separation of ownership between land and buildings could complicate
servicing and foreclosure.\250\ However, having carefully considered
comments on this point following the reproposal, the agencies have
decided to modify the definition of commercial real estate in the final
rule to address commenters' concerns about these land loans. The
agencies have concluded that excluding these ground-leased land loans
on improved property from the definition is not warranted and so have
explicitly included them in the definition of commercial real estate so
that these loans may qualify as QCRE loans if they otherwise meet the
qualifying criteria, or alternatively, may be included with pools of
other CRE loans to allow the sponsor to use the third-party purchaser
form of risk retention discussed in Part III.B.5 of this Supplementary
Information.
---------------------------------------------------------------------------

    \250\ See Revised Proposal, 78 FR at 57980.
---------------------------------------------------------------------------

2. Single Borrower Underwriting Standard
    Commenters generally supported the reproposed exemption from risk
retention for QCRE loans. However, as discussed further below, many
commenters stated that the proposed underwriting criteria were too
strict and requested that the agencies modify the QCRE loan criteria to
allow more loans to qualify for the exemption. In addition, some
commenters requested that the agencies expand the QCRE loan criteria
for, or provide an additional QCRE loan exemption for, single-borrower
or single-credit (SBSC) transactions involving a securitization of
cross-collateralized loans provided to one or more related borrowers.
Commenters stated that these transactions warranted an exemption
because they typically have had stronger historical performance than
non-SBSC CMBS transactions and due to market practice, few or none
would qualify as a QCRE loan. In addition, commenters asserted that B-
piece buyers have not historically been involved in these transactions
because of the limited number of loans involved. Commenters also
asserted that these transactions are particularly transparent to
investors because they involved only a few, large loans (as compared to
other CMBS transactions) and investors typically receive granular
information with respect to the loans. Commenters asserted that risk
retention for these structures would cause costs to increase and
possibly reduce access to credit for some companies without a
commensurate increase in investor protection, given the nature of the
loans involved and transparency to investors. One commenter proposed
that the SBSC exemption rely exclusively on extensive disclosure about
the securitization structure and loans in the structure rather than
quantitative underwriting criteria. Commenters also proposed that only
larger SBSC deals (over $200 million in ABS interests issued) be
exempted from risk retention to reduce the possibility that the
exemption would be used to effectively exempt a significant section of
the market.

    The agencies have carefully considered the commenters' requests for
separate QCRE loan criteria for SBSC transactions. Having reviewed
information provided by commenters as well as other information related
to this market, the agencies have concluded that it would not be
appropriate to adopt separate QCRE loan underwriting criteria for SBSC
transactions. An SBSC transaction may qualify for an exemption from
risk retention, like other CMBS transactions, to the extent the
securitized loans qualify as QCRE loans, and the regulators do not
believe there is sufficient support to justify establishing separate
underwriting criteria for SBSC transactions. The agencies have not
concluded that SBSC transactions as a category are of sufficiently low
risk to warrant a special exemption from risk retention. While most
CMBS transactions involve diversifying risk across types of properties,
SBSC transactions generally focus on one specific type of property (for
example, loans on properties related to one brand of hotel), which
potentially concentrates and increases credit risk as compared with a
diversified CMBS securitization. In addition, because of the cross-
collateralization or cross-default provisions in these deals and the
reliance on a single borrower, the failure of one loan in a deal could
cause a default of the entire securitization.
    Furthermore, the agencies are concerned that it would be difficult
to construct a definition that captures an SBSC transaction in a way
that would address the commenters' concerns while also being
sufficiently limited in scope to prevent widespread use of the option
in a manner that would undermine consistent application of the rule for
CMBS transactions. The agencies are further concerned that using a deal
size threshold to reduce inappropriate use of the option could be
unnecessarily arbitrary and restrictive for smaller borrowers without
providing sufficient regulatory benefit. Additionally, the agencies are
concerned that such a definition would inadvertently lead to exempting
from risk retention CMBS transactions with lower quality underwriting
than intended by the exemption and less stringent cross-
collateralization or cross-default features, as well as other criteria
historically associated with SBSC transactions.
    In addition, the agencies have concerns that the commenters'
suggested conditions for which transactions would qualify as a single-
borrower transaction or as a single-credit transaction would allow for
widespread structural evasion of the rule. A sponsor could easily
structure a CMBS transaction in which the single asset is a mortgage
loan secured by multiple properties or in which the single borrower is
an SPV formed by an entity that wants to finance a portfolio of
unrelated properties.
    Finally, the agencies note, as discussed further below, that the
criteria for QCRE loans has been modified in the final rule to provide
some additional flexibility.
3. Proposed QCRE Loan Criteria
    As discussed above, the agencies adjusted some of the QCRE loan
underwriting criteria as set forth in the original proposal in response
to commenter concerns. The agencies generally reproposed the original
structure of the qualifying criteria, divided into four categories:
ability to repay, loan-to-value requirement, valuation of the
collateral, and risk management and monitoring. These sections and
their associated comments are discussed below.
    The agencies received some comments that were generally supportive
of the QCRE loan criteria in the reproposal and that requested that the
agencies not loosen the criteria further because of concerns of the
effect that could have on lender behavior, to the detriment of
investors in CMBS transactions. One commenter in particular supported
the collateral valuation requirements with respect to appraisers.
    A number of commenters said the QCRE loan criteria were generally
too conservative, noting that only a small number of commercial real
estate loans would meet the criteria and that the exemption from risk
retention for QCRE loans would be rendered impractical for most
sponsors, thereby eliminating incentives to originate QCRE loans and
possibly causing funding problems, including for multifamily loans if
the Enterprises were to stop providing funding. One commenter claimed
that because the QCRE loan criteria is narrow and many CMBS
transactions would be subject to risk retention, this could cause rents
to rise in the multifamily sector and slow down job creation.
    Some commenters asserted that a much lower percentage of commercial
real estate loans would qualify as QCRE loans than residential
mortgages would qualify as QRMs under the reproposal, and generally
recommended that the QCRE loan criteria be crafted to capture a portion
of the market similar to that portion of the residential mortgage
market captured by the QRM definition. Another commenter suggested that
the agencies modify the QCRE loan criteria to follow metrics ``more
typical'' of balance sheet lenders such as insurance companies and
commercial banks. Another commenter asserted that the proposed QCRE
loan criteria would introduce interest rate sensitivity into the CMBS
market where it does not currently exist. A few commenters requested
that the agencies consider distinct QCRE loan underwriting standards
for different commercial real estate sectors. For example, a commenter
urged the agencies to allow for a higher loan-to-value ratio for
multifamily loans than allowed under the reproposed QCRE loan criteria.
    Many of the commenters who generally opposed the proposed QCRE loan
definition had specific critiques or suggestions related to each of the
categories of QCRE loan criteria, as discussed below.
4. Ability To Repay Criteria and Term
    Like the original proposal, the reproposal included a number of
criteria that would relate to the borrower's ability to repay in order
for a loan to qualify as a QCRE loan. The borrower would have been
required to have a DSC ratio of at least 1.25x for qualifying multi-
family property loans,\251\ 1.5x for qualifying leased QCRE loans,\252\
and 1.7x for all other commercial real estate loans. The reproposed
standards also would have required reviewing two years of historical
financial data and two years of prospective financial data of the
borrower. The loan would have been required to have either a fixed
interest rate or a floating rate that was effectively fixed under a
related swap agreement. The loan documents also would have had to
prohibit any deferral of principal or interest payments and any
interest reserve fund, resulting in excluding interest-only loans from
qualifying as QCRE loans.
---------------------------------------------------------------------------

    \251\ Under the reproposal, a ``qualifying multi-family loan''
would be, generally, a commercial real estate loan secured a
residential property with five or more residential dwellings and
where at least 75 percent of the net operating income is derived
from residential units and tenant amenities, but not other uses. See
Revised Proposal, 78 FR at 58038.
    \252\ Under the reproposal, a qualifying leased commercial real
estate loan generally means a commercial real estate loan secured by
nonfarm real property (other than multi-family and hotel properties)
that is occupied by tenants meeting certain criteria. See Revised
Proposal, 78 FR at 58038.
---------------------------------------------------------------------------

    The reproposal included a maximum amortization period of 25 years
for most commercial real estate loans, and 30 years for qualifying
multi-family loans, with payments made at least monthly for at least 10
years of the loan's term. Furthermore, payments made under the

loan agreement would be required to be based on a straight-line
amortization of principal and interest over the amortization period (up
to the maximum allowed amortization period, noted above). The minimum
loan term could be no less than 10 years and no deferral of repayment
of principal or interest could be permitted.
    A number of commenters objected to the agencies' reproposed DSC
ratios as too conservative, or suggested eliminating or changing the
DSC ratio criteria. Some commenters suggested lowering qualifying DSC
ratios to a range between 1.25x and 1.5x, or establishing criteria
similar to those used by Fannie Mae or Freddie Mac to fund multifamily
real estate loans. However, a commenter expressed concern that the
reproposed QCRE loan criteria unduly loosened the standard and
supported increasing the DSC ratio to 2.4x. A commenter claimed that
the DSC and LTV criteria, without taking into consideration other
characteristics of a property, would lead to an inappropriate
assessment of risk, and that each commercial real estate property has a
unique risk profile.
    Some commenters supported removing the proposed requirement to
examine two years of past borrower data or replacing it with two years
of property data, as they stated that many new CRE loans involve
stabilized properties purchased by new SPVs and the SPVs would not have
two years of historical data. In addition, as these loans are generally
non-recourse (or are made to SPVs whose only asset is the subject real
estate), only the property and income stream from the property are
available to satisfy the loan obligation.
    Many commenters supported the requirement for fixed interest rate
loans for QCRE loans. However, some commenters suggested expanding the
types of derivatives allowed to convert a floating rate into a fixed
rate through a rate cap derivative. Some commenters also supported the
restrictions on deferrals of principal and interest. However, other
commenters supported allowing interest-only loans if those loans had a
lower LTV ratio (such at 50 percent).
    Many commenters objected to the minimum length and amortization of
QCRE loans. These commenters said that 3, 5, and 7-year CRE loans have
become common in the industry, and therefore asserted that the proposed
minimum 10-year term criterion would inappropriately disqualify
numerous loans without much regulatory benefit. A commenter asserted,
for example, that default and delinquency data demonstrates that loan
term does not materially factor into or increase the likelihood of loss
for CMBS investors. Another commenter asserted that the loss rate for
shorter term loans is better than for 10-year loans. For similar
reasons, these commenters also supported a longer amortization period
for QCRE loans, up to 30 years. Other commenters, however, requested
that the agencies continue to disqualify interest-only loans from QCRE
loans and also to maintain the minimum term at 10 years.
    After carefully considering the comments on the underwriting
criteria for QCRE loans, the agencies are adopting in the final rule
QCRE loan criteria similar to those in the reproposal, with some
modifications to address some commenter concerns. The agencies are not
changing the DSC ratios from the reproposal, because the agencies
believe reducing these requirements would inappropriately allow riskier
loans to qualify for a complete exemption from risk retention. As noted
in the reproposal, these criteria are consistent with the Federal
banking agencies' historical standards for conservative CRE
lending.\253\
---------------------------------------------------------------------------

    \253\ These standards include the ``Interagency Guidelines for
Real Estate Lending.'' 12 CFR part 34, subpart D, Appendix A (OCC);
12 CFR part 208, subpart C, Appendix A (FRB); 12 CFR part 365,
Appendix A (FDIC).
---------------------------------------------------------------------------

    The agencies are also retaining the requirement not to include
interest-only loans or loans with interest-only periods as QCRE loans.
The agencies believe that interest-only loans or interest-only periods
distort assessment of repayment ability, increase risk at maturity due
to lack of principal reduction, and may present increased credit risk,
even with a lower LTV ratio and, accordingly, would be inappropriate
for qualifying CRE loan treatment.
    With respect to maximum amortization periods, the agencies are
aware that there are many non-multifamily CRE loans with amortization
periods in excess of 25 years. However, allowing a longer amortization
period for these loans reduces the amount of principal paid each month
on the loan before maturity, which can increase risks related to having
to refinance a larger principal amount than would be the case for a
loan with a shorter amortization period. Because the agencies believe
that loans with a maximum 25-year maturity reflect more stringent
underwriting, and believe that exemptions from risk retention should be
available only for the most prudently underwritten CRE loans, the
agencies are adopting an amortization period of 30 years for
multifamily residential QCRE loans and 25 years for all other QCRE
loans. The agencies are also making a technical change from requiring
straight-line amortizing payments to level payments of principal and
interest.
    The agencies are also adopting a 10-year minimum maturity for QCRE
loans. The agencies believe that loans with terms shorter than 10
years, such as three, five, or seven years, may create underwriting
incentives not commensurate with the high credit quality and low risk
necessary for a loan to qualify as a QCRE loan. For example, when
making a shorter term loan, an originator may focus only on a short
timeframe in evaluating the stability of the real estate underlying the
loan in an industry that might be at or near the peak of its business
cycle. In contrast, a 10-year maturity CRE loan requires underwriting
through a longer business cycle for the property, including downturns
that may not be captured appropriately when underwriting to a shorter
time horizon.
    In response to comments on lack of data availability for new loans
to SPVs that recently purchased property, the agencies are making
modest adjustments to the QCRE loan criteria to facilitate loans to
such borrowers. Therefore, the final rule allows originators to use two
years of historical data from the property, when the property has two
years of operating history.\254\ Under this revised standard,
properties with less than two years of operating history would still be
excluded from the QCRE loan standards because new properties present
significant additional risks and loans on those properties generally
should not be exempt from risk retention.
---------------------------------------------------------------------------

    \254\ In the CRE lending context, a sponsor is the party that
ultimately controls the property, such as by owning an SPV, which in
turn owns the CRE.
---------------------------------------------------------------------------

    Similar to the reproposal, the final rule requires that the
interest rate on a QCRE loan be fixed or convertible into a fixed rate
using a derivative product. However, in the final rule, the agencies
have expanded the allowable derivatives to include interest rate cap
derivatives, provided that the loan is underwritten based on the
maximum interest rate allowable under the cap, even if the loan is
originated at a lower rate. The agencies are not proposing to allow
other types of derivatives because they have concluded they are
insufficiently transparent for a QCRE loan standard.
5. Loan-to-Value Requirement
    The revised proposal would have required that the combined loan-to-

value (CLTV) ratio for first and junior loans for QCRE loans be less
than or equal to 70 percent and the LTV ratio for the first-lien loan
be less than or equal to 65 percent; or that the CLTV and LTV ratios be
less than or equal to 65 and 60 percent, respectively, for loans with
valuation using a capitalization rate below a certain threshold, as set
forth in the reproposal.\255\ As discussed in the reproposal, the
agencies concluded that these criteria would be appropriate for high
quality commercial real estate loans and to help protect securitization
investors against losses from declining property values and potential
defaults on the CRE loans.\256\
---------------------------------------------------------------------------

    \255\ Revised Proposal, 78 FR at 58041.
    \256\ Revised Proposal, 78 FR at 57982.
---------------------------------------------------------------------------

    Many commenters recognized that LTV standards are important to
ensuring high quality CRE loan underwriting. While some commenters
supported the agencies' proposed ratios, others asserted that they were
too conservative. Some commenters suggested that higher LTV ratios
(generally up to 70 percent) should be allowed in the QCRE loan
standards, that the CLTV ratio cap be removed, and that the reduction
in LTV and CLTV ratios for loans with certain valuation assumptions be
removed. Others, however, suggested more conservative maximum LTV ratio
criteria, including a 50 percent LTV ratio suggestion for interest-only
loans, if they were to be permitted in the QCRE loan criteria by the
agencies. One commenter indicated that the highest quality loans
secured in CMBS tended to have lower LTV ratios than would be permitted
for the QCRE loan standard, and expressed concern that the agencies may
not have been conservative enough in the reproposal.
    The agencies have considered the comments on LTV and CLTV ratio
requirements for QCRE loans and are adopting the standards as
reproposed. The agencies agree with those commenters who generally
supported a 65 percent LTV ratio requirement. While the agencies are
not adopting a 70 percent LTV ratio requirement, the 65 percent LTV
ratio requirement still allows for 70 percent debt financing with up to
5 percent subordinated financing. As discussed in the reproposal, the
agencies observe that the more equity a borrower has in a CRE project,
the lower the lender or investor's exposure to credit risk and the
greater the incentive for the borrower to perform on the loan.
Overreliance on excessive subordinated financing instead of equity
financing for a CRE property (which increases CLTV ratios) can
significantly reduce the cash flow available to the property, as
investors in subordinated finance often require high rates of return to
offset the increased risk of their subordinate position. The agencies
have concluded that a 70 percent CLTV ratio cap is generally
appropriate for a low risk QCRE loan standard, which would require the
borrower to have at least 30 percent equity in the project to help
protect securitization investors against losses from declining property
values and potential defaults.
    The agencies decline the commenters' suggestion to reduce the
maximum LTV ratio requirement for all QCRE loans, as 65 percent is
sufficiently conservative for a QCRE loan standard given the other
conservative underwriting requirements in the rule. The agencies also
decline to adopt a 50 or 55 percent LTV ratio requirement for interest-
only loans. As discussed above, the agencies believe interest-only
loans, even at lower LTV ratios, present significant risks that would
not meet an appropriately conservative QCRE loan underwriting standard.
    The agencies are also retaining the requirement that the maximum
LTV and CLTV ratios be lowered by 5 percent under certain appraisal
conditions, as in the reproposal, with minor technical modifications to
address commenter concerns. The ratios are only reduced if the
appraisal used to qualify the CRE loan as a QCRE loan used an income
approach with a direct capitalization rate, and that rate was lower
than the rate permitted by the final rule. The final rule text
clarifies that the appraisal used to qualify the CRE loan is not
required to use a direct capitalization rate. Generally, as direct
capitalization rates decline, values increase. In a lower cap rate
environment there is an increase in the amount that can be borrowed
given a fixed LTV or CLTV ratio, which is why the lower LTV and CLTV
ratios would apply. In addition, to address concerns about appraisals
using excessively high cap rates, the agencies are requiring that if a
direct capitalization rate was used in an appraisal to qualify the loan
as a QCRE loan, the rate must be disclosed to investors in the
securitizations.
6. Collateral
    The agencies proposed to require an appraisal and environmental
risk assessment for every property serving as collateral for a QCRE
loan. Commenters strongly supported both the appraisal and
environmental risk assessment for all QCRE loan properties. Many
commenters indicated this is already standard industry practice. A few
commenters expressed the view that the agencies were too strict in
requiring specific types of appraisals, such as an income-based
appraisal using a discounted cash flow and an appraisal using a direct
capitalization rate, rather than allowing a certified appraiser to
determine the appropriate valuation method. As noted above, the
agencies have made clarifications in the final rule to provide
originators and appraisers with more flexibility in determining the
appropriate appraisal approaches for a specific property that would be
used to meet the QCRE loan standards, while not restricting appraisers
from using other valuation methods that they believe are appropriate
for the property. The agencies also made a technical change in the
final rule to reflect the common appraisal terminology and Uniform
Standards of Professional Appraisal Practice terminology for the income
approach that is required to be in the written appraisal.
7. Risk Management and Monitoring
    The reproposal would have required lenders to obtain a first lien
in the property and limited the ability to pledge the property as
collateral for other loans. While many commenters supported the first-
lien requirement, one commenter supported allowing unlimited junior
liens to finance energy-efficient improvements on the CRE property
subject to the loan. A commenter requested that the agencies modify the
proposed QCRE loan criteria to take into account pari passu and junior
lien loans, noting that such modifications would not increase the risk
of QCRE loans. Some commenters supported the requirement that a
borrower obtain insurance on the property up to the property value,
while other commenters requested that the requirement be changed to
require insurance up to the lesser of the replacement cost of the
property improvements or the loan balance.
    The agencies are adopting the lien requirements as proposed. While
energy-efficient improvements may reduce utility expenses associated
with the property, the agencies do not wish the rule to facilitate
structures whereby additional financing, even if subordinate, is
obtained and thus increases leverage on the property. Regarding the
insurance amount, the agencies have concluded that a strong QCRE loan
standard would be maintained if the insurance limit in the criteria was
changed to no less than the replacement cost of property improvements,
in accordance with more customary market practice. After reviewing the
related comment, the

agencies determined that loan balance was not an appropriate
measurement as, in some jurisdictions, a lender may be required to make
insurance proceeds available to a borrower and, in those circumstances,
a prudent lender would wish to make sure that the proceeds are
sufficient to fully repair or replace the insured property.

C. Qualifying Automobile Loans

    Similar to the original proposal, the revised proposal included
underwriting standards for automobile loans that would be individually
exempt from risk retention (qualifying automobile loans, or QALs) if
securitized. As in the original proposal, the definition of automobile
loan in the reproposal generally would have included only first-lien
loans on light passenger vehicles employed for personal use. It
specifically excluded loans for vehicles for business use, medium or
heavy vehicles (such as commercial trucks and vans), lease financing,
fleet sales, and recreational vehicles including motorcycles. As
explained in the reproposal, the agencies did not follow
recommendations to propose including loans on vehicles more frequently
used for recreational purposes, such as motorcycles or business
purposes, because the risks and underwriting of those loans would be
different than that for vehicles used for personal use. In addition,
the reproposed definition did not include automobile leases because, as
the agencies explained, leases represent a different set of risks to
securitization investors than purchase loans. For example, automobile
resale price at the end of the lease period can affect the
securitization cash flow, which is not the case for purchase loan
securitizations.\257\
---------------------------------------------------------------------------

    \257\ See Revised Proposal, 78 FR at 57983.
---------------------------------------------------------------------------

    While some commenters supported the reproposed definition of
automobile loan, others asserted that it continued to be too narrow.
Several commenters suggested expanding the definition to include
motorcycles, because often they are not used solely as recreational
vehicles but as primary transportation and because, as these commenters
asserted, motorcycle loans perform as well as auto loans. The
commenters asserted that there would be no reason to categorically
exclude motorcycles from the QAL definition, even if they could
otherwise meet the QAL criteria, by excluding motorcycles from the
definition of automobile loan. They also contended that the fact some
motorcycles are used for recreational use does not lead to adverse
motorcycle loan performance.
    Other commenters supported allowing automobile leases to qualify as
QALs and recommended certain technical changes to the proposed QAL
criteria. In particular, one commenter supported expanding the
definition to include fleet purchases or fleet leasing, on the basis
that these leases or sales are generally with corporations or
government entities with strong repayment histories.
    Another comment on the definition of automobile loan raised
concerns that it would be difficult for an originator to determine
whether an automobile purchase was for consumer or non-consumer use.
    The agencies have carefully considered these comments and are
adopting the definition of automobile loans for QAL underwriting
standards as reproposed. The agencies believe it continues to be
appropriate to restrict the definition of automobile loan to light
passenger vehicles employed for personal use, not including motorcycles
and other vehicles that are commonly used for recreational purposes, as
well as everyday personal transportation. While the agencies
acknowledge some motorcycle loans may have strong underwriting and risk
characteristics similar to those of automobile loans, the agencies have
concluded that overall risk profile of motorcycles as a class remains
distinct from that of automobiles and, like other recreational
vehicles, exhibit overall a higher risk profile. Certain recreational
vehicles may also be highly customized before or after purchase, which
may reduce resale or recovery value in case of borrower default.
    The agencies also have decided not to expand the definition of
automobile loan to include vehicles used for business purposes through
fleet loans, as the risks and underwriting of such loans differ from
those of vehicles used for personal transportation. For example, a car
or truck used in a business may endure significantly more wear and
depreciate much faster than a vehicle used only for normal household
use.
    Similarly, for the reasons discussed in the reproposal, the
agencies are not expanding the definition of automobile loan to include
automobile leases. The agencies remain concerned that the credit risks
posed by leases are different than automobile purchase loans, in part
(as discussed above) due to resale price risk associated with returned
vehicles.
    Regarding the comment on difficulties determining consumer purpose,
the agencies believe originators or dealers will be able to
differentiate between types of customers based on the existing process
dealers and lenders must use to comply with TILA, which requires
disclosures be provided to borrowers purchasing vehicles for personal
use.
    The QAL underwriting criteria in the reproposal included
requirements regarding a borrower's ability to repay an automobile
loan, including with respect to verification of borrower income and a
borrower debt-to-income (DTI) ratio of no more than 36 percent. The
loan term criteria included a first lien security interest on the
vehicle, maximum maturity date, fixed rate interest, and level monthly
payments with full amortization of the loan, as well as strict limits
on deferral of payments and deferral of initiation of payments. The
credit history criteria included verification and minimum credit
history standards (such as no bankruptcy or repossession within the
previous 3 years). The LTV criteria impose a borrower down payment
requirement equal to fees, warranties and 10 percent of the purchase
price.\258\
---------------------------------------------------------------------------

    \258\ See Revised Proposal, 78 FR at 57984-57985.
---------------------------------------------------------------------------

    The agencies received a number of comments on the proposed QAL
underwriting criteria. Generally the comments expressed concern that
very few automobile loans would meet the QAL criteria because they
would not fit existing market practices. Some commenters asserted that
because the QAL criteria would not be met in existing market practice,
the resulting risk retention requirements on automobile securitizations
could discourage new issuances and impede liquidity and consumer
credit. Others asserted this result would be unduly punitive to
automobile securitizations as strong performers during the crisis,
especially as compared to the proposed definition of QRM, which would
exempt most residential mortgages from risk retention. Some commenters
also offered particular suggestions to change the criteria, as
discussed further below with respect to each category of criteria.
Additionally, some commenters requested that the agencies apply the
quantitative portions of the underwriting standards on a pool basis
(which would assess underwriting standards on a pool-wide, rather than
loan by loan, basis) rather than to individual loans, noting that the
homogeneity of securitized automobile loans and their typical
characteristics (not subject to interest rate fluctuations or
refinancings) would make an exemption from risk retention based on pool
level criteria appropriate. The agencies are not adopting this
suggestion in the final rule and the final rule only permits the
exemption to

apply to individual loans that meet the QAL criteria. The agencies
observe that section 15G of the Exchange Act indicates that the
reduction from risk retention for a qualifying asset is limited to the
asset itself that is securitized, and does not suggest an exemption for
a pool of assets that meets pool-wide underwriting criteria.\259\
Accordingly, the final rule provides that the underwriting standards
for QAL must be met by each loan for that loan to be exempt from risk
retention. Furthermore, the agencies do not believe providing risk
retention on a pool basis would further the goals of risk retention and
could lead to some of the transparency concerns discussed with respect
to unlimited blending of non-qualifying assets with qualifying assets.
For example, an exemption based on pool-level underwriting criteria
could obscure the true credit quality of the pool in a way that would
be difficult for investors to discern because of the potential for wide
variation (and varying degrees of document verification) of the
underwriting quality of those assets in a pool that did not meet a QAL
standard on an individual basis.
---------------------------------------------------------------------------

    \259\ See 15 U.S.C. 78o-11(c)(1)(B)(ii).
---------------------------------------------------------------------------

1. Ability To Repay Criteria
    As noted above, the ability-to-repay criteria for QALs in the
reproposal included a DTI ratio not in excess of 36 percent of a
borrower's monthly gross income. Under the proposed QAL criteria,
originators would also have been required to verify a borrower's income
and debt payments using standard methods.
    Commenters generally disagreed with the proposed ability-to-repay
criteria and requested a higher maximum DTI ratio or elimination of the
ratio criterion, on the basis that it is not typically used in current
automobile loan underwriting and not using it has not adversely
affected automobile loan performance because (commenters claimed)
borrowers often prioritize payment of their automobile loans over other
debt obligations. Some commenters offered a number of suggested
adjustments to the proposed DTI and verification requirements. Other
commenters suggested using a payment-to-income (PTI) ratio instead of a
DTI ratio because, they claimed, a PTI ratio is a stronger predictor of
vehicle loan performance than a DTI ratio and does not involve as many
operational burdens as a DTI ratio in providing quick approval of
automobile loans, a practice expected by automobile consumers. A
commenter also asserted that the proposed DTI requirements would put
lenders that rely on the securitization markets for funding at a
disadvantage to lenders that do not. Regarding the verification
requirements, commenters suggested that if verification of debt and
income would be retained as a criterion, originators should only be
required to verify those debts listed on a borrower's credit report and
rely on borrower stated income without verification.
    The agencies have carefully considered these comments, but have
concluded that the reproposed DTI criteria, including verification
requirements, is essential to determining a borrower's ability to
repay, which in turn is essential to a strong consumer underwriting
standard. As discussed in the original and revised proposals, the
agencies believe that a total exemption from risk retention should be
applied only to those loans that meet underwriting criteria associated
with strong credit performance. A DTI ratio is a meaningful and
comprehensive method for calculating a borrower's ability to repay a
loan, while a PTI ratio does not include other potentially significant
debts that may reduce a borrower's ability to repay the automobile
loan. The agencies have continued to find a 36 percent DTI ratio to be
an appropriately conservative measure of ability to repay commensurate
with a high quality automobile loan with low credit risk. Regarding
verification, the agencies are concerned that not all of a borrower's
liabilities may be listed on a credit report and therefore are adopting
the verification standards as proposed. In addition, relying on
borrower stated income in assessing ability to repay could lead to
overstatement of income by the borrower to obtain the loan or by the
originator to qualify the loan as a QAL. For these reasons, as well as
those discussed in the reproposal, the agencies are adopting the DTI
and verification requirements as reproposed.
2. Loan Terms
    As noted above, the reproposal included a number of criteria
relating to the automobile loan, including that the loan term be
calculated based on the origination date and loan payments could not be
contractually deferred.
    A commenter requested that the loan term be calculated from the
date of first payment rather than the origination date. Commenters also
requested that loan deferrals be allowed to assist borrowers with
hardship events.
    The agencies observe that the loan origination date and date of
first payment should usually be within a few weeks of each other, which
would not materially affect the loan term. The agencies do not view a
long period prior to the first payment date as consistent with a strong
QAL standard, as it could extend the total loan term for months beyond
the limits for maturity the agencies have identified as appropriate for
a QAL. While the agencies are retaining the requirement that the
contract not allow borrower-initiated payment deferrals, this
requirement would not affect subsequent servicer-initiated deferrals
that may be triggered by borrower hardships described by the
commenters. For these reasons and those discussed in the revised
proposal, the agencies are finalizing the loan term criteria as
proposed.
3. Reviewing Credit History
    In the reproposal, the QAL criteria included an originator
verification, within 30 days of originating a QAL, that the borrower
was not 30 days or more past due on any obligation; was not more than
60 days past due over the past two years on any obligation; and was not
a judgment debtor or in bankruptcy in the past three years. The
agencies also proposed a safe harbor enabling the originator to rely on
a borrower's credit report showing the borrower complies with the
standards. Also, the agencies proposed a requirement that all QALs be
contractually current at the closing of the securitization.
    Several commenters opposed the proposed credit history criteria and
requested that the agencies use instead a credit scoring system based
on FICO or a similar system of rating potential borrowers based on
credit history, generally using proprietary models. Commenters pointed
out that the automobile lending industry has used credit scoring as a
primary underwriting tool and would be unable under the QAL criteria to
continue to rely on that method for qualifying its best borrowers, and
therefore would not be able to use the criteria in order not to lose
those borrowers as customers.
    Commenters further asserted that the proposed credit history
verification criteria would be more burdensome than credit scoring
systems, thereby increasing costs for lenders and consumers. A
commenter suggested that the criteria would result in conclusions
possibly less objective than credit scoring systems. In addition, a few
commenters claimed that the QAL credit history standards would exclude
many consumers of good credit quality while failing to identify risky
consumers, whereas credit scoring models used in the industry would
more accurately discriminate between

high and low-credit quality borrowers. These commenters asserted that
this result would occur because the proposed criteria do not capture
many aspects of credit history that are captured by credit scoring
models. The commenters also recommended that the agencies adopt a
``vendor-neutral'' approach to incorporating the use of credit scores
in the QAL criteria to ensure that there would be no undue reliance on
a particular vendor and that credit models are already subject to
regulatory oversight (including being the subject of the banking
agencies' guidance on model validation) and are rigorously validated. A
commenter pointed to the FDIC's large bank assessment rule \260\ as an
example of how the agencies could adopt a vendor-neutral credit score
criterion into the QAL criteria. Some commenters also requested that
the agencies define ``contractually current'' and base compliance on
the securitization cut-off date rather than the closing date.
---------------------------------------------------------------------------

    \260\ 12 CFR part 327.
---------------------------------------------------------------------------

    The agencies have carefully considered the comments regarding the
proposed QAL criteria and the requests to use credit scoring in the
criteria. The agencies recognize that much of the current automobile
lending industry relies heavily or solely on an internally or
externally developed credit scoring system to approve automobile loans.
However, the agencies do not believe that a credit score alone is
sufficient underwriting for a conservative automobile loan with a low
risk of default. Furthermore, the agencies do not believe it is
appropriate for purposes of risk retention to establish regulatory
requirements that rely on a credit scoring system or combination of
proprietary credit scoring systems. The agencies are concerned that,
over time, market pressures around meeting QAL criteria or other
factors could lead to distortions in the scoring systems that do not
appropriately reflect credit risk. Additionally, the agencies have
broad policy concerns with linking regulatory underwriting criteria for
risk retention purposes to proprietary credit analyses using privately
developed models.
    Additionally, the agencies believe that a borrower must be
contractually current on the loan obligation prior to securitization in
order to have a robust underwriting requirement. However, the agencies
do not believe it is necessary to establish a definition of
contractually current, instead leaving this decision to the contract
between the originator and borrower. While the agencies believe a
securitization exempt from risk retention should contain only current
automobile loans, the agencies will adopt the commenters' suggestion to
require evaluation of a loan's status based on the cut-off date or
similar date for establishing the composition of the asset pool
collateralizing asset-backed securities issued pursuant to a
securitization transaction rather than the closing date of the
securitization.
    For these reasons, the agencies are adopting the credit history
criteria as set forth in the revised proposal.
4. Down Payment Requirement
    As noted above, the proposed QAL criteria included a down payment
requirement whereby automobile loan borrowers would have been required
to pay 100 percent of the taxes, fees, and extended warranties in
addition to 10 percent of the net purchase price (negotiated price less
manufacturer rebates and incentive payments) of the car.
    Most comments on the QAL criteria opposed the proposed down payment
requirements. The commenters proposed eliminating the down payment
entirely, eliminating the down payment requirement for the taxes, fees,
and extended warranties, or reducing the down payment requirement on
the net purchase price. One of these commenters asserted that prime
automobile loans do not require down payments generally because
vehicles depreciate rapidly and therefore, lenders generally do not
rely significantly on the value of the collateral when underwriting.
Furthermore, the commenter asserted that depreciation makes strategic
defaults highly unlikely and the short term of most automobile loans
makes down payments unnecessary. As with the verification requirements
discussed above, the commenter claimed that the down payment
requirement in the QAL criteria could put automobile lenders that use
securitization financing at a disadvantage as compared to others
because of increased burden on consumers in meeting the QAL criteria or
having more costs due to risk retention. The commenter also asserted
that down payments have far less relevance to the credit risk of
automobile loans than they do to residential loans, and that having
such a requirement in the QAL criteria would not be consistent with the
agencies' position on the QRM definition.
    As discussed in the reproposal, the agencies do not believe that an
automobile loan with an LTV ratio over 90 percent would be low-risk,
and that a customer should put some of the customer's own cash or
trade-in value into the deal to reduce risks for strategic default and
incent repayment of the loan. The agencies recognize that down payment
requirements for prime borrowers are not common in automobile lending,
but note that down payments provide an additional level of protection
to lenders and investors in automobile securitizations that ensures a
low level of credit risk over time as market conditions change.
    For the reasons discussed above, the agencies are adopting the QAL
criteria as set forth in the reproposal. As explained above, the
criteria ensure that QAL loans (that are fully exempt from risk
retention) are of very high quality and low credit risk, as required by
section 15G of the Exchange Act.\261\ The agencies recognize that the
QAL standards are in some respects more conservative than those of the
QRM definition. The agencies observe, however, that the statutory
standards for establishing QAL criteria and the QRM definition are
different.\262\ Furthermore, as discussed in the reproposal and Part VI
of this Supplementary Information, the agencies' decisions with regard
to the QRM definition take into consideration the particular dynamics
in the residential mortgage market and the effect of that market on the
economy. The dynamics in the automobile market are different, as are
the effects of the automobile market on the broader financial system
and economy, and the agencies have therefore considered the automobile
and residential markets separately, together with the differences in
the relevant statutory requirements, in establishing the QRM and QAL
standards.
---------------------------------------------------------------------------

    \261\ See 15 U.S.C. 78o-11(c)(2)(B).
    \262\ See id. at sections 78o-11(c)(2)(B) and 78-11(e)(4)(B).
---------------------------------------------------------------------------

VI. Qualified Residential Mortgages

    After carefully considering comments received on the reproposed
definition of QRM, as well as comments received on the alternative
approach to defining QRM, the agencies are adopting, as reproposed, the
definition of QRM that aligns with the definition of QM, as defined in
section 129C of TILA \263\ and the regulations thereunder. The agencies
are also providing an exemption from risk retention requirements for
certain mortgage loans secured by three-to-four unit residential
properties that meet the criteria for QM other than being a consumer
credit, as well as an exemption to permit sponsors to blend these
exempted mortgage loans with QRMs.
---------------------------------------------------------------------------

    \263\ 15 U.S.C. 1639c.
---------------------------------------------------------------------------

    The final rule also includes a separate exemption from risk
retention

requirements for certain types of community-focused residential
mortgages that are not eligible for QRM status under the rule, similar
to the exemptions provided from Regulation Z's ability-to-repay
requirement.\264\
---------------------------------------------------------------------------

    \264\ See Part VII of this Supplementary Information.
---------------------------------------------------------------------------

    The agencies are also including a provision in the final rule that
will require the agencies to periodically review the definition of QRM
and its effect on the mortgage securitization market, as well as the
exemptions provided for the three-to-four unit residential properties
and the community-focused residential mortgages. Each of these aspects
of the final rule is discussed more fully below.

A. Background

    Section 15G of the Exchange Act exempts sponsors of securitizations
from the risk retention requirements if all the assets that
collateralize the securities issued in the transaction are QRMs.\265\
In defining QRM, the statute requires that the agencies take into
consideration underwriting and product features that historical loan
performance data indicate result in a lower risk of default. In
addition, the statute requires that the definition of QRM be ``no
broader than'' the definition of QM.\266\
---------------------------------------------------------------------------

    \265\ See 15 U.S.C. 78o-11(c)(1)(C)(iii).
    \266\ See id. at section 78o-11(e)(4).
---------------------------------------------------------------------------

    In the original proposal, the agencies proposed to define QRM to
mean a covered closed-end credit transaction that meets the statutory
QM standards \267\ as well as additional underwriting criteria. These
additional underwriting criteria included minimum LTV and down payment
requirements, DTI requirements, and credit history criteria.\268\ These
additional criteria were developed after the agencies examined
extensive data on loan performance from several sources,\269\ and were
based on several goals and principles the agencies articulated in the
original proposal.\270\ The agencies also sought to implement the
statutory requirement that the definition of QRM be no broader than the
definition of a QM, as mandated by the Dodd-Frank Act. \271\ At the
time of the original proposal, the definition of QM had not been
adopted in a final rule.
---------------------------------------------------------------------------

    \267\ Under the original proposal, QRM was limited to a closed-
end first-lien mortgage to purchase or refinance a one-to-four
family property, at least one unit of which is the principal
dwelling of a borrower. In addition, consistent with the QM
requirement under section 129C(b)(2) of TILA, the maturity date of a
QRM could not exceed 30 years and QRMs would have been prohibited
from having, among other features, payment terms that allow
interest-only payments, negative amortization, ``balloon payments,''
or prepayment penalties. See Original Proposal, 76 FR at 24122.
    \268\ See Original Proposal, 76 FR at 24117.
    \269\ The agencies reviewed data supplied by McDash Analytics,
LLC, a wholly owned subsidiary of Lender Processing Services, Inc.,
on prime fixed-rate loans originated from 2005 to 2008, which
included underwriting and performance information on approximately
8.9 million mortgages; data from the 1992 to 2007 waves of the
triennial Survey of Consumer Finances, which focused on respondents
who had purchased their homes either in the survey year or the
previous year, and included information on approximately 1,500
families; and data regarding loans purchased or securitized by the
Enterprises from 1997 to 2009, which consisted of more than 78
million mortgages, and included data on loan products and terms,
borrower characteristics (e.g., income and credit score), and
performance data through the third quarter of 2010. See Original
Proposal, 76 FR at 24152.
    \270\ First, the agencies stated that QRMs should be of very
high credit quality, given that Congress exempted QRMs completely
from the credit risk retention requirements. Second, the agencies
recognized that setting fixed underwriting rules to define a QRM
could exclude many mortgages to creditworthy borrowers. Third, the
agencies sought to preserve a sufficiently large population of non-
QRMs to help enable the market for securities collateralized by non-
QRM mortgages to be relatively liquid. Fourth, the agencies sought
to implement standards that would be transparent and verifiable to
participants in the market. See Original Proposal, 76 FR at 24117.
    \271\ See 15 U.S.C. 78o-11(e)(4)(C). At the time of issuance of
the original proposal on April 29, 2011, the Board had sole
rulemaking authority for defining QM, which authority transferred to
CFPB on July 21, 2011, the designated transfer date under the Dodd-
Frank Act.
---------------------------------------------------------------------------

    The majority of commenters opposed the QRM definition in the
original proposal, expressing concerns over the 20 percent down payment
requirement in particular. These commenters stated that the proposed
definition of QRM was too narrow and would constrain credit
availability, especially for low- and moderate-income (LMI) borrowers
or first-time homebuyers. Many of these commenters urged the agencies
to postpone finalizing the QRM definition until after the QM definition
was finalized by the CFPB.\272\
---------------------------------------------------------------------------

    \272\ See Final QM Rule.
---------------------------------------------------------------------------

    As discussed in the reproposal, in deciding to propose a broader
QRM definition, the agencies carefully considered the concerns raised
by commenters with respect to the original proposed definition, the
cost of risk retention, current and historical data on mortgage lending
and performance, and the provisions of the final QM definition. The
agencies examined updated loan performance information and considered
the historical performance of residential mortgage loans with respect
to the QM criteria.\273\ Further, the agencies considered the potential
effects of a QRM definition on credit pricing and access under
prevailing market conditions, as well as direct and indirect costs of
lending that could be passed on to borrowers and restrict credit
availability.\274\
---------------------------------------------------------------------------

    \273\ See Revised Proposal, 78 FR at 57989-57990.
    \274\ See id. at 57991.
---------------------------------------------------------------------------

    The agencies decided in the reproposal to align the QRM definition
with the QM definition for several key reasons, which include meeting
the statutory goals and directive under section 15G of the Exchange Act
to limit credit risk, preserving access to affordable credit, and
reducing compliance burden. Among other factors related to credit risk,
the agencies discussed in the reproposal observations that loans that
meet the QM criteria have a lower probability of default than mortgages
that do not, most notably for loans originated near the peak of the
housing bubble that preceded the financial crisis.\275\ In addition,
the agencies observed that a QRM definition aligned with QM should
limit the scope of information asymmetry between sponsors and investors
because the QM definition requires, among other things, documentation
and verification of income and debt.\276\ In addition, the agencies
expressed concern about imposing further constraints on mortgage credit
availability under the prevailing tight mortgage lending conditions,
including through additional criteria that could reduce the credit risk
of QRMs further, such as LTV and credit history-related criteria. The
agencies also observed that the indirect costs of the interaction of
QRM with existing regulations and market conditions is difficult to
quantify and has the potential to be large, and that aligning the QRM
definition with the QM definition should minimize these costs.\277\
Finally, the agencies noted with concern that a QRM definition not
aligned with the QM definition could compound the segmentation in the
securitization market that may already occur between QMs and non-QMs.
It was acknowledged that, while the agencies recognized that the
alignment of QRM with QM could also further solidify the non-QM/QM
segmentation in the market, the consequences of segmentation due to
non-alignment were judged to be more severe.\278\
---------------------------------------------------------------------------

    \275\ See id. at 57989.
    \276\ See id. at 57990.
    \277\ See id. at 57991.
    \278\ See id.
---------------------------------------------------------------------------

    In reproposing to align the QRM definition with QM, the agencies
expressed an intention to review the advantages and disadvantages of
this decision as the market evolves, to ensure the risk retention rule
best meets

the statutory objectives of section 15G of the Exchange Act.\279\
---------------------------------------------------------------------------

    \279\ See id.
---------------------------------------------------------------------------

B. Overview of the Reproposed Rule

    The reproposal would have implemented the statutory exemption for
QRMs by defining ``qualified residential mortgage'' to mean ``qualified
mortgage'' as defined in section 129C of TILA \280\ and the regulations
issued thereunder.\281\ The agencies proposed to align the definition
of QRM with QM to minimize potential conflicts between the two
definitions and minimize burden in meeting both QM and QRM criteria.
Therefore, under the reproposal, a QRM would have been a loan that
---------------------------------------------------------------------------

    \280\ 15 U.S.C. 1639c.
    \281\ See Final QM Rule.
---------------------------------------------------------------------------

    (i) Met the general criteria for a QM under section 1026.43(e)(2);
    (ii) Met the special criteria of the temporary QM definition under
section 1026.43(e)(4);
    (iii) Met the criteria for small creditor portfolio loans under
section 1026.43(e)(5) or (e)(6); or
    (iv) Met the criteria for rural or underserved creditor balloon
loans under section 1026.43(f).
    This reproposed definition of QRM included any closed-end loan
secured by any dwelling (e.g., home purchase, refinances, home equity
loans, second or vacation homes), whether a first or subordinate lien.
However, the reproposed definition of QRM would not have included any
loan exempt from the ability-to-repay requirements and not eligible to
be a QM, such as home-equity lines of credit (HELOCs) or reverse
mortgages.\282\ In addition, loans exempt from the ability-to-repay
requirements (such as loans made through state housing finance agency
programs and certain community lending programs) were not separately
included in the definition of QRM, which under the statute cannot be
broader than QM.
---------------------------------------------------------------------------

    \282\ See 12 CFR 1026.43(a) and 1026.43(c).
---------------------------------------------------------------------------

    The agencies invited comment on all aspects of the reproposed
definition of QRM. In particular, the agencies asked whether the
reproposed definition would reasonably balance the goals of helping to
ensure high quality underwriting and appropriate risk management with
the public interest in continuing access to credit for creditworthy
borrowers. The agencies also asked whether the definition of QRM should
be limited to certain QM loans, such as loans that qualify for the QM
safe harbor under 12 CFR 1026.43(e)(1), and if the reproposed
definition of QRM should include loans secured by subordinate liens. In
addition, the agencies invited comment on an alternative approach to
defining QRM (QM-plus approach). Consistent with the statutory
requirement that QRM be no broader than QM, the QM-plus approach would
have taken the CFPB's definition of QM as a starting point, including
the requirements for product type, loan term, points and fees,
underwriting, income, and debt verification, and DTI,\283\ and added
four additional factors: the loan would have had to be a first-lien
mortgage loan, be secured by a one-to-four family principal dwelling,
and have an LTV ratio of 70 percent or less, and the borrower would
have had to meet specific credit history criteria.\284\ Under this
approach, significantly fewer loans likely would have qualified as
QRMs. The agencies asked a number of questions about the QM-plus
approach, including whether the benefits of the QM-plus approach would
exceed the benefits of the reproposed approach to align the QRM
definition to QM, taking into consideration financial stability, credit
access, and regulatory burden.\285\
---------------------------------------------------------------------------

    \283\ See Revised Proposal, 78 FR at 57993-57996.
    \284\ See Revised Proposal, 78 FR at 57993.
    \285\ See id. at 57995.
---------------------------------------------------------------------------

C. Overview of Public Comments

1. Comments Received on the Reproposed QRM Definition
    The agencies received a significant number of comments with respect
to the reproposed QRM definition, with most commenters expressing
support for the reproposal that would align the QRM definition with the
QM definition. Generally, these commenters stated that aligning the two
definitions would comply with statutory requirements, minimize negative
impact on the availability and cost of credit to borrowers (especially
LMI borrowers, minority borrowers, and first-time homebuyers), and
reduce potential costs, regulatory uncertainty, and compliance burden.
Some commenters specifically expressed support for retaining the
proposed full alignment with QM so that the proposed QRM definition
would not distinguish between loans that receive a ``safe harbor'' or a
``rebuttable presumption'' of compliance under the QM provisions. Some
commenters requested clarifications, expressed concerns, or suggested
modifications to the proposed QRM definition, including with respect to
loans exempted from the ability-to-repay rules under TILA, which are
discussed and addressed in more detail in Part VII of this
Supplementary Information.
    Several commenters opposed aligning the QRM definition with the QM
definition, asserting that such an approach would be contrary to
statutory intent. These commenters asserted that the definitions of QRM
and QM have distinct and different purposes, with the former addressing
risk posed to investors and the latter addressing consumer protection.
These commenters further stated that broadening the QRM definition
would reduce the effect of the risk retention rule with respect to
residential mortgages, which comprised one of the main securitization
markets that led to the financial crisis. These commenters also
expressed concern that the proposed QRM definition would be
insufficient to support the credit quality on which a stable mortgage
market depends.
    Most commenters that opposed the revised definition of QRM
supported most, if not all, aspects of the QRM definition in the
original proposal and recommended that the agencies adopt that QRM
definition instead. These commenters asserted that LTV and credit
history requirements are key criteria to ensure that QRMs represent a
lower risk of default and the risk retention rules offer some
protection to RMBS investors. One commenter asserted that the
reproposed QRM definition is based on the same credit reporting
requirements used prior to the financial crisis and continues to lack
credit reporting verification safeguards to ensure completeness and
accuracy. Another commenter suggested that the agencies require a loan-
level credit enhancement when QM loans exceed a stated LTV ratio.
    A few commenters expressed concern about the potential effects the
reproposed QRM definition might have on the market, in that QMs and
QRMs could become the only type of mortgage loans made and accepted on
the secondary market, or that the market may shift more towards
federally insured or guaranteed mortgages.
    Finally, commenters requested that the agencies clarify that the
requirement that a depositor certify as to the effectiveness of its
internal supervisory controls with respect to the process for ensuring
that mortgages included in a pool of QRM assets qualify as QRMs does
not impose an obligation on sponsors to guarantee that all assets are,
in fact, QRMs. As is indicated by the final rule's provision of a
buyback option for non-compliant assets, the agencies do not view the
certification as requiring that the controls guarantee compliance.
Rather, the process must be

robust and sufficient to enable the sponsor to carefully evaluate
eligibility.
2. Comments Received on the Alternative Approach to QRM
    The agencies also received numerous comments on the alternative QM-
plus approach. Commenters generally opposed the QM-plus approach,
asserting that it would be too restrictive, impose additional
compliance costs, and have a negative effect on the availability of
affordable credit, especially to LMI borrowers, minority borrowers, and
first-time homebuyers. In addition, many commenters expressed concern
that a QM-plus approach would slow the return of private capital in the
mortgage market because it would increase government and agency
involvement in the mortgage market and would make it more difficult for
sponsors to assemble a critical mass of QRMs necessary for a
securitization. Commenters also expressed concern that mortgages
meeting the QM-plus standard would effectively become the primary
mortgage product available, thus pushing out other mortgage loans that
would qualify as QMs from the mortgage market. Some commenters
supported a narrow definition of QRM as reflected in the QM-plus
approach, but generally recommended that the agencies adopt the
original proposed QRM definition rather than the QM-plus approach.
    One commenter specifically expressed concern about the exclusion of
secondary liens from the QM-plus approach, asserting that secondary
liens facilitate credit to borrowers and benefit the economy. Another
commenter asserted that because the QM-plus approach was described only
in the preamble, there was insufficient information to determine how
the QM-plus approach would be implemented. Some commenters requested
specific changes if the agencies were to go forward with the QM-plus
approach, including a lower down payment requirement, the exclusion of
piggyback loans, and the inclusion of credit scores.

D. Summary and Analysis of Final QRM Definition

1. Alignment of QRM With QM
    After carefully considering the comments received, the agencies are
adopting a definition of QRM that is aligned with the definition of QM,
with some modifications. Accordingly, the final rule defines a QRM to
mean a QM, as defined under section 129C of TILA and the regulations
issued thereunder, as may be amended from time to time. The agencies
also believe it is necessary to periodically review the QRM definition
to take into account developments in the residential mortgage market,
as well as the results of the CFPB's five-year review of the ability-
to-repay rules and the QM definition, which is required under section
1022(d) of the Dodd-Frank Act.\286\ Therefore, the final rule also
includes a provision that requires the agencies to conduct a periodic
review of the definition of QRM, which is discussed more fully below.
---------------------------------------------------------------------------

    \286\ See 12 U.S.C. 5512.
---------------------------------------------------------------------------

    The agencies have declined to adopt the QM-plus approach or the
approach from the original proposal. While the additional requirements
in those two approaches may include useful factors in determining the
probability of mortgage default, these additional credit overlays may
have ramifications for the availability of credit that many commenters
asserted were not outweighed by the corresponding reductions in the
likelihood of default from including these determinants in the QRM
definition. The agencies are concerned about the prospect of imposing
potential additional constraints on mortgage credit availability at
this time, especially as such constraints might disproportionately
affect LMI, minority, or first-time homebuyers.
    The agencies continue to believe that a QRM definition aligned with
the definition of QM meets the statutory goals and directive of section
15G of the Exchange Act to limit credit risk and promote sound
underwriting. At the same time, the agencies believe this definition
will also meet the important goals of preserving access to affordable
credit for various types of borrowers and facilitating the return of
private capital to the mortgage market. Furthermore, the agencies
believe this definition appropriately minimizes regulatory compliance
burdens in the origination of residential mortgage loans. The final
definition of QRM does not incorporate either an LTV ratio requirement
or standards related to a borrower's credit history, such as those in
the alternative QM-plus approach discussed in the reproposal. As the
agencies explained in the reproposal, although credit history and LTV
ratio are significant factors in determining the probability of
mortgage default and are important aspects of prudent underwriting, on
balance, the agencies believe policy considerations weigh in favor of
aligning QRM with QM at this time.
    Consistent with the discussion in the reproposal, the agencies
believe that a QRM definition that is aligned with the QM definition
meets the statutory requirement to take into consideration underwriting
and product features that historical loan performance data indicate
result in a lower risk of default.\287\ The criteria of the QM
definition support this determination. The QM criteria are structured
to help ensure that borrowers are offered and receive residential
mortgage loans that borrowers can afford. For example, the QM
definition requires full documentation and verification of consumers'
debt and income, and generally requires borrowers to meet a DTI
threshold of 43 percent or less, which helps to address certain
underwriting deficiencies, such as the existence of subordinate liens,
and may help to reduce incidents of mortgage fraud. The QM definition
also restricts the use of certain product features, such as negative
amortization, interest-only and balloon payments (except as provided
under special definitions available only to small portfolio creditors)
that historical data have shown correlate to higher rates of default.
As discussed in the reproposal, formal statistical models indicate that
borrowers with mortgages that do not meet these aspects of the QM
definition rule exhibit higher probabilities of default.\288\
Consistent with these statistical models, historical data indicate that
borrowers with mortgages that meet the QM criteria have lower
probabilities of default than those with mortgages that do not meet the
criteria.\289\
---------------------------------------------------------------------------

    \287\ 15 U.S.C. 78o-11(e)(4).
    \288\ See Shane M. Sherlund, ``The Past, Present, and Future of
Subprime Mortgages,'' Finance and Economics Discussion Series, Paper
2008-63 available at http://www.federalreserve.gov/pubs/feds/2008/200863/200863pap.pdf; Ronel Elul, Nicholas S. Souleles, Souphala
Chomsisengphet, Dennis Glennon, and Robert Hunt. ``What `Triggers'
Mortgage Default?'' American Economic Review 100 (May 2010): 490-
494.
    \289\ For further detail, see Revised Proposal, 78 FR at 57989-
57990.
---------------------------------------------------------------------------

    The agencies continue to believe that aligning the QRM and QM
definitions at this time will help promote access to affordable credit
by minimizing additional regulatory burden and compliance cost and
facilitating the return of private capital to the mortgage market.
Although mortgage lending conditions appear to have been easing
gradually for several quarters, standards overall remain tight,
especially for borrowers with lower credit scores or fewer funds for a
down payment. In the July 2014 Senior Loan Officer Opinion Survey of
Bank Lending Practices, approximately a fourth of all banks surveyed
reported that they had eased their standards for prime residential

mortgages in the second quarter of 2014.\290\ However, approximately
half of the banks surveyed reported that their standards for prime
conforming residential mortgages were tighter than the midpoint of
their longer-term ranges. Even more lenders reported levels of
standards that were tighter than historical averages for jumbo,
nontraditional, and subprime mortgages. Likewise, the Mortgage Bankers
Association's index of mortgage credit availability--designed to
capture the credit risk profile of mortgages being offered in the
market place--edged up over the first few months of 2014, suggesting
that mortgage credit conditions continue to improve. Nonetheless,
comparisons of this index to a roughly equivalent proxy for lending
conditions in 2004 suggest that credit availability is quite
restricted.
---------------------------------------------------------------------------

    \290\ Senior Loan Officer Opinion Survey of Bank Lending
Practices, Board of Governors of the Federal Reserve System (July
2014), available at http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201408/default.htm.
---------------------------------------------------------------------------

    An additional manifestation, in part, of tight credit standards is
the subdued level of mortgage and housing activity. Mortgage
applications in the first six months of 2014, as measured by the
Mortgage Bankers Association application indexes, were at the lowest
levels since the 1990s. Existing home sales rose only 3.5 percent in
the first six months of 2014 and are still roughly 25 percent below
their 2004 level. In addition, the private-label RMBS market remains
extremely small and limited to mortgages of very high credit quality.
In the second quarter of 2014, less than 1 percent of mortgage
originations were funded through private-label RMBS.\291\ The
securitizations that were issued were collateralized by mortgages with
a weighted average loan-to-value ratio of around 70 percent and, in
most cases, weighted average credit scores greater than 750.
---------------------------------------------------------------------------

    \291\ Mortgage Bankers Association, Quarterly Mortgage
Originations Estimates as of July 2014; Intex Solutions, Inc., and
Asset-Backed Alert, prime non-agency RMBS issued in second quarter
of 2014.
---------------------------------------------------------------------------

    At the same time, several mortgage and securitization regulatory
changes have been put in place that increase the amount of information
available to investors, improve mortgage underwriting, and increase
investors' ability to exercise their rights and obtain recoveries in
the event of mortgage default. For example, the CFPB has implemented
regulations governing mortgage servicing and loan originator
compensation in addition to the ability-to-repay rule and QM standards.
The ability-to-repay rule is particularly noteworthy for requiring loan
originators to document income, debts, and other underwriting factors,
which should in turn provide investors a more complete set of
information on which to base their investment decision. The Commission
recently adopted revisions to Regulation AB that, among other things,
require disclosure in registered RMBS transactions of detailed loan-
level information at the time of issuance and on an ongoing basis.
These revisions also require that securitizers provide investors with
this information three business days prior to the first sale of
securities so that they can analyze this information when making their
investment decision.\292\ The Commission also has proposed rules
required by section 621 of the Dodd-Frank Act \293\ that would prevent
sponsors and certain other securitization participants from engaging in
material conflicts of interest with respect to their
securitizations.\294\ Additionally, the Board, the FDIC, the OCC, the
FHFA and the Commission, among other federal agencies, have jointly
proposed rules required by section 956 of the Dodd-Frank Act \295\ that
would enhance reporting and oversight of incentive-based compensation
practices and prohibit compensation arrangements that encourage
inappropriate risk taking by financial institutions.\296\ These
regulatory actions are further complemented by efforts on the part of
the Enterprises and the industry to improve standards for due
diligence, representations and warranties, appraisals, and loan
information.\297\ Although additional changes may be necessary, taken
together, these changes and the other changes to be completed provide
additional support for aligning the definition of QRM with that of QM.
---------------------------------------------------------------------------

    \292\ See Asset-Backed Securities Disclosure and Registration;
Final Rule, 79 FR 57184 (Sept. 24, 2014).
    \293\ 15 U.S.C. 77z-2a.
    \294\ See Prohibition Against Conflicts of Interest in Certain
Securitizations; Proposed Rule, 76 FR 60320 (Sept. 28, 2011).
    \295\ 12 U.S.C. 5641.
    \296\ See Incentive-Based Compensation Arrangements; Proposed
Rule, 76 FR 21170 (Apr. 14, 2011).
    \297\ See Revised Proposal, 78 FR at 57990.
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2. Periodic Review of the QRM Definition
    The agencies recognized that aligning the QRM definition with the
QM definition could have potential problematic effects on
securitization markets, such as increasing of bifurcation in the
mortgage market between QM and non-QM loans. Although the agencies
continue to believe the benefits of the alignment at this time outweigh
these potential risks, the agencies stated in the reproposal that they
intended to review the advantages and disadvantages of aligning the QRM
and QM definitions as the market evolves.\298\
---------------------------------------------------------------------------

    \298\ See Revised Proposal, 78 FR at 57991.
---------------------------------------------------------------------------

    The agencies are adopting the reproposed QRM definition, but also
recognize that mortgage and securitization market conditions and
practices change over time, and therefore, believe it would be
beneficial to periodically review the QRM definition. Thus, the
agencies are committing in the final rule to review the QRM definition
at regular intervals to consider, among other things, changes in the
mortgage and securitization market conditions and practices (which may
include, for example, the structures of securitizations, the
relationship between, and roles undertaken by, the various transaction
parties, implications for investor protection and financial stability
arising from the relationship between Enterprise markets and private
label markets, and trends in mortgage products in various markets and
structures), as well as how the QRM definition is affecting residential
mortgage underwriting and securitization of residential mortgage loans
under evolving market conditions. The agencies also want the
opportunity to consider the results of future reviews of, and any
changes made to, the QM definition by the CFPB, any additional
regulatory changes affecting securitization that are adopted by the
agencies, as well as any changes to the structure and framework of the
Enterprises and those markets. As a result of these reviews, the
agencies may or may not decide to modify the definition of QRM. Any
such modification would occur through notice and comment rulemaking.
Otherwise, any changes the CFPB makes to the QM definition
automatically will modify the QRM definition.
    As provided in the final rule, the agencies will commence a review
of the definition of QRM not later than four years after the effective
date of this rule with respect to securitizations of residential
mortgages, five years after the completion of that initial review, and
every five years thereafter. In addition, the agencies will commence a
review at any time upon the request of any one of the agencies. The
agencies will jointly publish in the Federal Register notice of the
commencement of a review, including the reason for the review if it has
been initiated upon the request of one of the agencies. In the

notice, the agencies will seek public input on the review. The agencies
intend to complete each review no later than 6 months after initial
notice of the review, subject to extension by the agencies as
conditions warrant. Following the review, the agencies will jointly
publish a notice that includes their conclusions from the review and,
as part of such review, take whatever action is required by applicable
law, including the Administrative Procedure Act. If, as a result of the
review, the agencies decide to modify the definition of QRM, the
agencies will complete such rulemaking within 12 months of publication
in the Federal Register of the notice disclosing the determination of
their review, unless extended by the agencies.
    The agencies intend for their initial review of the QRM definition
to be completed after the publication of the report of the CFPB's
assessment of the ability-to-repay rules, including the QM definition,
which the CFPB is required to publish within five years of the
effective date of the ability-to-repay rule (i.e., January 10,
2019).\299\ However, as noted above, the agencies' initial review will
start no later than four years after the effective date of this final
rule with respect to residential mortgages. The agencies believe this
timing helps to ensure the initial review of the QRM definition
benefits from the CFPB's review and course of action regarding the
definition of QM, and will help the agencies in determining whether the
QRM definition should continue to align fully with the QM definition in
all aspects. Furthermore, the agencies expect additional information on
the housing and mortgage market will be available at the time the
initial review is conducted that would be important in determining
whether the then-current QRM definition remains appropriate under
prevailing market conditions and continues to meet the requirements and
policy purposes of section 15G of the Exchange Act.
---------------------------------------------------------------------------

    \299\ See 12 U.S.C. 5512.
---------------------------------------------------------------------------

3. Definition of QRM
    Under the final rule, QRM is defined by aligning it to the
definition of QM in the CFPB regulations under section 129C of TILA. A
QRM is a loan that is a ``covered transaction'' \300\ that meets the
general definition of a QM. The general definition of a QM provides
that the loan must have:
---------------------------------------------------------------------------

    \300\ See 12 CFR 1026.43(b)(1), which defines ``covered
transaction'' as a consumer credit transaction that is secured by a
dwelling, as defined in section 1026.2(a)(19), including any real
property attached to a dwelling, other than a transaction exempt
from coverage under section 1026.43(a) (i.e., HELOCs, time shares,
reverse mortgages, temporary or ``bridge'' loans of 12 months or
less, and certain construction loans).
---------------------------------------------------------------------------

     Regular periodic payments that are substantially equal;
     No negative amortization, interest only or balloon
features;
     A maximum loan term of 30 years;
     Total points and fees that do not exceed 3 percent of the
total loan amount, or the applicable amounts specified for small loans
up to $100,000;
     Payments underwritten using the maximum interest rate that
may apply during the first five years after the date on which the first
regular periodic payment is due;
     Consideration and verification of the consumer's income
and assets, including employment status if relied upon, and current
debt obligations, mortgage-related obligations, alimony and child
support; and
     Total DTI ratio that does not exceed 43 percent.\301\
---------------------------------------------------------------------------

    \301\ See 12 CFR 1026.4(e)(2).
---------------------------------------------------------------------------

    In addition, in the final rule, the definition of QRM includes
loans that meet one of the special types of QMs. One special QM is a
covered transaction that meets the CFPB's temporary government QM
definition.\302\ A loan eligible under the temporary QM definition must
satisfy the loan-feature limitations of the general definition of a QM:
the loans must have substantially equal periodic payments, with no
interest-only, negative amortization or balloon features; must have a
maximum 30-year term; and must comply with the points and fees
limitations.\303\ However, the loans are not subject to the
underwriting provisions of the general QM definition, such as the total
DTI ratio requirement of 43 percent or less. To be eligible under the
CFPB's temporary government QM definition, loans must be eligible for
purchase, guarantee or insurance by an Enterprise, U.S. Department of
Agriculture (USDA), or Rural Housing Services (RHS).\304\
---------------------------------------------------------------------------

    \302\ See 12 CFR 1026.43(e)(4).
    \303\ See 12 CFR 1026.43(e)(2) and 1026.43(e)(4).
    \304\ See 12 CFR 1026.43(e)(4)(ii).
---------------------------------------------------------------------------

    As discussed in the reproposal, the temporary QM definition with
respect to an Enterprise expires once the Enterprise exits
conservatorship, but in any case no later than January 21, 2021.\305\
Additionally, the temporary QM definition with respect to USDA and RHS
expires when USDA and RHS issue their own QM rules or, in any case, no
later than January 21, 2021.\306\
---------------------------------------------------------------------------

    \305\ See 12 CFR 1026.43(e)(4)(iii).
    \306\ See id.
---------------------------------------------------------------------------

    Lastly, a QRM is a loan that meets the definitions of QM issued by
HUD, the Department of Veterans Affairs (VA), USDA, and RHS under
section 129C of TILA. HUD, VA, USDA, and RHS each have authority under
the Dodd-Frank Act to define QM for their own loans. Specifically,
section 129C(a)(3) of TILA authorizes these agencies to issue rules
implementing the QM requirements under section 129C(a)(2) of TILA. USDA
and RHS have not yet issued rules under section 129C of TILA
    On December 11, 2013, HUD adopted a final rule to define QM for the
single family residential loans that it insures, guarantees or
administers and which took effect on January 10, 2014.\307\ In
addition, the VA issued an interim final rule to define QM for loans
that it insures or guarantees, with an effective date of May 9,
2014.\308\ Accordingly, the final definition of QRM now includes any
loan insured, guaranteed or administered as a QM under either the HUD
or VA definition of QM, as applicable.
---------------------------------------------------------------------------

    \307\ See Qualified Mortgage Definition for HUD Insured and
Guaranteed Single Family Mortgages, 78 FR 75215 (Dec. 11, 2013).
    \308\ See Loan Guaranty: Ability-to-Repay Standards and
Qualified Mortgage Definition Under the Truth in Lending Act, 79 FR
26620 (May 9, 2014).
---------------------------------------------------------------------------

    In the final rule, the definition of QRM also includes a loan that
meets any of the special QM definitions designed to facilitate credit
offered by small creditors.\309\ To qualify as a ``small creditor''
eligible under one of these special QM definitions, however, the entity
must meet certain asset and threshold criteria and hold the QM loans in
portfolio for at least three years, with certain exceptions.\310\ Thus,
loans meeting these special small creditor QM definitions would
generally be ineligible for securitization as QRMs for three years
following consummation.
---------------------------------------------------------------------------

    \309\ See 12 CFR 1026.43(e)(5) and (e)(6).
    \310\ See 12 CFR 1026.43(e)(5), (e)(6), and (f).
---------------------------------------------------------------------------

    A loan eligible under these special ``small creditor'' QM
definitions must meet the general requirements of a QM,\311\ except
that these loans receive greater underwriting flexibility (i.e., do not
need to meet the quantitative DTI threshold of 43 percent or
less).\312\ Additionally, a loan originated by a qualifying small
creditor may contain a balloon feature if the loan is originated during
the two-year transition period, which expires January 10, 2016,
provided the loan meets certain other criteria, such as a 5-year
minimum term.\313\ After January 10, 2016, the ability to write a
balloon QM will be limited to small creditors that operate

primarily in rural or underserved areas.\314\
---------------------------------------------------------------------------

    \311\ See 12 CFR 1026.43(e)(2).
    \312\ See 12 CFR 1026.43(e)(5), (e)(6), and (f).
    \313\ See 12 CFR 1026.43(e)(6).
    \314\ See 12 CFR 1026.43(f).
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    Consistent with the reproposed definition described above, the
final definition of QRM includes any closed-end loan secured by any
dwelling (e.g., home purchase, refinances, home equity loans, second or
vacation homes, and mobile homes, and trailers used as residences),
whether a first or subordinate lien.\315\ The final definition of QRM
does not include any loan exempt from the ability-to-repay requirements
under TILA and the ability-to-repay rules, such as HELOCs, reverse
mortgages, timeshares or temporary or ``bridge'' loans of 12 months or
less.\316\ In addition, the final definition of QRM does not include
those loans that were provided a regulatory exemption from the ability-
to-repay rules, such as loans made through state housing finance agency
programs and certain community lenders. If a loan is not subject to
TILA because it is deemed to be extended for a business purpose, it is
also not included in the definition of QM (and therefore, is not a
QRM). The agencies believe this approach is consistent with the
language and intent of section 15G of the Exchange Act, whereby a QRM
can be no ``broader than'' a QM.
---------------------------------------------------------------------------

    \315\ See 12 CFR 1026.43(e)(2), which provides that QM is a
covered transaction that meets the criteria set forth in 12 CFR
1026.43(e)(2), (4), (5), (6) or (f). A ``covered transaction'' is
defined to mean ``a consumer credit transaction that is secured by a
dwelling, as defined in Sec.  1026.2(a)(19), including any real
property attached to a dwelling, other than a transaction exempt
from coverage under [Sec.  1026.43(a)].''
    \316\ The Dodd-Frank Act excludes from the term ``residential
mortgage loan'' an open-end credit plan or an extension of credit
secured by an interest in a timeshare plan. See 15 U.S.C.
1602(cc)(5) and 1639c(i). The Dodd-Frank Act does not apply the
ability-to-repay provisions of TILA to reverse mortgages and
temporary or ``bridge'' loans with a term of 12 months or less. See
15 U.S.C. 1639c(a)(8). Therefore they are also exempt from the
ability-to-pay rules. Also excluded are most loan modifications,
unless the transaction meets the definition of refinancing set forth
in section 1026.20(a) of the Final QM rule. For a complete list, see
12 CFR 1026.43(a).
---------------------------------------------------------------------------

    To provide relief from risk retention for mortgage loans that are
collateralized by three-to-four unit residential properties and are not
included in the QRM definition because they are deemed not to be
covered transactions in the QM definition, but that otherwise meet all
the criteria to be a QM, the final rule includes a separate exemption,
as discussed further below in Part VII of this Supplementary
Information.
    Several commenters requested that the agencies clarify that the
incorporated QM definition include all statutory provisions, the
regulation, the regulation's commentary and appendix, and future
supporting guidance to prevent any difficult interpretive questions
about whether it is possible for a loan to be a QM and not a QRM. As
noted above, the agencies are defining QRM by cross-reference to the
definition of QM under section 129C of TILA, and any regulations issued
thereunder, to avoid potential conflicts between the definitions of QRM
and QM and to facilitate compliance. By cross-referencing to the
definition of QM, the final rule incorporates any rules issued under
section 129C of TILA that define QM, including any Official
Interpretation that interprets such rules.
    The rule provides that QRM means QM as amended by the CFPB from
time to time. As such, the rule presumes that each amendment to the
definition of QM will automatically be incorporated into the definition
of QRM unless the agencies act to amend the definition of QRM. However,
in exercising their responsibility under section 15G, the agencies will
evaluate and collectively consider each amendment to QM to decide
whether that amendment meets the requirements of section 15G, and take
such action, if any, as is required under applicable law, including the
Administrative Procedure Act. The agencies note that they will have
notice of proposed CFPB changes to the definition of QM and, thus, will
be in a position to commence consideration of possible changes to the
QM definition before the CFPB issues a final rule. As noted above,
section 13(d) of the rule also requires the agencies to conduct
periodic reviews of the definition of QRM.
    One commenter requested clarification that all QM definitions would
be included in the revised QRM definition and there would be full
alignment of QRM and QM throughout the life cycle of a loan. As
discussed more fully above, QRM is defined to include a loan that meets
any of the definitions of QM issued under section 129C of TILA. The
agencies also note that the determination of whether a loan meets the
QM definition occurs at consummation; post-consummation events that
cannot be reasonably anticipated are not relevant.\317\
---------------------------------------------------------------------------

    \317\ See 12 CFR 1026.43(c)(1) and corresponding official staff
commentary.
---------------------------------------------------------------------------

    Some commenters requested revisions to provisions that are set
forth in the QM definition, such as the cap on points and fees or the
43 percent DTI ratio limit. The agencies are required to implement the
statutory requirement that the definition of QRM be no broader than the
definition of a QM, and therefore cannot expand the definition of QRM
in this manner.
    Some commenters expressed concern with the reproposal to allow
higher-priced QMs to be pooled and securitized with non-higher priced
QMs. These commenters asserted that higher-priced means higher risk.
The commenters asserted, however, that excluding higher-priced QMs from
the definition of QRM would unduly restrict LMI access, and in that
case, it may be appropriate to treat these loans as QRMs but that the
agencies should prohibit their inclusion in securitizations that
consisted of non-higher-priced QMs. The requirements for QMs are the
same whether they are higher-priced or lower-priced, and those QM
criteria are one of the reasons the agencies defined QRM to mean QM. A
higher-priced QM under the CFPB's rule must generally meet the 43
percent DTI ratio requirement, have verified income and assets,
generally have points and fees that do not exceed the 3 percent cap,
have regular periodic payments, and contain no negative amortization,
interest only or balloon features (with exceptions for certain small
creditors). Accordingly, the final rule does not distinguish between
non-higher priced and higher-priced QMs, and both are eligible to be
QRMs without distinction, and therefore, can be pooled together in the
same securitization.
    A few commenters expressed concern that the reproposed QRM
definition would still contain in its practical implementation an
implicit bias in favor of a single credit scoring brand, FICO, to the
exclusion of others. These commenters stated that the Enterprises
exclusively use the credit scoring brand FICO when underwriting and
determining eligibility of loans for purchase. These commenters claimed
that because the QRM definition incorporates the temporary QM
definition by reference, which permits loans that are eligible for
purchase, guarantee or insurance by an Enterprise to be QRMs (such
loans must also still generally meet the general definition of a QM),
there is an implicit bias towards the FICO scoring brand. One commenter
further asserted that the unintended bias in favor of a single credit
scoring brand could be fixed while still ensuring the QM and QRM
definitions are aligned by having FHFA require the Enterprises to
revise their policies and practices to accept mortgages underwritten
with other validated credit scoring models in addition to the single
scoring brand currently permitted.
    The agencies note that, under the final rule, the definition of QRM
is a loan that meets any of the definitions of QM

issued under section 129C of TILA. Accordingly, the agencies note that
a loan is not required to be eligible for purchase by the Enterprises
to meet the definition of QRM.\318\ Thus, the agencies do not believe
the alignment of the QRM definition with the QM definition includes an
implicit bias in favor of a single credit scoring brand as there is no
requirement in the QM definition that a consolidated credit score be
used or obtained.\319\ Therefore, the agencies do not believe that any
changes to the QRM definition are needed.
---------------------------------------------------------------------------

    \318\ Some commenters also called on FHFA to require the
Enterprises to apply prime loan criteria in the automatic
underwriting system so that the combination of aligning the
definitions of QRM and QM and temporary QM definition applicable to
loans that qualify for purchase or guarantee by the Enterprises does
not cause a decline in underwriting standards and assures high
underwriting standards. The agencies view this issue to be outside
the scope of this joint rulemaking.
    \319\ The underwriting requirements under the general QM
definition and the small creditor QM definitions do not include a
requirement for a credit score or an explicit requirement to
consider credit history. However, credit history may be included in
underwriting for debt and DTI.
---------------------------------------------------------------------------

    A few commenters expressed concern about the potential bifurcation
effect on the market if the definitions of QRM to QM were to be
aligned, asserting that a QM/QRM loan may become the only type of
residential mortgage made and securitized. Some commenters suggested
that the agencies provide flexibility for creditors to continue
originating non-QM and non-QRM loans by allowing certain loans to
qualify for a lower than 5 percent risk retention requirement. As noted
in the reproposal, the agencies recognize that aligning the QRM and QM
definitions has the potential to intensify any existing bifurcation in
the mortgage market that may occur between QM and non-QM loans, as
securitizations collateralized by non-QMs could have higher funding
costs due to risk retention requirements in addition to potential risk
of legal liability under the ability-to-repay rule. The agencies
acknowledge this risk but believe that not aligning the QRM and QM
definitions would likely result in even more segmentation in the
securitization market and higher costs for consumers. Securitization
typically is a more cost-effective source of funding when the
underlying pool includes a large number of loans. However, QM and non-
QM loans are less likely to be combined in a pool because of the
different risk profiles and legal liabilities associated with these
loans, and QRM and non-QRM loans cannot be combined in a pool under the
restrictions of the rule. Accordingly, if the QRM and QM definitions
are not aligned and lenders have difficulty amassing a critical number
of loans for an asset pool to provide cost effective funding, they may
choose a source of funding other than securitization or charge higher
mortgage rates to consumers.
    A few other suggestions and concerns expressed by commenters
include: (i) a request that the agencies acknowledge that first
mortgages secured by real property in priority lien states are
encompassed within the QRM definition; (ii) caution that the QRM and
credit risk retention rule not evolve into a safety and soundness
standard in terms of evaluating an individual lender's real estate
portfolio; (iii) a request that the QRM definition reflect the value of
Homeownership Education and Counseling in reducing default; and (iv) a
request to allow non-U.S. originated transactions to benefit from the
QRM exemption. The agencies' definition of QRM is adopted as a
component of the broader credit risk retention rule that helps address
underwriting and incentive alignment concerns in the securitization
market and is not a safety and soundness, standard. The agencies'
adoption of the QRM definition does not limit or change the definition
of QM and, thus, the application of the definition of QM in priority
lien states and to non-U.S. originated transactions is limited by the
applicability of the QM definition under TILA and not the adoption of
the definition of QRM. Similarly, the agencies are not expressly
requiring or including as criteria to meet the QRM definition
homeownership education and counseling. The agencies also will evaluate
a lender's mortgage portfolio on its own merits and do not expect to
judge the safety and soundness of a loan or portfolio on whether or not
it meets the definition of QRM.
    A few commenters also expressed concern about including subordinate
liens in the scope of the QRM definition. These commenters were
concerned that permitting subordinate liens to be eligible for the QRM
exemption would introduce a layer of additional risk, especially where
the QRM definition did not contain a LTV ratio requirement. One
commenter specifically requested that the agencies reconsider the
inclusion of subordinate lien loans in the definition of QRM, noting
that second lien holders have been blamed for holding up short sales
and complicating efforts to resolve defaulted loans.
    The agencies appreciate these commenters' concerns. However,
similar to the reasons discussed in the reproposal, the agencies
believe aligning the definition of QRM to the QM definition, which
includes loans secured by any dwelling, as well as subordinate liens,
is appropriate to minimize potential conflicts between the two
definitions. The agencies believe allowing subordinate liens to qualify
for the QRM exemption also will help preserve credit access. Last, as
noted above, the QM definition requires full documentation and
verification of consumers' debt and income on all loans, which the
agencies believe helps to address risks that may accompany subordinate
liens.

E. Certification and Other QRM Issues

    In order for a QRM to be exempted from the risk retention
requirement, the rule includes evaluation and certification conditions
related to QRM status, consistent with statutory requirements and
similar to the reproposal. One commenter requested that the requirement
for measuring performance data be as of the cut-off date, and not the
closing date. In response to commenters' requests, the agencies have
modified the performance measurement date from the closing date to the
cut-off date or similar date.
    While some commenters supported the proposed certification
requirements, others suggested that the certification be submitted to
the appropriate Federal banking agency or the Commission, and not to
the investors, which the commenters said would create additional
liability and be functionally burdensome. One commenter suggested that
the agencies make clear that these certifications must be retained by
the sponsor for a period of no more than five years.
    The agencies believe that the certification by the depositor for
the securitization is important information that should be disclosed to
investors and therefore are not persuaded by the commenters' requests
to require that certification be submitted only to the Commission and
the appropriate Federal banking agency, if any.
    Several commenters expressed the belief that allowing for blended
pools of QRMs and non-QRMs would help ensure that a greater variety of
loans could be securitized and reduce market fragmentation between QRMs
and non-QRMs. These commenters requested that the agencies permit the
blending of non-QRMs and QRMs, with the QRMs being exempt from risk
retention and the non-QRMs being subject to risk retention (unless
otherwise exempt). Under this approach, the sponsor would be required
to hold credit risk in proportion to the non-qualifying assets

in the pool. These commenters expressed the belief that the exemption
authority under section 15G(e)(1) and (2) of the Exchange Act was
sufficiently broad to permit the agencies to provide a partial
exemption for securitizations collateralized by QRMs and non-QRMs.
Another approach suggested was that the agencies permit blending exempt
mortgage assets (e.g., seasoned loans) and QRMs, with all such
securitized assets remaining exempt from risk retention. Under this
approach the sponsor would not be required to hold any credit risk
since all of the assets in the pool would qualify for an exemption.
    Except as described in Part VII of this Supplementary Information
with respect to certain mortgage loans secured by three-to-four unit
properties that meet the QM criteria other than being an extension of
consumer credit, the agencies are not adopting the requested exemption
for blended pools of QRMs and non-QRMs. The agencies believe that the
breadth of the QRM definition in the final rule, as well as the
additional mortgage exemptions discussed in Part VII of this
Supplementary Information, should facilitate the return of private
capital to the mortgage market and preserve access to affordable credit
for various types of borrowers while the mortgage market continues to
stabilize. Furthermore, the agencies observe that differences in
product features, underwriting standards, and other factors associated
with QRMs and non-QRMs generally could tend to reduce the likelihood of
investors preferring combined pools. The agencies also note that a
reduction in a risk retention requirement for the pool based on
inclusion of QRMs would add complexity to the risk retention regime for
residential mortgages without evidence of any significant benefit.
Finally, the agencies are concerned, given the breadth of the QRM
definition, that allowing reduced risk retention for combined pools of
QRMs and non-QRMs will not provide sponsors with sufficient incentives
to ensure high quality underwriting of the non-QRM mortgages.\320\
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    \320\ The agencies are not addressing the permissibility of
exempting pools blending QRMs and non-QRMs at this time. The
agencies note that section15G of the Exchange Act refers to an
exemption from risk retention requirements with respect to an asset-
backed security if all the assets that collateralize the asset-
backed security are QRMs. See 15 U.S.C. 78o-11(c)(1)(C)(iii).
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F. Repurchase of Loans Subsequently Determined To Be Non-Qualified
After Closing

    The reproposal provided that, if after the closing of a QRM
securitization transaction, it was discovered that a mortgage did not
meet all of the criteria to be a QRM due to inadvertent error, the
sponsor would be obligated to repurchase the mortgage.\321\ While some
commenters expressed support for the proposed requirement, one
commenter asserted that investors have historically preferred
substitution over repurchase, especially when the required repurchase
would impact the value of the investment.
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    \321\ Sponsors may choose to repurchase a loan from securitized
pools even if there is no determination that the loan is not a QRM.
The agencies would not view such repurchases as determinative of
whether or not a loan meets the QRM standard.
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    Similar to the reproposal, the final rule includes a buyback
requirement for mortgages that are determined not to meet the QRM
definition by inadvertent error after the closing of the securitization
transaction, provided that the conditions set forth in section 13(c) of
the rule are met. These conditions are intended to provide a sponsor
with the opportunity to correct inadvertent errors by promptly
repurchasing any non-qualifying mortgage loans from the pool. In
addition, this requirement helps ensure that sponsors have a strong
economic incentive to ensure that all mortgages collateralizing a QRM
securitization satisfy all of the conditions applicable to QRMs prior
to closing of the transactions. As long as the loan met the QRM
requirements at the closing of the securitization transaction, however,
subsequent non-performance of the loan does not trigger the proposed
buyback requirement. For the reasons described above, the agencies are
not allowing substitution instead of repurchase in the final rule.

VII. Additional Exemptions

    As discussed in Part VI of this Supplementary Information, under
the final rule, a loan is eligible for the QRM exemption if it meets
one of the QM definitions issued under section 129C of TILA, as may be
amended from time to time. Meeting the QM criteria is also one of
several ways that a lender can choose to satisfy the minimum
underwriting standards for the ability-to-repay requirements under
TILA. Because QM loans may provide greater protection from potential
legal liability under TILA, many lenders are incentivized to make
QMs.\322\
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    \322\ HELOCs and timeshares are also not subject to any ATR
requirement, but not because of a statutory or regulatory exemption.
Rather, these loans were never included in the scope of loans
defined to be subject to the ATR requirement (i.e., residential
mortgage loans).
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Community-Focused Lending Exemption

    In addition to the classes of transactions exempt from the ability-
to-repay requirement under the Dodd-Frank Act, such as HELOCs, reverse
mortgages, timeshares or temporary or ``bridge'' loans of 12 months or
less, the CFPB exempted certain additional categories of loans made by
certain lenders from the ability-to-repay rules, under its regulatory
authority to exempt classes of transactions to help ensure borrowers
continue to have access to affordable mortgage credit. The CFPB used
its regulatory authority to exempt these lenders because they typically
use flexible and unique underwriting standards that differ from the
minimum underwriting standards of the ability-to-repay or QM criteria,
and the types of loans exempted are important sources of credit for
LMI, minority and first-time homebuyers.\323\ Loans exempt from the
ability-to-repay requirement fall into the following categories:
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    \323\ See 15 U.S.C. 1604(f). See also 78 FR 35430 (June 12,
2013).
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     An extension of credit made pursuant to a program
administered by a Housing Finance Agency, as defined under 24 CFR 266.5
(HFA).\324\
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    \324\ Housing Finance Agency means any public body, agency, or
instrumentality created by a specific act of a State legislature or
local municipality empowered to finance activities designed to
provide housing and related facilities, through land acquisition,
construction or rehabilitation. The term State includes the several
States, Puerto Rico, the District of Columbia, Guam, the Trust
Territory of the Pacific Islands, American Samoa and the Virgin
Islands.
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     An extension of credit made by an entity creditor
designated by the U.S. Treasury as Community Development Financial
Institution, as defined under 12 CFR 1805.104(h) (CDFI).
     An extension of credit made by a HUD-designated
Downpayment Assistance through Secondary Financing Provider (DAP),
pursuant to 24 CFR 200.194(a), operating in accordance with HUD
regulations.
     An extension of credit made by a HUD-designated Community
Housing Development Organization, as defined under 24 CFR 92.2 (CHDO),
provided it has entered into a commitment with a participating
jurisdiction and is undertaking a project pursuant to HUD's HOME
Investment Partnership Program, pursuant to 24 CFR 92.300(a).
     An extension of credit made by certain non-profit
organizations that extend credit no more than 200 times

annually,\325\ provide credit only to LMI consumers, and follow their
own written procedures to determine that consumers have a reasonable
ability to repay their loans (Eligible Nonprofits)
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    \325\ See 79 FR 25730 (May 6, 2014). The CFPB's proposed rule
would exclude from the 200 originations count certain forgivable or
deferred second lien loans.
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     An extension of credit made pursuant to a program
authorized by sections 101 and 109 of the Emergency Economic
Stabilization Act of 2008 (EESA).\326\
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    \326\ 12 U.S.C. 5211; 5219.
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    As a result, loans made by these entities do not need to comply
with the ability-to-repay requirement, for which QM is one way to
comply.
    The agencies received several comments regarding some of the above
extensions of credit. One commenter requested that the agencies clarify
that the proposed exemption from risk retention for asset-backed
securities issued or guaranteed by states, municipalities, and public
instrumentalities of states (state and municipal securitization
exemption) \327\ would include asset-backed securities issued by HFAs
and other state agencies and collateralized by loans financed by HFAs.
This commenter also asked for clarification on whether the use of
private servicers in those transactions would affect the availability
of the exemption. A few commenters requested that the agencies
automatically classify all state HFA loans as QRMs. One commenter
observed that the CFPB granted HFA loans an exemption from the ability-
to-repay requirement because of a strong record of lending to LMI
borrowers, so that compliance with the ability-to-repay requirement
would be of little benefit and could impede access to credit by LMI
borrowers. Another commenter also asserted that strong credit
performance from HFA loans would mean that risk retention is not
necessary to protect investors. This commenter further expressed
concern that if any HFA loans were subject to risk retention, other
securitization structures employed by the HFA that may not technically
qualify for the state and municipal securitizations exemption would
then be subject to risk retention, with negative consequences for
access to credit for underserved borrowers.
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    \327\ 15 U.S.C. 78o-11(c)(1)(G)(iii). See also Part IV.B of this
Supplementary Information.
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    Several commenters similarly observed that CDFIs and nonprofit
lenders are an important source of mortgage credit for LMI borrowers
and play a key role in neighborhood stabilization and community
development. These commenters stated that loans made by these entities
frequently would not fit the QM criteria because they use flexible
underwriting standards that consider an individual borrower's unique
circumstances and use homebuyer education and housing counseling to
support homeowners throughout the mortgage process. These commenters
raised the concern that the risk retention requirement would impose
disproportionate compliance burdens on these entities and could be a
significant barrier to obtaining investment in these lending programs.
Commenters also indicated that exempting these entities from the risk
retention requirement would be within the spirit of aligning QRM with
QM.
    A few other commenters also requested that the agencies similarly
consider including under the definition of QRM the other categories of
loans exempted by the CFPB from the ability-to-repay rules, or
otherwise provide them with an exemption from risk retention.
Commenters observed that CDFIs and nonprofit mortgage lenders are an
important source of mortgage credit for LMI borrowers and play a key
role in neighborhood stabilization and community development. The loans
made by these entities are not covered transactions under the ability-
to-repay rules (and therefore would not be classified as QMs in any
case) but also frequently would not independently meet the type of
underwriting standards in the CFPB's QM criteria because they use
flexible features that consider an individual borrower's unique
circumstances. At the same time, these lenders use homebuyer education
and housing counseling to support homeowners throughout the mortgage
process. These commenters raised the concern that the risk retention
requirements would be a disproportionate compliance burden for these
entities and could be a significant barrier to obtaining investment in
these lending programs if an exemption was not provided.
    Under section 15G of the Securities Act, the definition of a QRM
can be ``no broader than'' the definition of a QM. Because there are
various and unique underwriting practices used to make the loans
described above that are exempted from the ability-to-repay
requirement, including significant variations in DTI ratios and other
underwriting criteria, it is not possible for the agencies to determine
that these loans generally are not ``broader than'' QM. Therefore, the
agencies have concluded that they cannot include these community-
focused residential mortgages in the definition of QRM.
    As discussed previously with respect to other exemptions (or
requests for exemptions) from risk retention, however, the agencies may
provide an exemption from risk retention if the exemption would: (i)
help ensure high-quality underwriting standards for the securitizers
and originators of assets that are securitized or available for
securitization; and (ii) encourage appropriate risk management
practices by the securitizers and originators of assets, improve the
access of consumers and businesses to credit on reasonable terms, or
otherwise be in the public interest and for the protection of
investors.\328\
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    \328\ 15 U.S.C. 78o-11(e)(2).
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    For the reasons discussed below, and in response to concerns raised
by commenters, the agencies are providing an exemption from risk
retention under section 15G(e) of the Exchange Act for the categories
of loans described above (community-focused exempted loans), other than
extensions of credit made pursuant to a program authorized by sections
101 and 109 of the EESA. Generally, the agencies have concluded that
the loans made by lenders identified above and covered by this
exemption meet the requirements for an exemption under section 15G(e)
because they are either government-certified, or originated by
government-administered programs, or small non-profit programs that
have a specific community mission. As the primary mission of these
lenders is building and strengthening at-risk communities, or building
wealth for LMI families, strong underwriting procedures to maximize
affordability and borrower success in keeping their homes has been
integral to the programs that originate the community-focused exempted
loans. Because the stated mission is integral to the lending programs
administered by these lenders, the agencies believe these entities have
the incentive to maintain strong underwriting standards to help ensure
that they offer affordable loans to the borrowers they serve. The
stated mission also helps to protect investors because of the
incentives to maintain high underwriting standards and ensure that
borrowers are given appropriate and affordable loans. Additionally,
exemptions from risk retention for loans made by the above-listed
entities serve the public interest because these entities have stated
public mission purposes to make safe, sustainable loans available
primarily to LMI communities, which helps to improve access to credit
on reasonable terms for borrowers and is in

the public interest. The agencies further observe that these programs
are a significant source of credit to LMI communities. To the extent
these loans are or will be securitized, an exemption helps to ensure
that a risk retention requirement would not impede financing on
reasonable terms for such borrowers.
    In addition, the agencies below respond to concerns raised by
commenters with respect to the exemption under section 15G of the
Exchange Act and the final rule for asset-backed securities issued or
guaranteed by states and their instrumentalities, or by municipal
entities.
i. Housing Finance Agency Program Loans
    State HFAs are state lending programs established to help meet the
affordable housing needs of the residents of their states. Although
their characteristics vary widely, such as their relationship to the
state government, most HFAs are independent entities that operate under
the direction of a board of directors appointed by each state's
governor. They typically administer a wide range of affordable housing
and community development programs, including providing first-time
homebuyers with loans for existing and new construction and providing
financing to build and revitalize affordable housing units, revitalize
older neighborhoods and communities, and build shelters and
transitional and supportive housing.
    If an HFA is a public instrumentality of a state, then an asset-
backed security issued or guaranteed by such HFA (or otherwise issued
or guaranteed by the state that established the HFA or one of its
public instrumentalities) is exempt from the registration requirements
under section 3(a)(2) of the Securities Act \329\ and should be exempt
from risk retention under the state and municipal securitization
exemption provided in section 19(b)(3) of the final rule. Further, the
use of a private-sector entity to service loans that collateralize such
asset-backed securities would not, in and of itself, invalidate this
exemption. If an HFA is not a public instrumentality of a state whose
securities are exempt from the registration requirements under section