5:00 p.m.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
    Instructions: All comments will be posted without change to http://
www.fdic.gov/regulations/laws/federal, including any personal
information provided. Paper copies of public comments may be ordered
from the Public Information Center by telephone at<PHONE_NUMBER> or
(703) 562-2200.
    Securities and Exchange Commission: You may submit comments by the
following method:

Electronic Comments

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

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090
     All submissions should refer to File Number S7-14-11. This
file number should be included on the subject line if email is used. To
help us process and review your comments more efficiently, please use
only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
    Federal Housing Finance Agency: You may submit your written
comments on the proposed rulemaking, identified by RIN number 2590-
AA43, by any of the following methods:
     Email: Comments to Alfred M. Pollard, General Counsel, may
be sent by email at<EMAIL_ADDRESS>Please include ``RIN 2590-
AA43'' in the subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at<EMAIL_ADDRESS>to ensure timely receipt by the agency.
Please include ``RIN 2590-AA43'' in the subject line of the message.
     U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA43, Federal
Housing Finance Agency, Constitution Center, (OGC) Eighth Floor, 400
7th Street SW., Washington, DC 20024.
     Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA43,
Federal Housing Finance Agency, Constitution Center, (OGC) Eighth
Floor, 400 7th Street SW., Washington, DC 20024. A hand-delivered
package should be logged in at the Seventh Street entrance Guard Desk,
First Floor, on business days between 9:00 a.m. and 5:00 p.m.
    All comments received by the deadline will be posted for public
inspection without change, including any personal information you
provide, such as your name and address, on the FHFA Web site at http://www.fhfa.gov. Copies of all comments timely received will be available
for public inspection and copying at the address above on government-
business days between the hours of 10 a.m. and 3 p.m. at the Federal
Housing Finance Agency, Constitution Center, 400 7th Street SW.,
Washington, DC 20024. To make an appointment to inspect comments please
call the Office of General Counsel at<PHONE_NUMBER>.
    Department of Housing and Urban Development: Interested persons are
invited to submit comments regarding this rule to the Regulations
Division, Office of General Counsel, Department of Housing and Urban
Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500.
Communications must refer to the above docket number and title. There
are two methods for submitting public comments. All submissions must
refer to the above docket number and title.
     Submission of Comments by Mail. Comments may be submitted
by mail to the Regulations Division, Office of General Counsel,
Department of Housing and Urban Development, 451 7th Street SW., Room
10276, Washington, DC 20410-0500.
     Electronic Submission of Comments. Interested persons may
submit comments electronically through the Federal eRulemaking Portal
at www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt by HUD, and enables HUD to make them immediately available to
the public. Comments submitted electronically through the
www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
     Note: To receive consideration as public comments,
comments must be submitted through one of the two methods specified
above. Again, all submissions must refer to the docket number and title
of the rule.
     No Facsimile Comments. Facsimile (FAX) comments are not
acceptable.
     Public Inspection of Public Comments. All properly
submitted comments and communications submitted to HUD will be
available for public inspection and copying between 8 a.m. and 5 p.m.
weekdays at the above address. Due to security measures at the HUD
Headquarters building, an appointment to review the public comments
must be scheduled in advance by calling the Regulations Division at
202-708-3055 (this is not a toll-free number). Individuals with speech
or hearing impairments may access this number via TTY by calling the
Federal Information Relay Service at

800-877-8339. Copies of all comments submitted are available for
inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:
    OCC: Kevin Korzeniewski, Attorney, Legislative and Regulatory
Activities Division,<PHONE_NUMBER>, Office of the Comptroller of the
Currency, 400 7th Street SW., Washington, DC 20219.
    Board: Benjamin W. McDonough, Senior Counsel,<PHONE_NUMBER>; April
C. Snyder, Senior Counsel,<PHONE_NUMBER>; Brian P. Knestout, Counsel,
(202) 452-2249; David W. Alexander, Senior Attorney,<PHONE_NUMBER>; or
Flora H. Ahn, Senior Attorney,<PHONE_NUMBER>, Legal Division; Thomas
R. Boemio, Manager,<PHONE_NUMBER>; Donald N. Gabbai, Senior
Supervisory Financial Analyst,<PHONE_NUMBER>; Ann P. McKeehan, Senior
Supervisory Financial Analyst,<PHONE_NUMBER>; or Sean M. Healey,
Senior Financial Analyst,<PHONE_NUMBER>, Division of Banking
Supervision and Regulation; Karen Pence, Assistant Director, Division
of Research & Statistics,<PHONE_NUMBER>; or Nikita Pastor, Counsel,
(202) 452-3667, Division of Consumer and Community Affairs, Board of
Governors of the Federal Reserve System, 20th and C Streets NW.,
Washington, DC 20551.
    FDIC: Rae-Ann Miller, Associate Director,<PHONE_NUMBER>; George
Alexander, Assistant Director,<PHONE_NUMBER>; Kathleen M. Russo,
Supervisory Counsel,<PHONE_NUMBER>; or Phillip E. Sloan, Counsel,
(703) 562-6137, Federal Deposit Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
    Commission: Steven Gendron, Analyst Fellow; Arthur Sandel, Special
Counsel; David Beaning, Special Counsel; or Katherine Hsu, Chief, (202)
551-3850, in the Office of Structured Finance, Division of Corporation
Finance, U.S. Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-3628.
    FHFA: Patrick J. Lawler, Associate Director and Chief Economist,
<EMAIL_ADDRESS>(202) 649-3190; Ronald P. Sugarman, Principal
Legislative Analyst<EMAIL_ADDRESS>(202) 649-3208; Phillip
Millman, Principal Capital Markets Specialist,
<EMAIL_ADDRESS>(202) 649-3080; or Thomas E. Joseph,
Associate General Counsel<EMAIL_ADDRESS>(202) 649-3076;
Federal Housing Finance Agency, Constitution Center, 400 7th Street
SW., Washington, DC 20024. The telephone number for the
Telecommunications Device for the Hearing Impaired is<PHONE_NUMBER>.
    HUD: Michael P. Nixon, Office of Housing, Department of Housing and
Urban Development, 451 7th Street SW., Room 10226, Washington, DC
20410; telephone number<PHONE_NUMBER> (this is not a toll-free number).
Persons with hearing or speech impairments may access this number
through TTY by calling the toll-free Federal Information Relay Service
at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Overview of the Original Proposal and Public Comment
    C. Overview of the Proposed Rule
II. General Definitions and Scope
    A. Overview of Significant Definitions in the Original Proposal
and Comments
    1. Asset-Backed Securities, Securitization Transactions, and ABS
Interests
    2. Securitizer, Sponsor, and Depositor
    3. Originator
    4. Servicing Assets, Collateral
    B. Proposed General Definitions
III. General Risk Retention Requirement
    A. Minimum Risk Retention Requirement
    B. Permissible Forms of Risk Retention--Menu of Options
    1. Standard Risk Retention
    2. Revolving Master Trusts
    3. Representative Sample
    4. Asset-Backed Commercial Paper Conduits
    5. Commercial Mortgage-Backed Securities
    6. Government-Sponsored Enterprises
    7. Open Market Collateralized Loan Obligations
    8. Municipal Bond ``Repackaging'' Securitizations
    9. Premium Capture Cash Reserve Account
    C. Allocation to the Originator
    D. Hedging, Transfer, and Financing Restrictions
IV. General Exemptions
    A. Exemption for Federally Insured or Guaranteed Residential,
Multifamily, and Health Care Mortgage Loan Assets
    B. Exemption for Securitizations of Assets Issued, Insured, or
Guaranteed by the United States or Any Agency of the United States
and Other Exemptions
    C. Exemption for Certain Resecuritization Transactions
    D. Other Exemptions From Risk Retention Requirements
    1. Utility Legislative Securitizations
    2. Seasoned Loans
    3. Legacy Loan Securitizations
    4. Corporate Debt Repackagings
    5. ``Non-Conduit'' CMBS Transactions
    6. Tax Lien-Backed Securities Sponsored by a Municipal Entity
    7. Rental Car Securitizations
    E. Safe Harbor for Foreign Securitization Transactions
    F. Sunset on Hedging and Transfer Restrictions
    G. Federal Deposit Insurance Corporation Securitizations
V. Reduced Risk Retention Requirements and Underwriting Standards
for ABS Backed by Qualifying Commercial, Commercial Real Estate, or
Automobile Loans
    A. Qualifying Commercial Loans
    B. Qualifying Commercial Real Estate Loans
    1. Ability To Repay
    2. Loan-to-Value Requirement
    3. Collateral Valuation
    4. Risk Management and Monitoring
    C. Qualifying Automobile Loans
    1. Ability To Repay
    2. Loan Terms
    3. Reviewing Credit History
    4. Loan-to-Value
    D. Qualifying Asset Exemption
    E. Buyback Requirement
VI. Qualified Residential Mortgages
    A. Overview of Original Proposal and Public Comments
    B. Approach to Defining QRM
    1. Limiting Credit Risk
    2. Preserving Credit Access
    C. Proposed Definition of QRM
    D. Exemption for QRMs
    E. Repurchase of Loans Subsequently Determined To Be Non-
Qualified After Closing
    F. Alternative Approach to Exemptions for QRMs
VII. Solicitation of Comments on Use of Plain Language
VIII. Administrative Law Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Commission Economic Analysis
    D. OCC Unfunded Mandates Reform Act of 1995 Determination
    E. Commission: Small Business Regulatory Enforcement Fairness
Act
    F. FHFA: Considerations of Differences Between the Federal Home
Loan Banks and the Enterprises

I. Introduction

    The agencies are requesting comment on a proposed rule that re-
proposes with modifications a previously proposed rule to implement the
requirements of section 941 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Act, or Dodd-Frank Act).\1\ Section 15G of
the Exchange Act, as added by section 941(b) of the Dodd-Frank Act,
generally requires the Board, the FDIC, the OCC (collectively, referred
to as the Federal banking agencies), the Commission, and, in the case
of the securitization of any ``residential mortgage asset,'' together
with HUD and FHFA, to jointly prescribe regulations that (i) require a
securitizer to retain not less than 5 percent of the credit risk of any
asset that the securitizer, through the issuance of an asset-backed
security (ABS), transfers, sells, or conveys to a third party, and (ii)
prohibit a

securitizer from directly or indirectly hedging or otherwise
transferring the credit risk that the securitizer is required to retain
under section 15G and the agencies' implementing rules.\2\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010). Section 941 of
the Dodd-Frank Act amends the Securities Exchange Act of 1934 (the
Exchange Act) and adds a new section 15G of the Exchange Act. 15
U.S.C. 78o-11.
    \2\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
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    Section 15G of the Exchange Act exempts certain types of
securitization transactions from these risk retention requirements and
authorizes the agencies to exempt or establish a lower risk retention
requirement for other types of securitization transactions. For
example, section 15G specifically provides that a securitizer shall not
be required to retain any part of the credit risk for an asset that is
transferred, sold, or conveyed through the issuance of ABS by the
securitizer, if all of the assets that collateralize the ABS are
qualified residential mortgages (QRMs), as that term is jointly defined
by the agencies.\3\ In addition, section 15G provides that a
securitizer may retain less than 5 percent of the credit risk of
commercial mortgages, commercial loans, and automobile loans that are
transferred, sold, or conveyed through the issuance of ABS by the
securitizer if the loans meet underwriting standards established by the
Federal banking agencies.\4\
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    \3\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (e)(4)(A) and (B).
    \4\ See id. at section 78o-11(c)(1)(B)(ii) and (2).
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    In April 2011, the agencies published a joint notice of proposed
rulemaking that proposed to implement section 15G of the Exchange Act
(original proposal).\5\ The proposed rule revises the original
proposal, as described in more detail below.
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    \5\ Credit Risk Retention; Proposed Rule, 76 FR 24090 (April 29,
2011) (Original Proposal).
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    Section 15G allocates the authority for writing rules to implement
its provisions among the agencies in various ways. As a general matter,
the agencies collectively are responsible for adopting joint rules to
implement the risk retention requirements of section 15G for
securitizations that are backed by residential mortgage assets and for
defining what constitutes a QRM for purposes of the exemption for QRM-
backed ABS.\6\ The Federal banking agencies and the Commission,
however, are responsible for adopting joint rules that implement
section 15G for securitizations backed by all other types of assets,\7\
and are authorized to adopt rules in several specific areas under
section 15G.\8\ In addition, the Federal banking agencies are jointly
responsible for establishing, by rule, the underwriting standards for
non-QRM residential mortgages, commercial mortgages, commercial loans,
and automobile loans that would qualify ABS backed by these types of
loans for a risk retention requirement of less than 5 percent.\9\
Accordingly, when used in this Notice of Proposed Rulemaking, the term
``agencies'' shall be deemed to refer to the appropriate agencies that
have rulewriting authority with respect to the asset class,
securitization transaction, or other matter discussed.
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    \6\ See id. at section 78o-11(b)(2), (e)(4)(A) and (B).
    \7\ See id. at section 78o-11(b)(1).
    \8\ See, e.g. id. at sections 78o-11(b)(1)(E) (relating to the
risk retention requirements for ABS collateralized by commercial
mortgages); (b)(1)(G)(ii) (relating to additional exemptions for
assets issued or guaranteed by the United States or an agency of the
United States); (d) (relating to the allocation of risk retention
obligations between a securitizer and an originator); and (e)(1)
(relating to additional exemptions, exceptions or adjustments for
classes of institutions or assets).
    \9\ See id. at section 78o-11(b)(2)(B).
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    For ease of reference, the re-proposed rules of the agencies are
referenced using a common designation of Sec.  ----.1 to Sec.  ----.21
(excluding the title and part designations for each agency). With the
exception of HUD, each agency will codify the rules, when adopted in
final form, within each of their respective titles of the Code of
Federal Regulations.\10\ Section ----.1 of each agency's rule
identifies the entities or transactions subject to such agency's rule.
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    \10\ Specifically, the agencies propose to codify the rules as
follows: 12 CFR part 43 (OCC); 12 CFR part 244 (Regulation RR)
(Board); 12 CFR part 373 (FDIC); 12 CFR part 246 (Commission); 12
CFR part 1234 (FHFA). As required by section 15G, HUD has jointly
prescribed the proposed rules for a securitization that is backed by
any residential mortgage asset and for purposes of defining a
qualified residential mortgage. Because the proposed rules would
exempt the programs and entities under HUD's jurisdiction from the
requirements of the proposed rules, HUD does not propose to codify
the rules into its title of the CFR at the time the rules are
adopted in final form.
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    The preamble to the original proposal described the agencies'
intention to jointly approve any written interpretations, written
responses to requests for no-action letters and general counsel
opinions, or other written interpretive guidance (written
interpretations) concerning the scope or terms of section 15G of the
Exchange Act and the final rules issued thereunder that are intended to
be relied on by the public generally. The agencies also intended for
the appropriate agencies to jointly approve any exemptions, exceptions,
or adjustments to the final rules. For these purposes, the phrase
``appropriate agencies'' refers to the agencies with rulewriting
authority for the asset class, securitization transaction, or other
matter addressed by the interpretation, guidance, exemption, exception,
or adjustment.
    Consistent with section 15G of the Exchange Act, the risk retention
requirements would become effective, for securitization transactions
collateralized by residential mortgages, one year after the date on
which final rules are published in the Federal Register, and two years
after that date for any other securitization transaction.

A. Background

    As the agencies observed in the preamble to the original proposal,
the securitization markets are an important link in the chain of
entities providing credit to U.S. households and businesses, and state
and local governments.\11\ When properly structured, securitization
provides economic benefits that can lower the cost of credit to
households and businesses.\12\ However, when incentives are not
properly aligned and there is a lack of discipline in the credit
origination process, securitization can result in harmful consequences
to investors, consumers, financial institutions, and the financial
system.
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    \11\ Securitization may reduce the cost of funding, which is
accomplished through several different mechanisms. For example,
firms that specialize in originating new loans and that have
difficulty funding existing loans may use securitization to access
more-liquid capital markets for funding. In addition, securitization
can create opportunities for more efficient management of the asset-
liability duration mismatch generally associated with the funding of
long-term loans, for example, with short-term bank deposits.
Securitization also allows the structuring of securities with
differing maturity and credit risk profiles from a single pool of
assets that appeal to a broad range of investors. Moreover,
securitization that involves the transfer of credit risk allows
financial institutions that primarily originate loans to particular
classes of borrowers, or in particular geographic areas, to limit
concentrated exposure to these idiosyncratic risks on their balance
sheets.
    \12\ Report to the Congress on Risk Retention, Board of
Governors of the Federal Reserve System, at 8 (October 2010),
available at http://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf (Board Report).
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    During the financial crisis, securitization transactions displayed
significant vulnerabilities to informational and incentive problems
among various parties involved in the process.\13\ Investors did not
have access to the same information about the assets collateralizing
ABS as other parties in the securitization chain (such as the sponsor
of the securitization transaction or an originator of the securitized
loans).\14\ In addition, assets were resecuritized into complex
instruments, such as collateralized debt obligations (CDOs) and CDOs-
squared, which made it difficult for investors to discern the

true value of, and risks associated with, an investment in the
securitization.\15\ Moreover, some lenders using an ``originate-to-
distribute'' business model loosened their underwriting standards
knowing that the loans could be sold through a securitization and
retained little or no continuing exposure to the loans.\16\
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    \13\ See Board Report at 8-9.
    \14\ See S. Rep. No. 111-176, at 128 (2010).
    \15\ See id.
    \16\ See id.
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    Congress intended the risk retention requirements added by section
15G to help address problems in the securitization markets by requiring
that securitizers, as a general matter, retain an economic interest in
the credit risk of the assets they securitize. By requiring that the
securitizer retain a portion of the credit risk of the assets being
securitized, the requirements of section 15G provide securitizers an
incentive to monitor and ensure the quality of the assets underlying a
securitization transaction, and, thus, help align the interests of the
securitizer with the interests of investors. Additionally, in
circumstances where the assets collateralizing the ABS meet
underwriting and other standards that help to ensure the assets pose
low credit risk, the statute provides or permits an exemption.\17\
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    \17\ See 15 U.S.C. 78o-11(c)(1)(B)(ii), (e)(1)-(2).
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    Accordingly, the credit risk retention requirements of section 15G
are an important part of the legislative and regulatory efforts to
address weaknesses and failures in the securitization process and the
securitization markets. Section 15G complements other parts of the
Dodd-Frank Act intended to improve the securitization markets. Such
other parts include provisions that strengthen the regulation and
supervision of national recognized statistical rating organizations
(NRSROs) and improve the transparency of credit ratings; \18\ provide
for issuers of registered ABS offerings to perform a review of the
assets underlying the ABS and disclose the nature of the review; \19\
and require issuers of ABS to disclose the history of the requests they
received and repurchases they made related to their outstanding
ABS.\20\
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    \18\ See, e.g. sections 932, 935, 936, 938, and 943 of the Dodd-
Frank Act (15 U.S.C. 78o-7, 78o-8).
    \19\ See section 945 of the Dodd-Frank Act (15 U.S.C. 77g).
    \20\ See section 943 of the Dodd-Frank Act (15 U.S.C. 78o-7).
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B. Overview of the Original Proposal and Public Comment

    In developing the original proposal, the agencies took into account
the diversity of assets that are securitized, the structures
historically used in securitizations, and the manner in which
securitizers \21\ have retained exposure to the credit risk of the
assets they securitize.\22\ The original proposal provided several
options from which sponsors could choose to meet section 15G's risk
retention requirements, including, for example, retention of a 5
percent ``vertical'' interest in each class of ABS interests issued in
the securitization, retention of a 5 percent ``horizontal'' first-loss
interest in the securitization, and other options designed to reflect
the way in which market participants have historically structured
credit card receivable and asset-backed commercial paper conduit
securitizations. The original proposal also included a special
``premium capture'' mechanism designed to prevent a sponsor from
structuring a securitization transaction in a manner that would allow
the sponsor to offset or minimize its retained economic exposure to the
securitized assets by monetizing the excess spread created by the
securitization transaction.
---------------------------------------------------------------------------

    \21\ As discussed in the original proposal and further below,
the agencies propose that a ``sponsor,'' as defined in a manner
consistent with the definition of that term in the Commission's
Regulation AB, would be a ``securitizer'' for the purposes of
section 15G.
    \22\ Both the language and legislative history of section 15G
indicate that Congress expected the agencies to be mindful of the
heterogeneity of securitization markets. See, e.g., 15 U.S.C. 78o-
11(c)(1)(E), (c)(2), (e); S. Rep. No. 111-76, at 130 (2010) (``The
Committee believes that implementation of risk retention obligations
should recognize the differences in securitization practices for
various asset classes.'').
---------------------------------------------------------------------------

    The original proposal also included disclosure requirements that
were specifically tailored to each of the permissible forms of risk
retention. The disclosure requirements were an integral part of the
original proposal because they would have provided investors with
pertinent information concerning the sponsor's retained interests in a
securitization transaction, such as the amount and form of interest
retained by sponsors.
    As required by section 15G, the original proposal provided a
complete exemption from the risk retention requirements for ABS that
are collateralized solely by QRMs and established the terms and
conditions under which a residential mortgage would qualify as a QRM.
In developing the proposed definition of a QRM, the agencies considered
the terms and purposes of section 15G, public input, and the potential
impact of a broad or narrow definition of QRM on the housing and
housing finance markets. In addition, the agencies developed the QRM
proposal to be consistent with the requirement of section 15G that the
definition of a QRM be ``no broader than'' the definition of a
``qualified mortgage'' (QM), as the term is defined under section
129C(b)(2) of the Truth in Lending Act (TILA) (15 U.S.C. 1639C(b)(2)),
as amended by the Dodd-Frank Act, \23\ and regulations adopted
thereunder.\24\
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    \23\ See 15 U.S.C. 78o-11(e)(4)(C). As adopted, the text of
section 15G(e)(4)(C) cross-references section 129C(c)(2) of TILA for
the definition of a QM. However, section 129C(b)(2), and not section
129C(c)(2), of TILA contains the definition of a ``qualified
mortgage.'' The legislative history clearly indicates that the
reference in the statute to section 129C(c)(2) of TILA (rather than
section 129C(b)(2) of TILA) was an inadvertent technical error. See
156 Cong. Rec. S5929 (daily ed. July 15, 2010) (statement of Sen.
Christopher Dodd) (``The [conference] report contains the following
technical errors: the reference to `section 129C(c)(2)' in
subsection (e)(4)(C) of the new section 15G of the Securities and
Exchange Act, created by section 941 of the [Dodd-Frank Act] should
read `section 129C(b)(2).' In addition, the references to
`subsection' in paragraphs (e)(4)(A) and (e)(5) of the newly created
section 15G should read `section.' We intend to correct these in
future legislation.'').
    \24\ See 78 FR 6408 (January 30, 2013), as amended by 78 FR
35430 (June 12, 2013). These two final rules were preceded by a
proposed rule defining QM, issued by the Board and published in the
Federal Register. See 76 FR 27390 (May 11, 2011). The Board had
initial responsibility for administration and oversight of TILA
prior to transfer to the Consumer Financial Protection Bureau.
---------------------------------------------------------------------------

    The original proposal would generally have prohibited QRMs from
having product features that were observed to contribute significantly
to the high levels of delinquencies and foreclosures since 2007. These
included features permitting negative amortization, interest-only
payments, or significant interest rate increases. The QRM definition in
the original proposal also included other underwriting standards
associated with lower risk of default, including a down payment
requirement of 20 percent in the case of a purchase transaction,
maximum loan-to-value ratios of 75 percent on rate and term refinance
loans and 70 percent for cash-out refinance loans, as well as credit
history criteria (or requirements). The QRM standard in the original
proposal also included maximum front-end and back-end debt-to-income
ratios. As explained in the original proposal, the agencies intended
for the QRM proposal to reflect very high quality underwriting
standards, and the agencies expected that a large market for non-QRM
loans would continue to exist, providing ample liquidity to mortgage
lenders.
    Consistent with the statute, the original proposal also provided
that sponsors would not have to hold risk retention for securitized
commercial, commercial real estate, and automobile loans that met
proposed underwriting

standards that incorporated features and requirements historically
associated with very low credit risk in those asset classes.
    With respect to securitization transactions sponsored by the
Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac) (jointly, the Enterprises), the
agencies proposed to recognize the 100 percent guarantee of principal
and interest payments by the Enterprises on issued securities as
meeting the risk retention requirement. However, this recognition would
only remain in effect for as long as the Enterprises operated under the
conservatorship or receivership of FHFA with capital support from the
United States.
    In response to the original proposal, the agencies received
comments from over 10,500 persons, institutions, or groups, including
nearly 300 unique comment letters. The agencies received a significant
number of comments regarding the appropriate amount and measurement of
risk retention. Many commenters generally supported the proposed menu-
based approach of providing sponsors flexibility to choose from a
number of permissible forms of risk retention, although several argued
for more flexibility in selecting risk retention options, including
using multiple options simultaneously. Comments on the disclosure
requirements in the original proposal were limited.
    Many commenters expressed significant concerns with the proposed
standards for horizontal risk retention and the premium capture cash
reserve account (PCCRA), which were intended to ensure meaningful risk
retention. Many commenters asserted that these proposals would lead to
significantly higher costs for sponsors, possibly discouraging them
from engaging in new securitization transactions. However, some
commenters supported the PCCRA concept, arguing that the more
restrictive nature of the account would be offset by the requirement's
contribution to more conservative underwriting practices.
    Other commenters expressed concerns with respect to standards in
the original proposal for specific asset classes, such as the proposed
option for third-party purchasers to hold risk retention in commercial
mortgage-backed securitizations instead of sponsors (as contemplated by
section 15G). Many commenters also expressed concern about the
underwriting standards for non-residential asset classes, generally
criticizing them as too conservative to be utilized effectively by
sponsors. Several commenters criticized application of the original
proposal to managers of certain collateralized loan obligation (CLO)
transactions and argued that the original proposal would lead to more
concentration in the industry and reduce access to credit for many
businesses.
    An overwhelming majority of commenters criticized the agencies'
proposed QRM standard. Many of these commenters asserted that the
proposed definition of QRM, particularly the 20 percent down payment
requirement, would significantly increase the costs of credit for most
home buyers and restrict access to credit. Some of these commenters
asserted that the proposed QRM standard would become a new
``government-approved'' standard, and that lenders would be reluctant
to originate mortgages that did not meet the standard. Commenters also
argued that this proposed standard would make it more difficult to
reduce the participation of the Enterprises in the mortgage market.
Commenters argued that the proposal was inconsistent with legislative
intent and strongly urged the agencies to eliminate the down payment
requirement, make it substantially smaller, or allow private mortgage
insurance to substitute for the requirement within the QRM standard.
Commenters also argued that the agencies should align the QRM
definition with the definition of QM, as implemented by the Consumer
Financial Protection Bureau (CFPB).\25\
---------------------------------------------------------------------------

    \25\ See 78 FR 6407 (January 30, 2013), as amended by 78 FR
35429 (June 12, 2013) and 78 FR 44686 (July 24, 2013).
---------------------------------------------------------------------------

    Various commenters also criticized the agencies' proposed treatment
of the Enterprises. A commenter asserted that the agencies' recognition
of the Enterprises' guarantee as retained risk (while in
conservatorship or receivership with capital support from the United
States) would impede the policy goal of reducing the role of the
Enterprises and the government in the mortgage securitization market
and encouraging investment in private residential mortgage
securitizations. A number of other commenters, however, supported the
proposed approach for the Enterprises.
    The preamble to the original proposal described the agencies'
intention to jointly approve certain types of written interpretations
concerning the scope of section 15G and the final rules issued
thereunder. Several commenters on the original proposal expressed
concern about the agencies' processes for issuing written
interpretations jointly and the possible uncertainty about the rules
that may arise due to this process.
    The agencies have endeavored to provide specificity and clarity in
the proposed rule to avoid conflicting interpretations or uncertainty.
In the future, if the heads of the agencies determine that further
guidance would be beneficial for market participants, they may jointly
publish interpretive guidance documents, as the federal banking
agencies have done in the past. In addition, the agencies note that
market participants can, as always, seek guidance concerning the rules
from their primary federal banking regulator or, if such market
participant is not a depository institution or a government-sponsored
enterprise, the Commission. In light of the joint nature of the
agencies' rule writing authority, the agencies continue to view the
consistent application of the final rule as a benefit and intend to
consult with each other when adopting staff interpretations or guidance
on the final rule that would be shared with the public generally. The
agencies are considering whether to require that such staff
interpretations and guidance be jointly issued by the agencies with
rule writing authority and invite comment.\26\
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    \26\ These items would not include interpretation and guidance
in staff comment letters and other staff guidance directed to
specific institutions that is not intended to be relied upon by the
public generally. Nor would it include interpretations and guidance
contained in administrative or judicial enforcement proceedings by
the agencies, or in an agency report of examination or inspection or
similar confidential supervisory correspondence.
---------------------------------------------------------------------------

    The specific provisions of the original proposal and public
comments received thereon are discussed in further detail below.

C. Overview of the Proposed Rule

    The agencies have carefully considered the many comments received
on the original proposal as well as engaged in further analysis of the
securitization and lending markets in light of the comments. As a
result, the agencies believe it would be appropriate to modify several
important aspects of the original proposal and are issuing a new
proposal incorporating these modifications. The agencies have concluded
that a new proposal would give the public the opportunity to review and
provide comment on the agencies' revised design of the risk retention
regulatory framework and assist the agencies in determining whether the
revised framework is appropriately structured.
    The proposed rule takes account of the comments received on the
original proposal. In developing the proposed

rule, the agencies consistently have sought to ensure that the amount
of credit risk required of a sponsor would be meaningful, consistent
with the purposes of section 15G. The agencies have also sought to
minimize the potential for the proposed rule to negatively affect the
availability and costs of credit to consumers and businesses.
    As described in detail below, the proposed rule would significantly
increase the degree of flexibility that sponsors would have in meeting
the risk retention requirements of section 15G. For example, the
proposed rule would permit a sponsor to satisfy its obligation by
retaining any combination of an ``eligible vertical interest'' and an
``eligible horizontal residual interest'' to meet the 5 percent minimum
requirement. The agencies are also proposing that horizontal risk
retention be measured by fair value, reflecting market practice, and
are proposing a more flexible treatment for payments to a horizontal
risk retention interest than that provided in the original proposal. In
combination with these changes, the agencies propose to remove the
PCCRA requirement.\27\ The agencies have incorporated proposed
standards for the expiration of the hedging and transfer restrictions
and proposed new exemptions from risk retention for certain
resecuritizations, seasoned loans, and certain types of securitization
transactions with low credit risk. In addition, the agencies propose a
new risk retention option for CLOs that is similar to the allocation to
originator concept proposed for sponsors generally.
---------------------------------------------------------------------------

    \27\ The proposal would also eliminate the ``representative
sample'' option, which commenters had argued would be impractical.
---------------------------------------------------------------------------

    Furthermore, the agencies are proposing revised standards with
respect to risk retention by a third-party purchaser in commercial
mortgage-backed securities (CMBS) transactions and an exemption that
would permit transfer (by a third-party purchaser or sponsor) of a
horizontal interest in a CMBS transaction after five years, subject to
standards described below.
    The agencies have carefully considered the comments received on the
QRM standard in the original proposal as well as various ongoing
developments in the mortgage markets, including mortgage regulations.
For the reasons discussed more fully below, the agencies are proposing
to revise the QRM definition in the original proposal to equate the
definition of a QRM with the definition of QM adopted by the CFPB.\28\
---------------------------------------------------------------------------

    \28\ See 78 FR 6407 (January 30, 2013), as amended by 78 FR
35429 (June 12, 2013) and 78 FR 44686 (July 24, 2013).
---------------------------------------------------------------------------

    The agencies invite comment on all aspects of the proposed rule,
including comment on whether any aspects of the original proposal
should be adopted in the final rule. Please provide data and
explanations supporting any positions offered or changes suggested.

II. General Definitions and Scope

A. Overview of Significant Definitions in the Original Proposal and
Comments

1. Asset-Backed Securities, Securitization Transactions, and ABS
Interests
    The original proposal provided that the proposed risk retention
requirements would have applied to sponsors in securitizations that
involve the issuance of ``asset-backed securities'' and defined the
terms ``asset-backed security'' and ``asset'' consistent with the
definitions of those terms in the Exchange Act. The original proposal
noted that section 15G does not appear to distinguish between
transactions that are registered with the Commission under the
Securities Act of 1933 (the Securities Act) and those that are exempt
from registration under the Securities Act. It further noted that the
proposed definition of ABS, which would have been broader than that of
the Commission's Regulation AB,\29\ included securities that are
typically sold in transactions that are exempt from registration under
the Securities Act, such as CDOs and securities issued or guaranteed by
an Enterprise. As a result, the proposed risk retention requirements
would have applied to securitizers of ABS offerings regardless of
whether the offering was registered with the Commission under the
Securities Act.
---------------------------------------------------------------------------

    \29\ See 17 CFR 229.1100 through 17 CFR 229.1123.
---------------------------------------------------------------------------

    Under the original proposal, risk retention requirements would have
applied to the securitizer in each ``securitization transaction,''
defined as a transaction involving the offer and sale of ABS by an
issuing entity. The original proposal also explained that the term
``ABS interest'' would refer to all types of interests or obligations
issued by an issuing entity, whether or not in certificated form,
including a security, obligation, beneficial interest, or residual
interest, but would not include interests, such as common or preferred
stock, in an issuing entity that are issued primarily to evidence
ownership of the issuing entity, and the payments, if any, which are
not primarily dependent on the cash flows of the collateral held by the
issuing entity.
    With regard to these three definitions, some commenters were
critical of what they perceived to be the overly broad scope of the
terms and advocated for express exemptions or exclusions from their
application. Some commenters expressed concern that the definition of
``asset-backed securities'' could be read to be broader than intended
and requested clarification as to the precise contours of the
definition. For example, certain commenters were concerned that the
proposed ABS definition could unintentionally include securities that
do not serve the same purpose or present the same set of risks as
``asset-backed securities,'' such as securities which are, either
directly or through a guarantee, full-recourse corporate obligations of
a creditworthy entity that is not a special-purpose vehicle (SPV), but
are also secured by a pledge of financial assets. Other commenters
suggested that the agencies provide a bright-line safe harbor that
defines conditions under which risk retention is not required even if a
security is collateralized by self-liquidating assets and advocated
that certain securities be expressly excluded from the proposed rule's
definition of ABS.
    Similarly, a number of commenters requested clarification with
regard to the scope of the definition of ``ABS interest,'' stating that
its broad definition could potentially capture a number of items not
traditionally considered ``interests'' in a securitization, such as
non-economic residual interests, servicing and special servicing fees,
and amounts payable by the issuing entity under a derivatives contract.
With regard to the definition of ``securitization transaction,'' a
commenter recommended that transactions undertaken solely to manage
financial guarantee insurance related to the underlying obligations not
be considered ``securitizations.''
2. Securitizer, Sponsor, and Depositor
    Section 15G stipulates that its risk retention requirements be
applied to a ``securitizer'' of an ABS and, in turn, that a securitizer
is both an issuer of an ABS or a person who organizes and initiates a
securitization transaction by selling or transferring assets, either
directly or indirectly, including through an affiliate or issuer. The
original proposal noted that the second prong of this definition is
substantially identical to the definition of a ``sponsor'' of a
securitization transaction in the

Commission's Regulation AB.\30\ Accordingly, the original proposal
would have defined the term ``sponsor'' in a manner consistent with the
definition of that term in the Commission's Regulation AB.\31\
---------------------------------------------------------------------------

    \30\ See Item 1101 of the Commission's Regulation AB (17 CFR
229.1101) (defining a sponsor as ``a person who organizes and
initiates an asset-backed securities transaction by selling or
transferring assets, either directly or indirectly, including
through an affiliate, to the issuing entity.'').
    \31\ As discussed in the original proposal, when used in the
federal securities laws, the term ``issuer'' may have different
meanings depending on the context in which it is used. For the
purposes of section 15G, the original proposal provided that the
agencies would have interpreted an ``issuer'' of an asset-back
security to refer to the ``depositor'' of an ABS, consistent with
how that term has been defined and used under the federal securities
laws in connection with an ABS.
---------------------------------------------------------------------------

    Other than issues concerning CLOs, which are discussed in Part
III.B.7 of this Supplementary Information, comments with regard to
these terms were generally limited to requests that the final rules
provide that certain specified persons--such as underwriting sales
agents--be expressly excluded from the definition of securitizer or
sponsor for the purposes of the risk retention requirements.
3. Originator
    The original proposal would have defined the term ``originator'' in
the same manner as section 15G, namely, as a person who, through the
extension of credit or otherwise, creates a financial asset that
collateralizes an ABS, and sells the asset directly or indirectly to a
securitizer (i.e., a sponsor or depositor). The original proposal went
on to note that because this definition refers to the person that
``creates'' a loan or other receivable, only the original creditor
under a loan or receivable--and not a subsequent purchaser or
transferee--would have been an originator of the loan or receivable for
purposes of section 15G.
4. Securitized Assets, Collateral
    The original proposal referred to the assets underlying a
securitization transaction as the ``securitized assets,'' meaning
assets that are transferred to the SPV that issues the ABS interests
and that stand as collateral for those ABS interests. ``Collateral''
would be defined as the property that provides the cash flow for
payment of the ABS interests issued by the issuing entity. Taken
together, these definitions were meant to suggest coverage of the
loans, leases, or similar assets that the depositor places into the
issuing SPV at the inception of the transaction, though it would have
also included other assets such as pre-funded cash reserve accounts.
Commenters pointed out that, in addition to this property, the issuing
entity may hold other assets. For example, the issuing entity may
acquire interest rate derivatives to convert floating rate interest
income to fixed rate, or the issuing entity may accrete cash or other
liquid assets in reserve funds that accumulate cash generated by the
securitized assets. As another example, commenters noted that an asset-
backed commercial paper conduit may hold a liquidity guarantee from a
bank on some or all of its securitized assets.

B. Proposed General Definitions

    The agencies have carefully considered all of the comments raised
with respect to the general definitions of the original proposal. The
agencies do not believe that significant changes to these definitions
are necessary and, accordingly, are proposing to maintain the general
definitions in substantially the same form as they were presented in
the original proposal, with one exception.\32\
---------------------------------------------------------------------------

    \32\ Regarding comments about what securities constitutes an ABS
interest under the proposed definition, the agencies preliminarily
believe that non-economic residual interests would constitute ABS
interests. However, as the proposal makes clear, fees for services
such as servicing fees would not fall under the definition of an ABS
interest.
---------------------------------------------------------------------------

    To describe the additional types of property that could be held by
an issuing entity, the agencies are proposing a definition of
``servicing assets,'' which would be any rights or other assets
designed to assure the servicing, timely payment, or timely
distribution of proceeds to security holders, or assets related or
incidental to purchasing or otherwise acquiring and holding the issuing
entity's securitized assets. These may include cash and cash
equivalents, contract rights, derivative agreements of the issuing
entity used to hedge interest rate and foreign currency risks, or the
collateral underlying the securitized assets. As noted in the rule
text, it also includes proceeds of assets collateralizing the
securitization transactions, whether in the form of voluntary payments
from obligors on the assets or otherwise (such as liquidation
proceeds). The agencies are proposing this definition in order to
ensure that the provisions of the proposal appropriately accommodate
the need, in administering a securitization transaction on an ongoing
basis, to hold various assets other than the loans or similar assets
that are transferred into the asset pool by the securitization
depositor. The proposed definition is similar to elements of the
definition of ``eligible assets'' in Rule 3a-7 under the Investment
Company Act of 1940, which specifies conditions under which the issuer
of non-redeemable fixed-income securities backed by self-liquidating
financial assets will not be deemed to be an investment company.
    To facilitate the agencies revised proposal for the QRM definition,
the agencies are proposing to define the term ``residential mortgage''
by reference to the definition of ``covered transaction'' to be found
in the CFPB's Regulation Z.\33\ Accordingly, for purposes of the
proposed rule, a residential mortgage would mean a consumer credit
transaction that is secured by a dwelling, as such term is also defined
in Regulation Z \34\ (including any real property attached to a
dwelling) and any transaction that is exempt from the definition of
``covered transaction'' under the CFPB's Regulation Z.\35\ Therefore,
the term ``residential mortgage'' would include home equity lines of
credit, reverse mortgages, mortgages secured by interests in timeshare
plans, and temporary loans. By defining residential mortgage in this
way, the agencies seek to ensure that relevant definitions in the
proposed rule and in the CFPB's rules on and related to QM are
harmonized to reduce compliance burden and complexity, and the
potential for conflicting definitions and interpretations where the
proposed rule and the QM standard intersect. Additionally, the agencies
are proposing to include those loans excluded from the definition of
``covered transaction'' in the definition of ``residential mortgage''
for purposes of risk retention so that those categories of loans would
be subject to risk retention requirements that are applied to
residential mortgage securitizations under the proposed rule.
---------------------------------------------------------------------------

    \33\ See 78 FR 6584 (January 30, 2013), to be codified at 12 CFR
1026.43.
    \34\ 12 CFR 1026.2(a)(19).
    \35\ Id.
---------------------------------------------------------------------------

III. General Risk Retention Requirement

A. Minimum Risk Retention Requirement

    Section 15G of the Exchange Act generally requires that the
agencies jointly prescribe regulations that require a securitizer to
retain not less than 5 percent of the credit risk for any asset that
the securitizer, through the issuance of an ABS, transfers, sells, or
conveys to a third party, unless an exemption from the risk retention
requirements for the securities or transaction is otherwise available
(e.g., if the ABS is collateralized exclusively

by QRMs). Consistent with the statute, the original proposal generally
required that a sponsor retain an economic interest equal to at least 5
percent of the aggregate credit risk of the assets collateralizing an
issuance of ABS (the base risk retention requirement). Under the
original proposal, the base risk retention requirement would have
applied to all securitization transactions that are within the scope of
section 15G, regardless of whether the sponsor were an insured
depository institution, a bank holding company or subsidiary thereof, a
registered broker-dealer, or other type of entity.\36\
---------------------------------------------------------------------------

    \36\ Synthetic securitizations and securitizations that meet the
requirements of the foreign safe harbor are examples of
securitization transactions that are not within the scope of section
15G.
---------------------------------------------------------------------------

    The agencies requested comment on whether the minimum 5 percent
risk retention requirement was appropriate or whether a higher risk
retention requirement should be established. Several commenters
expressed support for the minimum 5 percent risk retention requirement,
with some commenters supporting a higher risk retention requirement.
However, other commenters suggested tailoring the risk retention
requirement to the specific risks of distinct asset classes.
    Consistent with the original proposal, the proposed rule would
apply a minimum 5 percent base risk retention requirement to all
securitization transactions that are within the scope of section 15G,
regardless of whether the sponsor is an insured depository institution,
a bank holding company or subsidiary thereof, a registered broker-
dealer, or other type of entity, and regardless of whether the sponsor
is a supervised entity.\37\ The agencies continue to believe that this
exposure should provide a sponsor with an incentive to monitor and
control the underwriting of assets being securitized and help align the
interests of the sponsor with those of investors in the ABS. In
addition, the sponsor also would be prohibited from hedging or
otherwise transferring its retained interest prior to the applicable
sunset date, as discussed in Part III.D of this SUPPLEMENTARY
INFORMATION.
---------------------------------------------------------------------------

    \37\ See proposed rule at Sec. Sec.  ----.3 through ----.10.
Similar to the original proposal, the proposed rule, in some
instances, would permit a sponsor to allow another person to retain
the required amount of credit risk (e.g., originators, third-party
purchasers in commercial mortgage-backed securities transactions,
and originator-sellers in asset-backed commercial paper conduit
securitizations). However, in such circumstances, the proposal
includes limitations and conditions designed to ensure that the
purposes of section 15G continue to be fulfilled. Further, even when
a sponsor would be permitted to allow another person to retain risk,
the sponsor would still remain responsible under the rule for
compliance with the risk retention requirements.
---------------------------------------------------------------------------

    The agencies note that the base risk retention requirement under
the proposed rule would be a regulatory minimum. The sponsor,
originator, or other party to a securitization may retain additional
exposure to the credit risk of assets that the sponsor, originator, or
other party helps securitize beyond that required by the proposed rule,
either on its own initiative or in response to the demands or
requirements of private market participants.

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

    Section 15G expressly provides the agencies the authority to
determine the permissible forms through which the required amount of
risk retention must be held.\38\ Accordingly, the original proposal
provided sponsors with multiple options to satisfy the risk retention
requirements of section 15G. The flexibility provided in the original
proposal's menu of options for complying with the risk retention
requirement was designed to take into account the heterogeneity of
securitization markets and practices and to reduce the potential for
the proposed rules to negatively affect the availability and costs of
credit to consumers and businesses. The menu of options approach was
designed to be consistent with the various ways in which a sponsor or
other entity, in historical market practices, may have retained
exposure to the credit risk of securitized assets.\39\ Historically,
whether or how a sponsor retained exposure to the credit risk of the
assets it securitized was determined by a variety of factors including
the rating requirements of the NRSROs, investor preferences or demands,
accounting and regulatory capital considerations, and whether there was
a market for the type of interest that might ordinarily be retained (at
least initially by the sponsor).
---------------------------------------------------------------------------

    \38\ See 15 U.S.C. 78o-11(c)(1)(C)(i); see also S. Rep. No. 111-
176, at 130 (2010) (``The Committee [on Banking, Housing, and Urban
Affairs] believes that implementation of risk retention obligations
should recognize the differences in securitization practices for
various asset classes.'').
    \39\ See Board Report; see also Macroeconomic Effects of Risk
Retention Requirements, Chairman of the Financial Stability
Oversight Counsel (January 2011), available at http://www.treasury.gov/initiatives/wsr/Documents/Section 946 Risk
Retention Study (FINAL).pdf.
---------------------------------------------------------------------------

    The agencies requested comment on the appropriateness of the menu
of options in the original proposal and the permissible forms of risk
retention that were proposed. Commenters generally supported the menu-
based approach of providing sponsors with the flexibility to choose
from a number of permissible forms of risk retention. Many commenters
requested that sponsors be permitted to use multiple risk retention
options in any percentage combination, as long as the aggregate
percentage of risk retention would be at least 5 percent.
    The agencies continue to believe that providing options for risk
retention is appropriate in order to accommodate the variety of
securitization structures that would be subject to the proposed rule.
Accordingly, subpart B of the proposed rule would maintain a menu of
options approach to risk retention. Additionally, the agencies have
considered commenters' concerns about flexibility in combining forms of
risk retention and are proposing modifications to the various forms of
risk retention, and how they may be used, to increase flexibility and
facilitate different circumstances that may accompany various
securitization transactions. Additionally, the permitted forms of risk
retention in the proposal would be subject to terms and conditions that
are intended to help ensure that the sponsor (or other eligible entity)
retains an economic exposure equivalent to at least 5 percent of the
credit risk of the securitized assets. Each of the forms of risk
retention being proposed by the agencies is described below.
1. Standard Risk Retention
a. Overview of Original Proposal and Public Comments
    In the original proposal, to fulfill risk retention for any
transactions (standard risk retention), the agencies proposed to allow
sponsors to use one of three methods: (i) Vertical risk retention; (ii)
horizontal risk retention; and (iii) L-shaped risk retention.
    Under the vertical risk retention option in the original proposal,
a sponsor could satisfy its risk retention requirement by retaining at
least 5 percent of each class of ABS interests issued as part of the
securitization transaction. As discussed in the original proposal, this
would provide the sponsor with an interest in the entire securitization
transaction. The agencies received numerous comments supporting the
vertical risk retention option as an appropriate way to align the
interests of the sponsor with those of the investors in the ABS in a
manner that would be easy to calculate. However, some commenters
expressed concern that the vertical risk retention option would expose
the sponsor to

substantially less risk of loss than if the sponsor had retained risk
under the horizontal risk retention option, thereby making risk
retention less effective.
    Under the horizontal risk retention option in the original
proposal, a sponsor could satisfy its risk retention obligations by
retaining a first-loss ``eligible horizontal residual interest'' in the
issuing entity in an amount equal to at least 5 percent of the par
value of all ABS interests in the issuing entity that were issued as
part of the securitization transaction. In lieu of holding an eligible
horizontal residual interest, the original proposal allowed a sponsor
to cause to be established and funded, in cash, a reserve account at
closing (horizontal cash reserve account) in an amount equal to at
least 5 percent of the par value of all the ABS interests issued as
part of the transaction (i.e., the same dollar amount (or corresponding
amount in the foreign currency in which the ABS are issued, as
applicable) as would be required if the sponsor held an eligible
horizontal residual interest).
    Under the original proposal, an interest qualified as an eligible
horizontal residual interest only if it was an ABS interest that was
allocated all losses on the securitized assets until the par value of
the class was reduced to zero and had the most subordinated claim to
payments of both principal and interest by the issuing entity. While
the original proposal would have permitted the eligible horizontal
residual interest to receive its pro rata share of scheduled principal
payments on the underlying assets in accordance with the relevant
transaction documents, the eligible horizontal residual interest
generally could not receive any other payments of principal made on a
securitized asset (including prepayments) until all other ABS interests
in the issuing entity were paid in full.
    The agencies solicited comment on the structure of the eligible
horizontal residual interest, including the proposed approach to
measuring the size of the eligible horizontal residual interest and the
proposal to restrict unscheduled payments of principal to the sponsor
holding horizontal risk retention. Several commenters expressed support
for the horizontal risk retention option and believed that it would
effectively align the interests of the sponsor with those of the
investors in the ABS. However, many commenters raised concerns about
the agencies' proposed requirements for the eligible horizontal
residual interest. Many commenters requested clarification as to the
definition of ``par value'' and how sponsors should calculate the
eligible horizontal residual interest when measuring it against 5
percent of the par value of the ABS interests. Moreover, several
commenters recommended that the agencies use different approaches to
the measurement of the eligible horizontal residual interest. A few of
these commenters recommended the agencies take into account the ``fair
value'' of the ABS interests as a more appropriate economic measure of
risk retention.
    Several commenters pointed out that the restrictions in the
original proposal on principal payments to the eligible horizontal
residual interest would be impractical to implement. For example, some
commenters expressed concern that the restriction would prevent the
normal operation of a variety of ABS structures, where servicers do not
distinguish which part of a monthly payment is interest or principal
and which parts of principal payments are scheduled or unscheduled.
    The original proposal also contained an ``L-shaped'' risk retention
option, whereby a sponsor, subject to certain conditions, could use an
equal combination of vertical risk retention and horizontal risk
retention to meet its 5 percent risk retention requirement.\40\
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    \40\ Specifically, the original proposal would have allowed a
sponsor to meet its risk retention obligations under the rules by
retaining: (1) Not less than 2.5 percent of each class of ABS
interests in the issuing entity issued as part of the securitization
transaction (the vertical component); and (2) an eligible horizontal
residual interest in the issuing entity in an amount equal to at
least 2.564 percent of the par value of all ABS interests in the
issuing entity issued as part of the securitization transaction,
other than those interests required to be retained as part of the
vertical component (the horizontal component).
---------------------------------------------------------------------------

    The agencies requested comment on whether a higher proportion of
the risk retention held by a sponsor under this option should be
composed of a vertical component or a horizontal component. Many
commenters expressed general support for the L-shaped option, but
recommended that the agencies allow sponsors to utilize multiple risk
retention options in different combinations or in any percentage
combination as long as the aggregate percentage of risk retained is at
least 5 percent. Commenters suggested that the flexibility would permit
sponsors to fulfill the risk retention requirements by selecting a
method that would minimize the costs of risk retention to sponsors and
any resulting increase in costs to borrowers.
b. Proposed Combined Risk Retention Option
    The agencies carefully considered all of the comments on the
horizontal, vertical, and L-shaped risk retention with respect to the
original proposal.
    In the proposed rule, to provide more flexibility to accommodate
various sponsors and securitization transactions and in response to
comments, the agencies are proposing to combine the horizontal,
vertical, and L-shaped risk retention options into a single risk
retention option with a flexible structure.\41\ Additionally, to
provide greater clarity for the measurement of risk retention and to
help prevent sponsors from structuring around their risk retention
requirement by negating or reducing the economic exposure they are
required to maintain, the proposal would require sponsors to measure
their risk retention requirement using fair value, determined in
accordance with U.S. generally accepted accounting principles
(GAAP).\42\
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    \41\ See proposed rule at Sec.  ----.4.
    \42\ Cf. Financial Accounting Standards Board Accounting
Standards Codification Topic 820.
---------------------------------------------------------------------------

    The proposed rule would provide for a combined standard risk
retention option that would permit a sponsor to satisfy its risk
retention obligation by retaining an ``eligible vertical interest,'' an
``eligible horizontal residual interest,'' or any combination thereof,
in a total amount equal to no less than 5 percent of the fair value of
all ABS interests in the issuing entity that are issued as part of the
securitization transaction. The eligible horizontal residual interest
may consist of either a single class or multiple classes in the issuing
entity, provided that each interest qualifies, individually or in the
aggregate, as an eligible horizontal residual interest.\43\ In the case
of multiple classes, this requirement would mean that the classes must
be in consecutive order based on subordination level. For example, if
there were three levels of subordinated classes and the two most
subordinated classes had a combined fair value equal to 5 percent of
all ABS interests, the sponsor would be required to retain these two
most subordinated classes if it were going to discharge its risk
retention obligations by holding only eligible horizontal residual
interests. As discussed below, the agencies are proposing to refine the
definitions of the eligible vertical interest and the eligible
horizontal residual interest as well.
---------------------------------------------------------------------------

    \43\ See proposed rule at Sec.  ----.2 (definition of ``eligible
horizontal residual interest'').
---------------------------------------------------------------------------

    This standard risk retention option would provide sponsors with
greater flexibility in choosing how to structure their retention of
credit risk in a manner compatible with the practices of the
securitization markets. For example, in

securitization transactions where the sponsor would typically retain
less than 5 percent of an eligible horizontal residual interest, the
standard risk retention option would permit the sponsor to hold the
balance of the risk retention as a vertical interest. In addition, the
flexible standard risk retention option should not in and of itself
result in a sponsor having to consolidate the assets and liabilities of
a securitization vehicle onto its own balance sheet because the
standard risk retention option does not mandate a particular proportion
of horizontal to vertical interest or require retention of a minimum
eligible horizontal residual interest. Under the proposed rule, a
sponsor would be free to hold more of an eligible vertical interest in
lieu of an eligible horizontal residual interest. The inclusion of more
of a vertical interest could reduce the significance of the risk
profile of the sponsor's economic exposure to the securitization
vehicle. The significance of the sponsor's exposure is one of the
characteristics the sponsor evaluates when determining whether to
consolidate the securitization vehicle for accounting purposes.
    As proposed, a sponsor may satisfy its risk retention requirements
with respect to a securitization transaction by retaining at least 5
percent of the fair value of each class of ABS interests issued as part
of the securitization transaction. A sponsor using this approach must
retain at least 5 percent of the fair value of each class of ABS
interests issued in the securitization transaction regardless of the
nature of the class of ABS interests (e.g., senior or subordinated) and
regardless of whether the class of interests has a par value, was
issued in certificated form, or was sold to unaffiliated investors. For
example, if four classes of ABS interests were issued by an issuing
entity as part of a securitization--a senior AAA-rated class, a
subordinated class, an interest-only class, and a residual interest--a
sponsor using this approach with respect to the transaction would have
to retain at least 5 percent of the fair value of each such class or
interest.
    A sponsor may also satisfy its risk retention requirements under
the vertical option by retaining a ``single vertical security.'' A
single vertical security would be an ABS interest entitling the holder
to a specified percentage (e.g., 5 percent) of the principal and
interest paid on each class of ABS interests in the issuing entity
(other than such single vertical security) that result in the security
representing the same percentage of fair value of each class of ABS
interests. By permitting the sponsor to hold the vertical form of risk
retention as a single security, the agencies intend to provide sponsors
an option that is simpler than carrying multiple securities
representing a percentage share of every series, tranche, and class
issued by the issuing entity, each of which might need to be valued by
the sponsor on its financial statements every financial reporting
period. The single vertical security option provides the sponsor with
the same principal and interest payments (and losses) as the vertical
stack, in the form of one security to be held on the sponsor's books.
    The agencies considered the comments on the measurement of the
eligible horizontal residual interest in the original proposal and are
proposing a fair value framework for calculating the standard risk
retention because it uses methods more consistent with market
practices. The agencies' use of par value in the original proposal
sought to establish a simple and transparent measure, but the PCCRA
requirement, which the agencies proposed to ensure that the eligible
horizontal residual interest had true economic value, tended to
introduce other complexities. In addition, the use of fair value as
defined in GAAP provides a consistent framework for calculating
standard risk retention across very different securitization
transactions and different classes of interests within the same type of
securitization structure.
    However, fair value is a methodology susceptible to yielding a
range of results depending on the key variables selected by the sponsor
in determining fair value. Accordingly, as part of the agencies'
proposal to rely on fair value as a measure that will adequately
reflect the amount of a sponsor's economic ``skin in the game,'' the
agencies propose to require disclosure of the sponsor's fair value
methodology and all significant inputs used to measure its eligible
horizontal residual interest, as discussed below in this section.
Sponsors that elect to utilize the horizontal risk retention option
must disclose the reference data set or other historical information
which would meaningfully inform third parties of the reasonableness of
the key cash flow assumptions underlying the measure of fair value. For
the purposes of this requirement, key assumptions may include default,
prepayment, and recovery. The agencies believe these key metrics will
help investors assess whether the fair value measure used by the
sponsor to determine the amount of its risk retention are comparable to
market expectations.
    The agencies are also proposing limits on payments to holders of
the eligible horizontal residual interest, but the limits differ from
those in the original proposal, based on the fair value measurement.
The agencies continue to believe that limits are necessary to establish
economically meaningful horizontal risk retention that better aligns
the sponsor's incentives with those of investors. However, the agencies
also intend for sponsors to be able to satisfy their risk retention
requirements with the retention of an eligible horizontal residual
interest in a variety of ABS structures, including those structures
that, in contrast to mortgage-backed securities transactions, do not
distinguish between principal and interest payments and between
principal losses and other losses.
    The proposed restriction on projected cash flows to be paid to the
eligible horizontal residual interest would limit how quickly the
sponsor can recover the fair value amount of the eligible horizontal
residual interest in the form of cash payments from the securitization
(or, if a horizontal cash reserve account is established, released to
the sponsor or other holder of such account). The proposed rule would
prohibit the sponsor from structuring a deal where it receives such
amounts at a faster rate than the rate at which principal is paid to
investors in all ABS interests in the securitization, measured for each
future payment date. Since the cash flows projected to be paid to
sponsors (or released to the sponsor or other holder of the horizontal
cash reserve account) and all ABS interests would already be calculated
at the closing of the transactions as part of the fair value
calculation, it should not be unduly complex or burdensome for sponsors
to project the cash flows to be paid to the eligible horizontal
residual interest (or released to the sponsor or other holder of the
horizontal cash reserve account) and the principal to be paid to all
ABS interests on each payment date. To compute the fair value of
projected cash flows to be paid to the eligible horizontal residual
interest (or released to the sponsor or other holder of the horizontal
cash reserve account) on each payment date, the sponsor would discount
the projected cash flows to the eligible horizontal residual interest
on each payment date (or released to the sponsor or other holder of the
horizontal cash reserve account) using the same discount rate that was
used in the fair value calculation (or the amount that must be placed
in an eligible horizontal cash reserve account, equal to the fair value
of an eligible horizontal residual

interest). To compute the cumulative fair value of cash flows projected
to be paid to the eligible horizontal residual interest through each
payment date, the sponsor would add the fair value of cash flows to the
eligible horizontal residual interest (or released to the sponsor or
other holder of the horizontal cash reserve account) from issuance
through each payment date (or the termination of the horizontal cash
reserve account). The ratio of the cumulative fair value of cash flows
projected to be paid to the eligible horizontal residual interest (or
released to the sponsor or other holder of the horizontal cash reserve
account) at each payment date divided by the fair value of the eligible
horizontal residual interest (or the amount that must be placed in an
eligible horizontal cash reserve account, equal to the fair value of an
eligible horizontal residual interest) at issuance (the EHRI recovery
percentage) measures how quickly the sponsor can be projected to
recover the fair value of the eligible horizontal residual interest. To
measure how quickly investors as a whole are projected to be repaid
principal through each payment date, the sponsor would divide the
cumulative amount of principal projected to be paid to all ABS
interests through each payment date by the total principal of ABS
interests at issuance (ABS recovery percentage).
    In order to comply with the proposed rule, the sponsor, prior to
the issuance of the eligible horizontal residual interest (or funding a
horizontal cash reserve account), or at the time of any subsequent
issuance of ABS interests, as applicable, would have to certify to
investors that it has performed the calculations required by section
4(b)(2)(i) of the proposed rule and that the EHRI recovery percentages
are not expected to be larger than the ABS recovery percentages for any
future payment date.\44\ In addition, the sponsor would have to
maintain record of such calculations and certifications in written form
in its records and must provide disclosure upon request to the
Commission and its appropriate Federal banking agency, if any, until
three years after all ABS interests are no longer outstanding. If this
test fails for any payment date, meaning that the eligible horizontal
residual interest is projected to recover a greater percentage of its
fair value than the percentage of principal projected to be repaid to
all ABS interests with respect to such future payment date, the
sponsor, absent provisions in the cash flow waterfall that prohibit
such excess projected payments from being made on such payment date,
would not be in compliance with the requirements of section 4(b)(2) of
the proposed rule. For example, the schedule of target
overcollateralization in an automobile loan securitization might need
to be adjusted so that the sponsor's retained interest satisfies the
eligible horizontal residual interest repayment restriction.
---------------------------------------------------------------------------

    \44\ See proposed rule at Sec.  ----.4(b).
---------------------------------------------------------------------------

    The cash flow projection would be a one-time calculation performed
at issuance on projected cash flows. This is in part to limit
operational burdens and to allow for sponsors to receive the upside
from a transaction performing above expectations in a timely fashion.
It should also minimize increases in the cost of credit to borrowers as
a result of the risk retention requirement. At the same time, the
restriction that a sponsor cannot structure a transaction in which the
sponsor is projected to recover the fair value of the eligible
horizontal residual interest any faster than all investors are repaid
principal should help to maintain the alignment of interests of the
sponsor with those of investors in the ABS, while providing flexibility
for various types of securitization structures. Moreover, the
restriction would permit a transaction to be structured so that the
sponsor could receive a large, one-time payment, which is a feature
common in deals where certain cash flows that would otherwise be paid
to the eligible horizontal residual interest are directed to pay other
classes, such as a money market tranche in an automobile loan
securitization, provided that such payment did not cause a failure to
satisfy the projected payment test.
    On the other hand, the restriction would prevent the sponsor from
structuring a transaction in which the sponsor is projected to be paid
an amount large enough to increase the leverage of the transaction by
more than the amount which existed at the issuance of the asset-backed
securities. In other words, the purpose of the restriction is to
prevent sponsors from structuring a transaction in which the eligible
horizontal residual interest is projected to receive such a
disproportionate amount of money that the sponsor's interests are no
longer aligned with investors' interests. For example, if the sponsor
has recovered all of the fair value of an eligible horizontal residual
interest, the sponsor effectively has no retained risk if losses on the
securitized assets occur later in the life of the transaction.
    In addition, in light of the fact that the EHRI recovery percentage
calculation is determined one time, before closing of the transaction,
based on the sponsor's projections, the agencies are proposing to
include an additional disclosure requirement about the sponsor's past
performance in respect to the EHRI recovery percentage calculation. For
each transaction that includes an EHRI, the sponsor will be required to
make a disclosure that looks back to all other EHRI transactions the
sponsor has brought out under the requirements of the risk retention
rules for the previous five years, and disclose the number of times the
actual payments made to the sponsor under the EHRI exceeded the amounts
projected to be paid to the sponsor in determining the Closing Date
Projected Cash Flow Rate (as defined in section 4(a) of the proposed
rule).
    Similar to the original proposal, the proposed rule would allow a
sponsor, in lieu of holding all or part of its risk retention in the
form of an eligible horizontal residual interest, to cause to be
established and funded, in cash, a reserve account at closing
(horizontal cash reserve account) in an amount equal to the same dollar
amount (or corresponding amount in the foreign currency in which the
ABS are issued, as applicable) as would be required if the sponsor held
an eligible horizontal residual interest.\45\
---------------------------------------------------------------------------

    \45\ See proposed rule at Sec.  ----.4(c).
---------------------------------------------------------------------------

    This horizontal cash reserve account would have to be held by the
trustee (or person performing functions similar to a trustee) for the
benefit of the issuing entity. Some commenters on the original proposal
recommended relaxing the investment restrictions on the horizontal cash
reserve account to accommodate foreign transactions. The proposed rule
includes several important restrictions and limitations on such a
horizontal cash reserve account to ensure that a sponsor that
establishes a horizontal cash reserve account would be exposed to the
same amount and type of credit risk on the underlying assets as would
be the case if the sponsor held an eligible horizontal residual
interest. For securitization transactions where the underlying loans or
the ABS interests issued are denominated in a foreign currency, the
amounts in the account may be invested in sovereign bonds issued in
that foreign currency or in fully insured deposit accounts denominated
in the foreign currency in a foreign bank (or a subsidiary thereof)
whose home country supervisor (as defined in section 211.21 of the
Board's Regulation K) \46\ has adopted capital standards consistent
with the Capital Accord of the Basel Committee on Banking Supervision,
as amended, provided the foreign bank is

subject to such standards.\47\ In addition, amounts that could be
withdrawn from the account to be distributed to a holder of the account
would be restricted to the same degree as payments to the holder of an
eligible horizontal residual interest (such amounts to be determined as
though the account was an eligible horizontal residual interest), and
the sponsor would be required to comply with all calculation
requirements that it would have to perform with respect to an eligible
horizontal residual interest in order to determine permissible
distributions from the cash account.
---------------------------------------------------------------------------

    \46\ 12 CFR 211.21.
    \47\ Otherwise, as in the original proposal, amounts in a
horizontal cash reserve account may only be invested in: (1) United
States Treasury securities with remaining maturities of one year or
less; and (2) deposits in one or more insured depository
institutions (as defined in section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813)) that are fully insured by federal
deposit insurance. See proposed rule at Sec.  ----.4(c)(2).
---------------------------------------------------------------------------

    Disclosure requirements would also be required with respect to a
horizontal cash reserve account, including the fair value and
calculation disclosures required with respect to an eligible horizontal
residual interest, as discussed below.
    The original proposal included tailored disclosure requirements for
the vertical, horizontal, and L-shaped risk retention options. A few
commenters recommended deleting the proposed requirement that the
sponsor disclose the material assumptions and methodology used in
determining the aggregate dollar amount of ABS interests issued by the
issuing entity in the securitization. In the proposed rule, the
agencies are proposing disclosure requirements similar to those in the
original proposal, with some modifications, and are proposing to add
new requirements for the fair value measurement and to reflect the
structure of the proposed standard risk retention option.
    The proposed rule would require sponsors to provide or cause to be
provided to potential investors a reasonable time prior to the sale of
ABS interests in the issuing entity and, upon request, to the
Commission and its appropriate Federal banking agency (if any)
disclosure of:
     The fair value (expressed as a percentage of the fair
value of all ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of the eligible horizontal residual
interest that will be retained (or was retained) by the sponsor at
closing, and the fair value (expressed as a percentage of the fair
value of all ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of the eligible horizontal residual
interest required to be retained by the sponsor in connection with the
securitization transaction;
     A description of the material terms of the eligible
horizontal residual interest to be retained by the sponsor;
     A description of the methodology used to calculate the
fair value of all classes of ABS interests;
     The key inputs and assumptions used in measuring the total
fair value of all classes of ABS interests and the fair value of the
eligible horizontal residual interest retained by the sponsor
(including the range of information considered in arriving at such key
inputs and assumptions and an indication of the weight ascribed
thereto) and the sponsor's technique(s) to derive the key inputs;
     For sponsors that elect to utilize the horizontal risk
retention option, the reference data set or other historical
information that would enable investors and other stakeholders to
assess the reasonableness of the key cash flow assumptions underlying
the fair value of the eligible horizontal residual interest. Examples
of key cash flow assumptions may include default, prepayment, and
recovery;
     Whether any retained vertical interest is retained as a
single vertical security or as separate proportional interests;
     Each class of ABS interests in the issuing entity
underlying the single vertical security at the closing of the
securitization transaction and the percentage of each class of ABS
interests in the issuing entity that the sponsor would have been
required to retain if the sponsor held the eligible vertical interest
as a separate proportional interest in each class of ABS interest in
the issuing entity; and
     The fair value (expressed as a percentage of the fair
value of all ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of any single vertical security or
separate proportional interests that will be retained (or was retained)
by the sponsor at closing, and the fair value (expressed as a
percentage of the fair value of all ABS interests issued in the
securitization transaction and dollar amount (or corresponding amount
in the foreign currency in which the ABS are issued, as applicable)) of
the single vertical security or separate proportional interests
required to be retained by the sponsor in connection with the
securitization transaction.
    Consistent with the original proposal, a sponsor electing to
establish and fund a horizontal cash reserve account would be required
to provide disclosures similar to those required with respect to an
eligible horizontal residual interest, except that these disclosures
have been modified to reflect the different nature of the account.
Request for Comment
    1(a). Should the agencies require a minimum proportion of risk
retention held by a sponsor under the standard risk retention option to
be composed of a vertical component or a horizontal component? 1(b).
Why or why not?
    2(a). The agencies observe that horizontal risk retention, as
first-loss residual position, generally would impose the most economic
risk on a sponsor. Should a sponsor be required to hold a higher
percentage of risk retention if the sponsor retains only an eligible
vertical interest under this option or very little horizontal risk
retention? 2(b). Why or why not?
    3. Are the disclosures proposed sufficient to provide investors
with all material information concerning the sponsor's retained
interest in a securitization transaction and the methodology used to
calculate fair value, as well as enable investors and the agencies to
monitor whether the sponsor has complied with the rule?
    4(a). Is the requirement for sponsors that elect to utilize the
horizontal risk retention option to disclose the reference data set or
other historical information that would enable investors and other
stakeholders to assess the reasonableness of the key cash flow
assumptions underlying the fair value of the eligible horizontal
residual interest useful? 4(b). Would the requirement to disclose this
information impose a significant cost or undue burden to sponsors?
4(c). Why or why not? 4(d). If not, how should proposed disclosures be
modified to better achieve those objectives?
    5(a). Does the proposal require disclosure of any information that
should not be made publicly available? 5(b). If so, should such
information be made available to the Commission and Federal banking
agencies upon request?
    6. Are there any additional factors that the agencies should
consider with respect to the standard risk retention?
    7. To what extent would the flexible standard risk retention option
address concerns about a sponsor having to consolidate a securitization
vehicle for accounting purposes due to the risk retention requirement
itself, given that

the standard risk retention option does not require a particular
proportion of horizontal to vertical interest?
    8(a). Is the proposed approach to measuring risk retention
appropriate? 8(b). Why or why not?
    9(a). Would a different measurement of risk retention be more
appropriate? 9(b). Please provide details and data supporting any
alternative measurement methodologies.
    10(a). Is the restriction on certain projected payments to the
sponsor with respect to the eligible horizontal residual interest
appropriate and sufficient? 10(b). Why or why not?
    11(a). The proposed restriction on certain projected payments to
the sponsor with respect to the eligible horizontal residual interest
compares the rate at which the sponsor is projected to recover the fair
value of the eligible horizontal residual interest with the rate which
all other investors are projected to be repaid their principal. Is this
comparison of two different cash flows an appropriate means of
providing incentives for sound underwriting of ABS? 11(b). Could it
increase the cost to the sponsor of retaining an eligible horizontal
residual interest? 11(c). Could sponsors or issuers manipulate this
comparison to reduce the cost to the sponsor of retaining an eligible
horizontal residual interest? How? 11(d). If so, are there adjustments
that could be made to this requirement that would reduce or eliminate
such possible manipulation? 11(e). Would some other cash flow
comparison be more appropriate? 11(f). If so, which cash flows should
be compared? 11(g). Does the proposed requirement for the sponsor to
disclose, for previous ABS transactions, the number of times the
sponsor was paid more than the issuer predicted for such transactions
reach the right balance of incremental burden to the sponsor while
providing meaningful information to investors? 11(h). If not, how
should it be modified to better achieve those objectives?
    12(a). Does the proposed form of the single vertical security
accomplish the agencies' objective of providing a way for sponsors to
hold vertical risk retention without the need to perform valuation of
multiple securities for accounting purposes each financial reporting
period? 12(b). Is there a different approach that would be more
efficient?
    13(a). Is three years after all ABS interests are no longer
outstanding an appropriate time period for the sponsors' record
maintenance requirement with respect to the calculations and other
requirements in section 4? 13(b). Why or why not? 13(c). If not, what
would be a more appropriate time period?
    14(a). Would the calculation requirements in section 4 of the
proposed rule likely be included in agreed upon procedures with respect
to an interest retained pursuant to the proposed rule? 14(b). Why or
why not? 14(c). If so, what costs may be associated with such a
practice?
c. Alternative Eligible Horizontal Residual Interest Proposal
    The agencies have also considered, and request comment on, an
alternative provision relating to the amount of principal payments
received by the eligible horizontal residual interest. Under this
alternative, on any payment date, in accordance with the transaction's
governing documents, the cumulative amount paid to an eligible
horizontal residual interest may not exceed a proportionate share of
the cumulative amount paid to all holders of ABS interests in the
transaction. The proportionate share would equal the percentage, as
measured on the date of issuance, of the fair value of all of the ABS
interests issued in the transaction that is represented by the fair
value of the eligible horizontal residual interest.
    For purposes of this calculation, fees and expenses paid to service
providers would not be included in the cumulative amounts paid to
holders of ABS interests. All other amounts paid to holders of ABS
would be included in the calculations, including principal repayment,
interest payments, excess spread and residual payments. The transaction
documents would not allow distribution to the eligible horizontal
residual interest any amounts payable to the eligible horizontal
residual interest that would exceed the eligible horizontal residual
interest's permitted proportionate share. Such excess amounts could be
paid to more senior classes, placed into a reserve account, or
allocated in any manner that does not otherwise result in payments to
the holder of the eligible horizontal residual interest that would
exceed the allowed amount.
    By way of illustration, assume the fair value of the eligible
horizontal residual interest for a particular transaction was equal to
10 percent of the fair value of all ABS interests issued in that
transaction. In order to meet the requirements of the proposal, the
cumulative amount paid to the sponsor in its capacity as holder of the
eligible horizontal residual interest on any given payment date could
not exceed 10 percent of the cumulative amount paid to all holders of
ABS interests, excluding payment of expenses and fees to service
providers. This would allow large payments to the eligible horizontal
residual interest so long as such payments do not otherwise result in
payments to the holder of the eligible horizontal residual interest
that would exceed the allowed amount.
    The agencies request comment on this alternative mechanism for
allowing the eligible horizontal residual interest to receive
unscheduled principal payments, including whether the agencies should
adopt the alternative proposal instead of the proposed mechanism for
these payments described above.
Request for Comment
    15(a). Other than a cap in the priority of payments on amounts to
be paid to the eligible horizontal residual interest and related
calculations on distribution dates and related provisions to allocate
any amounts above the cap, would there be any additional steps
necessary to comply with the alternative proposal? 15(b). If so, please
describe those additional steps and any associated costs.
    16. Would the cost and difficulty of compliance with the
alternative proposal, including monitoring compliance, be higher or
lower, than with the proposal?
    17(a). Does the alternative proposal accommodate more or less of
the current market practice than the proposal? 17(b). If there is a
difference, please provide data with respect to the scale of that
difference.
    18. With respect to the alternative proposal, should amounts other
than payment of expenses and fees to service providers be excluded from
the calculations?
    19(a). Does the alternative proposal adequately accommodate
structures with unscheduled payments of principal, such as scheduled
step downs? 19(b). Does the alternative adequately address structures
which do not distinguish between interest and principal received from
underlying assets for purposes of distributions?
    20(a). Are there asset classes or transaction structures for which
the alternative proposal would not be economically viable? 20(b). Are
there asset classes or transaction structures for which the alternative
proposal would be more economically feasible than the proposal?
    21. Should both the proposal and the alternative proposal be made
available to sponsors?
    22(a). The proposal includes a restriction on how payments on an
eligible horizontal residual interest must be structured but does not
restrict actual

payments to the eligible horizontal residual interest, which could be
different than the projected payments if losses are higher or lower
than expected. The alternative proposal for payments on eligible
horizontal residual interests does not place restrictions on structure
but does restrict actual payments to the eligible horizontal residual
interest. Does the proposal or the alternative proposal better align
the sponsor's interests with investors' interests? 22(b). Why or why
not?
2. Revolving Master Trusts
a. Overview
    Securitization sponsors frequently use a revolving master trust
when they seek to issue more than one series of ABS collectively backed
by a common pool of assets that change over time.\48\ Pursuant to the
original proposal, the seller's interest form of risk retention would
only be available to revolving master trusts.
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    \48\ In a revolving master trust securitization, assets (e.g.,
credit card receivables or dealer floorplan financings) are
periodically added to the pool to collateralize current and future
issuances of the securities backed by the pool. Often, but not
always, the assets are receivables generated by revolving lines of
credit originated by the sponsor. A major exception would be the
master trusts used in the United Kingdom to finance residential
mortgages.
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    The seller's interest is an undivided interest held by the master
trust securitization sponsor in the pool of receivables or loans held
in the trust. It entitles the sponsor to a percentage of all payments
of principal, interest, and fees, as well as recoveries from defaulted
assets that the trust periodically receives on receivables and loans
held in the trust, as well as the same percentage of all payment
defaults on those assets. Investors in the various series of ABS issued
by the trust have claims on the remaining principal and interest, as a
source of repayment for the ABS interests they hold.\49\ Typically, the
seller's interest is pari passu to the investors' interest with respect
to collections and losses on the securitized assets, though in some
revolving master trusts, it is subordinated to the investors' interest
in this regard. If the seller's interest is pari passu, it generally
becomes subordinated to investors' interests in the event of an early
amortization of the ABS interests held by investors, as discussed more
below. Commenters representing the interests of securitization sponsors
generally favored the seller's interest approach but requested certain
modifications.
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    \49\ Generally, the trust sponsor retains the right to any
excess cash flow from payments of interest and fees received by the
trust that exceeds the amount owed to ABS investors. Excess cash
flow from payments of principal is paid to the sponsor in exchange
for newly generated receivables in the trust's existing revolving
accounts. However, the specific treatment of excess interest, fees,
and principal payments with respect to any ABS series within the
trust is a separate issue, discussed in connection with the
agencies' proposal to give sponsors credit for some forms of
eligible horizontal risk retention at the series level, as explained
in further detail below.
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    The agencies are proposing to maintain the seller's interest as the
specific risk retention option for master trusts, with changes from the
original proposal that reflect many of the comments received, as
discussed in further detail below. The modifications to this option are
intended to refine this method of risk retention to better reflect the
way revolving master trust securitizations operate in the current
market.
    As discussed in greater detail below, among other things, the
agencies are proposing to modify the original proposal with respect to
master trusts by:
     Allowing sponsors that hold a first-loss exposure in every
series of ABS issued by a master trust to count the percent of such
interest that is held consistently across all ABS series toward the
minimum 5 percent seller's interest requirement;
     Removing the restriction in the original proposal that
prohibited the use of the seller's interest risk retention option for
master trust securitizations backed by non-revolving assets;
     Clarifying how the seller's interest can be used in
connection with multi-level legacy trusts and master trusts in which
some of the seller's interest corresponds to loans or receivables held
in a legacy master trust;
     Revising the calculation of the 5 percent seller's
interest amount so it is based on the trust's amount of outstanding ABS
rather than the amount of trust assets;
     Clarifying the rules regarding the use of certain
structural features, including delinked credit enhancement structures,
where series-specific credit enhancements that do not support the
seller's interest-linked structures, and the limited use of assets that
are not part of the seller's interest to administer the features of the
ABS issued to investors; and
     Clarify how the rule would apply to a revolving master
trust in early amortization.
b. Definitions of Revolving Master Trust and Seller's Interest
    The seller's interest form of retention would only be available to
revolving master trusts. These are trusts established to issue ABS
interests on multiple issuance dates out of the same trust. In some
instances the trust will issue to investors a series with multiple
classes of tranched ABS periodically. In others, referred to as
``delinked credit enhancement structures,'' the master trust maintains
one or more series, but issues tranches of ABS of classes in the series
periodically, doing so in amounts that maintain levels of subordination
between classes as required in the transaction documents. The revolving
master trust risk retention option is designed to accommodate both of
these structures.
    The agencies' original proposal would require that all securitized
assets in the master trust must be loans or other extensions of credit
that arise under revolving accounts. The agencies received comments
indicating that a small number of securitizers in the United States,
such as insurance premium funding trusts, use revolving trusts to
securitize short-term loans, replacing loans as they mature with new
loans, in order to sustain cash flow and collateral support to longer-
term securities. In response to commenters, the agencies are proposing
to expand the securitized asset requirement to include non-revolving
loans.\50\ Nevertheless, as with the original proposal, all ABS
interests issued by the master trust must be collateralized by the
master trust's common pool of receivables or loans. Furthermore, the
common pool's principal balance must revolve so that cash representing
principal remaining after payment of principal due, if any, to
outstanding ABS on any payment date, as well as cash flow from
principal payments allocated to seller's interest is reinvested in new
extensions of credit at a price that is predetermined at the
transaction and new receivables or loans are added to the pool from
time to time to collateralize existing series of ABS issued by the
trust. The seller's interest option would not be available to a trust
that issues series of ABS at different times backed by segregated
independent pools of securitized assets within the trust as a series
trust, or a trust that issues shorter-term ABS interests backed by a
static pool of long-term loans, or a trust with a re-investment period
that precedes an ultimate amortization period.
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    \50\ Revolving master trusts are also used in the United Kingdom
to securitize mortgages, and U.S. investors may invest in RMBS
issued by these trusts. This proposed change would make it easier
for these issuers to structure their securitizations in compliance
with section 15G for such purpose.
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    In general, the seller's interest represents the seller/sponsor's
interest in the portion of the receivables or loans that does not
collateralize outstanding

investors' interests in ABS issued under series. Investor interests
include any sponsor/seller's retained ABS issued under a series. As
discussed above, a seller's interest is a typical form of risk
retention in master trusts, whereby the sponsor of a master trust holds
an undivided interest in the securitized assets. The original proposal
defined ``seller's interest'' consistent with these features, as an ABS
interest (i) in all of the assets that are held by the issuing entity
and that do not collateralize any other ABS interests issued by the
entity; (ii) that is pari passu with all other ABS interests issued by
the issuing entity with respect to the allocation of all payments and
losses prior to an early amortization event (as defined in the
transaction documents); and (iii) that adjusts for fluctuations in the
outstanding principal balances of the securitized assets.
    The proposal would define ``seller's interest'' similarly to the
original proposal. However, in response to comments, the agencies have
made changes to the definition from the original proposal to reflect
market practice. The first change would modify the definition to
reflect the fact that the seller's interest is pari passu with
investors' interests at the series level, not at the level of all
investors' interests collectively. The agencies are proposing this
change because each series in a revolving master trust typically uses
senior-subordinate structures under which investors are entitled to
different payments out of that series' percentage share of the
collections on the trust's asset pool, so some investors in
subordinated classes are subordinate to the seller's interest. The
second change would modify the definition to reflect the fact that, in
addition to the receivables and loans that collateralize the trust's
ABS interests, a master trust typically includes servicing assets.\51\
To the extent these assets are allocated as collateral only for a
specific series, these assets are not part of the seller's
interest.\52\ Furthermore, the proposal clarifies that the seller's
interest amount is the unpaid principal balance of the seller's
interest in the common pool of receivables or loans. The seller's
interest amount must at least equal the required minimum seller's
interest.
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    \51\ The definition of ``servicing assets'' is discussed in Part
II.B of this Supplementary Information.
    \52\ Although this language allows certain assets held by the
trust to be allocated as collateral only for a specific series and
excluded from the seller's interest, it does not allow a trust to
claim eligibility for the seller's interest form of risk retention
unless the seller's interest is, consistent with the revolving
master trust definition, generally collateralized by a common pool
of assets, the composition of which changes over time, and that
securitizes all ABS interests in the trust. Absent broad exposure to
the securitized assets, the seller's interest ceases to be a
vertical form of risk retention. The proposed language is designed
to accommodate limited forms of exclusion from the seller's interest
in connection with administering the trust, dealing with the
revolving versus amortizing periods for investor ABS series,
implementation of interest rate features, and similar aspects of
these securitization transactions.
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    In addition, the agencies are considering whether they should make
additional provisions for subordinated seller's interests. In some
revolving master trusts, there is an interest similar to a seller's
interest, except that instead of the interest being pari passu with the
investors' interest with respect to principal collections and interest
and fee collections, the sponsor's (or depositor's) share of the
collections in the interest are subordinated, to enhance the ABS
interests issued to investors at the series level. The agencies are
considering whether to permit these subordinated interests to count
towards the 5 percent seller's interest treatment, since they perform a
loss-absorbing function that is analogous to a horizontal interest
(whereas a typical seller's interest is analogous to a vertical
interest, and typically is only subordinated in the event of early
amortization). Because they are subordinated, however, the agencies are
considering requiring them be counted toward the 5 percent requirement
on a fair value basis, instead of the face value basis applied for
regular, unsubordinated seller's interests.\53\ The sponsor would be
required to apply the same fair value standards as the rule imposes
under the general risk retention requirement.
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    \53\ The fair value determination would be for purposes of the
amount of subordinated seller's interest included in the numerator
of the 5 percent ratio. The denominator would be the unpaid
principal balance of all outstanding investors' ABS interests, as is
proposed for regular, unsubordinated seller's interests.
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    In addition to these definitional changes, the agencies are
proposing modifications to the overall structure of the master trust
risk retention option as it was proposed in the original proposal, in
light of comments concerning the manner in which the seller's interest
is held. In some cases, the seller's interest may be held by the
sponsor, as was specified in the original proposal, but in other
instances, it may be held by another entity, such as the depositor, or
two or more originators may sponsor a single master trust to securitize
receivables generated by both firms, with each firm holding a portion
of the seller's interest. Accordingly, the agencies are proposing to
allow the seller's interest to be held by any wholly-owned affiliate of
the sponsor.\54\
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    \54\ The requirement for the holder to be a wholly-owned
affiliate of the sponsor is consistent with the restrictions on
permissible transferees of risk retention generally required to be